Annuities are insurance products that guarantee you an income for a fixed period of time or for life. Some annuities, called market value adjusted annuities, defer the payment of the guaranteed income and give you the opportunity to accumulate more money than the promised interest rate in the contract. But you must understand how these contracts work before you buy into one.
Guaranteed Rate -- Plus
A market value adjustment annuity is an annuity that offers a guaranteed interest rate but also offers a market value adjustment if you surrender the contract. The market value adjustment adjusts the interest you earn in the contract according to current interest rates being offered in the bond market, where the annuity derives its interest from.
Lock in Higher Gains
The purpose of the market value adjustment is to adjust the annuity's benefits according to current market conditions while still retaining attractive fixed interest rates. This provides some measure of security for the investor in that the market value adjustment can be used to lock in gains that are higher than the guaranteed rate if the investor is willing to surrender the contract prior to maturity.
The benefit of a market value adjustment on your annuity is that you could make more than the promised interest rate in the contract. If current interest rates are higher than the guaranteed rate, you may cash in your annuity to receive the current market rate. If you do, the annuity will credit your savings with the current interest rate giving you more money than you otherwise would have received from the contract.
Also Can Adjust Downward
The disadvantage to a market value adjustment in your annuity is that your earnings could be less than the guaranteed rate. If you need your savings and must cash in your annuity, the annuity's interest rate may be adjusted downward. If interest rates are lower than the guaranteed rate, the insurer credits your annuity with the lower market rate. You receive less than the promises outlined in the contract.
Before you buy a market value adjusted annuity, make sure you won't need the money you are investing in the annuity for that period of time. Annuities are long-term contracts, and market value adjusted annuities are contracts in which you won't want to be forced to liquidate, as you will lose money in a low interest rate environment.