What Does a Market Value Adjustment (MVA) Mean in Annuities?

Annuities are financial contracts between an individual and an insurance company. These arrangements are designed to help people accumulate savings on a tax-deferred basis and then convert those savings into a reliable income stream. Annuities provide a way to manage longevity risk, offering payments that can last for a specific period or a lifetime. Funds within an annuity grow with taxes deferred until withdrawals begin. This allows for compounding earnings without annual tax liabilities.

Defining Market Value Adjustment

A Market Value Adjustment (MVA) is a contractual provision in certain annuity products, primarily fixed and fixed-indexed annuities. It adjusts the annuity contract’s value when funds are withdrawn or the contract is surrendered early. The MVA’s purpose is to protect the insurance company from losses due to significant shifts in interest rates. When an annuity holder takes money out before the contract’s term ends, the insurer might need to liquidate underlying investments, such as bonds, at a loss if current interest rates have changed unfavorably.

This adjustment can either increase or decrease the amount received by the annuity owner. It is not a fee, but a mechanism to align the annuity’s value with current market conditions. An MVA helps the insurer manage the interest rate risk associated with the long-term investments that back annuity guarantees. By sharing this risk with the policyholder, insurance companies may be able to offer more competitive interest rates on their annuity products.

Mechanics of MVA Calculation

MVA calculation is tied to interest rate changes between the contract’s issue date and the withdrawal or surrender date. If market interest rates have risen since the annuity was purchased, the MVA will result in a negative adjustment, reducing the amount the annuity owner receives. Conversely, if interest rates have fallen, the MVA may be a positive adjustment, potentially increasing the payout. This inverse relationship reflects how an insurer’s underlying bond portfolio value fluctuates with interest rate changes.

Each insurance company employs its own formula for calculating the MVA, often referencing an external interest rate benchmark. Common benchmarks include the Treasury Constant Maturity Series or a corporate bond index. The formula also considers the remaining term of the annuity contract, as longer durations can amplify the impact of interest rate shifts. While a positive MVA can increase the surrender value, it cannot exceed the annuity’s accumulation value. Similarly, a negative MVA cannot reduce the cash surrender value below any guaranteed minimums specified in the contract.

Scenarios Where MVA Applies

A Market Value Adjustment is triggered by actions taken by the annuity holder during the contract’s surrender charge period. These actions include withdrawals that exceed the annual penalty-free amount allowed by the contract. Most annuity contracts permit penalty-free withdrawals, often up to 10% of the account value, but amounts beyond this threshold can activate the MVA. The MVA also applies when an annuity contract is fully surrendered or terminated before the end of its specified term or guarantee period.

The MVA may also apply if an annuity is transferred to another product or provider before the initial contract period concludes. The MVA is a contract feature, not a separate fee, and is applied in addition to any applicable surrender charges. Once the annuity’s initial surrender period concludes, MVAs no longer apply to withdrawals or surrenders.

MVA and Surrender Charges

A Market Value Adjustment and a surrender charge both impact the amount received from an early withdrawal or surrender, and they often apply simultaneously. A surrender charge is a fee imposed by the insurance company for early access to funds. This charge helps the insurer recover initial expenses like sales commissions and administrative costs. Surrender charges follow a declining schedule over a set number of years, starting at 7% in the first year and gradually decreasing to 0% over seven years.

In contrast, a Market Value Adjustment is a contractual adjustment that reflects the impact of current interest rate movements on the annuity’s value. Unlike a surrender charge, which is always a deduction, an MVA can either increase or decrease the payout depending on prevailing interest rates. While a surrender charge is a fixed percentage of the withdrawn amount, the MVA is a calculation based on market conditions. Both components protect the insurance company’s financial stability, but they address different aspects of early contract termination.