What Is the Effect of a Market Value Adjustment on Annuities?

An annuity is a financial contract purchased from an insurance company, designed to provide a steady stream of income, often during retirement. Individuals typically pay premiums, either as a lump sum or over time, and in return, the insurer makes payments to them later. A Market Value Adjustment (MVA) annuity introduces a specific mechanism that can alter the value of these payments under certain conditions.

Market Value Adjustment Annuities

Market Value Adjustment (MVA) annuities are a specific type of annuity, commonly found among fixed and fixed indexed annuities. These contracts include a feature that ties their surrender value to external market conditions, primarily interest rates. The MVA feature allows the insurance company to offer potentially more competitive rates by sharing interest rate risk with the annuity holder.

Defining the Market Value Adjustment

A Market Value Adjustment (MVA) is a contractual provision designed to align an annuity’s value with current market conditions if the contract is surrendered or if withdrawals exceed permitted amounts before the end of a specified guarantee period. From the insurer’s perspective, the MVA helps mitigate interest rate risk, especially when policyholders make early withdrawals. The adjustment reflects changes in prevailing interest rates that have occurred since the annuity was originally purchased.

Factors Causing the Adjustment

The primary external factor triggering an MVA is a change in general interest rates since the annuity was issued. If prevailing interest rates have risen since the annuity’s purchase, a negative MVA is applied, which reduces the annuity’s surrender value. Conversely, if interest rates have fallen, a positive MVA may be applied, potentially increasing the surrender value. The magnitude of this adjustment is also influenced by the remaining term of the annuity’s guarantee period, with longer remaining terms leading to a more significant MVA.

Impact on Withdrawals and Surrenders

The Market Value Adjustment directly affects the amount of money an annuity holder receives upon early withdrawal or full surrender of the contract. If interest rates at the time of withdrawal are higher than when the annuity was purchased, a negative MVA will reduce the payout, similar to how bond values decrease when interest rates rise. For example, a $100,000 annuity might yield only $95,000 after a negative MVA is applied. Conversely, if interest rates have fallen since the purchase, a positive MVA could increase the payout, potentially resulting in more than the initial value.

This adjustment is distinct from, and can be applied in addition to, any surrender charges specified in the annuity contract. Surrender charges are fees imposed for early withdrawals to help the insurer recoup sales and administrative costs, declining over the surrender charge period. The MVA is a market-driven adjustment that can either add to or subtract from the value, depending on interest rate fluctuations. It is generally applied to amounts withdrawn in excess of penalty-free allowances and within the surrender charge period.