Market Value Adjustment

Written by Hersh Stern Updated Friday, December 1, 2023


Many multi-year guaranteed annuity (MYGA) and fixed index annuity (FIA) contracts include a Market Value Adjustment (MVA) feature. An MVA allows the insurance company to give you a higher rate by protecting itself from bond market losses.

Here’s how a typical MVA works:

When you purchase a MYGA or FIA annuity, your premium earns a fixed rate of interest. This rate is guaranteed by your insurance company. The insurance company, in turn, invests your premium in interest-bearing investments, like bonds or mortgages, with durations that match the rate guarantee period of your annuity.

For example, if you purchased a 5 year MYGA, your company may invest your premium in a matching 5-year bond.

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You probably know that interest rates in the economy fluctuate up and down. These daily changes in rates directly impact the liquidation value of the bonds and mortgages your insurance company is holding.

A general rule of thumb is that if interest rates increase the value of the underlying bond will decrease. And vice versa.

So, if you applied to your company for a surrender of premium before the end of the rate guarantee period, it’s possible, your company may need to liquidate the bonds it purchased when you started at a loss, if interest rates increased in the interim.

With an annuity that has an MVA feature, your company has the right to pass on to you some or all of the loses it incurred by liquidating its bonds before maturity.

Most annuities do permit annual withdrawals of a limited amount called a “penalty-free withdrawal.” This may equal your annual interest earnings, or up to 10% of your account value, or a RMD amount if you’re age 70-1/2 or older and your annuity is funded with IRA money.

If you withdraw an amount greater than the penalty-free amount an MVA will apply. If the interest rates on new annuity contracts at the time of your withdrawal are higher than when you bought your annuity, it’s likely you will be charged a negative MVA amount, increasing your cost to withdraw this money.

Here’s an example of how an MVA might be applied: Say several years remain in your current surrender charge period and the interest rate at the time of your purchase was 3.00%. If you decide to withdraw more than the penalty-free amount and interest rates on new contracts have increased to 3.75%, the surrender would result in a negative adjustment to the cash surrender value. If, on the other hand, interest rates on new contracts have decreased to 2.25%, you would receive a positive adjustment to your cash surrender value.

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Insurance companies do this in order to protect themselves should you decide to surrender your existing contract for a competing contract which has a higher interest rate. The current company will be able to recoup some of its losses from your account value. Conversely, the insurance company might prefer that you surrender a policy with a higher interest rate if the current rates are lower, ending their obligation to pay you that higher rate. In which case they will pay you an MVA bonus amount.

At the end of the guaranteed period there is a “window”, usually lasting thirty days, when no surrender charges or MVA applies on any withdrawals. If you take no action during this window, your company will declare a new contract rate based on current interest rates and a new surrender charge and MVA period will begin again.

It’s important that you study the company brochures and specimen contract language before you commit to any annuity purchase.

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