Have you ever wondered what a market value adjustment is? It’s a common question for people exploring annuities. In simple terms, a market value adjustment (MVA) is a feature some annuities include to balance risk between you and the insurance company.

When you buy an annuity with an MVA, you’re agreeing to certain rules about withdrawing your money early. In exchange, you often get higher interest rates than other types of annuities without this feature. Let’s break down how this adjustment works and why it might matter to you.

How Does a Market Value Adjustment Work?

When you purchase an annuity with a market value adjustment, the insurance company invests your premium into long-term, secure assets like bonds. These investments guarantee the value of your annuity.

If you withdraw more than your penalty-free allowance during the surrender charge period, the MVA may adjust the surrender value of your annuity. This adjustment depends on current interest rates:

- If interest rates are higher than when the annuity was issued, the surrender value may decrease (negative adjustment).

- If interest rates are lower, the surrender value may increase (positive adjustment).

Scenario	MVA Impact	Example
Interest rates go up	Negative adjustment	Insurance Company bonds paying 5% lose value because new bonds pay 6%.
Interest rates go down	Positive adjustment	Insurance Company bonds paying 5% gain value because new bonds pay 4%.

This sharing of risk allows insurance companies to offer higher interest rates on annuities with MVAs.

Simplifying the Market Value Adjustment

Let’s put this into plain language. When you send your premium to the insurance company, they combine it with other people’s premiums and invest in bonds and other secure assets.

For example, if they purchase a bond paying 5% and interest rates on new bonds rise to 6%, their bond loses value. If you withdraw more than allowed during this time, the company may sell the bond at a loss and pass some of that loss to you.

On the flip side, if rates drop to 4%, the bond gains value. If you withdraw above your limit in this case, you might get a positive adjustment because the company sells the bond at a profit.

Why Market Value Adjustments Exist: A Bond Comparison

A market value adjustment operates similarly to buying bonds yourself. When you buy a bond paying 5% and rates rise to 6%, you won’t be able to sell your bond at full face value. This is the same principle behind the MVA.

The adjustment is not meant to be unfair—it reflects the reality of changing interest rates. This feature ensures the insurance company can manage its investments responsibly while still providing you with competitive interest rates.

When Does a Market Value Adjustment Apply?

The MVA only applies if you withdraw more than your penalty-free allowance during the surrender charge period. For example:

- You have a 10% penalty-free withdrawal limit but decide to withdraw 20% of your account value in a year.

- You cash out your entire annuity early.

In these cases, the MVA may be applied to adjust the surrender value based on current interest rates. However, most people rarely encounter an MVA because they stay within their contract terms.

Exclusions: What a Market Value Adjustment Does Not Apply To

Market value adjustments are limited to certain situations. They do not apply to:

- Penalty-free withdrawals: If your contract allows a 10% annual withdrawal, MVA won’t affect it.

- Death benefits: Your beneficiaries won’t see an MVA applied to their payout.

- Required Minimum Distributions (RMDs): Even if your RMD exceeds the penalty-free amount, MVA won’t apply.

- Terminal illness or confinement waivers: If you qualify for these, the annuity value is paid out without MVA.

- Income riders: Scheduled payments from income riders are not subject to MVA.

Exclusions	Description
Penalty-free withdrawals	No MVA on withdrawals within contract terms.
Death benefits	Beneficiaries receive full value without adjustment.
RMDs	No MVA applied to legally required withdrawals.
Terminal illness waivers	Full account value is paid without MVA in qualifying situations.

The Role of Experts in Navigating a Market Value Adjustment

Understanding the details of a market value adjustment can be complex, which is why working with a knowledgeable annuity professional is important. An expert can help you:

- Ensure you have enough liquidity outside the annuity.

- Choose a product that aligns with your financial goals.

- Navigate contract terms to avoid unnecessary adjustments.

If you’re considering an annuity with market value adjustments or already own one, now might be a good time to evaluate your options.

Conclusion: Learn More About Market Value Adjustments

A market value adjustment offers higher interest rates in exchange for sharing some risk with the insurance company. While it might seem complicated at first, the concept boils down to balancing the value of long-term investments with changing interest rates.

If you’d like to learn more or explore whether an annuity with a market value adjustment is right for you, consider reaching out by getting on my schedule.

Episode 56: Market Value Adjustments & Annuities