The Cash Flow Clock: For Retirees - Book - Page 84
The Cash Flow Clock
if there are 8 years left in the contract, the surrender
charge is likely around 8%. As the contract gets
closer to expiring, the surrender charge gets closer to
zero.
Annuity liquidity can also be limited by a Market
Value Adjustment (MVA). An MVA can increase or
decrease the surrender value of an annuity depending
on how interest rates have changed since the annuity
was purchased. When interest rates are high,
insurance companies can purchase bonds at higher
rates and can pass on that higher growth to their
clients. An MVA can make it more difficult for an
annuity holder to move from a product that was
purchased when interest rates were lower to a new
one in a high interest rate environment. The MVA is
not applicable after the contract term has expired.
For most annuities, at least 10% of the contract value
is liquid each year. If we are considering annuities as
potential investments in our portfolio, it is critical
that we understand how the surrender charges and
MVA might affect our liquidity. If the 10% per year
is sufficient liquidity, an annuity might be a good
option. If not, then we may need to consider
investments with more liquidity, even if they offer
lower rates of return.
79
