Understanding a Market Value Adjustment

Have you heard of a “market value adjustment” when researching annuities? A market value adjustment is a contract feature that comes with annuities of the fixed variety. Generally you will find it attached to traditional fixed annuities and indexed annuities.

A contract with this feature is called a “market value adjusted annuity,” or an MVA annuity for short. MVA annuities tend to offer higher interest rates than regular fixed annuities do.

With a market value adjustment feature in the contract, the insurance company shares some of its investment risk with an annuity policyholder. In exchange, the policyholder may enjoy more chances for growth potential than a regular fixed contract may provide. That being said, the market value adjustment factor applies typically to excess contract withdrawals and surrender charges. And depending on the interest rate environment, an MVA may be positive or negative, which can increase or decrease a surrender charge amount. 

The insurance company uses the market value adjustment factor as a safeguard against annuity contract surrenders and, in turn, to maintain its financial strength. That way it can maintain its contractual guarantees and promises made to its annuity policyholders.

Let’s look more at what a market value adjustment involves — and how it may be beneficial or negative.

Why are Interest Rates Important? 

A market value adjustment may be positive or negative. It depends on whether interest rates are up or down since the date of annuity purchase. When setting the adjustment factor, insurance carriers look to the 10-year Treasury:

• If 10-year Treasury rates have gone down from when the contract was issued, the market value adjustment will be negative.
• Should 10-year Treasury rates have gone up from when the contract was issued, it will cause the market value adjustment to be positive.

That could make a surrender charge higher or lower, depending on whether the MVA is positive or negative. While this can be less than appealing, it’s also a form of protection for insurance carriers and its policyholders.

Early contract surrenders may disrupt the investment schedule the carrier committed to when entering the agreement with a policyholder. So the adjustment factor can be used to offset those disruptions.

Current Interest Rates Spotlight Market Value Adjustments

When you enter into an annuity contract with an insurance company, the interest rate you are guaranteed is dependent on interest rate conditions at the time you purchased the policy. That contract also specifies a certain number of years you are committed to holding the policy.

Fixed annuities that feature a market value adjustment (MVA) offer you the flexibility of guarantee terms in concert with the potential for higher interest yields than traditional fixed contracts. Because guarantee terms are available in a range of time-frames, they typically reward longer-term commitments with higher interest rates.

Using a Market Value Adjustment as a Safeguard

Why is this important? The insurance company pools much of your premium dollars with other policyholders’ premiums to invest in bonds that have a set duration. It may also hold other long‐term instruments based on the understanding of the number of years you committed to holding your policies.

If interest rates change from when the policy was issued to when it is surrendered, an early surrender can disrupt the insurance company’s pricing. If this happens, the insurance company will levy an MVA. This is to compensate it for the money it will lose by having made payouts to someone at higher rates earlier in the contract and or that individual not having completed the stated contract length.

Market value adjustments only come into play with excess withdrawals or contract surrenders during the term of the contract. Generally speaking, an excess withdrawal is a withdrawal of more than 10% of your accumulation value. An excess withdrawal could lead to you paying a bigger penalty.

Breaking It Down

Let’s break down the impact of MVAs with an example. When interest rates increase, the market value of bonds goes down. Let’s say you held a $10,000 bond with a 4% yield and the Fed raised interest rates to 5%. Investors would then have the ability to purchase a $10,000 bond with a 5% yield, so the market price of your bond would drop due to demand.

Therefore, a MVA is essentially a rise or decline in the value of assets held by an insurance company. Insurers use it to combat changes in the value of their investments due to market forces.

By assuming some of the risk, your accumulation value can increase or decrease, depending on whether interest rates fall or rise. From this standpoint, it can be to your advantage in some cases.

Market Value Adjustments – Friend or Foe?

The answer to that is, “It depends.” Let’s say you have an MVA annuity with several years in your current surrender charge period. Your interest rate at time of purchase was 4%. If interest rates now sit at 4.5% and you withdraw more than your penalty-free amount, your surrender would prompt a negative adjustment to the cash surrender value.

Conversely, if interest rates on new contracts decreased to 3.5%, you would receive a positive adjustment to your cash surrender value.

Insurance companies realize you might want to surrender an existing contract and choose a higher interest rate product when interest rates rise, so MVAs are their way of protecting themselves—and their financial strength to pay future claims—by recouping some of their losses from your contract value.

Conversely, the insurance company might prefer that you surrender a policy with a higher interest rate if the current rates are lower, ending their obligation to pay you that higher rate. In this case, they will pay you an MVA bonus amount.

The More You Know 

If you are determining whether an annuity makes sense for your retirement, an MVA annuity is just one of many options available. Before making any decision, take note of your financial situation.

Factors to consider include your financial liquidity needs, whether you may need the money in the future, the amount of time you are willing to lock your money up, and the potential risks that may come with early withdrawals from an MVA annuity.

Of course, it’s also prudent to shop around for the best guarantees and benefits that different carriers can offer for your situation. Working with a knowledgeable financial professional who understands retirement, income, and annuities can help strengthen your financial security.

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