Balancing Risk and Reward: Navigating Annuity MVAs
When it comes to understanding how annuities work it is important to be aware of the various features that are typically on an annuity contract. In this article, we are going to take a deeper dive into the Market Value Adjustment (MVA).
The Basics
What is a Market Value Adjustment? The MVA, also called an interest adjustment, is a tool that may be included on annuity contracts that allows carriers to offer higher rates on annuities. It comes into play when a policy has a withdrawal in excess of the free withdrawal amount during the MVA period.
How it Works
When an insurance company issues an annuity policy, they purchase a set of bonds at the prevailing interest rate. The bonds are typically purchased for a term equal to the MVA period of the policy. If a policyowner takes a withdrawal that is subject to the MVA, the underlying bonds are sold to return the premium paid. The interest rates at that time will determine the amount of the original premium the insurance company can recover. Depending on the current interest rate environment, the bonds may be sold at a loss or gain.
MVA IMPACT
Positive Impact
If interest rates had decreased at the time the underlying bonds are sold there may be a positive adjustment. The insurance company uses a predetermined MVA calculation to determine the portion of the gain the policyowner receives. The positive adjustment is added to the accumulation value then any applicable withdrawal charges would be applied.
Negative Impact
If interest rates had increased at the time the underlying bonds are sold there may be a negative adjustment. The insurance company will have to sell the bonds at a loss to recover the policyowner’s principal. At the point of surrender, the predetermined MVA calculation determines the portion of the loss the policyowner pays. This amount is subtracted from the accumulation value, along with any applicable withdrawal charges. The impact of a negative MVA cannot cause the surrender value to go below the state defined guarantee minimum.
For additional information, click on the following to download National Life Group’s Market Value Adjustment flyer.
For more information, contact your local Agent or National Life Group.
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