eAC Sales Idea:
Finding Money
If you saw a $1 bill on the street and all you had to do was bend over and
pick it up, would you? What if it were $1,000?
You can help your clients find money in their Market Value Adjusted, or MVA
annuity products. In certain circumstances, your client can actually make money
by surrendering their annuity early. If you bring them the idea, you will not
only make yourself their hero for life, but you also have a new annuity sale!
What Is An MVA?
An MVA is a mechanism in many annuities that requires the owner to participate
in market risk during the surrender period of the annuity. If the owner surrenders
the annuity prior to the end of the surrender period, the MVA is assessed,
and can either increase or decrease the value of the annuity. Most MVAs are
based on the constant treasury rate. If the constant treasury rate has decreased
since the purchase of the annuity, the MVA will add value to the contract.
If the constant treasury rate has increased, the MVA will be in addition to
any surrender charges that would be assessed for early surrender.
Most newer contracts have proportional and capped MVAs. Basically, the MVA
could be positive, but it is capped at the amount of surrender charge remaining
in the contract. This provision effectively prevents your client from being
able to profit from an early surrender. However, some older contracts have
MVAs that are not proportional, and are not capped, which is a big opportunity
for agents who know what questions to ask.
The Opportunity
Some older contracts have an MVA that is not proportional or capped. In a
declining interest rate environment, the MVA could be positive enough to not
only overcome the surrender charge, but cause the annuity to be worth more
than the accumulation value. Remember, the MVA only applies while the contract
is in its surrender period. If the client does not surrender the contract,
or if the surrender period has already expired, the client can not collect
on the MVA.
An MVA formula in an older contract might look like this:
| (A-B) x N/12 |
Where:
A=Starting Treasury Rate
B=Ending Treasury Rate +0.25%
N=Number of months remaining in the surrender
period |
If your client bought a 12-year contract in 1996 when the constant maturity
treasury rate was 8.25%, and surrendered today (24 months remaining) with a
3% surrender charge and a treasury rate of 4.75%, the surrender calculation
would look like this (assuming a $200,000 accumulation value as of today):
| MVA: |
(8.25%-4.75%)
x 24/12 |
x $200,000
= $14,000 |
| Surrender charge: |
3% |
x $200,000
= $6,000 |
| Additional value for early surrender: |
|
= $8,000 |
You were able to hand your client an additional $8,000 just because you knew
what questions to ask. Further, the only way your client can capitalize on
the information you have provided them is by surrendering the contract early,
which means you have a new sale in the amount of $208,000.
Over the last several years, T-bill rates have been declining. If your client
has an annuity that is 5-8 years old, and has an MVA feature, it is worth investigating.
Here are a few questions you can ask the insurance company’s service
department:
- Can you tell me whether the MVA amount right now is positive or negative?
- Can you give me a current MVA calculation?
- Can you give me a current surrender value including the MVA calculation?
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