Adjusted Market Value Ambiguities

Investing in fixed annuities is a complex and challenging process for both new and experienced investors. When evaluating this type of investment, investors should always read the prospectus for the fixed annuity. However, the prospectus may fail to mention certain ambiguities related to the specific investment. Therefore, investors should understand the common ambiguities associated with these investments.

What is Adjusted Market Value?

Adjusted market value represents an alteration in the value of a fixed annuity account resulting from the early liquidation of the account. This concept specifically applies to fixed annuities and can result in either a positive or negative value adjustment. The nature of the adjustment depends on the interest rates at the time the investor set up the annuity compared with the interest rates at the time of liquidation.

Explaining Fixed Annuities

A fixed annuity is an investment that pays out a set amount of money at regular intervals for a specified period of time. At the time of purchase, the investor and the insurance company that sells the fixed annuity agree to the terms and conditions of the annuity. After purchasing the annuity, the investor receives dividends, usually monthly, based on the interest rate and the value of the fixed annuity at the time of purchase. Fixed annuities represent one potential investment option.

Expirations and Market Value Adjustments

The ambiguity of the fixed annuities interest rate relates to the guaranteed interest rate specified in the fixed annuity’s contract compared with the actual interest rate available at the time of liquidation. This ambiguity exists only in instances where the investor chooses to liquidate the fixed annuity prior to the expiration date specified on the fixed annuity’s contract. If the contract rate of the fixed annuity has not expired and the actual interest rate at the time of liquidation is lower than at the time of purchase, the fixed annuity will have a positive increase in market value. If, on the other hand, the actual current interest rate is higher than the interest rate at the time of purchase, the fixed annuity will have a negative increase in market value.

Variations in Expiration Times

Another ambiguity related to this type investment depends on the type of fixed annuity purchased. The majority of fixed annuities involve an interest rate guarantee and market value adjustment period that expire at the same time. However, this is not always the case because some fixed annuity investments have a market value adjustment period that expires prior to the interest rate guarantee. This ambiguity can have a significant impact on the liquidation value should you decide to liquidate the account prior to the expiration date of both the interest rate guarantee and the market value adjustment period.

References

• Complete Safe Income Annuity Information: Market Value Adjustment (MVA)
• Morgan Stanley Smith Barney: Market Value Adjustment (MVA)
• Principles of Finance; Scott Besley and Eugene Brigham; 2008