Annuity Vs. Bank Account
Even when the world financial markets suffer a downturn, parents should consider whether investing their child's net settlement into an annuity is in his best interest. A qualified financial planner needs to be consulted. The following points should be thoroughly explored with your financial planner.
|Rate of Interest||Currently much higher than a bank account. The rate is 4.5% in January 2009. This rate will neither increase nor decrease during the life of the annuity.||Less than 1% in January 2009 for certificates of deposit. This could stay the same, go down or go up and even exceed the rate payable for an annuity as time goes on.|
|Taxable||No, neither the original payment nor the interest provided by the annuity is taxable.||Yes, the interest is taxable but the original payment itself is not taxable.|
|Controllable||Yes, by decisions made by the parents when the annuity is purchased. An 18-year-old with an annuity will receive only as much money as his parents have directed. He will continue to receive measured payments in accordance with his parents' wishes.||No. An 18-year-old with a blocked bank account will receive every penny on his 18th birthday.|
|Risk||During the Great Depression, only six-tenths of one percent of the assets of the life insurance industry in the USA were lost. (See U.S. Congress, Hearings Before the Temporary National Economic Committee: Part 28, Life Insurance. U.S. Government Printing Office, 1940, p. 15678.)||Fully insured by US government up to certain limits.|
Parents need to compare the odds of the life insurance industry losing the settlement money, versus the odds of an 18-year-old losing the money. Generally, one would expect correct financial decisions from the life insurance industry, as opposed to an 18-year-old. Not many suddenly "rich" 18-year-olds will escape the lure of unnecessary purchases, bad investments, and outright fraud. Here are two important questions to consider during your discussion with your financial planner:
- Are the odds of losing your child's money by purchasing an annuity less than the odds that your child at age 18 will "blow" all or most of his settlement funds?
- If you had a whole lot of money on your 18th birthday, would you have skipped going to college?
If the answer to either question is affirmative, then discuss with your financial planner whether it makes the most sense to put the funds into an annuity rather than turn them over to your 18-year-old.
Courts also will approve putting the child's money into a UGMA account, US Treasury instruments, and restricted trusts such as special needs trusts and qualified settlement trusts. All of these, however, require the services of a paid trustee and are cumbersome and costly to set up.