Market-value adjusted annuities: Key considerations for advisors

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By Anna Baluch

Like most financial products, market value-adjusted (MVA) fixed annuities come with trade-offs.

In exchange for potentially higher interest rates, any withdrawals above the free withdrawal limit during the surrender period may be adjusted, depending on how interest rates have changed since the annuity was purchased.

“If interest rates have declined, an early withdrawal could result in a positive adjustment that increases the amount a client receives,” said Brian Kunkel, senior vice president of marketing strategy and field services at AmeriLife.

Conversely, if interest rates have increased since the client purchased the annuity, an early withdrawal may result in a negative adjustment that reduces their total payout. However, if the contract is held until the end of the surrender period, the MVA never comes into play.

“An MVA fixed annuity may be appropriate for someone with a longer time horizon who doesn’t anticipate they’ll need access to funds during the surrender period,” said Tom Buckingham, chief growth officer at Nassau Financial Group.

How to decide if an MVA makes sense

Annuities are long-term retirement vehicles. Therefore, determining whether to purchase an annuity shouldn’t revolve around whether it’s an MVA or non-MVA product, advisors say.

Rather, the decision should be based on the client's time horizon, liquidity and income needs, and long-term retirement objectives. Advisors should also consider what benefits an MVA contract provides and how that fits into the overall retirement strategy.

The key question is whether the client can leave the funds invested without needing significant access during the surrender period.

“If the funds are intended for long-term retirement income and the client has sufficient liquid assets elsewhere, an MVA may be appropriate,” Kunkel explained.

However, if they’re designed for emergency use, an MVA annuity isn’t the best choice.

Ultimately, annuities with MVA fees should be used with a defined time horizon.

“This allows them to complement market-based investments by providing principal protection while equity investments can be used for longer-term growth,” said Angie Welsh, founder and president at My Annuity Agents.

Explaining MVAs to clients

Not every retirement dollar needs to do the same job. Some assets offer liquidity, some support growth, and some provide guaranteed income.

“The advisor’s role is to match each solution to the client’s objectives and help them understand the trade-offs involved,” explained Buckingham.

That’s why it’s important to explain that an MVA annuity is not designed to serve every purpose.

Instead, it may be a good option for clients who are seeking long-term retirement income and have other assets available for short-term needs.

Also, when discussing MVAs, advisors must debunk the common misconception that an MVA is always subject to a penalty.

Instead, this type of annuity includes an adjustment that may be positive or negative, depending on interest rate movements.

In declining interest rate environments, an MVA can result in an adjustment in the client's favor, while in rising interest rate environments, it can result in a negative adjustment.

At the end of the day, an MVA is primarily designed to discourage policyholders from withdrawing funds early. It isn’t added as another revenue-generating source for the insurance company.

“MVA annuities are not inherently better or worse than other financial planning tools,” Welsh said.