Given the prevailing interest rate environment, it’s not surprising that sales of all types of fixed annuities fell 5 percent in 2006, according to figures from LIMRA International. What some might find surprising is that while sales of book-value fixed annuities dropped 11 percent last year, sales of products with a market value adjustment (MVA) feature grew 72 percent, according to Beacon Research, an Illinois-based research firm.
Like a book-value fixed annuity, an MVA-based fixed annuity pays a declared rate of interest for a specified period. But unlike book-value contracts, they also include a provision under which account value may be adjusted positively or negatively at the time of partial or full surrender. The adjustment is tied to the movement of a benchmark interest rate over the life of the contract. An increase in the benchmark rate means the contract’s account value will be adjusted lower, while a drop in the rate means an upward adjustment in account value.
So investors who expect the benchmark rate to fall during the term of the contract might prefer an MVA-based fixed annuity to give themselves more potential upside than a straight book-value product. However, in buying an MVA they also expose themselves to downside risk.