Key Takeaways
- Buying an annuity for a child can provide them with a regular, secure income for life.
- A deferred income annuity is likely to work best for a child.
- Potential drawbacks include lack of access to the principal and inflation concerns.
Reasons To Buy an Annuity for a Child
People buy annuities for their children or grandchildren to ensure their financial security. With an annuity, assets do not have to go through probate, are protected against market downturns, and can guarantee income for the rest of your child’s lifetime. When and how your loved one receives the money will depend on how you structure the annuity contract.
Avoid Probate
Creating a will can help ensure that your assets are distributed according to your wishes. Upon your passing, your will must undergo probate to be authenticated and validated by the court. It’s important to note that while all wills need to go through probate, not all assets necessarily do. Here is a list of assets that typically bypass the probate process:
- Life insurance policies with named beneficiaries
- Annuity contracts with named beneficiaries
- Retirement accounts with designated beneficiaries
- Bank accounts with Payable on Death (POD) provisions
- Investment accounts with Transfer on Death (TOD) registrations
Many individuals seek to spare their heirs from the lengthy and expensive probate process when settling their estate.
One way to address this concern is by using annuities as an estate planning tool.
“I think an income annuity purchased by a parent for a child is a small piece of estate planning — but a good one,” Lili Vasileff, Certified Financial Planner (CFP® professional) and president of Wealth Protection Management, told Annuity.org.
Grow and Protect an Inheritance
In addition to avoiding probate, an annuity can offer growth potential for an inheritance and flexibility, with the option to customize the annuity contract with add-ons called riders. The annuity’s beneficiaries can choose whether to receive the funds as a lump sum or a series of income payments.
“The annuity guarantees income at some future point for the child, and the cash value put down in the annuity gets the money out of the parent’s estate, assuming the child is the owner,” said Vasileff, who is also a Certified Divorce Financial Analyst (CDFA) and Master Analyst in Financial Forensics (MAFF).
Plus, an annuity can protect the cash value you put down, also known as the premium, so you will not lose your initial investment, even in a market downturn.
Guarantee Income for Life
Most children won’t spend a large lump sum of money responsibly. An annuity gives your child regular payments for the rest of their life or a specific period. This helps ensure the money is spent wisely, and they won’t face financial distress.
Ronnie Zelek has had an annuity since he was a child. In an interview with Annuity.org, he explained the benefits of having an annuity from a young age.
Q&A with Annuity Owner Ronnie Zelek
Ronnie Zelek
Annuity Owner
- How did you get an annuity as a child?
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My mom purchased the annuity after my father passed away so she could secure financial freedom for herself, my brother and me.
- How did your mother set up your annuity?
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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.
- How do you benefit from your annuity?
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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.
Annuities create the guarantee of future income, and the desire to offer that kind of safety to our children is enticing. However, it is important to remember that annuity contracts are often difficult to break and are based on planning many years or decades into the future. Your financial needs and wishes for your child may change, and it is worth considering all the options before selecting an annuity.
Stephen Kates, CFP®, Licensed Life Insurance ProducerPrincipal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
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.
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.
Ready To Invest in Annuities?
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.
Review Annuity.org’s list of best annuity providers to get a head start in your annuity provider research. Our editorial team found MassMutual to be the best issuer for deferred income annuities, which could work best for a child.
MassMutual
Financial strength ratings are based on 2022 AM Best data.
Provider Details
Since its founding in 1851, MassMutual has offered insurance and retirement products including life insurance, annuities and IRAs. The Massachusetts-based company holds an A++ rating from S&P Global Ratings.
Annuities Offered
- 1 Fixed
- 1 Deferred Income
- 1 SPIA
Pros
- A- Rating from BBB and 0.03 NAIC Complaint Index score
- Income annuities have lots of payout options
- Low minimum premium for income annuities
Cons
- Fewer product options available than from other providers
Our Take
MassMutual has provided life insurance and annuity products for over 170 years. Today, the company offers a fixed annuity as well as two income annuities. All the annuity products have a $10,000 minimum premium and relatively low surrender charges between 4% and 8%.
MassMutual’s income annuities can be customized in several ways. The company offers several payout options and optional inflation protection. RetireEase Choice, the deferred income option, allows annuity owners to defer payments from 13 months to 30 years after the purchase date.
Beat the Bank With Fixed Annuity Rates As High As 6.4%