This Tool to Keep Clients From Going Broke in Old Age Looks More Attractive Than Ever, Advisor Says

QLAC Planning Basics

As Opiela explains, the idea of hedging longevity risk is an important component of the planning discussion when it comes to QLACs, but that’s not the whole story. Especially with rates where they are today, the QLAC can also be an attractive approach from an internal rate of return perspective.

Opiela shares the theoretical example of a healthy man who is 63 and thinking about funding a QLAC.

“Let’s imagine that he transfers $200,000 in qualified money into a QLAC that begins to pay out at his age 80,” Opiela suggests. “With rates where they are today, at age 80, he could expect to receive around $74,000 annually in guaranteed lifetime income. If he lives to age 88 in this scenario, the income translates to a 6% internal rate of return on the dollars deployed to the QLAC, and that number only goes up over time.”

Opiela stresses the importance of health considerations in this planning discussion. Simply put, this is may not be a great strategy for a client with health issues and/or doubts about living long enough to reclaim their initial investment.

“But, as you can see, if someone is healthy now and they are worried about outliving their funds, this is a great, simple option,” he says. “One may obtain a higher return than conservative, longer-term bond funds with no reinvestment or interest rate risk. This example is approximately a 6% internal rate of return starting at age 88, and it climbs thereafter — contractually guaranteed by the insurance company.”

Other QLAC Considerations

Beyond the potential for an early death, Opiela says, the other primary drawback of a QLAC is losing liquidity. In this sense, it is a great solution for the mass affluent, he says, because this group will likely have enough liquid assets to address the early phase of retirement but may face a tougher picture if they end up living beyond 90 or even 100.

“If someone is worried about passing away before they get income from the annuity, there are products out there with a cash refund option,” Opiela says. “Depending on the client’s concerns, you can incorporate this concept. But keep in mind, there is a cost.”

Citing the prior example of the healthy 63-year-old man buying a QLAC that starts paying income at 80, the use of a cash refund option would decrease his $74,000 a year in guaranteed income by a little more than $10,000.

“There is a tradeoff,” Opiela says. “Still, I like to see that the products are getting more flexible in this regard, and I see this as an important option for advisors to know.

“The important planning point here is that today, the future income solves may be higher in QLACs, but we should acknowledge that fixed indexed annuities have other potentially attractive elements to them as well,” Opiela concludes. “Those will give you some additional liquidity and flexibility, but likely are not going to beat the guaranteed income from the QLAC.”

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