If you have an annuity, or if you have ever looked at an annuity illustration, you may have noticed the term, “Market Value Adjustment”, or MVA for short.
An early mentor of mine once told me, “There are no deals in the insurance industry. Everything is based on math.”
Market Value Adjustment is just another calculation that the actuaries use to protect the Annuity Owner (you) and the Annuity Issuer (insurance company).
Market Value Adjustments will not affect the vast majority of Annuity Owners, but if you’re a nerd like me and want to understand all the ins and outs of how these amazing products work to protect your money, then you will find this very interesting!
Let’s jump into it!
What is Market Value Adjustment?
When insurance companies issue annuities, they assume several risks. One risk is the chance that contract owners will want to withdraw money from their annuities at a time when the market value of the investments backing their annuities is low. When an insurance company issues an annuity with a Market Value Adjustment (MVA) feature, the contract owner may share some of that risk through the MVA.
This adjustment could increase or decrease the surrender value of an annuity only if more than the penalty-free amount is withdrawn or the contract is surrendered during the surrender charge period. Because the insurance company and the contract owner share the risk with MVA annuities, a higher interest rate can usually be paid on MVA annuities than on similar annuities without MVA.
Generally speaking, an MVA is a mathematical calculation that is used to adjust, up or down, the amount of any surrender or withdrawal taken from a fixed or fixed indexed annuity.
This calculation is based on a comparison of the interest rate conditions at the time of the surrender or withdrawal to the interest rate conditions at the time the premium was originally credited.
The MVA increases or decreases the annuity’s Surrender Value based on changes in the 10-Year Point on the A Rated US Bloomberg Fair Value Curve. A good example is in 2021 when Bond Rates were at an all-time low, there were a lot of Annuity Owners whose Surrender Value was the same, or higher, than their Account Value.
The MVA is applied to help insurance companies prudently manage changing conditions so they can offer their customers more competitive products. You will not be affected if you keep your contract through the withdrawal charge schedule and only take free withdrawals. The MVA is not applicable in all states.
When is the MVA applied?
MVA is calculated whenever a surrender or withdrawal is requested that is subject to a withdrawal charge (above the penalty-fee withdrawal amount). The MVA will be calculated as a separate adjustment that is in addition to any applicable withdrawal charge.
If you are working with a competent Annuity Advisor, this should never be an issue. Available liquidity in the annuity, and outside of the annuity, should be part of the strategy for your retirement income.
When is the MVA not applied?
The MVA does not apply to:
- Any free withdrawal amount that is not subject to a withdrawal charge
- Any death benefit paid to the beneficiary
- Required Minimum Distributions
- Terminal Illness and Confinement Waiver
- Income Rider provisions
Example of MVA:
The amount of the MVA is determined by a mathematical formula using an external benchmark, which measures changes in the interest rate environment. The market value adjustment period is 10 years (120 months).
In general, if external benchmark rates are lower at the time of withdrawal than at the time the premium was received, the surrender value will be increased. If external interest rates are higher at the time of withdrawal than at the time the premium was received, the surrender value will be reduced. The Market Value Adjustment is assessed until the end of the surrender charge period, and no longer applies afterward.
If the external benchmark changes from 5% to 4% then the cash surrender value would be
$98,332 determined as described below:
- Accumulation Value $100,000
- Penalty-Free Withdrawal Amount $10,000
- Accumulation Value Subject to Surrender Charges and MVA $90,000
- Surrender Charge (4%) $3,600
- MVA Amount $1,932
- Cash Surrender Value (AV – SC + MVA) $98,332
If the external benchmark changes from 5% to 6% then the cash surrender value would be
$94,522 determined as described below:
- Accumulation Value $100,000
- Penalty-Free Withdrawal Amount $10,000
- Accumulation Value Subject to Surrender Charges and MVA $90,000
- Surrender Charge (4%) $3,600
- MVA Amount -$1,878
- Cash Surrender Value (AV – SC + MVA) $94,522
So, there you have it! To all you engineer types out there, you loved this article. To everyone else, I’m sorry to bore you with this week’s Atlas Annuity Newsletter. At the end of the day, MVA should not be an issue if you are working Atlas. I use a customized approach to my strategies and make sure that something like MVA will never be a barrier to you reaching your retirement goals.
If you haven’t had a chance yet, you can see a detailed presentation of how I approach my annuity strategies. Just head on over to the “Videos” tab on the website and watch the “Atlas Annuity Strategy” video series. Then go ahead and check out the FAQs on my “Contact” page to find out what it will be like to work with me. I think you’ll find it to be a breath of fresh air!
As we head into fall and the temperature cools, annuities are just heating up for this year and it’s only getting better and better. I hope this week’s newsletter finds you well!
All the best,
Marty