Market Value Adjustment on a Fixed Annuity
Annuities are life insurance products that guarantee you a retirement income. Some annuities defer this income payment and are referred to as "deferred annuities." In some states, insurers are allowed to sell market value adjusted annuities. These annuities may alter your original contract earnings up or down, and you should understand how they could impact your savings before you purchase one of these annuities.
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Purpose
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The purpose of a market value adjusted (MVA) annuity is to provide an annuity whose value may be adjusted upward or downward according to market conditions. MVA annuities generally invest in bonds or bond-like investments, and they typically pay a fixed rate.
Significance
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A market adjustment may be made throughout the life of the contract if you decide to surrender the contract. This MVA may give you more or less than what's actually in your annuity contract. The MVA works by changing the surrender charge in the annuity contract to reflect current market conditions. For example, if you buy into a fixed annuity with a market rate of 5 percent, and over the next five years the market interest rates drop to 3 percent, you would receive additional money over the current rate to achieve the 5 percent stated in your contract. In this case, your MVA would be positive. Additionally, the surrender charges on an annuity that pays 3 percent would be lower than an annuity that pays 5 percent, so your actual gain after surrender charges likely would be higher (depending on your tax bracket and the amount of money in the annuity).
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Benefit
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The benefit to a market value adjusted annuity is that you can potentially earn more than current market rates. The MVA guarantees a minimum amount of money you may earn. This could provide you with money you otherwise would not receive.
Disadvantage
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The disadvantage to market value adjusted annuities is that this crediting method works in reverse as well. If interest rates rise, your annuity policy value is adjusted downward. This happens when the rate stated in the policy is less than the current market interest rates.
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