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Two-Tiered Annuity

Among certain producer groups, primarily TSA producers, the two-tiered annuity has been extremely popular for many years. The popularity of the two-tiered annuity has diminished since the introduction of more consumer-oriented products. The National Association of Insurance Commissioners (NAIC) has expressed less enthusiasm about these types of products as well.

Usually, the first-year interest rate is quite high relative to the market, as are subsequent guarantees. Commissions are also typically high relative to other products. The insurer can offer high rates and high commissions because those rates are predicated on the assumption that the contractholder will stay with the product through annuitization. The annuitization requirements may allow for a 'term certain,' but usually requires a life contingency option. If the contractholder does not annuitize, there may be a surrender charge combined with a lower interest credit retroactive to the inception of the policy. 

In other words, the contractholder will receive one "tier" of interest by staying with the contract through annuitization and a lower tier if they don't. One might consider this type of annuity to be a trap. If the contractholder stays and annuitizes, he or she may not receive a desirable annuity payment factor. If the contractholder chooses to surrender and leave the contract, it can be very expensive.

Last Updated: 9/23/2012 10:05:00 PM