How Can a Market Value Adjusted Annuity Be Affected by Interest Rates?

Have annuities ever popped up on your retirement-planning radar? You might have come across some annuity contracts with a Market Value Adjustment feature. Several fixed index annuities and multi-year guarantee annuities (MYGAs) include this factor in their contracts.

A market value adjustment (MVA) simply refers to the ability of an insurance carrier to offer you higher rates by protecting itself against bond market declines. When an annuity has a market value adjustment in its contract, it’s called a market value adjusted annuity (or MVA annuity for short).

Normally the insurance company holds the interest-rate risk when you buy a fixed annuity. But an MVA annuity gives you the chance to earn a higher rate in exchange for sharing in some of that risk with your insurer.

After all, bond values are sensitive to interest rate movements. So one way to think of this is as a “safeguard” for the insurance carrier against bond market losses.  

If an MVA annuity happens to fall into your retirement purview, here’s a helpful look at what it might involve.

When Does a Market Value Adjustment Apply?

A market value adjustment kicks in when you choose to surrender your annuity contract. Your insurance carrier will apply the adjustment factor to any surrender charge to which you are subject.

The other time an MVA arises is when you take out a balance from your annuity that exceeds the “annual free withdrawal” amount which your annuity spells out. For many annuity contracts, the annual free withdrawal is up to 10% of your annuity’s accumulation value, per year.

The accumulation value refers to the walk-away amount of your money before it’s net of any fees and/or surrender charges.

If your withdrawn balance does exceed that amount, you will likely have to pay a penalty on the difference, along with any applicable taxes on your withdrawn balance. The MVA would be applied to this, too.

Otherwise, you generally don’t have to worry about market value adjustments outside of annuity surrenders or excess withdrawals.

How Does a Market Value Adjustment Work?

When you buy a fixed annuity, your money grows at a fixed interest rate. The insurance company guarantees this rate for a certain period.

Meanwhile, the insurance company invests your money in generally conservative, interest-bearing instruments such as treasuries, bonds, and mortgages. These investment holdings have timespans that last as long as the period for which your annuity rate is guaranteed.

If you buy a fixed index annuity, there is a slight difference in how the insurance company invests your premium. Just like before, most of your money (for example, often in excess of 95 cents of every dollar put in) will go into low-risk fixed-income assets in the carrier’s general fund.

The remaining small portion of your premium is invested into a call options strategy, which is tied to an index. Many insurance companies use the S&P 500 price index. How much interest your annuity earns will vary on the options strategy, its duration, and how it performs. And your fixed index annuity also has a floor to protect you against index losses.

So, say you bought a MYGA annuity with a 10-year rate guarantee period. The insurance company might match that 10-year span by investing your premium into a 10-year bond.

A general governing principle for the bond market is the relationship between interest rates and bond values. When interest rates go up, the values of the underlying bonds typically decline. And the same also holds – when interest rates go down, the values of the underlying bonds rise.

Market Value Adjustments and Interest Rates

Interest rates go up and down due to a changing economy. Every day, those interest rate swings directly affect the values of the fixed-income assets in which your premium is invested.    

Should you surrender your annuity contract, the insurance company may be forced to liquidate some of its fixed-income assets it bought when your contract began. And the insurance company may “take a hit” if interest rates have fallen from when your annuity contract started.

With an annuity contract that has a market value adjustment feature, the insurance company might pass some, or even all, of its bond value losses that it took when you surrendered your contract – and when it therefore had to liquidate some of those underlying fixed-income holdings. That would mean a negative market value adjustment for your contract.

And if interest rates dipped from when you started your contract? Then the opposite can apply. This might mean the MVA on your contract is positive.

It could even exceed some or all of the surrender fees associated with your contract. This is one way in how the insurance company can offer you some potential offsets in exchange for you sharing in its interest-rate risk.

Example of a Market Value Adjustment

So, how might a market value adjustment be applied to a MYGA annuity or fixed index annuity contract?

Here’s a quick example. Say that you are some years into a 10-year fixed index annuity contract. When you bought your annuity, the interest rate was 3.2%. If you decide to surrender your contract, and interest rates on new contracts have risen to 3.5%, you would have a negative market value adjustment.

The cash surrender value of your annuity – or your walk-away cash amount net of surrender charges and any other applicable fees – would have a negative adjustment to the amount.

On the other hand, say you bought into a fixed index annuity, again with a 10-year surrender period and with the interest rate at 3.2%.

If the interest rate on new contracts dropped to 2.8%, you would receive a positive adjustment to your cash surrender value. 

Why Does the Relationship with Interest Rates Matter?

Over the last few decades, the bond market has seen considerable swings. But while interest rate hikes have been prevalent in the past few years, before that the U.S. economy had been in a low-interest rate environment for many years.

Retirement investors might consider how existing annuities, and other fixed-income assets in their portfolio for that matter, may help move them forward or backward toward their income security and other financial goals. 

To give an idea, check out the example of the 10-year Treasury. Since the year-start of 2008, rates on the 10-Year Treasury had moved below 4.0%. In mid-2011, rates started hovering below 3.0%, a trend that didn’t reverse itself until roughly September of 2018.

At that time, the constant maturity rate of a 10-Year Treasury peaked at 3.05%, eventually hitting targets just north of the 3-percent mark before dipping below it again in 2019.

Then bond prices started declining again. In June 2019, the benchmark yield on the 10-Year Treasury fell to its lowest level at that point in over 2.5 years. And what happens to interest rates is also difficult to predict, even for seasoned economists, as one Wall Street Journal survey of economists shows.

It’s extremely difficult for even the experts to predict market performances with precise accuracy. In the Wall Street Journal Survey of Economists, “almost nobody saw the nosedive in bond yields coming,” then observed reporters Avantika Chilkoti and Daniel Kruger.

At that point in time, over 60 analysts had forecast a rates range of roughly 2.50%-3.50%. Their expectations for end-of-year rates? Some were as high as 4.00%. Meanwhile, the actual yield was just slightly above 2.08%. Talk about a big difference!

Putting Your Retirement Strategy in Place

Having worked hard for many years, you may desire a comfortable and financially secure retirement lifestyle. Changing economic conditions and lingering low interest rates remind us that nothing is ever certain.

If you believe that you could benefit from reducing the “guesswork” in your retirement income plan, think about taking guidance from a knowledgeable retirement income strategist. Financial professionals at SafeMoney.com understand the power of annuities and other insurance contracts in helping you secure reliable income streams for life.

They can help you explore different income options – and even discuss ways to potentially enhance a current financial strategy. Are you ready for personal guidance? Help is only a click away.

Use our “Find a Financial Professional” section to connect with someone directly. You can request a personal initial appointment to discuss your goals. Should you need a personal referral, call us at 877.476.9723.