If the market goes up, would you like more interest? If the market goes down, you keep your current rate of interest.
How can that be?
Like all things the “devil is in the details.” But it is actually true! To make things fair, years ago the state insurance regulators made annuity companies change their rules when they were in a position to make “windfall” profits. Much like the gas and oil boom in the 1980s, already producing oil wells could make substantially more from the same well, so the federal government imposed the “windfall” profits oil tax act.
The same is true for insurance company annuities. Since annuities are generally a long term commitment, what happens when interest rates suddenly increase? Or decrease? How is the planning field kept level?
The answer is a ruling which created a new type of an annuity called, Market Value Adjusted Guaranteed Interest Account (MVA)
MVAs work this way, they pay interest but will adjust the interest if market conditions shift in a greater (up or down) than normal manner. Suppose interest rates are 3% but suddenly rise to 7%, the insurance company would profit because of the increase in interest rates, but you would still be at the old rate. So to make it fair, if you cancel, die or change your annuity (the trigger) during a major change in interest rates, you receive an adjustment. That adjustment is called market Rate Adjustments.
The change in the interest rate environment can benefit or not benefit you. As an example if the opposite is true, and you were receiving 7% but interest rates drop to 3% and you were to prematurely cancel your annuity, the insurance company would contractually need to be compensated for their loss, you have to share with them the downside.
As always, if you keep your annuity to maturity, or an heir inherits it, you will receive your contractual guarantees.
To summarize: The market value adjustment is simply an increase or decrease in the annuity’s value, depending on the interest rate environment as it relates to general interest rates. It occurs only if you withdraw money or die before the contract period ends. (Maturity) Depending on prevailing rates, a market value adjustment may adjust the amount you receive up, down, or not at all. The field is considered level for both sides, the annuity owner and the annuity company.
Annuities are regulated by each state, and not all states have approved MVA contracts.