Kelly Bullis: Should you be thinking about doing a longevity annuity?

OK! I get it. Long name sounds funny, what am I talking about anyway?

Longevity annuities (or QLACs: Qualified Longevity Annuity Contracts) are a type of annuity that will start paying if you’re still alive at a given age to ensure that no matter what’s happened in your portfolio, you have some amount of money to continue living without making drastic lifestyle changes late in life.

Another way of putting it, a longevity annuity is like a different kind of life insurance. Only instead of insuring your inevitable death, it ensures that if that inevitable death event doesn’t happen before you run out of assets to live on, you will have some new income stream kick in to keep you going financially until that unknown, but eventual event (death) finally occurs.

Given the fact that folks are starting to outlive their projected life expectancy (example, my father-in-law is 97 and probably in good enough shape that his doctor would say he is only 78 years old), many of the old estate planning/financial planning models used are starting to come up short. To put it bluntly, many folks are running out of retirement savings. Remember when companies used to offer pensions instead of 401ks? A pension keeps going until you die. A 401k has a limited amount of funds, when they are all gone, so is any further retirement pay from that 401k.

Longevity annuities are relatively low-cost. That’s because the guarantee starts at some point in the future. When a person purchased a longevity annuity, the issuing company is betting that most folks will die before the kick-in age (which can be selected when purchased), thus they (the annuity issuing company) doesn’t have to pay anything. For those who live long enough to start receiving longevity annuity payments, the expectation is that they will still not live that long. Thus, the issuing company can charge quite low premiums.

Who is a good candidate for purchasing this type of annuity? Folks who are relatively healthy, and expect to live beyond 80-85 years old. Folks who are concerned that they might run out of retirement funds, so they don’t do fun things in their retirement years while they are still healthy. (Knowing they have a backstop of a longevity annuity should they live long lives, might take the fear out of taking that big cruise, or taking that dream trip to Europe, etc.)

You purchase such a type of annuity, just like you purchase any other annuity. Same folks, just need to tell them you are interested in a QLAC. They will run their numbers and come back with an amount you pay up front, just like any other annuity. That means that, should you live long enough to start taking out payments, some will be non-taxable return of capital.

Have you heard? Ecclesiastes 9:5a says, “For the living know that they will die, but the dead don’t know anything…”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.