Market Value Adjustment (MVA) – Good or Bad?

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Market Value Adjustment

written by: Josh Garland, ChFC®

What is an MVA?

An MVA or Market Value Adjustment is either a positive or negative adjustment that is made to the surrender value of an annuity contract. Generally, an MVA is only triggered when a surrender charge will occur; this is a key point that is often overlooked. If an annuity policy is no longer within its surrender charge period then the MVA will no longer exist. Additionally, if a client takes a withdrawal that is within the penalty-free withdrawal corridor, commonly 10%, then that withdrawal will not trigger an MVA. Lastly, not all annuity contracts come with an MVA, so it is important to check the details of the contract to know whether it is present.

How does an MVA work?

In a previous article titled, “How do Index Annuities Actually Work?” I explain that when a client purchases a Fixed Index Annuity (FIA), the insurance carrier will use the majority of the client premium to purchase bonds. The mechanics of an MVA and its reason for existence hinges upon this one characteristic of the FIA creation process. For example, if a client were to purchase a 10 year FIA the insurance company would then in turn buy 10 year bonds with the expectation that this client has committed to a 10 year hold and upon bond maturity those funds will be returned. However, if in 5 years that client decides they want to surrender their annuity policy early, they are required to pay the surrender charge at that time along with the MVA.  Whether that MVA will be positive or negative depends upon what has happened to interest rates over that 5 year period.  If interest rates have gone up, then the insurance company will suffer a loss when they sell the block of bonds to produce the required funds that must be returned to the client and that loss will then be passed through to the client’s surrender value in the form of a negative MVA. If the opposite were to occur and interest rates had gone down, the insurance company will be able to sell those bonds at a “premium,” and that gain will be passed on as a positive MVA to the client’s surrender value. The exact calculations of the MVA can vary by carrier and often have a maximum MVA level. So please review the carrier specific disclosures for exact details per product.

Here is an example of a great piece that describes how Lincoln Financial Group calculates an MVA:

A Dose of Reality!

At the end of the day, if we are truly presenting annuities the “right” way, to appropriate prospects, then an MVA does more good than bad for our clients.

Here’s why:

  1. An MVA allows the insurance carrier to pass on some of the risk of loss due to an early surrender, this alleviates product expense and that allows the carrier to offer better interest crediting potential to the client.
  2. The annuity offered to your client should only have a surrender period that is appropriate for their investment time horizon. If they have expressed that they will likely need funds in 5 years as an example, then they have no business purchasing an annuity with a surrender period longer than 5 years. Remember the MVA only applies when a surrender charge will be assessed. So, when clients hold the policy through the surrender period the MVA can do no harm.

To summarize, a market value adjustment can have a positive or negative effect on your client’s annuity contract. However, as long as your client holds their policy to the end of its surrender period and does not take a withdrawal in excess of their penalty free withdrawal amount then they will remain unaffected by the MVA. So it is important that we present appropriate annuity options that meet our clients’ needs to avoid any potential problem that could arise from an MVA allowing our clients to only benefit from the increased crediting potential.

Annuities at Their Best!

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Annuities come in all sorts of shapes and sizes.  They can be a great option for clients spanning the low to high risk spectrum of choices.  At their core, annuities will grow tax deferred and avoid probate upon death.  Additionally, fixed annuities offer a fixed rate of return that is often higher than what you can receive at the bank.  Fixed index annuities offer upside crediting potential that is tied to a market index, but still maintains principal protection.  For those who are more aggressive, variable annuities offer full market participation through the use of sub-accounts within the contract.  Additionally, these products can add features, known as riders, to provide leveraged long-term care benefits, enhanced death benefits and lifetime income.

It is easy to see that annuities provide a lot of exciting different benefits, but when are annuities actually at their best?


Voltaire said it best when he stated “I advise you to go on living to enrage those who are paying your annuities. It is the only pleasure I have left.” 


 

Here is a French philosopher living in the 1700’s, Age of Enlightenment, who totally understood how to stick it to the man!  What do I mean by that?  You see, all too often we lose sight of the fact that annuities are insurance products and insurance products are built to protect us against a specific risk.  So, what risk does an annuity protect us against?  It’s the risk of living too long, otherwise known as longevity risk.  Did you know that 1 in 4 65 year olds today will live past the age of 90 and 1 in 10 will past age 95?*

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Here’s another eye opener, according to the Employee Benefit Research Institute: the majority of baby boomers will run out of funds for retirement only 10 to 20 years into retirement.**

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In other words, annuities are at their very best when they are in a position to do exactly what they were built to do in the first place, which is to provide guaranteed lifetime income.  In today’s words, here’s what Voltaire was saying: “If you want to get the biggest possible return out of your annuities and really stick it to the insurance carrier, then just live a long time!”  People today are living longer than ever before which means, when used properly, annuities are at their best right now!

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*Wells Fargo Retirement Survey (2012)

**The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects, Employee Benefit Research Institute, 2011

What are Your Reasons for Not Discussing Income Protection with Your Clients?

By | DI Insurance | No Comments

 

Maybe you have thought:

  • I will sell it to them later.
    • Fact: People usually don’t get healthier as they grow older, and coverage will cost more.
  • They can use their savings if they can’t earn an income.
    • Fact: Even if they save 10% of their salary, one year of disability could easily wipe out many years of savings.
  • I believe they have disability coverage through their employer.
    • Fact: Group Long-Term Disability (LTD) insurance typically covers 60% of gross income, and benefits are usually taxable. Could they afford more than a 40% pay cut?
  • It costs too much.
    • Fact: The average annual cost is typically only 1-3% of earnings.
  • It won’t happen. My clients are healthy.
    • Fact: Almost 3 in 10 workers entering the workforce today will become disabled before retirement.
  • I am not an expert and don’t want to look foolish in front of my client.
    • Fact: We are here to help you look like you have been selling income protection for years and will help you with the presentation as well as do joint calls.

Your client’s ability to work and earn a paycheck is a very important asset that you can help them protect. Please watch the presentation above to learn more!

Five of the Most Common Life Insurance Mistakes

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There are a number of mistakes that can be made within a life insurance portfolio. Five of the most common mistakes involving personal and business life insurance, which can be easily avoided or corrected:

Mistake 1: It is forgotten that term insurance will terminate and/or become expensive to carry.
Short-term products should be used when the duration of the need is definitely short-term. Long-term products should be employed when the need is long-term or indefinite. A combination of the two may also be appropriate. Read More

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