Have you done an annual review with a client lately and realized that the surrender value was higher than you expected? That may be due to the Market Value Adjustment, that thing you’ve always heard of but may not fully understand.

Here’s a great definition: A market value adjustment (MVA) is the increase or decrease in the value of the assets held by the insurance company. This increase or decrease in value can be passed on to the client to help create an annuity that can offer more client friendly features. This adjustment is typically only passed on to the client on withdrawals in excess of the free withdrawal amounts which includes full surrender.

Market Value Adjustments 101

MVAs have a negative connotation for some, but in my opinion, there are times when MVAs actually benefit clients. MVAs allow the insurance company to give a client more upside potential because they are sharing risk with the client. The insurance company issues an annuity contract with the understanding that the client is committing to the length of the contract. They buy bonds of a certain duration based on that client commitment. When a client surrenders a policy early, they are breaking that commitment.

This can throw off the insurance company’s pricing if there has been a change in interest rates from when the policy was issued to when the policy is surrendered. The MVA is a way for the insurance company to reconcile with the client based on interest rate movement and adjust the surrender charge accordingly.

How Today’s MVAs May Benefit Your Clients

MVAs are based on the 10-year treasury, so if the 10-year treasury was lower when the policy was issued than it is when the policy is surrendered, it will cause the MVA to be negative. When an MVA is negative, it subtracts dollars from your client’s surrender value, meaning the surrender penalty to your client is greater. If the 10-year treasury was higher when the policy was issued than it is when the policy is surrendered, it will cause the MVA to be positive. When an MVA is positive, it adds dollars into your client’s surrender value, meaning the surrender penalty to your client is less.