Pros and Cons of Setting Up an Annuity for a Child
The main benefit of purchasing an annuity for your child is helping secure their financial future. Annuity payments can last the rest of their lives, ensuring they always have money coming in even if they face unexpected economic issues.
However, a downside to annuities is that the contract can be hard to break. You’re typically locked into the contract once you have committed to the annuity. According to the U.S. Securities and Exchange Commission, if you try to withdraw from an annuity too early, you could face a surrender charge.
“The cons are tying up the cash value, anticipating the annuity company will exist in the long-term and delaying the gift to the child,” Vasileff said.
Pros
- Secure a financial future for the child.
- Grow funds over time.
- Avoid probate.
- Protect the child from spending rashly.
- Defer taxes until the annuity pays income.
Cons
- Annuity contracts are hard to break.
- Fixed payments may not keep up with inflation.
- Your child can only access what is available in each payment.
Q&A with Annuity Owner Ronnie Zelek
- My mom purchased the annuity after my father passed away so she could secure financial freedom for herself, my brother and me.
- She set it up in a way that helped provide for me as a kid, cover my college and continue until I became an adult. And once I became 18, the annuity actually transferred to me. So, it helped pay for my expenses in college and even after because it is a lifetime annuity.
- It’s helped supplement a lot of things in my life. For example, my buying power of things was accelerated in some shape or form because I had this extra little pool of money coming to me monthly. So that’s always been a little bit of help. It’s a relief in some ways when things have gotten harder because the regular income is always there. And when things are better, I can save the additional income or do other fun projects.
While Zelek’s success story is noteworthy, this isn’t to say buying an annuity for a child is perfect for every situation. Before you buy an annuity, understand if an annuity is in your child’s best interest and aligns with your financial goals.
How Will the Annuity Work?
How the annuity works varies, depending on what type you purchase. If you’re looking for a simple contract with minimal risk, a deferred income annuity is likely to work best for a child.
With a flexible premium deferred annuity, you pay into it over time, similar to any other savings account. Since you’re planning for a child, you might pay into it over years, or even decades, and build up a significant value.
Deferred annuities can grow at a specific rate, depending on the type you purchase. Then, at a predetermined time, the annuity can convert into a stream of payments that will pay out to your child. You could set this for when they turn 18, 25 or any other age that makes sense for your situation.
Those payments can then last for the rest of your child’s life. You determine their frequency. Payments typically come monthly or annually.
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Setting Up an Annuity for a Child
Generally, you can set up an annuity for your child in three steps.
- Choose a trustworthy annuity company.
- Customize the contract to meet your child’s needs.
- Sign your contract and pay into the annuity.
Choosing a trustworthy annuity provider is one of the most important steps. If the company you choose goes out of business or enters bankruptcy years later, your annuity may not be secured. Selecting an established, reputable company can help prevent that from happening.