Attention Annuity Policy Holders - Some annuity investors have a rare opportunity to cash in their contracts right now without paying surrender charges. What’s more, their insurance carrier might be willing to pay them above and beyond their surrender value for doing so! If you bought a fixed annuity or equity indexed annuity in the last 2 to 3 years, read what I’m about to say very carefully.
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Assume you purchased a fixed annuity in June of 2006 with an initial deposit of $100,000, and your annuity value has now grown to $110,000. Traditionally, if you wanted to liquidate your account right now, just two years into your contract, you would have to pay a surrender penalty. Assuming your annuity had a surrender period of 8 to 10 years, your penalty would be somewhere around 7%. So if you cashed out now, you wouldn’t get $110,000. You would get $102,300.
Enter the Market Value Adjustment… a positive or negative adjustment the annuity policy holder incurs when surrendering an annuity early.
Exit your Annuity without Surrender Penalties* - Call (619)564-4873
Here’s how it works. Back in June of 2006, your insurance carrier purchased a bond as the underlying security on your investment. Bonds are not the only way insurance companies invest your deposits, but for simplicity’s sake, let’s say they purchased a $100,000 bond paying a fixed rate of 6% with a 10 year maturity. So guess what happens to the value of that bond paying 6% when interest rates drop like they have in the last two years? If you said it’s value increases, give yourself a pat on the back.
Now let’s assume you’re a bond investor. Today you can only find bonds paying an interest rate of 3% or 4%. But let’s say you want a bond paying 6%. Okay. You can get one, because like stocks, bonds can be traded. You can buy the insurance carrier’s bond. You’ll just have to pay a premium for it. So when the original bond cost the insurance company $100,000, you might pay them $115,000 for it.
So now you understand the basis of how market value adjustments work. When interest rates go down, it policy holders get a positive market value adjustment, and inverse is true when rates go up. You see, some insurance carriers who normally charge annuity holders penalties for early surrender are now sitting on bonds they bought for $100,000, but today are worth $115,000. If that is the case, the annuity policy holder might be shocked to open his/her annuity statement and see that their surrender value is not $102,300. Instead, it’s $108,000, or $110,000, or even $113,000! That’s more than the annuity value! Interest rates have dropped so low and made the carriers’ bonds so valuable, that if you bought a fixed annuity in the last couple years, it’s likely that your market value adjustment will have made up for some or all of your surrender penalty, or more, making your surrender value Higher than your annuity value!
My advice is to you is to call your insurance carrier and ask what your current surrender value is. If it is near your annuity value, you might consider transferring to an annuity that will give you a bonus and automatically increase your annuity value. Be careful, though. You don’t want to move an annuity in which you’ve been paying for rider benefits such as guaranteed income or long term care, because you could lose those benefits. In addition, there are tax considerations when moving an annuity, so be sure to consult a tax professional and your insurance professional before making any moves.
Please also see my article on the benefits of an annuity compared to a CD.
*Not everyone will have a positive market value adjustment, meaning you could incur surrender penalties for exiting an annuity early.
I would also be happy to help you understand your current annuity values and make suggestions as to whether or not a transfer would make sense for you. Call Chris Huntley at 619-564-4873.
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