CD-Type Annuities - Market Value Adjustment (MVA)

The market value adjustment or MVA is probably one of the more confusing elements of fixed annuities. An MVA is nothing more than an adjustment (positive or negative) that is applied when an account is liquidated early. It is designed to help the insurance company coordinate the value of the underlying investments it makes when it funds your annuity (i.e bonds, loans, etc.) with the early liquidation proceeds of the annuity.

The way an MVA works is simple. If you make an early liquidation of an annuity that has an MVA, you may have some money added to your liquidation value or you may have some money taken away. Whether money is added or subtracted depends on whether the interest rates in the market are higher or lower than when you invested in the annuity. If interest rates in the market are higher than when you placed your annuity investment, the adjustment is negative (money is taken away). Similarly, if interest rates in the market are lower than when you invested in your annuity, the adjustment is positive (money is added).

For example, suppose you purchased an annuity with a market interest rate of 6%. Over the next year, the market interest rates dropped to 4%. If you liquidated your annuity (before your MVA period expires), your MVA would be positive. That is, money would be added to your early liquidation proceeds since interest rates were lower than when you placed the investment. (Of course, any surrender penalties would still apply.)

For most CD-type 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. I highly recommend that you 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 more interest, they have been a boon to investors who want higher interest rates. However, you need to understand what an MVA is and how it can affect your investment should you liquidate your annuity early.