6 Reasons Why Longevity Annuities Are Becoming So Popular
As people examine their financial needs in retirement, more and more people are incorporating longevity annuities into those plans. A longevity annuity offers a number of attractive features that you cannot find in other financial products. Here are six reasons why you might want to purchase a longevity annuity.
1. You don't have to worry about outliving your money
One of the chief concerns of retirees is that they will draw down their savings and wind up living in poverty during their final remaining years. A longevity annuity is structured in such a way that it guarantees* that you will receive a predetermined amount of money every month, or other interval of time that you choose, for the rest of your life.
In a recent press release, the U.S. Treasury recognized deferred income annuities as an important option to protect against longevity risks. “As boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement,”1 said J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy. “All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings.”2
The Treasury is now giving special tax status to certain longevity annuities they call QLACs. Recent regulations expand the availability of longevity annuities and make them accessible to the 401 (k) and IRA markets.3 The goal is to provide people with a tool that can help protect them from outliving their retirement nest egg.
So what exactly is a QLAC? the term "qualified longevity annuity contract" is being used to describe this new class of annuities that are given special status. The money in a QLAC is not subject to the normal required minimum distributions (RMDs) that typically kick in at age 70 1/2. In fact, distributions from a QLAC can be delayed to start as far out as age 85.
These new regulations require that in order to be considered a QLAC, the longevity contract must specify a date by which distributions will start and the start date of the distributions can be no later than the first day of the month following your 85th birthday.
The regulations also make clear that participants in a 401(k) or similar plan, or an IRA. are able to use as much as 25% (up to $125,000) of their account balance to purchase a longevity annuity.
An ROP (return of premium) option was also included in the financial regulations. There is a cost to add an ROP feature which will result in lower payments during distribution, but that cost is estimated to be relatively small.
It is clear that the Treasury, IRS, and others are recognizing that the income for life provided by annuities can play an important role in protecting against the risk of outliving your money.
If you have a 401(k) or other employer-sponsored individual account plan or an IRA, call Crown Atlantic at 855-386-4552 to see if a qualified longevity annuity contract makes sense for you.
2. You don't have to invest in risky stocks to generate income
When you buy a longevity annuity, you do not have to worry about losing any of the principal due to market downturns. You have a contract with the insurance company. In return for turning over a sum of money, the insurance company agrees to pay you a specific amount of money each month. The insurance company can invest the money as it sees fit, and it assumes all market risk.
3. It provides a regular monthly income
Unless you spent your career working in a government job or for a private employer who still offers a pension to its employees, chances are, the only regular stream of income you will have in retirement is Social Security. Most people cannot live on Social Security alone. Longevity annuities can provide a guaranteed stream of income that will supplement your monthly Social Security check.
4. You can determine when you want to start receiving payments
Not everyone who retires needs income immediately. A longevity annuity allows you to choose a year, or a future age, in which the stream of income will be turned on. When you pay that single premium to purchase a longevity annuity, you also select the payout date. Longevity annuities may have a certain minimum deferral period such as seven or 10 years. Your monthly payout will be more if you delay the start of your payouts for a longer period of time.
5. You know the amount of money you will receive
If you buy a longevity annuity at age 60 and do not plan to start receiving regular payouts until you are 75, much can happen over those 15 years. Your payout amount and payout start date is right there in your contract. You know what you will be getting when you turn 75. Your payout amount does not change if interest rates change or due to market volatility.
6. You can cover both you and your surviving spouse
Having income for your life is fantastic, but what about your spouse? You can set up a longevity annuity so that your spouse will also be assured of an income should you die before your spouse.
Your rate of return will depend, in part, on how long you live and the payout amount you receive each month. In certain circumstances, you may be able to convert a longevity annuity to an immediate annuity and start receiving income before your original payout date. While most longevity annuities are fairly straightforward, you should always go over them thoroughly. Talk with a professional, experienced in annuities, before you buy.
Annuities are long-term insurance contracts designed for retirement. As a result there may be fees or penalties for early withdrawals, including surrender charges and if taken prior to age 59 1/2, may be subject to a 10% federal additional tax.
*Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company; they are not insured by the FDIC.
1http://www.treasury.gov/press-center/press-releases/Pages/jl2673.aspx
2http://www.treasury.gov/press-center/press-releases/Pages/jl2448.aspx
3http://www.irs.gov/irb/2014-30_IRB/ar07.html