- Buying an annuity for your child can help provide a guaranteed stream of income for the rest of their lives and ensure that they remain financially secure.
- Setting up an annuity for your child can prevent them from burning through a lump-sum inheritance and ensure that they always have an income.
- There are potential drawbacks, including lack of access to the principle and inflation concerns.
- There are several types and styles of annuities, but deferred annuities may make the most sense when purchasing one for your child. This gives you the chance to pay into the annuity and build its value over time.
Should You Buy an Annuity for Your Child?
While everyone’s circumstances are different, buying an annuity for your child can guarantee continuous income for them after you are gone.
Some annuities are paid into over time, with the value growing over many years. If you have a young child and don’t need the annuity to pay out until they are, for example, in their 30s, then you could pay into it over decades and build up a significant value in interest.
When you are ready for the annuity to pay out, your child will begin receiving payments within a time frame you set — such as monthly or annually — to help secure their financial future.
Read More: Reasons To Buy An Annuity
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.
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Pros and Cons of Setting Up an Annuity for Your Child
There are pros and cons to buying an annuity for your child. It’s important to remember that this is not the only way to leave money for your children or help them financially. But, under the right circumstances, it can be a beneficial option.
The main benefit of purchasing an annuity for your child is helping secure their financial future. The payments from an annuity can last the rest of their lives, providing financial security and ensuring that they will always have money coming in even if they face unexpected financial issues.
Pros of Buying an Annuity for Your Child
- Helps guarantee their financial future
- Prevents your child from blowing through a lump-sum inheritance
- You can pay into and build up the annuity over years
An annuity can ensure that your children won’t exhaust the inheritance you leave for them too quickly by providing consistent and predictable income over an extended period, rather than a lump sum they could potentially lose. You can structure an annuity to continue paying for many years, providing them with a reliable source of income.
There are also downsides and potential drawbacks to purchasing an annuity for your child. The first is mainly a caution: It can be very difficult, and sometimes impossible, to break an annuity contract.
Cons of Buying an Annuity for Your Child
- Annuity contracts often cannot be broken
- There are inflation concerns if the payments are steady
- Your child can’t access more money than what is available in each payment
Once you have committed to the annuity, you are typically locked into the contract. If your financial circumstances change 10 years down the road, for example, there may not be much that you can do about accessing those illiquid funds.
This also means that your child typically won’t be able to access money beyond what they receive in their regular payment stream. This could be a drawback if your child one day needs access to a lump sum of cash; It’s unlikely that they’ll be able to recover that money in an emergency.
An additional disadvantage of annuity payouts is that they are typically fixed and may lose their value over time because of inflation. However, certain annuities provide provisions that allow for adjusted payouts to offset the impact of inflation.
If these drawbacks make you think twice about buying an annuity for your child, consider alternatives for estate planning — such as setting up a trust — which can offer similar benefits without losing control of the underlying investment principal.
What Type of Annuity Should You Purchase?
Annuities come in many forms. There is no one option that makes sense for everyone.
But when looking at an annuity to purchase for your child, it may make the most sense to look at deferred annuities. According to the U.S. Securities and Exchange Commission, deferred annuities are paid into over time, tax-deferred and begin their stream of payments years down the road.
If you are looking to set up payments for your child that will last throughout their lives and after you are gone, deferred annuities offer the chance to build up that value over time and begin payments down the road instead of immediately. The other option is an immediate annuity, where you’ll commit a lump sum and payments begin immediately.
There are several options for structuring how annuities build up their value and pay out as well, with varying levels of risk. Fixed annuities, for example, pay out at a fixed rate with no variation.
Meanwhile, an option like a variable annuity sees your contributions invested, which results in significantly more risk but significantly higher rewards if the investments perform well.
How much risk you are willing to take may depend on your personal situation. Again, there is no one option that is best for everyone looking to purchase an annuity for their child.
Read More: First-Time Annuity Buyers
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How Will the Annuity Work?
Assuming that you opt for a deferred annuity, the process of how the product will work is fairly straightforward.
Once you have purchased the annuity, you will begin to pay into it over time similar to any other savings account. Since you’re planning for your child, you might pay into it over years (or even decades) and build up a significant value.
Then, at a predetermined time, the annuity will convert into a stream of payments that will pay out to your child. You could set this for when they turn 18 or 25, or any other time that makes sense for your situation.
Those payments will then last for the rest of your child’s life. You determine their frequency as well. Payments typically come monthly or annually.
How To Set Up an Annuity for Your Child
The first step in setting up an annuity for your child is to choose a provider to purchase the annuity from. When picking a provider, it’s important to be sure that you find a reliable company.
If the company you choose goes out of business or enters bankruptcy years down the road, then your annuity may not be secured. Selecting an established, reputable and trusted company can help to prevent that from happening. The rating given to a company can help determine if you can trust them.
Once you have selected a company, you can go over your annuity options with a representative and pick the product that makes the most sense for you. You then pay into the annuity.
Remember that it can be very difficult to get out of an annuity contract once you have purchased the product. It is important to understand exactly what you want and need before finalizing the purchase.
Editor Samantha Connell contributed to this article.