So, you’ve decided you need a Qualified Longevity Annuity Contract (QLAC), pronounced cue-lack.
You have decided that a QLAC purchase is an excellent way to insure against the risk of outliving your assets. You have sufficient IRA retirement assets for the purchase to make sense. Your good health makes it reasonable to expect you will need QLAC annuity income when you are in your late 70’s and 80’s and hopefully, after. You’ve used QLACguru’s calculators, spoken with your advisors, and evaluated whether the purchase makes good sense from a tax perspective. (Please see our previous blog post on 8 Signs You Need a QLAC).
Set out below is the step-by-step process for purchasing a QLAC. (For an infographic summarizing this blog piece, click here.) While this process may vary slightly from carrier to carrier and agent to agent, here is guidance on what to expect along the way to owning a QLAC Annuity:[i]
1. Select an Agent or Broker. Given the newness of the QLAC product, there are relatively few agents who are well-versed in the sales and illustration of QLACs. Whether you ultimately buy from an online agency or a local provider, we recommend starting with an online agency with a comparison quoting engine. Why? Annuity Carriers vary in terms of how they price different QLAC product features. Local agents typically represent only one or two carriers while online agents like immediateannuities.com will quote 7 or 8. So, even if you are uncomfortable making your purchase online, it pays to start your QLAC journey comparison shopping multiple carriers online first, rather than go straight to a single, local provider.
Here are five questions we ask when selecting an agency:[ii]
- How long has the agency been in business?
- With how many carriers offering QLAC annuities does the agency work?
- How many QLAC annuities has the agency sold?
- What is the agency’s Better Business Bureau Rating?
2. Select QLAC product attributes that are best for you. If you are married, you will need to determine whether you want to have income over the length of one life or choose a Joint & Survivor benefit which will pay over the lives of both you and your spouse. If you have children or other heirs in your retirement plans, you will want to choose between an annuity with a “Cash Refund” (Return of Premium -- ROP) feature which provides a return of the unpaid premium amounts upon your death and a “Life-only” annuity with no death benefit. A Cash Refund/ROP annuity will provide a better outcome for your heirs if you die early but will pay a lesser benefit during your life than a Life-only policy.
3. Select a carrier. Each of the decisions about product features above includes economic trade offs. Each of these features will be priced differently by different carriers. Also, you will want to verify the claims-paying abilities of each of the carriers by checking their credit ratings (e.g., A.M. Best).
4. Request Annuity Purchase Paperwork. Know what you want? Ready to pull the trigger? It is time to contact your agent or broker. Together, you will review your plans. Your agent will go through an application questionnaire with you, which will allow your agent to complete the carrier’s annuity application partially. During the review of the application questionnaire, the agent will verify the amount of the annuity purchase, making sure you are meeting all the tax rules for a QLAC purchase, including limits on how much you can contribute to your QLAC annuity. The Qualified Longevity Annuity Contract or "QLAC" premium purchase is limited to 25% of a retirement plan (i.e., assets held in tax-qualified accounts such as an IRA), but no more than $135,000 from all plans. Your agent will request a copy of your end-of-prior-year IRA balances from your IRA account required for the paperwork. Other questions in the questionnaire will include the name of your IRA Custodian and your IRA account number. Your QLAC application will also include a funds transfer form, which allows your insurance carrier to request funds directly from your IRA custodian. This kind of transfer is called a trustee-to-trustee transfer, which means you will not need to write a check to buy your QLAC policy.
5. Complete and Mail Annuity Application Paperwork. The agent will overnight the carrier application to you for your review and signature. The agent will typically include a prepaid envelope which you will use, depending on the carrier, to mail the application and funds transfer form to the carrier for processing. It is important to review your annuity application paperwork with your agent and sign all the forms including the funds transfer form. Once the application is completed, your work is done. The agent or broker will follow up with the insurance company to make sure that the package was received and is in good order.
6. Sign Receipt of Policy Delivery Notification. Over the next two weeks, the Insurance company requests funds using the form you signed, and the IRA custodian mails the check to the Insurance Company on your behalf to purchase the annuity. Then your QLAC annuity contract is printed by the carrier and overnighted to your agent. Your agent will make sure that the contract is correct, and will then overnight the contract to you. Once you receive the contract, you will be asked to sign and return a receipt of delivery notification. This notification is to confirm that you have received the annuity contract. Often, both the carrier and agent (or broker) will request a copy of this document.
7. Calculate Your Lower Required Minimum Distributions! Once the carrier funds your QLAC, it must file a 1098-Q identifying you as the owner of a QLAC. The document includes your taxpayer ID and the balance of the newly formed QLAC. After age 72, your Required Minimum Distributions will be reduced because the QLAC purchase price is no longer part of the IRA account balance. Because the distribution was made to purchase a Qualified QLAC, that IRA distribution is not as taxable.
8. Receive Yearly Annuity Account Correspondence. You will receive an annual statement of account from the insurance company. This statement typically includes the Income start date and the amount of the benefit. Depending on your annuity contract features, some companies will allow you to adjust the annuity start date, moving it backward or forwards in time, typically in five-year increments. This flexibility usually applies to cash refund (Return of Premium) policies only. (If you think you’ll want this kind of flexibility, ask which carriers offer this flexibility before you buy the QLAC.)
9. Decide How Annuity Payments Should Be Made. One to two months before the income start date of your annuity, many carriers will send a letter offering to set up direct deposit. You can choose to receive a paper check or direct deposit. For this, you will need to provide a voided check and your checking account information.
10. Enjoy Life-long Annuity Benefits Payments. Congratulations! Because of your careful planning, you will receive annuity payments from the insurance company for the rest of your life. Uncle Sam will treat your QLAC annuity benefit payments as ordinary income. You will receive a 1099-R from the insurance company at the end of each year recognizing this income to you. The longer you live, the smarter you will feel about your QLAC purchase!
Want to learn more? Check out our videos page to see additional QLACguru videos. See our calculators page to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page. Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with sequence Sequence Risk, how QLACs are similar to and different from Social Security, as well as many other topics. Free Consultation. If you would like us to develop a free RMD analysis and illustration of how a QLAC might work for you, please click here.