How Longevity Annuities Compare
There are 15 different types of annuities available, and each one has their own benefit propositions and contractual limitations. Longevity annuities solve for future income needs, or what I refer to as income later or target date income planning.
In the world of annuities, there are only two ways to solve for income later needs. One way is to use an income rider attached to a deferred annuity, like a variable or indexed annuity. An income rider is an attached benefit that typically grows at a contractual rate, with that guaranteed amount only used for income. Income rider valuations are monopoly money unless used for lifetime income. Income riders are flexible, but are taxed last in, first out (LIFO), meaning gains are taxed first when the strategy is in a non-IRA account.
Any money coming out of a qualified account, like a traditional IRA, is taxed at those IRA rules. That includes any type of annuity, including longevity annuities and QLACs.
When using a longevity annuity outside of an IRA (i.e., non-qualified account), the taxation of that income is favorable because it is annuitized. Annuitization is a combination of return of principal and interest, so you only pay taxes on the interest portion of the income. This is called the exclusion ratio in the annuity industry, and describes that part of that income is not taxable.
Longevity annuity quotes from your agent or adviser cannot be “juiced” from a proposal standpoint. Only the contractual guarantees can be shown, which is a good thing because you should own an annuity for what it will do and not what it might do. Always buy the contractual guarantees.
Longevity risk is simply the possibility of running out of money, or outliving your money. Annuities are the only product on the planet that contractually solve for longevity risk.
That fact certainly doesn’t mean that everyone needs to own a longevity annuity, or needs to own any annuity for that matter.
What it does mean is that it might make sense to consider whether this future income strategy makes sense for your specific situation.