A two-tiered annuity is basically a dual-fund, dual-interest rate contract. The two funds are the accumulation account and the surrender value. There is a permanent increasing surrender charge.
The interest rate offered is a relatively high interest rate, but only if the owner holds the contract for a certain number of years and then must annuitize the contract. If the annuity is surrendered at any point prior to the contract period, the interest credited to the contract is recalculated from the contract’s inception using a lower tier of interest rates.
The higher tier of rates is designed to reward annuitization and to make the product more attractive than competing annuities, the lower tier of rates generally makes the contract very unattractive compared to other alternatives. And the interest penalty applies under some contracts even if the annuity is surrendered due to the death of the owner. This type of fixed annuity contract has come under scrutiny by state insurance departments in how they are marketed and sold especially to seniors.