First, let’s examine why insurance companies impose an MVA, and the answer is simple – an MVA allows the company to offer higher rates, be that an annually declared interest rate, a guaranteed interest rate, or higher caps/lower spreads in the case of indexed interest crediting formulas. Thus, the addition of an MVA improves the product benefit to the annuity owner. You can see examples of this by comparing products from the same insurance company with and without an MVA. For example, a leading provider of Multi-Year Guaranteed Annuity contracts, in this case a 5 year guarantee, offers a guaranteed rate that is nearly 14% higher on their MVA version than that offered by their non-MVA version. Similarly, this same carrier offers an Annual Point-to-Point Indexed Strategy Cap rate that is nearly 16% higher on the MVA version than on the non-MVA version. In today’s low interest rate environment, this matters.

Second, an MVA will never affect the annuity owner unless they make an excess withdrawal or surrender the contract prior to the end of the surrender charge schedule. This is unlikely to happen if the annuity has been properly and suitably placed based upon the client’s needs analysis, and the client understands the provisions of the annuity and why they are repositioning money into the annuity. Granted, stuff happens in life that may require an annuity owner to need to make an excess withdrawal or even a full surrender, but that is typically the exception ????????not the rule, particularly as most quality annuities waive both surrender charges and MVA for “emergency” access such as confinement to a nursing home or a terminal illness. Of course, other unforeseen financial needs may arise that cannot be addressed with other assets set aside in planning for this purpose, but again, this is generally the exception and not the rule. If the owner surrenders the contract because they are unhappy with growth performance (most commonly in the case of indexed annuities), then it is questionable if they understood the true performance potential of the annuity at purchase decision.

Many agents avoid MVA because they find them difficult to explain; this is understandable. The MVA calculation is complex, and while many insurance company disclosures provide an example of the calculation, it is frankly difficult for most clients to grasp, thus the presence of an MVA is understandably viewed by many agents as an impediment to the sales process. Perhaps a simpler way to explain the MVA, presented below, will help.

“A Market Value Adjustment, or MVA, allows the insurance company to offer richer benefits, for example higher rates, than they might otherwise be able to in a low interest rate environment such as today.

The primary financial instruments that support annuity benefits are investment grade bonds that are purchased by the insurance company. Bonds are subject to what is referred to as “interest rate risk”, which simply put means that once the bonds are purchased, if interest rates increase, the Market Value of the bonds decreases. One of the benefits of owning an annuity instead of bonds is that you ?????? transferring this “interest rate risk” to the insurance company.

The annuity contract allows for a penalty-free and MVA-free withdrawal of up to 10% of contract value each contract year – thus the insurer is assuming the “interest rate risk” up to 10% of your contract value. With an MVA, if you withdraw more than 10% of your contract value, you are simply sharing the “interest rate risk” with the insurer on amounts exceeding the penalty-free amount.

Of course, if you never exceed the penalty-free withdrawal amount, then the MVA will never affect you at all, and at the conclusion of the period in which surrender charges apply, you may withdraw any amount of your contract value without surrender charge or MVA.”