As clients have begun to feel the shifting winds with respect to the general economy, the annuity market is now undergoing its own type of evolution. While products that tie fluctuations in an annuity’s cash surrender value to prevailing market interest rates may have seemed unacceptably risky to most clients just a few months ago, changes in today’s interest rate environment now have clients flocking to find these features. Annuities with market value adjustment (MVA) features may be the next hot product for clients looking to beat the return on other conservative investment products, so make sure you are ready for this emerging product trend.
Market Value Adjusted annuities: The Basics
The basic premise behind the MVA annuity is that it allows the carrier to adjust the product’s cash surrender value upward or downward if the client chooses to surrender the product before maturity. The adjustment is calculated based on the difference between the interest rate guaranteed under the particular contract and the then-prevailing market interest rates.
Generally, if the prevailing interest rate at the time of surrender is higher than the contract’s guaranteed rate, the client’s cash surrender value will be adjusted downward. On the other hand, if rates move lower than the rate guaranteed under the contract, the client can receive a surrender value that may be more than the original investment — the surrender value will be increased to reflect the higher annuity rate.
As with other fixed annuities, if a client purchases a fixed MVA annuity and holds it for the duration of the product’s guarantee period — which may be as short as three years or upwards of fifteen years — the product simply pays the guaranteed rate.
Why MVAs are appealing now
In recent years, the prevailing interest rates have been so low that annuity carriers have only been able to offer products with similarly low guaranteed interest rates, so there was very little difference to be realized with an MVA annuity. Because interest rates on some investments — including many of those commonly held by the carriers themselves — have begun to creep higher, carriers have likewise started to offer higher rates on certain products.
This rise in interest rates, whether fleeting or long-term, allows clients to lock in a higher rate on their annuity product — in some cases, for a period that is as short as three to five years. If rates begin to drop and the client chooses to surrender the product, he can take advantage of the MVA feature.
Further, annuity carriers often offer clients higher interest rates with MVA annuities than with other annuity products because the client bears the interest rate risk; therefore, even if interest rates remain relatively stable during the guarantee period and the client holds the product to maturity, he may have locked in a higher interest rate than would be available with similarly conservative investment products.
As with all annuity products, professional advice can be critical to the success or failure of the client’s investment strategy, so it is important that clients be advised of the fine print, as many of these products contain surrender fees that must be taken into account when determining the advisability of the strategy. However, if recent product performance is any indicator, MVA annuities are likely to be the next big hit in the annuity game.
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