What Happens to a QLAC When You Die?

A Qualified Longevity Annuity Contract (QLAC) is a specialized deferred income annuity. It provides a guaranteed income stream that begins later in life, typically at an advanced age such as 80 or 85. Individuals often incorporate QLACs into their financial plans using funds from qualified retirement accounts like 401(k)s or IRAs. This instrument mitigates the risk of outliving retirement savings, a growing concern as life expectancies increase. This article explores the outcomes for a QLAC upon the death of the annuitant or designated beneficiary, detailing contractual provisions and tax implications.

Understanding QLACs

A QLAC functions as a deferred income annuity purchased with funds directly from qualified retirement accounts, including traditional 401(k)s, 403(b)s, governmental 457(b) plans, and traditional IRAs. These contracts are designed to offer a guaranteed income stream that begins at a predetermined future date, which can be as late as age 85. A QLAC’s principal function is to protect against longevity risk, ensuring consistent income throughout one’s extended retirement years.

A significant benefit of a QLAC is its ability to defer required minimum distributions (RMDs) on the invested amount. Funds allocated to a QLAC are excluded from RMD calculations until the annuity payments commence, which can significantly reduce an individual’s taxable income during the earlier stages of retirement. The maximum amount an individual can invest in a QLAC is a lifetime limit, set at $210,000 per person for 2025, and this amount is subject to inflation adjustments. This limit applies across all qualified retirement accounts, but each spouse can contribute up to this limit from their respective accounts.

Unlike some other annuities, QLACs do not allow for variable or indexed returns and do not offer cash surrender values. Once purchased, the funds are committed to the contract, becoming illiquid until payments begin. This structure reinforces their purpose as a longevity hedge, not a short-term investment vehicle.

Death Benefit Provisions

The disposition of a QLAC upon the death of the annuitant is determined by the specific contractual provisions selected at the time of purchase. These options allow individuals to tailor the QLAC to their preferences regarding potential benefits for beneficiaries. Not all QLACs include death benefits, and the choice of a death benefit feature can influence the amount of the periodic income payments received by the annuitant.

Return of Premium (ROP)

One common death benefit option is the “Return of Premium” (ROP) feature, also known as a cash refund. If the annuitant dies before the total annuity payments received equal the original premium paid into the QLAC, the remaining balance of the premium, minus any payments already made, is paid to the designated beneficiaries. This ensures that at least the initial investment is returned, either to the annuitant through payments or to their heirs. Choosing this feature results in lower periodic income payments compared to a QLAC without such a provision.

Period Certain

Another available death benefit is the “Period Certain” option, which guarantees payments for a specific number of years, regardless of whether the annuitant lives for the entire period. If the annuitant dies before the guaranteed period concludes, the remaining payments are then made to the designated beneficiary for the remainder of that set term. For example, a 10-year period certain guarantees 120 monthly payments; if the annuitant dies after 60 payments, the beneficiary receives the remaining 60.

Joint Life

A “Joint Life” QLAC is designed to provide income over the lifetimes of two individuals, typically a spouse. Under this arrangement, payments continue to the surviving spouse or joint annuitant after the primary annuitant’s death. The income stream will continue for as long as either of the annuitants is alive, providing financial security for the surviving individual. While this option ensures continued income for a loved one, it results in lower initial payments than a single-life annuity due to the longer expected payout duration.

Pure Longevity Annuities

Some QLACs are structured as “Pure Longevity Annuities” with no death benefit. In such contracts, if the annuitant dies before payments begin, or before recouping the full premium through payments, no remaining value or death benefit is paid to beneficiaries. This design offers the highest possible periodic payments to the annuitant for a given premium, as the insurance company is not obligated to return any portion of the premium if the annuitant dies prematurely. This option is chosen by individuals primarily concerned with maximizing their own guaranteed lifetime income.

Recipient Options and Tax Implications

When a death benefit from a QLAC is triggered, the options available to beneficiaries and the tax consequences depend on the beneficiary’s relationship to the deceased annuitant and the specific terms of the QLAC contract. Since QLACs are funded with pre-tax contributions from qualified retirement accounts, any distributions to beneficiaries are subject to income tax.

Spousal Beneficiaries

For a surviving spouse designated as the beneficiary, flexible options exist. A spouse can choose to continue the QLAC as their own, potentially delaying the start of payments or rolling the death benefit into their own qualified retirement plan or IRA. If the spouse continues the QLAC, the income payments will remain tax-deferred until they are received, at which point they are taxed as ordinary income. This spousal continuation allows for the preservation of tax-deferred growth and the continued benefit of RMD deferral on the QLAC amount until the spouse reaches their own required beginning date for distributions.

Non-Spousal Beneficiaries

Non-spousal beneficiaries, such as children or other relatives, have fewer options but still receive the death benefit. They can choose to take the death benefit as a lump sum distribution. When a lump sum is received, the entire amount is taxed as ordinary income to the beneficiary in the year of distribution, as the original contributions were pre-tax. This can lead to a significant tax liability, potentially pushing the beneficiary into a higher tax bracket.

Alternatively, if the QLAC contract permits, non-spousal beneficiaries may have the option to receive the death benefit as a series of annuitized or periodic payments over time. This stretch option can help spread the tax burden over several years, as each payment is taxed as ordinary income as it is received. However, specific IRS rules dictate the duration over which these payments can be made, and they do not allow for continued RMD deferral beyond certain periods for non-spousal beneficiaries.

All distributions from QLACs, whether to the annuitant or beneficiaries, are taxed as ordinary income because they are funded with pre-tax dollars. If a QLAC was funded with after-tax contributions, a portion of each payment would be considered a return of principal and thus tax-free, though this is uncommon for QLACs within qualified plans.