MVAs: Most Valuable Annuity?
What on earth is an MVA?
According to Barron’s Insurance Dictionary, a Market Value Adjustment is “an increase or decrease in the surrender charge of the life insurance policy or annuity contract depending on the current financial markets.” Well, kinda. An MVA is actually separate from the surrender charge. In essence, an MVA is a feature that is often attached to deferred annuities, which could increase or decrease the cash surrender value of the annuity if more than the penalty-free amount is withdrawn (or if the contract is fully surrendered) during the surrender charge period.
In general, if interest rates are lower at the time of withdrawal than at the time the annuity contract was issued, the annuity’s cash surrender value will be increased (thus, market value adjusted). However, if interest rates are higher at the time of withdrawal than at the time of policy issue, the cash surrender value will be reduced. Ultimately, the MVA is a risk-mitigation feature that allows the insurance company to offer an annuity so that the annuity purchaser can take advantage of higher credited rates if they are willing to accept the risk that they may receive less money than anticipated should they withdraw more than their penalty-free withdrawal amount.
Sharing of risk
Because this is a feature whereby the insurance company shares some pricing risk with the annuity purchaser, ratings agencies such as Standard & Poor’s encourage insurance companies to use MVAs on their deferred annuities, so much so that today, 51 percent of all indexed annuities have a market value adjustment.
On the not-so-good side, a market value adjustment may mean an annuity purchaser receives less cash value than anticipated should they cash out of their annuity or withdraw more than the penalty-free amount.
On the pretty positive side, a market value adjustment may translate to an annuity purchaser receiving a relatively competitive credited interest rate. Plus, they could end up receiving more money than they paid into the annuity if they cash surrender while the MVA is positive.
No matter how you spin it, MVAs make no difference whatsoever unless the annuity purchaser withdraws more than their annual penalty-free withdrawal amount. Almost every indexed annuity that is available for sale today grants the purchaser the right to access 10 percent of the annuity’s value each year, without being subject to surrender penalties. So, if the annuitant withdraws 11 percent or more of their annuity’s value, they will have an MVA imposed on a portion of their withdrawal. However, if they never withdraw more than 10 percent from the annuity in any given year, they don’t need to know what MVA stands for, much less how to calculate it.
“Ultimately, the MVA is a risk-mitigation feature.”
By Sheryl Moore for December 2012 issue of Senior Market Advisor Magazine. Sheryl Moore is president and CEO of AnnuitySpecs.com and LifeSpecs.com, indexed product resources in Des Moines, Iowa.