Although insurance companies usually assume your interest-rate risk when you buy a fixed annuity, that’s not always the case. With a market value-adjusted (MVA) fixed annuity, you assume the interest-rate risk. In return, the insurance company can afford to pay you a slightly higher interest rate than it pays on non-MVA annuities (book value annuities).
If MVA annuities pay a higher rate, why buy anything else? Because, if interest rates go up and you decide to break an MVA contract to take advantage of a fixed annuity that offers the new rate, you’ll pay a bigger penalty than if you broke a book value contract.
The MVA triggers two penalties when you withdraw too much money (over 10 percent, in most cases) from your annuity during the surrender period. Typically:
You have to pay a surrender charge (for example, equal to the number of years left in the surrender period)
Your account value is adjusted
Downward if interest rates have risen since you bought your annuity
Upward if rates have declined
Keep in mind the effects of interest-rate risk. Suppose you buy a $10,000 bond that pays 5-percent interest per year. Your bond has a face value of $10,000 and a yield (rate of return) of 5 percent. But then calamity occurs. The Federal Reserve’s Board of Governors raises interest rates to 6 percent. Immediately, the market price of your bond drops.
Why does your bond lose value when rates rise? Because no one wants to pay $10,000 for a bond with a 5-percent yield when he can buy a $10,000 bond with a 6-percent interest rate! Your 5-percent bond will fetch about $9,260 on the open market when 6-percent bonds are selling for $10,000. The important principle to remember is this: When interest rates rise, the market prices of existing bonds fall.
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Source:http://www.dummies.com/how-to/content/what-is-a-market-valueadjusted-fixed-annuity.html
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