Understanding Two-Tiered Annuities

A Two-Tiered Annuity is a product with three different values.

The first value is the tier-one value is the premium accumulated with interest earnings, just like a regular fixed annuity. This value is available to the client if they decide to surrender their contract as a lump-sum after the surrender charge period.

The second value is the surrender value, which is the tier-one value less the surrender charge. This value is available to the client if they decide to surrender their contract as a lump-sum during the surrender charge period.

The third value is the tier-two value, which provides a benefit typically higher than the tier-one value and is only available to the client if they annuitize the contract. Tier-two benefits could include higher interest rates, higher index crediting, bonuses or other benefits which encourage the client to annuitize, thereby leaving assets longer with the insurance company. In some products clients must wait a certain period of time before they can access these higher tier-two values.

Why would a client buy a two-tier product?

Two-tier products can be valuable for the right client in several ways. If clients have a need for a lifetime stream of income, they could receive higher lifetime benefits under a two-tier product than under a regular deferred annuity that is annuitized or immediate annuity. Secondly, due to the design and pricing of two-tier products, tier-one credited rates could be higher than a non-tiered deferred annuity in the form of better participation rates, caps or fees.

What are some of the disadvantages of two-tier products?

These products may not be suitable for clients that have short-term liquidity needs or a desire to pass on lump-sum benefits to their heirs. In addition, clients usually have to wait a period of time to receive the higher tier-two values and annuitization is required to receive those values, which spreads the benefits out over a period of time.

Insurance agents should be very clear that their clients who are considering a two-tiered annuity understand the different values, how to access their values and the restrictions or consequences when they do. Clients should assess their needs and examine all aspects of an annuity product before determining if that particular annuity design fits their needs and financial goals.