Advisors, do a little checking on the client that bought a safe annuity product that had a Market Value Adjustment (MVA) “feature” and is five or more years old! Here is what I have just discovered.
The MVA was put on some annuity contracts that guaranteed interst rates to protect the insurance company against rising rates.
Here’s how they work — The client purchased an annuity some 8 years ago and the guaranteed interst rate was 3 per cent. The company must pay 3% on the money. But if interest rate go to 5%, they have benefited since they don’t have to pay 5%, so the MVA says essentially that if the interst rates are higher in the general market than the interest guaranteed to pay in the contract, the MVA will charge an additional surrender charge to compensate the insurance company for the difference in the value of the two rates.
But heres where that very same feature has backfired on some of the older contracts at intererst rates that are higher than the current market: The company issued at 3% but the current market is 1 or 1.5%. The MVA works against the indurance company by adding to the policy surrender value! So even if the contract is still subject to surrender charges, the MVA might offset or completley eliinate, or even make a gain by surrendering the contract and moving the money!
So who do we work for? The clients best interest. If the client has one of these types of annuity products, and feel the surrender charge is keeping them form moving the funds, a little digging will determine if the contract has an MVA and it might be to the contracts holders advantage to surrender. Of course there are many other factors in the decision besides this on feature, but something that has worked to several clients advantage.
A recent case had a $5784 surrender charge and a ($6128) MVA- he gets his account value PLUS $237. But only if he surrenders the contract. Now because this case already has a is a gain on the contract, this case is moving to a no load, no surrender charge annuity to retain the section 1035 benefit and avoid the tax issue and that might not work for everybody. But its worth looking at.