Longevity insurance, commonly referred to as a longevity annuity, is a deferred income annuity. Deferred annuities promise to pay a specific monthly income amount for life beginning at a future date in exchange for an immediate lump-sum premium payment. However, up until recently, they were not as attractive to purchase with qualified retirement plan funds as they were with taxable dollars. This is due to the fact that longevity annuities can defer income as late as age 85, but were counted as an asset when determining one’s required minimum distribution (“RMD”) at age 70 ½.

To address this challenge, the Treasury Department issued regulations on July 2^nd, 2014. The final regulations ease the burden of planning for longevity by changing how RMDs are calculated, if you use a new type of deferred income annuity called a “Qualified Longevity Annuity Contract” (“QLAC”). What is significant about this ruling is that an investor can now use tax-deferred money to fund a QLAC. Monies used to fund a QLAC are now excluded from the RMD calculation. Payments from a QLAC (whenever they begin) are implicitly assumed to satisfy the RMD obligation. To be eligible to be treated as a QLAC, a longevity annuity must meet the following criteria:

• The cumulative dollar amount invested into all QLACs across all retirement accounts may NOT exceed the LESSER of $125,000 or 25% of the value of all retirement accounts.
• The limitations will apply separately for each spouse for their own retirement accounts.
• The QLAC must begin payouts no later than age 85.
• The QLAC must provide fixed payouts (not variable or equity-indexed), though it may have a cost-of-living adjustment.
• The QLAC cannot have a cash surrender value once purchased (i.e., it must be irrevocable and illiquid), but it can have a return-of-premium death benefit.
• QLACs are not available for Roth IRAs or defined benefit plans 

Pros and Cons

QLACs may be used as a strategic investment for tax planning to help lower your income tax bill. Another advantage is piece of mind. Longevity insurance can help alleviate the fear of out living your assets, knowing that you will be receiving an income stream until death.

The primary risk to purchasing these contracts is that they are illiquid and irrevocable. Additionally, without the purchase of a death benefit rider, these policies are on a use it or lose it basis. What this means is if you die before you start to receive your benefits, you lose all the benefits – they cannot be passed on to a beneficiary. Another disadvantage to longevity insurance is that you are negatively affected by inflation. Inflation will decrease the amount of benefit you receive, barring any inflation rider. Longevity annuities can be structured in different ways (costs, benefits, riders, etc.) and each potential policy should be reviewed in-depth, taking into account each individual’s particular situation.