A commonly misunderstood feature is the annuity Market Value Adjustment provision that’s included with most policies. This provision influences your account value during its surrender term. It can have a noticeable effect on the account should you surrender your annuity early.
And in some cases, it can help you exit an underperforming annuity lock-in gains that wouldn’t otherwise be available. In this post, we’ll discuss what an MVA is and why you should watch it carefully.
What Is A Market Value Adjustment?
Simply speaking, an MVA annuity provision is a feature that affects the annuity account value during the surrender phase. It’s not included on all contracts, but it is very common. To understand its meaning, we must first understand the investments annuities typically hold.
There are several rules and regulations governing insurance companies and the annuities they offer. Insurance companies are not lending institutions like banks. They have much higher reserve requirements and purchase investments accordingly.
Insurance companies purchase debt (think government treasuries and highly-rated corporate bonds) to fund their operations and provide products with guaranteed rates. The treasuries and bonds purchased are packaged into annuities and sold to consumers with a known rate of return.
Sometimes the rate is fixed like in the case of a Multi-Year Guaranteed Annuity – or MYGA for short. You might see 5.50% for 5 years, for instance. In other cases, the rate can and will fluctuate over the annuity term.
Insurance companies profit on spreads – the difference between their internal returns and what they offer to annuity policyholders. If they are offering 5.50%, then we might expect their internal returns are 6.00%. The difference (.50 basis points in this example) is the spread that funds their profits.
Bonds Increase And Decrease In Value
While they mature, government and corporate bonds fluctuate in price. When interest rates rise, bond prices fall. When rates decrease, the value of the bonds increases. The two move inversely.
And that’s why many insurance companies use the Market Value Adjustment as a hedge to protect themselves and their policyholders. An MVA is only used during the surrender phase of an annuity contract. If you surrender your contract before maturity, your account may be worth more or less than the stated surrender value. Most insurance companies declare the MVA value on our annual statements.
In an environment where rates have increased dramatically, the bonds the insurance company owns will likely decrease in value. If many policyholders decided to surrender their contracts early, this would negatively impact an insurance company’s profitability. In fact, it could cause significant financial strain.
Over the last few years, interest rates been on the rise. This has caused bank failures, and that’s concerning. Market Value Adjustments protect consumers and insurance companies during times like these. This makes annuities much safer if there’s a run on financial institutions.
How Does The MVA Help Annuities?
We know rates decrease when the Federal Reserve tries to stimulate the economy. This means bond (debt) prices increase. That can be advantageous for certain fixed and indexed annuities with a Market Value Adjustment.
The lower rates are causing the underlying investments behind annuities to increase in value. Thus, it might be a good time to examine your current annuity account value. It may be worth considerably more than you thought.
If it is worth more – and there are no significant surrender penalties – you could consider exiting the contract. You may be able to lock in a higher rate with another insurance company through a 1035 tax-free exchange.
Will A Market Value Adjustment Hurt My Annuity?
The MVA can decrease your account value when interest rates increase. This is only true if you surrender your annuity before it reaches maturity, however. Once mature, the MVA no longer applies.
Most owners don’t surrender their contracts early unless they have no choice. Annuities are longer-term investments. Most policies provide liquidity to their owners by offering free yearly withdrawals. Accumulated interest, ten percent annual, and Required Minimum Distribution, terminal illness, and/or catastrophic health withdrawals are features many accounts provide. These withdrawals would not be affected by an MVA one way or the other.
Insurance companies also account for the death of the owner/insured/annuitant. Market Value Adjustments do not apply at passing. However, not all annuities offer a death benefit that’s free from surrender fees. Be sure to ask your agent if you’re uncertain about death benefit provisions.
Certain States & Contracts Have Unique MVA Rules
As annuity brokers, we get a lot of questions about annuity features. More specifically, our clients want to know whether Market Value adjustments help or hurt their annuity accounts. The good news is they don’t usually come into play. Very rarely does someone need to surrender their annuity before it’s mature and take a loss.
But if you are worried about MVAs and surrender penalties, know that some annuity policies don’t automatically include an MVA rider. Several insurance companies (ELCO Mutual Life is a good example) don’t include MVAs on any of their contracts. Others allow you to add or remove the provision and then adjust the crediting rates accordingly. Still others include a Return or Premium feature that would nullify any MVA changes.
And there are certain states, like California and New York, where insurance companies cannot include the MVA provision on any of their annuity contracts. The good news is that there are several insurance companies and annuity contracts to choose from. You can almost always find one that fits your investment needs and goals.
Contact Us For More Information
Annuities do have some moving parts – some more than others. If you do have a Market Value Adjustment on your contract, you want to know what it means. It can be a helpful feature in an environment where interest rates are falling.