The Two-Tiered Annuity: A Flawed Retirement Plan

Shawn Plummer

CEO, The Annuity Expert

Hello there, dear reader! If you’ve been considering your financial future, and the word ‘annuity‘ has popped up a few times in your research, you’re in the right place. It’s my pleasure to guide you through the financial maze of two-tiered annuities. By the end of our journey together, you’ll understand what they are, how they function, and whether they might fit your retirement plans.

What is a Two-Tiered Annuity?

First, let’s ensure we’re all on the same page here. A two-tiered annuity is a specific contract between you and an insurance company. You invest money in this contract expecting it to grow over time and provide a steady stream of income later on.

A unique characteristic of the two-tiered annuity is its structure, specifically designed with the accumulation and payout stages, catering to the market’s needs. This split-annuity structure can offer some attractive benefits tailored to market demands, but there are also specific considerations that arise in this context. But more on that later.

Two-Tiered Annuity

How Do Two-Tier Annuities Work?

The annuity contract owner keeps the contract in force for several years before withdrawing funds as an annuitized payment. There is no lump-sum

Cashing In A Two-Tier Annuity

When the two-tier annuity contract is cashed out in a single sum or the contract owner withdraws, the interest credited to the contract or the withdrawn funds is re-calculated from the annuity’s issue date. A lower, non-competitive level of interest is used in the reevaluation instead of the higher tier of interest rates.

Benefits of a Two-Tiered Annuity

The natural charm of a two-tiered annuity is in its practical design. Let’s get into it:

Bonus Annuity Features

Often, a two-tiered annuity comes with an initial ‘bonus’ credited to your account, hence earning the name ‘bonus annuity.‘ This can be anywhere from 5-10% of your initial investment, immediately boosting your nest egg.

Earnings Growth Potential

Another upside is the potential for growth in the accumulation phase. During this period, the money you invest earns interest, typically at a rate higher than what traditional savings accounts might offer.

Guaranteed Income Stream

Once you reach the payout phase, you’ll receive a guaranteed income for a specified period or life, depending on the terms of your annuity contract.


The drawbacks of a two-tier annuity include the following:

  • A reduction in liquidity compared to other deferred annuities
  • the contract owner being locked into the two-tier annuity, only able to get out of it by taking a reduction in cash value or electing the annuity settlement option 

Two-Tiered Annuity Contracts Can Be

Two-Tiered Annuity Structure

Two-Tiered Annuities require an annuity owner to defer their contract for a specified period and then convert your annuity contract’s value into an irrevocable stream of annuity payments.

Example:  Let’s say your two-tier annuity contract is a 5×10 annuity.  This means the two-tier contract requires the annuity to be deferred (grow) at a minimum of 5 years. Suppose the client wants access to the annuity after five years. In that case, they must convert the deferred annuity into an income annuity at a minimum income distribution period of at least ten years.

Let me say the minimum requirements another way.  

If you buy a 5×10 two-tiered annuity, the minimum period you’ll be in the contract is at least 15 years (5 years of growing the contract and then taking an annuity payout of 10 years).

Two-Tiered Annuity Pros

The two-tiered annuity contracts generally have higher annuity payout amounts for retirement income planning than an immediate or deferred annuity.

You probably were offered a nice premium bonus to entice you.

Typically, these retirement annuities offered better growth or a higher guaranteed interest rate simply because you would be stuck in the contract for a long time.

At least you get a higher rate of return with your “cemented” annuity.

You don’t necessarily have to convert your future retirement dollars into a guaranteed lifetime income, but rather a fixed period instead.

Two-Tiered Annuity Cons

You usually don’t know your retirement income payment amounts because these retirement annuities were mostly performance-based (indexed products) that earned gains versus the guaranteed income riders of modern annuities.

Contracts have limited liquidity (penalty-free withdrawals) during the accumulation phase if any at all. Therefore, there would be no liquidity in the income phase.

Annuity owners were forced to convert their accumulated value into periodic payments for a fixed period.

If you could surrender your contract, the surrender charges would be extremely high, and you’d lose a significant amount in your accumulation value.

Finally, beneficiaries could have had zero death benefits if they chose a contingent life payout (single life or joint and survivor).

Annuitization and Two-Tiered Annuities

Now, let’s address an important question that often concerns two-tiered annuities: “Does a two-tiered annuity require annuitization?

The short answer is yes, but let me explain further. Annuitization is converting your accumulated funds into a stream of income. With two-tiered annuities, to fully access the benefits (including the bonus and the higher rate of return), annuitization is typically required. This means you agree to a schedule of payouts over time instead of a lump-sum withdrawal.

It’s worth noting that annuitization is a commitment. Once decided, it might be challenging or costly to change your mind. So, it’s crucial to consider whether you’re ready for that level of commitment before opting for a two-tiered annuity.

Two-Tiered Annuities

Striking a Balance: Is a Two-Tiered Annuity Right for You?

As with any financial decision, a two-tiered annuity’s suitability depends on your circumstances and goals. It’s essential to balance the enticing benefits and the necessary commitment required.

A two-tiered annuity could be an excellent choice if you value a guaranteed income stream and are comfortable committing your funds for an extended period. For example, if you’re a retiree looking for a reliable source of income, this might be an ideal option.

On the other hand, if you anticipate needing a large lump sum shortly or the idea of tying up your money for years makes you uneasy, this might not be the right fit for you. The ability to adapt your financial strategy to unexpected circumstances is an essential aspect to consider.

Next Steps

In summary, two-tiered annuities offer an immediate bonus, the potential for higher returns during the accumulation phase, and a guaranteed income stream in the payout phase. However, these benefits usually come with the requirement of annuitization, which means committing to a fixed payout schedule and potentially limiting your ability to make a lump-sum withdrawal.

What Is A Two-Tiered Annuity

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Frequently Asked Questions

What are the advantages of a two-tiered annuity?

A two-tier deferred annuity typically offers higher interest rates than other annuities with a similar structure, making it their main benefit.

What is the most significant disadvantage of an annuity?

Annuities have several disadvantages, such as lengthy contracts, limited control over your investment, minimal or no interest earned, and high charges. Moreover, liquidity options are also fewer with annuities, and you need to wait until 59.5 to withdraw without penalty.

What is the best type of annuity?

Fixed deferred annuities, such as indexed and MYGA, are often the most appropriate choice among annuities if you want to protect your initial investment.

What is the advantage of a two-tier system?

Dividing your network into two tiers offers the advantage of concealing internal networks. This means that by segregating the public network, which is user-facing, from the private network, which is the data center, you enhance security by keeping the data center information hidden.

What are the two-tier benefits?

In a two-tier system, some employees receive less pay and fewer benefits than others.

What type of annuity is the most favorable among retirees?

Seniors looking for annuities should consider immediate options since they start paying out within a year of purchase. First, however, choosing the annuity that aligns with their retirement goals is essential.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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