The Market Value Adjustment (MVA)

Hello and welcome, dear reader. Today, we will delve into the often complex but pivotal market value adjustment (MVA) topic. This concept holds significant weight when dealing with financial instruments like annuities. We will provide a comprehensive understanding of a market value adjustment, how it works, who it benefits, and why it’s essential for anyone who holds an annuity. By making the knowledge we share practical and relevant, we hope to empower you to make better financial decisions. So, let’s get started.

“A market value adjustment is a method an annuity issuer lessens its risk of interest rates. In other words, a financial change can be used on an annuity contract if someone breaks the terms by withdrawing early.”

What is a Market Value Adjustment (MVA)?

A withdrawal above the maximum penalty-free amount will be subject to market value adjustment (MVA) for the period the surrender charges apply. An MVA is an amount by which a full or partial withdrawal is adjusted, resulting in a positive or negative impact on the withdrawal. The adjustment will apply to any withdrawal subject to a surrender charge and will be applied on the withdrawal date before applying the surrender charge. MVAs will not apply to a penalty-free withdrawal amount.

How does A Market Value Adjustment (MVA) Work?

Depending on the direction interest rates move, the market value adjustment may increase or decrease benefits payable under the contract. However, in no event will the MVA reduce the cash surrender value below the guaranteed minimum. An adjustment will not apply to:

• amounts are withdrawn under the penalty-free withdrawal provision,
• death benefits, or
• amounts are withdrawn, not subject to a surrender charge.

A Market Value Adjustment can be attached to a traditional fixed, fixed index annuity, or multi-year guaranteed annuity (MYGA) with a built-in interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to economic market conditions.

Most contracts have a fair value adjustment built-in as a standard feature, especially a fixed indexed annuity.

The MVA allows the life insurance company to give you higher caps and growth rates to protect against market losses.

The market value adjustment only applies when you withdraw any amount in addition to the annual penalty-free withdrawal amount or if you surrender the annuity contract before the contract terms.

• Example #1:  You have an annual 10% penalty-free withdrawal provision of your annuity, but you pocket 15% of your annuity in a given year. The MVA will apply from 11% to 15% of that withdrawal.
• Example #2:  You are in a 10-year annuity contract. You decide in year seven to cancel the contract and move your money. The market value adjustment will apply to that cash surrender value.

If the interest rates are higher at the time of withdrawal than when the contract was purchased, a negative MVA will apply.

If interest rates are lower at the time of withdrawal than when the contract was purchased, a positive MVA will apply.

Why is there a Market Value Adjustment (MVA) in the first place?

The market value adjustment is how the insurance company protects itself from significant losses when a policy owner terminates their contract before the agreed term, specifically in varying market conditions.

The adjustment allows the life insurance company to pass down some of the risks of loss to the annuity owner due to an early surrender of the contract. In addition, the MVA alleviates expenses and allows them to offer a higher interest credit rate back to the client.

Who does the Market Value Adjustment Apply To?

An annuity contract owner wants to liquidate more cash value than they can in any given year. A contract owner wants to surrender their deferred annuity policy before the contract expiration date.

What are alternatives to an MVA?

• Consumers can find annuities with no MVA. In addition, some states won’t allow for an MVA.
• An annuity with extra liquidity like a Return of Premium or Accumulating Penalty-Free Withdrawals feature.
• Shorter-term annuity.

Market Value Adjusted Annuity Vs. Certificate Annuity

A market value-adjusted annuity and a certificate annuity can seem similar but bear fundamental differences. For example, both offer a fixed rate of return for a specified period. However, a market value-adjusted annuity has an MVA feature, which a certificate annuity does not.

The MVA feature makes market value-adjusted annuities more responsive to changes in market interest rates, thus potentially offering higher returns (or greater risk) than certificate annuities.

The Protective Mechanism of the MVA

The MVA serves to protect insurance companies from the risk of rate fluctuation. For example, when interest rates rise, more policyholders might want to surrender their annuities to invest in higher-yielding options. The MVA market value adjustment protects the insurance company by reducing the surrender value, thus discouraging early surrender.

However, it’s crucial to note that the market value adjustment is usually not used in the event of the annuitant’s death. In such instances, the beneficiaries typically receive the total account value or the guaranteed death benefit, whichever is higher, without any MVA.

The Creation of the Market Value Adjustment

The MVA mechanism was developed to adjust yields when interest rates rapidly changed. The exact origin of MVA is unclear, but it’s generally attributed to the efforts of economists and financial experts seeking ways to protect insurance companies from interest rate risks during the 1980s, a period characterized by volatile interest rates.

Next Steps

If you consider withdrawing more than penalty-free, understand how an MVA could impact your decision. You can request a quote from us for specific information about how an MVA would affect your situation. We hope this guide has helped explain surrender charges and MVAs. If you have any questions, please do not hesitate to contact us.

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