Market Value Adjustment (MVA)

As annuities grow based on bonds invested from your premiums, their values tend to shift with the market. Changing interest rates will affect the value of your bonds. At times, the value of an investment or security drops below the purchase price. When you withdraw or surrender money before the end of your contract, as in a retirement plan, you may be subject to a Market Value Adjustment (MVA) that reflects that decrease.

Understanding the MVA is vital to making informed decisions about whether or not to take distributions before your account matures. Here’s everything you need to know about the Market Value Adjustment and how it relates to your annuity.

Why do Insurance Companies Apply a Market Value Adjustment?

An annuity builds wealth by investing your premiums in bonds that gain value over time. If you withdraw or surrender the annuity before maturation, its value is entirely dependent on the current interest rate. In some markets, that could be significantly higher than what you paid. Your insurer would have to pay the difference, which means they would take a loss.

To offset this loss, most insurance companies apply a Market Value Adjustment to your withdrawal. This shifts your disbursement amount to reflect the annuity at current market rates. 

MVAs can be negative, as in the scenario described above, or positive, as when interest rates drop. In that case, the insurance company will disburse your requested amount, potentially with a positive adjustment to give you a better rate of return. However, this is highly dependent on the terms of your contract and how much the company stands to lose. Before making an early withdrawal, do your homework to be sure you won’t be leaving money on the table.

How Does Market Value Adjustment Affect Your Annuity?

Your insurance provider may allow a certain number or monetary amount of withdrawals per year without a penalty. If it does not and you withdraw early, or if you exceed this threshold, your annuity may incur an MVA. If the value of the bond has dropped, the percentage difference will be reflected in your disbursement. 

In short, you can withdraw early and/or more than permitted, and:

  • if interest rates are rising, you’ll experience a negative MVA.
  • If interest rates are dropping, you’ll experience a positive MVA.

Market Value Adjustments can also be triggered if you surrender your annuity before the contract has matured. There is often a penalty window, aka the surrender period, lasting up to a few years after purchasing the annuity. In such a case, if you surrender, you typically pay a fee that’s a percentage of the annuity’s current value. Over time, the surrender fee may drop to $0, at which point the contract is typically fulfilled. 

The surrender could significantly reduce your disbursement if interest rates are high. Thankfully, there is often a minimum cash-out guarantee below which the MVA cannot reduce your disbursement.

That said, if interest rates are lower when you surrender the annuity, the bond value would be lower. You could be subject to a positive MVA as the insurance company doesn’t need to offset a loss.

So, if you must cash out, do so when interest rates are down — or wait until your surrender period has passed.

What are the Early Withdrawal Penalties for Annuities?

Like other investment assets, there is typically a tax penalty for disbursements before a certain age. In the case of annuities, you may incur a 10% tax penalty if you withdraw before the age of 59 1/2. Annuity withdrawals are also subject to income tax. Always run the numbers before cashing out your annuity. 

Both early withdrawals and surrenders can trigger the tax penalty. As both are considered taxable income, you’ll also need to consider your tax rate and how disbursements may increase your tax bill.

How can I leave an annuity contract without incurring an MVA?

If you’re interested in surrounding an annuity to get out of a contract you don’t like, you could consider a 1035 exchange, which could spare you the MVA and surrender fees. However, you may still incur tax penalties. Always check with your financial advisor to see how this change would affect your liabilities. 

Frequently Asked Questions

How does an MVA work?

An MVA kicks in when an annuitant withdraws before their surrender period ends or if they withdraw more than their annual allowance. It adjusts the disbursement based on the shift in the bond’s value, which depends on the interest rate as determined by the market.

How much can I withdraw per year without an MVA or penalty?

If your contract allows it, the maximum you can withdraw before the contract matures is usually 10%.

How much is the surrender penalty?

If you choose to surrender your annuity, you’ll incur a fee. This usually starts at 10% in year 1 and declines each year. For example, a 10-year surrender period would have a penalty of just 1% in its final year.

How is the MVA calculated?

Each contract has a unique formula for determining the MVA. In general, though, the company will compare the interest rate at the time of purchase to the current interest rate, use the number of years elapsed as the quotient, and apply the resulting percentage to your disbursement. This number will be positive if interest rates have declined and negative if rates have increased. 

Working with the agent that Safe Wealth Plan connected me with was an efficient and professional experience. The knowledge I gained has been invaluable. I highly recommend Safe Wealth Plan.

Casey Davis
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