If a market value adjusted annuity is surrendered before the guarantee period ends, what happens to its cash value?

When a market value adjusted (MVA) annuity is surrendered prior to the end of the guarantee period, the cash value is affected by the market value adjustment mechanism. This feature is designed to protect the insurance company from adverse interest rate movements and is in place to ensure that the annuity can remain a viable product under varying market conditions.

When the annuity is surrendered early, the value is adjusted based on the current interest rates relative to the interest rates guaranteed in the contract. If interest rates have risen since the annuity was purchased, the market value adjustment will typically reduce the cash value, as the surrender occurs at a less favorable time for the annuity owner. Conversely, if interest rates have fallen, the cash value may be increased, reflecting the higher value of the guarantee in a lower rate environment.

This adjustment is crucial because it aligns the value of the annuity with prevailing market conditions, ensuring that the insurance company can maintain its ability to pay future claims. Thus, the correct answer highlights the impact of market fluctuations on the cash value during an early surrender.