Definition
A market value adjustment is a contractual adjustment applied to the amount payable on a withdrawal or surrender from a deferred annuity, calculated by reference to the change in interest rates or a specified index between the time of contract issue and the time of withdrawal, and operating to increase or decrease the payable amount accordingly.
Why it matters
The market value adjustment is the mechanism by which deferred annuity contracts pass a portion of interest rate risk back to the contract owner on early withdrawal. It is the feature that makes the cost of accessing capital before the surrender period ends rate-environment-dependent in a way that the surrender charge alone is not. Naming the market value adjustment directly is what distinguishes contracts with one from those without.
How it works
In a contract with a market value adjustment, the amount payable on a withdrawal in excess of the free withdrawal allowance is calculated using a formula that references the change in a specified interest rate or index — typically a Treasury yield, a corporate bond yield, or a similar reference rate — between contract issue and withdrawal. If rates have risen since issue, the market value adjustment reduces the payable amount, reflecting that the carrier would need to liquidate assets at a loss; if rates have fallen, the adjustment increases the payable amount. The market value adjustment is applied in addition to the surrender charge, not in place of it, and applies only to the amount in excess of the free withdrawal allowance. The adjustment formula is specified in the contract, and the calculation methodology must be disclosed under state insurance regulation. Some contracts apply the adjustment only on full surrender; others apply it on any excess withdrawal during the surrender period.
In practice
For an individual considering a deferred annuity with a market value adjustment, the practical effect is that the cost of early withdrawal is rate-environment-dependent and not fully knowable at issue. Reading the contract identifies the reference rate, the formula, and the conditions under which the adjustment applies. A professional should be able to characterize how the adjustment would behave in plausible rate scenarios over the surrender period, and to identify whether the contract's market value adjustment applies on partial withdrawal in excess of the free amount or only on full surrender. Plan fiduciaries should treat the presence and structure of a market value adjustment as part of the conditional-liquidity disclosure for any in-plan deferred annuity option.
In the Longevity Standard Framework
Market value adjustment is supporting vocabulary in the Longevity Standard framework — it modifies the magnitude of withdrawal cost within the conditional value of the liquidity claim property, one of four values that the liquidity claim property can take, alongside full, partial, and none. The adjustment does not change the contract's liquidity value — that remains conditional during the surrender period — but it makes the cost of conditional access rate-environment-dependent rather than fixed. Two contracts with identical surrender charge schedules can have materially different practical liquidity profiles depending on whether one carries a market value adjustment and the other does not.
Related terms
- Surrender charge
- Surrender period
- Free withdrawal provision
- Liquidity
- Multi-year guaranteed annuity (MYGA)
- Fixed indexed annuity
- Bailout provision