Market Value Adjustments are financial mechanisms applied to certain insurance and investment products, particularly during the early years of a contract. An MVA is a tool that adjusts the amount received upon early withdrawal based on changes in specific financial indices. This adjustment can either increase or decrease the amount you receive, depending on the movement of the relevant index. In the case of Ameritas indexed annuities, it’s the Bloomberg US Aggregate Credit Yield to Worst.
Purpose and benefits of an MVA
The primary purpose of an MVA is to protect both you and the insurance company from interest rate risks and ensure that the contract value remains fair. By adjusting the payout based on current market conditions, MVAs help maintain the financial stability of the issuing company and provide a more accurate reflection of the contract’s value.
This can benefit you in several ways, particularly in the context of annuities:
Fair valuation: An MVA ensures that the value of the investment reflects current market conditions in the value of the annuity.
Potential for higher returns: By tying the value of the investment to current market rates, an MVA shares interest rate risk between you and the company.
Transparency: In annuity contracts, MVAs are based on a clear and predefined formula, providing a transparent understanding of how investment values are determined.
Encourages long-term investing: By applying adjustments for early withdrawals, MVAs encourage customers to keep their investments for the intended term, which can be beneficial for long-term financial strategies and can help customers achieve better financial outcomes.
When does an MVA apply to my indexed annuity?
An MVA comes into play if you decide to make a withdrawal or surrender your annuity during the surrender charge period. The surrender charge period is a predetermined timeframe during which early withdrawals are typically subject to penalties. The purpose of the MVA is to reflect the current market conditions at the time of withdrawal or surrender, providing a more accurate adjustment to the annuity’s value based on those conditions.
When does an MVA not apply?
There are specific circumstances where an MVA will not be applied, including:
Free withdrawals: These are withdrawals allowed by the annuity without any penalties, often limited to a certain percentage of the annuity’s value each year.
Death benefit: The MVA does not affect any death benefits that are paid out upon the death of the annuity holder.
Minimum guaranteed surrender value: This is a minimum amount guaranteed1 to be received if the annuity is surrendered, regardless of market conditions.
Post-surrender charge period: Once the surrender charge period has ended, any withdrawals or surrenders are no longer subject to an MVA.
Impact of index changes on an MVA
For Ameritas indexed annuities, the impact of the MVA on the amount you receive depends on the movement of the Bloomberg US Aggregate Credit Yield to Worst index:
- Positive index change: If the index increases, the amount you receive from a withdrawal or surrender will decrease.
- Negative index change: If the index decreases, the amount you receive from a withdrawal or surrender will increase.
- No index change: If there is no change in the index, there will be no impact on the amount received from a withdrawal or surrender.
Calculation of an MVA
MVAs are calculated using a specific formula. At Ameritas, the formula involves multiplying the amount withdrawn or surrendered that exceeds the penalty-free withdrawal amount by the MVA factor. Here’s a breakdown of the calculation:
MVA factor formula
The MVA factor is calculated as follows:
MVA factor = [(1+A/1+B)N]−1
Where:
- A = Bloomberg US Aggregate Credit Yield to Worst as of the business day prior to the issue date.
- B = Bloomberg US Aggregate Credit Yield to Worst as of the business day prior to the date of withdrawal or surrender.
- N = The number of days from the date of withdrawal or surrender until the next policy anniversary, divided by the number of days in the current policy year, plus the number of whole years remaining in the surrender charge period.
Surrender charge cap and floor
Ameritas annuities have provisions to ensure fairness and protection for both the annuity holder and the insurer, balancing the potential benefits and costs associated with early surrender of the annuity.
Protection of minimum value: Even after applying the MVA and surrender charges, the amount you receive will not drop below a certain minimum guaranteed1 value. This protects your investment from significant loss due to market conditions or fees.
Cap on positive adjustments: If the market conditions result in a positive MVA, this positive adjustment will be limited so that it cannot entirely negate the surrender charge. This ensures the insurer keeps compensation for the early termination of the annuity.
Nonforfeiture benefit: This is a guarantee1 that ensures that you keep some part of their accumulated value even if you decide to surrender the annuity before the end of the surrender charge period. This benefit is designed to protect you from losing their entire investment due to early withdrawal or surrender, providing a minimum guaranteed1 amount that you receive, regardless of market conditions.
Ameritas can help
A Market Value Adjustment is an important feature of certain financial products, designed to reflect current market conditions in the value of withdrawals or surrenders during the surrender charge period. Understanding how MVAs work, when they apply and their impact based on index movements is crucial for making informed decisions about your investments and withdrawals. By considering MVAs in your investment strategy, you can better manage the timing and impact of your financial actions.
An indexed annuity from Ameritas also provides other features to help you reach your financial goals. Talk to a financial professional to help you learn more about indexed annuities and how they fit in with your financial strategy.
Sources and References:
1Guarantees are based on the claims-paying ability of the issuing company.
2Example is hypothetical and for illustrative purposes only.
Withdrawals may be taxable and, if taken prior to age 59½, a 10% penalty tax may also apply. The information presented here is not intended as tax or other legal advice. For application of this information to your specific situation, you should consult an attorney
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