Market Value Adjusted Annuities

7 Oct

In the last 25 years, interest rates on retirement savings have fluctuated from 14% to less than 4%,  and no one can really be sure what the future holds (you can get estimates using the annuity calculator). Sometimes this makes finding an investment that pays a steady income (which adjusts for rising and falling interest rates) a difficult chore.

   One method is to select investments with various maturity dates to lock in your money over a range of interest rates. This is typically done by laddering bonds.  Long-term fixed investments usually pay a higher rate than short-term ones. However, as interest rates go up, it could be costly to liquidate long-term investments and reinvest the money at newer, higher rates. So how can you keep up with the best yields available while protecting your income against rate decreases?

   Market value adjusted annuities (MVAA) are fixed annuities that let you lock in interest rates for several terms that can range from one to 10 years.   At the end of each term, the annuity company will present a new interest rate and offer you an opportunity to withdraw your money without surrender charges. But what if you wanted the money earlier, before the end of the term? If you were to surrender the account before the fixed period ends, the annuity company will adjust the surrender value to reflect changes in the prevailing interest rates.  Therefore, you could be credited a higher or lower rate than that within the annuity contract, depending on market conditions. In other words, the annuity company shares the gain or loss on their bind portfolio with you.  If interest rates have fallen, you have a gain.  If interest rates have risen, you have a loss.

For example, suppose you purchased an annuity with a market interest rate of 7%. Over the next three years, the market interest rates drop to 4%. If you liquidate your annuity (before your MVA period expires), your MVA would be positive. Money would be added to your early liquidation proceeds since interest rates were lower than when you placed the investment. (any surrender penalties would still apply.)

For most multi-year fixed annuities, the interest rate guarantee period and the MVA period expire at the same time. However, a few annuities will have an MVA period that is longer than the interest rate guarantee period but avoid these. Choose only annuities in which the MVA period has expired by the end of the interest rate guarantee. Since the MVA feature allows insurance companies to pay a higher return, they have been a boon to investors who want higher interest rates.

It’s possible that your current deferred annuity has this market value adjustment provision and you may not even know it.  Look in the contract or have your retirement advisor review it for you.  Because interest rates have declined, you may be able to gain favorably with the market value adjustment.  Also consider any surrender charges if they apply to your contract.

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