Robert Klein has sold his fair share of qualified longevity annuity contracts (QLACs) over the past three-and-a-half years, and every sale has been to a high-net-worth client.
“The primary purpose of each sale has been to provide sustainable lifetime income later in life,” said Klein. He is the founder and president of Retirement Income Center, a registered investment advisory in Newport Beach, one of Southern California’s wealthiest enclaves.
Klein said he has been bringing up the subject of QLACs more frequently; and he has seen an uptick in interest in QLACs, a special kind of deferred income annuity (DIA).
He’s not alone.
Nearly four years after the U.S. Treasury Department authorized QLACs for the 401(k) and the individual retirement account (IRA) markets to help workers save for retirement, advisors seem to be expressing a warming curiosity about DIAs, according to quotation data.
Last year, 34.8 percent of income annuity quotes were for income annuities with a start date of 13 months or more, according to CANNEX USA, an annuity quotation tracking service.
In 2016, an estimated 32.1 percent of income annuity quotes were for DIAs with a start date of 13 months or more. Contrast that with the previous year, when only 28.3 percent of quotes were for DIAs with a start date of 13 months or more, CANNEX USA reported.
QLACs Larger Than Income Annuities
When Treasury Department officials authorized the launch of QLACs in July 2014, the idea was to give middle-market buyers an incentive to create their own pension by moving a portion of their retirement assets into a product they could never outlive.
That may be happening, annuity experts say, especially since consumers can fund a QLAC in installments prior to retirement, similar to the way they fund a 401(k).
“But there’s a second application that’s emerged and that is with the high-net- worth [segment] — that’s what I hear from some of our clients with regard to the increase in QLAC quotes,” said Gary Baker, CANNEX president and CEO.
The average size of QLAC policies sold to date tends to be larger than that of regular income annuities in general. This is a sign that annuity specialists are using QLACs to develop tax strategies, he added.
Maximum premium contributions into a QLAC for 2018 are set at $130,000, slightly higher than the $125,000 limit allowed in 2017. Meanwhile, average premiums for traditional single-life income annuities hover in the $90,000-$100,000 range, depending on the distribution channel, Baker said.
The amount of deferred income annuity quotes continues to grow at CANNEX USA. But, Baker said, QLAC searches now are beginning to increase in the retail advisor channel compared with the traditional direct and rollover channels for these products.
Recent quoting activity aside, DIA sales for now still represent a tiny sliver of the fixed annuity market, which sold $25 billion worth of fixed annuities in the third quarter.
Third-quarter DIA sales fell 14 percent to $520 million compared with the year-ago period, according to LIMRA Secure Retirement Institute.
For DIA sales to take off, they would need a boost from more buyers in the vast middle market. However, QLACs are not an easy sell because those buyers tend to be skittish about putting large amounts of retirement capital into a product to which they don’t have immediate access.
Tying up 25 percent of a $200,000 retirement portfolio means $50,000 is unavailable for emergencies, capital inaccessible to replace a lost pension or to provide an income floor should something happen to Social Security, said financial planner Sandra Adams.
For a middle-market buyer, “They say, that’s too much risk for me,” said Adams, a partner with the Center for Financial Planning in Southfield, Mich.
Taxes, RMDs and Deferrals
Buyers with retirement assets in the $500,000 to $2 million range, also known as the emerging affluent, are key prospects for QLACs.
Investing in a QLAC with anything much less than the $130,000 maximum, however, doesn’t generate enough lifetime income, advisors say.
QLACs offer several advantages to those for whom $130,000 isn’t going to break the bank.
QLACs can cut taxes by reducing the required minimum distribution (RMD), said Alexander Koury, a financial advisor with ValuesQuest in Phoenix.
A $1 million IRA could easily fund a $130,000 QLAC. With $130,000 “off the table,” the new RMD would be calculated on $870,000 as QLACs are excluded from RMDs since they have no cash value.
Many retirees today already have income guarantees thanks to Social Security, pensions and even other annuities.
Those income streams should provide more than enough income, so the RMD is forcing retirees at the age of 70.5 to take income they don’t need, money taxed at higher marginal tax rates, Koury said.
QLAC income streams become taxable at a future date. If the retiree passes away before taking income, the principal is returned to the beneficiaries.
High-net-worth buyers don’t need to solve for income as much as they need to solve for longevity. So investing $130,000 to help fund life expectancy to the age of 95 or older, at a time when interest rates are back on the rise, is why wealthy buyers are interested in QLACs, advisors say.
Other advisors, such as Klein, say the fixed payments issued by QLACs make it easier for retirees to plan and budget for medical expenses, prescription drugs and long-term care.
Fluctuating RMDs make it difficult to project annual withdrawal amounts compared with projected retirement income needs, he said.
At the end of the day, mass affluent and wealthy retirees collecting Social Security and lucky enough to benefit from a pension don’t sweat market swings, don’t obsess over return on investment, and rarely lose sleep over basis points of rising and falling interest rates.
Grandparents would prefer doting on their grandchildren who are running around the baseball diamond or performing in a dance recital.
Deferring the RMD — which QLAC owners can do as late as age 85 — isn’t nearly as exciting as generating dependable income, especially if buyers give their QLAC time to grow, Klein said.
People say setting aside $130,000 in a QLAC isn’t that much to begin with, but it depends on when you buy it and the number of years of deferral, he said.
“If you buy it in your late 40s and defer until you are 80, you can get a sizeable income,” Klein said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]