What Happens to the Cash Value of a Market Value Adjusted Annuity?
Demystify Market Value Adjusted Annuities. Understand how market factors and other elements shape your annuity's cash value.
An annuity is a contract issued by an insurance company designed to provide a steady income stream, often during retirement. A Market Value Adjusted (MVA) annuity introduces a specific mechanism that affects its cash value, particularly through market value adjustments and other factors.
Understanding Market Value Adjusted Annuities
A Market Value Adjusted (MVA) annuity is a type of fixed annuity offering a guaranteed interest rate for a predetermined period. Unlike a traditional fixed annuity, its cash value is subject to an adjustment if funds are surrendered or withdrawn before the end of the guaranteed interest rate period. The contract period, often called the surrender period, typically ranges from three to ten years, during which the guaranteed interest rate applies. This adjustment mechanism links to changes in broader market interest rates compared to the annuity’s initial crediting rate. The purpose of this design is to align the annuity’s value with current market conditions, particularly when early withdrawals occur.
How Market Value Adjustment Works
The market value adjustment impacts an MVA annuity’s cash value during a surrender or significant withdrawal before the guarantee period concludes. This adjustment protects the insurance company from interest rate risks, ensuring the surrender value reflects current market conditions. The MVA can increase or decrease the amount received, depending on how interest rates have moved since purchase.
If general interest rates rise after purchase, the MVA will likely decrease the cash value upon early surrender or excess withdrawal. This occurs because the annuity’s fixed, lower interest rate becomes less attractive in a higher interest rate environment, requiring the insurer to offset potential losses. Conversely, if market interest rates fall, the MVA will likely increase the cash value. In this scenario, the annuity’s fixed rate is more attractive than current market rates.
This adjustment is applied at the time of the early withdrawal or surrender and is calculated by comparing the relevant interest rate at the contract’s issue date to the rate when the withdrawal happens. The specific formula varies by insurer, but the principle remains an inverse relationship between the market value adjustment and prevailing interest rates.
Other Factors Influencing Cash Value
While the market value adjustment is a significant factor, other elements also influence an MVA annuity’s cash value. The guaranteed interest rate applied to the principal consistently contributes to cash value growth over time. This crediting rate is a fundamental component of the annuity’s accumulation phase, allowing funds to grow on a tax-deferred basis.
Surrender charges are separate fees imposed for early withdrawals or full surrender before the specified surrender period ends. These charges typically start higher in initial years, often 7% to 10% in the first year, and gradually decrease over three to ten years. They are applied in addition to any market value adjustment and help the insurer recover upfront costs.
Most MVA annuity contracts include free withdrawal provisions, allowing owners to withdraw a percentage of their accumulation value annually without incurring surrender charges or an MVA. This allowance is commonly 10% of the annuity’s value each year. Withdrawals exceeding this free allowance within the surrender period typically trigger both applicable surrender charges and the market value adjustment.
Optional riders, providing enhanced benefits like guaranteed income or death benefits, may have associated fees deducted from the cash value, reducing the net amount available.
Accessing Your Annuity’s Cash Value
Accessing an MVA annuity’s cash value involves several considerations. If an annuity owner fully surrenders the contract before the surrender period ends, the final payout is determined after applying any applicable market value adjustment and surrender charges. The MVA will adjust the value based on current interest rates, and the surrender charge will further reduce the amount based on the contract’s schedule.
Partial withdrawals can be made, but like full surrenders, they may be subject to the MVA and surrender charges if they exceed the contract’s free withdrawal allowance. For instance, if a contract permits a 10% penalty-free withdrawal, any amount taken above that threshold incurs these adjustments and fees.
Another way to access the value is through annuitization, which converts the accumulated cash value into a series of regular income payments, either for a set period or for life. When an annuity is held to its full term and then annuitized, the market value adjustment and surrender charges are generally not applied, as the contract is fulfilling its intended long-term purpose.
Withdrawals and surrenders also carry tax implications. Any gains withdrawn are typically taxed as ordinary income. If withdrawals are taken before age 59½, they may be subject to an additional 10% federal tax penalty on the taxable portion, unless a specific IRS exception applies. This penalty is distinct from the insurer’s surrender charges and is levied by the Internal Revenue Service.