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.
- 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.
- 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.