The Market Value Adjustment alters a fixed deferred annuity based on the current interest rate.

For retirees or other individuals seeking investment options without volatility, it may be preferable to choose another form of annuity.

Keep reading to learn more.

The Basic Principles of Annuities

An annuity is an insurance contract. You pay in a certain amount, either as a lump sum or via monthly premiums; this is the accumulation phase. At a specified future date, the annuity begins paying out a certain sum to you each month; this is the annuitization phase.

Annuities may either be fixed (you are paid the same amount every month) or variable (the amount you receive depends on the performance of the investments underlying the annuity).

Annuities are also either immediate (you are taxed during the accumulation phase) or deferred (you are taxed during the annuitization phase).

The Reason for the MVA

The insurance company takes your premiums (and those of other clients), and invests in fixed-rate such as bonds. These assets accrue in value, allowing the insurer to provide you the guaranteed payout, cover their issuance expenses, and make a healthy profit.

However, fixed-rate investments are highly sensitive to changes in the interest rate. While a decline in interest rates boosts the value of the investments, increases diminish their value.

The long investment horizon provided by the full accumulation period means that fluctuations in the interest rate tend to average out. The annuity has time to generate the money necessary to pay you your benefit, and allow the company to remain profitable.

If you, or other investors, withdraw early, it diminishes the insurance company’s profitability. The Market Value Adjustment (MVA) is therefore imposed to offset the effect of a prematurely surrendered annuity contract, or any amount drawn additional to the annual penalty-free withdrawal amount.

The MVA thus acts as a safeguard for the insurance company and allows it to offer higher interest crediting rates.

Due to how the underlying assets are affected by interest rates, the MVA increases the contract’s surrender value if interest rates decline, and decreases it should they rise.

Important Facts About the MVA

Insurance companies differ in how they calculate MVA. Common methods use either market performance (i.e. whether the underlying investments have increased or decreased in value), or interest rate (i.e. whether it has increased or decreased since the annuity was contracted.

MVA doesn’t apply to any amount withdrawn following the surrender period, or under any penalty-free clause.

Regardless of the calculation method, the MVA may never reduce the cash surrender value below the minimum guaranteed by the annuity contract.

However, withdrawals before age 59½ can lead not only to an MVA, but also to an early  withdrawal tax penalty of 10%, and ordinary income tax to boot.

Why You Need Expert Advice

Contract terms vary enormously. The interest rate can soar or plummet. The calculations surrounding Market Value Adjustment (MVA) can be baffling.

Instead of trying to work it all out yourself, consult an experienced retirement planner regarding any annuity or other investment option you are considering.

Many people have learned about the power of using the Safe Money approach to reduce volatility. Our Safe Money Guide is in its 20th edition and is available for free.  

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