What is a market value adjustment in annuities?

A market value adjustment (MVA) in annuities is a feature that modifies the surrender value of the annuity based on prevailing interest rates at the time of withdrawal compared to the interest rates when the annuity was purchased. This means that if an annuity owner decides to withdraw funds or surrender the annuity before the end of its term, the adjustment will correspond to the difference in interest rates.

For example, if the current interest rates have increased since the annuity was purchased, the adjustment may decrease the surrender value, as the insurer has to account for reinvesting at higher prevailing rates. Conversely, if interest rates have fallen, the adjustment may increase the surrender value because the insurer is less likely to have to offer higher rates for new investments. This mechanism protects the insurance company from market fluctuations and helps them maintain their profits while providing a fair value to the annuity owner based on market conditions.

Understanding the concept of market value adjustment is crucial for consumers considering an annuity, as it can significantly impact the actual cash value of the annuity if they decide to make an early withdrawal.