American General Life has started offering qualified longevity annuity contracts (QLACs).
A QLAC is a deferred income annuity (DIA) that starts making income payments late in life. It is also known as a longevity annuity. The QLAC is a unique form of DIA that can be used with certain retirement plans. Created by new federal regulations published in July, these DIAs allow plan participants to allocate some of their qualified plan money to a QLAC. This will reduce the required minimum distributions (RMDs) the person must pay starting at age 70.5, with a consequent modest reduction in RMD-related income taxes.
Ever since the regulations came out in July, the annuity industry has been buzzing about which carrier would be first to hit the streets with a QLAC.
On Nov. 3, the Houston annuity unit of American International Group (AIG) published a bulletin stating that its American Pathway Deferred Income Annuity is “eligible to be designated as a QLAC when purchased as a traditional IRA.” The company is “committed” to being a leader in QLAC sales, the bulletin said.
This week, the Retirement Income Journal broke the news about AIG’s product, calling it the first QLAC. Several annuity experts predict other carriers will follow suit, perhaps before year-end.
AIG has supplied InsuranceNewsNet with materials showing some details about its QLAC product. Of interest to producers is that the carrier’s QLAC is for use with individual retirement accounts (IRAs).
Federal regulations do allow QLACs to be offered with defined contribution (DC) plans such as 401(k)s as well as in the IRA environment. However, industry experts have been predicting the first QLACs to come out will be those for IRAs. That is because the IRA environment is perceived to be less complex than DC plans and because carriers want to wait to see if plan sponsor demand will grow for QLAC offerings with 401(k)s and other DC retirement plans.
Many producers work with IRAs, whether direct-sold or rollover IRAs from employer plans. The arrival of QLACs to the IRA market opens up another avenue for retirement income strategies they might want to consider recommending to clients.
QLAC must be elected
To purchase the AIG QLAC, a customer must submit a signed election form which indicates that the owner wants AIG’s DIA for IRAs to be treated as a QLAC and to have the contract so endorsed.
If buyers do not submit an election form, the product “will be considered to be a non-QLAC DIA and will follow the standard qualified/IRA rules,” the AIG materials point out. (A non-QLAC generally needs to start making payouts by age 70.5 or the person’s actual start date for RMDs — much sooner than the maximum start date for QLAC payouts, which is 85.)
The DIA, American Pathway, is a single premium fixed annuity. Variable and indexed annuities, or similar contracts, cannot be used as a QLAC, the company points out.
The issue ages for the QLAC range from zero to 83.
As indicated, the QLAC’s income payments must begin no later than the first day of the month following the month of the owner’s 85th birthday. That is by federal regulation. This is so even though other DIAs — the so-called traditional DIAs that are available outside of the retirement plan environment — typically allow payouts to start later than this if the owner so wishes.
The premiums that can be allocated to AIG’s QLAC are subject to limits set by the federal regulations. The lifetime limit is the lesser of $125,000 (indexed to cost-of-living in future years) or 25 percent of the individual’s aggregated traditional IRA account values as of the prior December 31, less previous IRA QLAC premium.
The payment types can be single or joint life, either life only or life with cash refund.
The death benefit prior to the start of income can either be return-of-premium (ROP) or no death benefit. “ROP plus interest is not permitted,” the AIG materials state.
Owners can elect to have their annual payment increase if they wish. The options include: CPI-U Index, 1 percent to 5 percent simple, compounded or flat dollar.
In a white paper on QLACs, the company makes a distinction between the QLAC DIAs that meet the new regulations and the so-called non-QLACs mentioned above. The non-QLACs are DIAs that carriers started offering with qualifying employer-sponsored plans and also with IRAs before the new regulations took effect. Those products continue to remain available, but the payouts generally start by age 70.5, and the customer’s RMDs are not reduced.
By comparison, QLACs that meet the new regulations generally refer to contracts with income start dates after age 70.5 and at or before age 85. People who elect this will have their IRA’s RMDs reduced to reflect the amount that has been directed to the QLAC.
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