Compare Annuities for Children: Smart Ways to Build Long-Term Security and Save on Future Costs

How to Set Up an Annuity for a Child

There isn’t just one way to establish an annuity for a child. The biggest decision is who owns the contract. That determines who controls the money, when the child gains control, and potentially how withdrawals are taxed.

1. Parent-Owned Annuity With the Child as Beneficiary

The parent purchases and owns the annuity and names the child as beneficiary.

How it works:

• Parent is the owner.
• Parent controls deposits and withdrawals.
• The parent is usually the annuitant as well.
• Child receives the remaining value or death benefit when the parent dies.

Best for: Parents who want to retain complete control over the money while creating an inheritance for the child.

Pros:

• Parent retains control.
• Child cannot access the money prematurely.
• Tax-deferred growth while money remains inside the annuity.
• Beneficiary designation generally allows proceeds to bypass probate.

Cons:

• The money legally belongs to the parent, not the child.
• The parent’s creditors and estate-planning situation may affect the contract.
• The child generally inherits the annuity rather than receiving unrestricted tax-free money.
• Taxable annuity gains are generally taxable as ordinary income when distributed.

2. Parent-Owned Annuity With the Child as Annuitant

A parent or grandparent can potentially own an annuity while naming the child as the annuitant.

The owner still controls the contract. The annuitant is generally the person whose life is used for certain contractual calculations.

Best for: Situations where the insurance company permits a young annuitant and the contract is intentionally designed around the child’s life expectancy.

Pros:

• Adult retains ownership and control.
• Potentially very long accumulation period.
• Can be incorporated into multigenerational planning.

Cons:

• Carrier rules vary substantially.
• Naming a child as annuitant does not automatically give the child ownership.
• Death-benefit provisions can depend on whether the owner or annuitant dies, so the actual contract language matters.

This should not be set up simply because someone wants the child’s age attached to the annuity. There should be a clear planning reason for doing it.

3. UTMA or UGMA Custodial Annuity

An annuity can potentially be established under a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) arrangement, subject to state law and the insurance company’s rules.

The registration might effectively resemble:

Parent or other adult, Custodian for Child under the state’s UTMA

The custodian controls the annuity while the child is a minor.

Once the state’s applicable termination age is reached, the child becomes legally entitled to the property.

Best for: Parents or grandparents who want to make an irrevocable financial gift to a child.

Pros:

• Money legally belongs to the child.
• Adult custodian manages it while the child is young.
• Can provide decades of tax-deferred annuity accumulation.
• Relatively straightforward compared with establishing a trust.

Cons:

• The gift is generally irrevocable.
• The child eventually obtains control.
• You cannot simply take the money back because circumstances change.
• State UTMA and UGMA rules differ.
• Insurance companies have their own minimum-age and custodial ownership requirements.

One issue to consider is taxation. Nonqualified annuity withdrawals generally distribute taxable earnings before principal, and taxable amounts withdrawn before age 59½ may be subject to an additional 10% federal tax unless an exception applies.

That makes liquidity planning particularly important when putting a child’s money into an annuity.

4. Trust-Owned Annuity for the Child

A trust can own an annuity with the child as the beneficiary.

For example:

Irrevocable Trust → Owns Annuity → Child Is Trust Beneficiary

This is considerably more sophisticated than using a UTMA.

Best for:

• Larger gifts
• Wealthy families
• Estate planning
• Grandparent planning
• Children who should not receive a large lump sum at age 18 or 21
• Multigenerational wealth planning
• Situations where distributions need to be controlled

Pros:

• Parent or grandparent can establish rules controlling distributions.
• Money can potentially remain managed well into adulthood.
• Trust can specify when the child receives income or principal.
• Useful for multigenerational estate planning.

Cons:

• Legal and tax complexity.
• Attorney fees.
• Trust taxation can be unfavorable if structured incorrectly.
• Not every trust should own an annuity.

Trust-owned annuities should be coordinated with an estate-planning attorney, CPA, and annuity specialist before the contract is purchased.

5. Grandparent-Owned Annuity With Grandchild as Beneficiary

Grandparents can purchase an annuity and name a grandchild as beneficiary.

This is similar to parent ownership but can be useful for legacy planning.

Best for: Grandparents who want to earmark assets for grandchildren without immediately giving the grandchildren control.

Pros:

• Grandparent maintains control.
• Tax-deferred growth.
• Beneficiary designation can generally bypass probate.
• Multiple grandchildren can potentially be designated by percentage.

Cons:

• The annuity remains the grandparent’s property.
• Beneficiaries generally owe ordinary income tax on previously untaxed annuity gains.
• Estate and generation-skipping transfer tax issues should be considered for large estates.

6. Grandparent Funds a UTMA Annuity for a Grandchild

Instead of keeping ownership, a grandparent can make an irrevocable gift into a UTMA or UGMA arrangement established for the grandchild.

The adult custodian manages the account until the state’s applicable termination age.

Best for: Grandparents who are comfortable permanently gifting the money.

Pros:

• Creates an asset specifically belonging to the grandchild.
• Long time horizon for accumulation.
• Simpler than establishing a sophisticated trust.

Cons:

• Grandparent gives up ownership permanently.
• Child eventually receives control.
• Gift-tax reporting may need consideration for larger contributions.
• An annuity may restrict access to money that could otherwise be needed for education, a house, or other expenses.

7. Roth IRA Annuity for a Working Child

A child who has legitimate taxable compensation may be eligible to establish a Roth IRA, and a Roth IRA can be structured as an individual retirement annuity.

The child needs qualifying compensation. That could potentially include legitimate earnings from:

• A W-2 job
• Babysitting
• Lawn care
• Modeling
• Working in a family business
• Other legitimate self-employment

The contribution cannot exceed the applicable IRA contribution limit or the child’s qualifying compensation, whichever is lower.

The money used for the contribution does not necessarily have to physically come from the child’s paycheck. A parent or grandparent can provide the money, provided the child has sufficient qualifying compensation.

Best for: A working teenager or young adult with an exceptionally long retirement horizon.

Pros:

• Potentially decades of tax-advantaged growth.
• Qualified Roth distributions can eventually be tax-free.
• No lifetime RMD requirement for the Roth IRA owner under current rules.
• Creates retirement savings very early.

Cons:

• Child must have legitimate qualifying compensation.
• An annuity may be unnecessarily restrictive for a young Roth IRA owner.
• Insurance companies commonly have minimum issue-age requirements.
• Long surrender periods can create liquidity problems.

For most working children, a custodial Roth IRA invested conventionally should also be compared against a Roth IRA annuity.

8. Annuity Owned by a Trust Created by a Grandparent

For substantial family wealth, a grandparent can establish an irrevocable trust for a grandchild and have that trust purchase an annuity.

This gives the family much more control than a UTMA.

For example, the trust could specify:

• Income beginning at age 25
• Additional distributions at age 30
• Additional distributions at age 35
• Money available for education
• Money available for a first home
• Lifetime trust distributions
• Restrictions protecting assets from poor financial decisions

Best for: Larger estates and grandparents who want control extending beyond the child’s age of majority.

Pros:

• Greater control than a UTMA.
• Can provide structured distributions instead of a lump sum.
• Potentially useful for asset-protection and estate-planning strategies.

Cons:

• Legal and tax costs.
• Trust must be drafted properly.
• Annuity taxation becomes considerably more technical.

9. Structured-Settlement Annuity for a Child

A child receiving money because of a lawsuit, injury, or legal settlement may have proceeds placed into a structured-settlement annuity.

Instead of giving the child a large lump sum, the settlement can guarantee payments at predetermined ages.

For example:

• $50,000 at age 18
• $50,000 at age 21
• $100,000 at age 25
• Monthly income beginning at age 30

Best for: Minor settlements and personal-injury cases.

Pros:

• Guaranteed scheduled payments.
• Prevents an 18-year-old from receiving and potentially spending the entire settlement.
• Can be customized around future financial needs.
• Certain qualifying personal-injury structured settlements can receive favorable federal tax treatment.

Cons:

• Usually very difficult or impossible to change after establishment.
• Limited liquidity.
• Future inflation can reduce purchasing power.

10. Special Needs Trust With an Annuity

An annuity may sometimes be incorporated into a trust designed for a child with special needs.

The trust, rather than the child directly, would normally control the asset.

Best for: Families coordinating lifetime financial support with government-benefit eligibility.

Pros:

• Potential lifetime income planning.
• Trustee controls distributions.
• Can integrate with broader special-needs planning.

Cons:

• Medicaid and SSI rules can be extremely technical.
• The wrong ownership or payout arrangement can jeopardize benefits.
• Requires an attorney familiar with special-needs planning.

This should not be established using a generic annuity application without legal guidance.

11. Adult Owns the Annuity and Uses Scheduled Withdrawals for the Child

The adult can simply purchase an annuity in his or her own name and later use withdrawals to pay for the child’s:

• College
• First house
• Wedding
• Business
• Graduate school
• Other financial needs

There is no legal transfer of ownership to the child.

Best for: Parents who want maximum flexibility and control.

Pros:

• Parent keeps control.
• Parent decides when and how much the child receives.
• Child does not automatically receive the account at a particular age.

Cons:

• Withdrawals may generate taxable income.
• Surrender charges may apply.
• Money remains part of the parent’s financial assets.

12. Adult Owns the Annuity Today and Transfers It Later

Some annuity contracts allow ownership to be changed to an adult child later.

However, this needs to be handled carefully.

A parent or grandparent should not assume they can purchase an annuity today and simply gift the contract to the child later without tax consequences.

Transfers of annuity contracts can create:

• Income-tax consequences
• Gift-tax considerations
• Ownership issues
• Beneficiary changes
• Carrier-specific restrictions

Best for: Families that want to maintain control initially but anticipate eventually transferring ownership to the child.

Pros:

• Adult maintains control during the early years.
• Ownership may potentially be transferred once the child is older and financially responsible.
• Allows the family to delay the decision about when the child receives control.

Cons:

• Transfers can create unexpected tax consequences.
• Insurance-company approval may be required.
• Contract provisions may change based on ownership.
• Poor planning can create avoidable tax or estate problems.

If eventual ownership by the child is the objective, it is usually better to determine the ownership strategy before purchasing the annuity.

13. Set Up a Non-Spousal SPIA or DIA for the Child

A parent, grandparent, or other family member can potentially fund a nonqualified Single Premium Immediate Annuity (SPIA) or Deferred Income Annuity (DIA) designed to provide guaranteed payments to a child or grandchild, subject to the insurance company’s minimum-age, ownership, annuitant, and payee requirements.

This is different from buying a deferred annuity and simply naming the child as beneficiary. The objective is to convert a lump sum into a contractual future income stream for the child.

How a SPIA Works

With a Single Premium Immediate Annuity, one lump-sum premium is deposited with the insurance company and income generally begins within a relatively short period.

Depending on the contract, payments could be structured as:

• Lifetime income
• Life with a guaranteed period
• Payments for a specified number of years
• Payments for a specified amount
• Other available settlement options

For example, a parent or grandparent could fund an annuity intended to provide a child with guaranteed income rather than giving the child unrestricted access to a lump sum.

How a DIA Works

A Deferred Income Annuity works similarly, except the income commencement date is pushed further into the future.

For example, money could potentially be deposited while the child is young with guaranteed income scheduled to begin at:

• Age 18
• Age 21
• Age 25
• Age 30
• Age 40
• Retirement

Actual minimum ages and allowable deferral periods depend on the insurance company.

The longer the income is deferred, the more time the insurer has before payments begin, which can materially affect the guaranteed future payout.

Why This Setup Is Unique

The purpose isn’t primarily account-value growth or liquidity.

The goal is guaranteed future income.

Instead of giving the child a large lump sum at a predetermined age, the family can create a contract designed to provide scheduled or lifetime income.

This can be useful when the person funding the annuity wants to provide long-term financial support while reducing the risk that the entire inheritance is spent immediately.

Non-Spousal Structure

The recipient does not have to be the purchaser’s spouse.

A parent, grandparent, or another person may potentially fund an annuity benefiting a child or grandchild. However, the exact setup varies by insurance company.

Depending on the carrier and contract, the parties can include:

• Purchaser: Parent or grandparent providing the premium.
• Owner: Person or entity legally controlling the contract.
• Annuitant: Person whose life expectancy may determine payments.
• Payee: Person receiving the income.
• Beneficiary: Person receiving applicable remaining contract benefits after a death.

These roles should be established correctly from the beginning. A poorly structured arrangement can produce unintended income-tax, gift-tax, estate-planning, or death-benefit consequences.

Best for:

• Parents wanting to establish lifetime income for a child.
• Grandparents creating a predictable financial legacy.
• Families concerned about a beneficiary spending an inheritance too quickly.
• Families wanting payments to begin at a specific future age.
• Parents or grandparents who value guarantees more than liquidity.
• Families trying to convert a lump-sum gift into scheduled future income.

Pros:

• Can create guaranteed income for the child’s future.
• Income can potentially last for the child’s entire lifetime.
• A DIA can postpone payments until a specific future age.
• Reduces the risk associated with giving a young adult a large unrestricted lump sum.
• Payments are backed by the issuing insurance company’s claims-paying ability.
• Certain guarantees can be added so beneficiaries receive payments if the annuitant dies prematurely.
• Can be incorporated into larger gifting and estate-planning strategies.

Cons:

• Liquidity can be extremely limited.
• Annuitization can be irreversible.
• Once the income arrangement is established, changing it may be difficult or impossible.
• Life-only payments can stop at the annuitant’s death unless additional guarantees are included.
• Adding refund or period-certain guarantees generally reduces the initial income payment.
• Inflation can reduce the purchasing power of level payments over several decades.
• Carrier minimum-age requirements may eliminate this strategy for very young children.
• A large premium could create gift-tax reporting considerations.
• Taxation can become more complicated when the purchaser, owner, annuitant, and income recipient are different people.

What Annuities for Children Really Are

An annuity for a child isn’t a special product. It’s a standard annuity (fixed, indexed, or immediate) owned by a parent or grandparent, with the child as the annuitant or future beneficiary. The adult controls the money, decides how it grows, and determines when and how funds are distributed.

For first-time buyers, this means:

• You—not the child—control withdrawals, income start dates, and investment direction.
• The child benefits later through tax-deferred compounding or guaranteed income.
• The annuity must be funded with after-tax money (non-qualified) unless it’s set up within a Roth IRA.

Stop guessing at custodial rules and let us handle the contract setup for you for free.

Note: If you are a young adult in your 20s or 30s looking to buy an accumulation or retirement plan for your own financial future, see our guide on annuities for young adults instead.

Annuity Inheritance Planning: A Focused Look at Multigenerational Planning

Why Parents Consider Annuities for Children

• Guaranteed growth: Fixed annuities and MYGAs provide predictable returns higher than most savings accounts or CDs.
• Tax-deferred compounding: Earnings grow faster because taxes are delayed until withdrawal.
• Principal protection: Fixed and indexed annuities protect your investment from market losses.
• Future income: Optional income riders (GLWBs) can turn savings into lifetime income later in adulthood.
• Financial legacy: You can transfer wealth while avoiding probate through direct beneficiary designations.

When Annuities Don’t Make Sense

• You’ll need the money before the annuity matures.
• You want tax-free college savings (529 plans are better for that).
• You expect higher returns and can tolerate market volatility (brokerage accounts may outperform).
• You don’t want to deal with early-withdrawal penalties or long surrender schedules.

Reasons to Use an Annuity for a Child

• Lock In Guaranteed Lifetime Income Starting in Adulthood
• Grow Funds Safely With a Multi-Year Guaranteed Annuity (MYGA)
• Replace the Need for a Trust With Annuity Restrictions
• Provide Lifetime Support for a Child With Special Needs
• Build a Child’s Retirement With a Roth IRA Annuity
• Use a SPIA to fund a life insurance policy for life
• Delay a Child’s Inheritance With a Deferred Annuity

Best Annuity Options for Children

1. MYGA (Multi-Year Guaranteed Annuity)

• How it works: A fixed annuity with a set interest rate for a chosen term (like a CD but tax-deferred).
• Pros: Predictable growth, low risk, penalty-free annual withdrawals, and better rates than most bank CDs.
• Cons: Early withdrawals face penalties; gains are taxed as ordinary income.
• Best for: Parents and grandparents who want guaranteed accumulation for future milestones like a car, college gap fund, or wedding.
• Funding methods: Cash, gifts, or a 1035 exchange from an existing annuity.

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2. Fixed Indexed Annuity (FIA)

• How it works: Earn interest tied to an index (like the S&P 500) without risking losses from market downturns.
• Pros: Principal protection with growth potential above fixed annuities; optional GLWB income riders for future guaranteed lifetime income.
• Cons: Returns depend on index performance, caps, and participation rates; liquidity is limited during the surrender period.
• Best for: Long-term growth with protection for a future adult income stream.
• Funding methods: Cash, gifts, or 1035 exchange.

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3. Roth IRA Annuity (for working teens)

• How it works: If a teen has earned income, they can fund a Roth IRA that owns a fixed or indexed annuity.
• Pros: Tax-free growth and withdrawals in retirement; combines principal protection and lifetime income potential.
• Cons: Contribution limits and 5-year rule; requires earned income.
• Best for: Teens with part-time jobs who want to start compounding tax-free income early.

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4. Structured Settlement Annuity

• How it works: Used in court-approved settlements for minors. The annuity pays future guaranteed installments.
• Pros: Predictable payments; often creditor-protected.
• Cons: No flexibility to change terms; used only for legal settlements.
• Best for: Families receiving personal injury or legal settlement funds.

How to Fund an Annuity for a Child

• Cash or savings: Most common option; use after-tax dollars.
• 1035 exchange: Move money from an existing annuity without triggering taxes.
• Custodial accounts (UGMA/UTMA): You can fund an annuity from these, but the adult must still hold ownership.
• Roth IRA contributions: For teens with earned income.

Tax Considerations

• Non-qualified annuities: Gains are taxed as ordinary income upon withdrawal.
• Roth IRA annuities: Tax-free growth and withdrawals after age 59½.
• 529 vs. annuity: 529s are better for education; annuities are better for protected long-term savings and income.

Who Should Buy an Annuity for a Child

• Parents and grandparents seeking long-term growth and principal protection.
• Families who want a guaranteed income source for a child later in life.
• Those who have already maxed out retirement and education savings.

Who Shouldn’t

• Families that need flexible access to cash.
• Those who haven’t built an emergency fund.
• Investors who prefer market growth over stability.

Related Insurance to Protect the Plan

• Parent Term Life Insurance: Funds the annuity if a parent dies early.
• Disability Insurance: Protects income so parents can continue contributions.
• Child Riders: Add low-cost coverage for a child under a parent’s policy.
• Hybrid Life/LTC Policies: Ensure care costs don’t drain funds meant for the child.

Realistic Expectations for First-Time Buyers

An annuity for a child is about safety and patience, not fast profits. The trade-off for guaranteed protection is slower growth and limited liquidity. For long-term wealth transfers, it’s one of the most dependable strategies available—especially when paired with other accounts like a 529 or Roth IRA.

Cost-Saving Tips

• Compare A-rated carriers side by side before buying.
• Use 1035 exchanges to fix weak annuities tax-free.
• Avoid variable annuities—they carry high fees and market risk .
• Choose participation-rate strategies on FIAs for long-term potential.
• Ask about free annual withdrawals for flexibility.

Bottom Line

Contact The Annuity Expert to compare quotes from top-rated insurers and find the lowest-cost annuity options for your child’s future. Call 1-770-755-1565 or request free quotes online today.

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