Market Value Adjustments: How They Impact Annuity Returns

Market Value Adjustments (MVAs) are a critical feature to understand when considering certain types of annuity contracts, particularly for those seeking fixed-income alternatives. They are essentially mechanisms used by insurance companies to protect themselves from interest rate risk when you, as the annuity holder, decide to withdraw funds before the end of the contract term, especially during the surrender charge period. MVAs are most commonly associated with fixed annuities like Fixed Indexed Annuities (FIAs) and Multi-Year Guaranteed Annuities (MYGAs), although they can appear in other variations as well.

Imagine an insurance company as a large investor. When you purchase a fixed annuity, the insurer takes your premium and invests it, often in fixed-income securities like bonds, to generate the returns needed to meet their obligations to you, including guaranteed interest rates or index-linked growth. These investments are made with a long-term horizon, matching the expected duration of the annuity contract. However, if you decide to surrender your annuity early – say, to access a lump sum of cash – the insurer might need to liquidate some of these underlying investments prematurely.

This is where MVAs come into play. Interest rates are constantly fluctuating. If interest rates have risen since you initially purchased your annuity, the value of the insurer’s older, lower-yielding bond investments will have decreased in the secondary market. If the insurer has to sell these bonds to fulfill your early withdrawal request, they would realize a loss. To mitigate this potential loss, and to ensure fairness to other annuity holders who are keeping their contracts in force, an MVA might be applied to your withdrawal. In this scenario of rising interest rates, the MVA would likely be negative, meaning your withdrawal amount would be reduced.

Conversely, if interest rates have fallen since you bought your annuity, the value of the insurer’s older, higher-yielding bond investments would have increased. In this case, if you surrender your annuity, the insurer could sell those bonds at a profit. An MVA in this scenario would likely be positive, increasing your withdrawal amount. Think of it as a reflection of the current market value of the assets backing your annuity contract.

It’s crucial to note that MVAs are not arbitrary penalties. They are designed to mirror the impact of interest rate changes on the underlying investments supporting the annuity. They are a way of ensuring that early withdrawals don’t negatively impact the insurer’s ability to meet its long-term obligations and maintain the promised returns for all policyholders.

It’s important to distinguish between annuity types regarding MVAs. Variable annuities, for example, typically do not have MVAs. This is because with variable annuities, the investment risk is largely borne by the annuity holder, as the value is directly tied to the performance of chosen subaccounts. Immediate annuities also generally don’t involve MVAs because they are designed for immediate payout; there is no accumulation phase where early withdrawals during a surrender period are relevant.

When considering an annuity with an MVA, you should carefully evaluate your long-term financial plans and liquidity needs. If you anticipate needing access to a significant portion of your funds before the surrender charge period ends, an annuity with an MVA might not be the most suitable choice, or you must fully understand the potential impact of interest rate fluctuations. Conversely, if you are seeking long-term, tax-deferred growth and are less concerned about early withdrawals, the MVA might be a less significant factor, particularly if the annuity offers attractive crediting rates or other benefits. Always review the annuity contract’s specific terms and conditions regarding MVAs, including how they are calculated and any limitations or caps, to make an informed decision aligned with your financial objectives and risk tolerance.