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.

We all know suitability is the driving force that will lead to a better image for indexed annuities. Even though you and I have always looked at suitability for your clients, others in our industry have not. So I was interested to watch a video interview with Jack Marrion, one of the most respected voices in our industry. Marrion is discussing his new book..”Index Annuities…A Suitable Approach.”
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The book explains index annuity concepts and crediting methods with easy-to-understand graphics, and compares index annuities with other financial vehicles.jack marrion indexed annuity expert internal marketing organization

If you’re looking for good advice on staying straight with regulators, actual case studies to help the annuity producer stay compliant and how securities registration affects suitability, this book would be a good guide.

If Marrion’s name isn’t familiar to you, he is president of a research consultancy that publishes the Index Compendium newsletter, the consumer education materials of Safe Money Places and the Advantage Compendium research studies. He is frequently referenced by regulators and in SEC rule filings relating to annuities, as well as appearing as an expert witness. His first index annuity book Index Annuities – Power & Protection is regarded as the ultimate text on index annuities.

To check out the interview, click here

Chris Price

Guest Blogger Chris Price
His insight is invaluable to Shurwest and to our advisors. If you want Chris’ input on a securities-related case, call me and I’ll get him on the line. And now, from Chris Price:

When it’s stormy outside, we humans naturally seek a cozy cave to hide out in for protection. That’s what we do with our money, too. Bonds have been a traditional “cave” for retirees’ “safe money”—especially for those who believe they only have three choices when allocating their nest egg: cash, stocks or bonds.

But how safe is that cave? Could rocks start falling from the ceiling? Financial analysts warning of a bond bubble on the verge of bursting think so.

Type “bond bubble” into your web browser and you’ll get 275,000 hits on the subject, from such sources as Forbes and MSNBC.