When choosing a QLAC, you’ll need to decide whether:
- to include return of premium and death benefit features, which allow your beneficiaries to recoup your initial investment if you die earlier than expected;
- to add an inflation rider, which allows your payments to increase each year, either based on CPI-U or a fixed percentage increase;
- to purchase a single life product that covers just you, or a joint life product that covers you and a spouse; and/or
- to start the income at the latest possible age (your 85th birthday) or sooner.
Let’s break down each of these choices in a bit more detail.
Return of Premium & Death Benefit: These two features are closely related. A return of premium rider ensures that your beneficiary will receive the full premium back if you die before income has started when you haven’t yet received any payments. With a death benefit, if you die after income has started but before you’ve recouped your initial investment, your beneficiary will receive the difference between the premium and what you’ve already received from income payouts.
Inflation: Most insurance carriers offer an inflation adjustment or annual increase rider that will adjust the QLAC income payments annually for inflation. The adjustment made could be predetermined (between 1-5%) or in some cases be based on a Consumer Price Index. Obtaining these increases will require a lower starting income. Note that the inflation rider does not cover the deferral period, instead only going into effect once the income stream begins.
Single or Joint Life: With a single life QLAC, payouts continue for as long as the owner/primary annuitant is alive. Note: in the case of qualified plan, the primary annuitant must be the plan owner. With a joint life product, the owner/annuitant can add a joint annuitant, on whose life the payments will also be based. Adding a joint annuitant lowers the starting payment since payments are expected to last longer than with a single life product. With a joint life product, you also have the option of choosing to maintain or reduce the income benefit after the first annuitant passes. 100% continuation means the payments don’t change, making this the most expensive option. Electing 50% continuation means your income is cut in half on the death of the first annuitant, but this option is less expensive.
Income Start Age: Income can start at any date between when the owner/annuitant is 70½ and when he or she turns 85. Later income start dates provide higher payouts and more RMD tax-deferral.
One last thing: these choices should be made at the same time that you’re deciding which carrier to go with since not all options are available with all carriers.
Learn more about QLACs, how they work, and how to best customize them for your needs in the QLAC Guide.