What Is a Two-Tier Annuity?

Two-tier annuities offer a higher rate of earning for investors who do not cash out early.

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Annuities offer a guaranteed income in exchange for a one-time premium payment. A two-tier annuity has two different interest rates, depending on how long you hold the annuity. If you hold onto your annuity until its maturity date, you will be entitled to an interest rate that is higher than the rate on a comparable single-tier annuity. However, if you decide to cash out the annuity before this date, your earnings will be retroactively adjusted down to a much lower rate.


Two-tier annuities often produce higher returns than traditional annuities. Because the income stream is designed to extend over a period of several years, immediate liquidity is not required. This gives the insurance company more freedom to place your premiums into high-return investments that will take longer to mature. The two-tier structure and deferred income may also discourage creditors from coming after your annuity.


The main drawback of any type of annuity is the inability to access your money. With a two-tier annuity, this can be a major disadvantage because you can lose years of earnings if you change your mind and cash out early. Cash flow can also be a problem once your income stream starts if the payments are spread out too far. Monthly or annual payments are the most common arrangements for a two-tier annuity. The withdrawal restriction also prevents you from moving your money if you find an investment option that returns a higher rate of interest.


Due to their liquidity restrictions, two-tier annuities work best when used as a long-term retirement plan option rather than a cash investment. They are designed for people who have adequate savings and income to live on only the installment payments. If you would have to cash out your original investment to cover an emergency, a two-tier annuity is probably not a good investment choice for you because of the strict withdrawal penalties.

Legal Concerns

Two-tier annuities are not legal in all states because of shady marketing practices involved in their sales. In states that do permit two-tiered annuities, the state insurance commissioner regulates the terms of their sale. Only a life insurance company may sell two-tier annuities. The salesperson handling your annuity must be a licensed life insurance agent according to the laws in your state.