Qualified longevity annuity contracts offer even worse returns than standard life insurance.
I wrote recently that people who buy life insurance are effectively loaning money to insurance companies at around a 2.5% interest rate, which is a great deal for the companies and a lousy investment for the policyholders.
A recent Wall Street Journal article noted that QLACs are typically bought by people nearing retirement who are worried that that they might outlive their retirement savings. One example is a 65-year-old who buys a $200,000 QLAC at age 65 and starts receiving monthly payments of $11,175 at age 85. That’s $134,100 a year, which sounds like a great return on a $200,000 investment.
What is the implied rate of return on a QLAC? It’s complicated, but a durable rule to remember is this: “If someone who is pretty smart offers to sell you an investment and it is really difficult to figure out the rate of return, the odds are that the rate of return is pretty bad.” The only way QLACs could ever be financial attractive is if you live many, many years past your life expectancy. For example, if Bob buys a QLAC with a death benefit and lives to 100, his implied annual return is 7.7%, which is getting closer but still not as good as stocks.
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