Nationwide New Heights Select Fixed Indexed Annuity Review

Introduction

In this article, we will discuss in-depth the Nationwide New Heights Select Fixed Indexed Annuity. It is the new and revamped version of the very popular Nationwide New Heights Fixed Indexed Annuity. I have tried my best to provide an in-depth and unbiased analysis of this plan after extensive research and due diligence.

The Nationwide New Heights Select Fixed Indexed Annuity was launched in March 2021 and offers tenures of 8,9,10, and 12 years.

Fixed Index Annuities are contracts between the annuitant and an insurance company in which the insurance company promises to credit interest based on the performance of a certain stock market index. Fixed Index Annuities have an inbuilt feature of capital protection, so even if the index goes down, your principal will remain safe.

Annuities are complex products and many advisors try to missell them without properly understanding the needs of the buyer. Thus, it is very important that you should educate yourself on these products and not solely depend upon the annuity agent’s high-pressure sales pitch.

The review of the Nationwide New Heights Select Fixed Indexed Annuity will be broken into multiple subcategories and I will compare it with the Nationwide New Heights at the end of this article:

• Product Description
• Rates and Costs associated with this annuity
• Riders
• What makes this product stand out?
• What I don’t like
• Comparison with New Heights Select
• Company Details
• Conclusion

Product Description – Nationwide New Heights Select FIA

The Nationwide New Heights Select is a Fixed Indexed Annuity (FIA) plan that offers the annuitant (annuity investor) an opportunity to earn a market index-linked return without having to incur the risk of market downside. It is a suitable plan for retirees or people who are approaching retirement and aim to grow and protect their retirement savings. This plan is also suitable for people who are looking for guaranteed lifetime income or plan to leave a legacy for their loved ones, in addition to protecting and growing their retirement savings.

Let’s have a look at the high-level fine print of Nationwide New Heights Select Fixed Income Annuity and then we will discuss each point in detail.

The Nationwide New Heights Select policy is almost identical for all policy tenures, except the crediting period and surrender charge schedule. For ease of discussion and better clarity, we will discuss the New Heights Select 9 policy for the rest of the article.

How does the New Height Select 9 policy work?

Any annuitant (maximum age at the time of policy issue: 80) can purchase the New Heights Select 9 policy with a minimum initial purchase amount of $25,000; and in return, he will earn market index returns (calculated through a formula that we will discuss shortly), normally, credited once every three years. Apart from the three-year crediting period, there are various events that may trigger earnings credit: On free withdrawals; For a long-term care event or terminal illness or injury event; or when a death benefit is payable.

The New Heights Select 9 offers the annuitant to chose from one or more of the five indexes to determine his earnings crediting formula. Each of these indexes has two strategies to chose from (making a total of 10 strategy options), and at any point in time, the contract may be allocated to a maximum of five strategy options. We will discuss each available index briefly:

1. SG Macro Compass Index: The SG Macro Compass Index is an index designed to identify changes in the economic cycle and rotate asset class allocations seeking to provide stable and consistent long-term appreciation in up, down, and sideways markets. Based on the economic outlook for expanding, contracting, or neutral markets, the Index may shift allocations of up to 13 underlying global assets in equities, bonds, and commodities with the aim to generate returns. The index is updated once every quarter. 

One thing that concerns me about the index is that it has very limited historical data. The index was launched in August 2020, and it would be very early to know about the empirical performance of the index. The company’s back-tested data shows that it would have performed better than the S&P 500 index most of the time, but the limited actual data shows that it performed weakly in front of the S&P 500 index. Still, it may be noteworthy that the backtested and the actual results show very low volatility; thus it may be a suitable index for annuitants who are looking for stable returns. 

2. NYSE Zebra Edge II Index: The NYSE® Zebra Edge® II Index evaluates the 500 largest publicly traded companies in the United States each quarter and removes the riskiest and most volatile companies, leaving fewer irrational equities. The index aims to eliminate the volatility and risk associated with popular and largely traded stocks.

The company’s backtested data shows that it would have performed better than the S&P 500 index most of the time, but again, this is a new relatively new index, launched in October 2020, and we have very limited actual empirical data to assess its performance.

3. S&P 500 Index: The S&P 500 index is one of the most popular and oldest indexes in the world. It tracks 500 large-cap publicly traded stocks listed in the United States. It is a reliable index and has often succeeded in the test of time. 

It is very important to note that the New Heights Select plan offers a low participation rate for the S&P 500 index, meaning that you will be credited only a small part of the S&P 500 return to your annuity. These rates tend to change frequently; I will discuss more on the rates shortly.

4. J.P. Morgan Mozaic II Index: The J.P. Morgan Mozaic II Index utilizes some of the same investment philosophies used by the largest institutional investors seeking positive returns in both good and bad market environments. It focuses to potentially generate consistent returns while managing volatility. It is a broadly diversified index that tracks multiple asset classes across equities, fixed income, and commodities.

The J.P. Morgan Mozaic II Index has a decent operating history of more than 5 years where it has posted consistent returns. The good news is that Nationwide offers a generous participation rate for this index. In my opinion, this is an ideal index to opt for the New Heights Select annuity given its high participation rates and consistent performance.  

5. MSCI EAFE Index: MSCI EAFE is a widely recognized international equities index consisting of large companies across developed countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada. MSCI EAFE includes equities across a range of industries and regions, providing broad opportunities for growth.

Again, It is important to note that the New Heights Select plan offers a low participation rate for the MSCI EAFE index, meaning that you will be credited only a small part of the MSCI EAFE return to your annuity. These rates tend to change frequently; I will discuss more on the rates shortly.

Rates and Costs associated with the New Heights Select Annuity

The earnings crediting formula

The earnings crediting formula is the most important part of this annuity discussion. It is important to know that we don’t simply get the index return credited to our annuity. There are a few rates and caps that the company has in place that affect our earnings. These rates tend to change over time, and the updated rates can always be checked at the company’s website. 

The formula to calculate the earnings credited is:

(Index Allocation % X Index Return) + (Declared Rate Allocation % X Declared Rate) – (Annual Strategy Spread X Crediting Period)

Let’s have a look at the New Heights Select 9 rate sheet (as of 7/1/2021) to understand how the earnings are determined.

The first thing to note is that we have five indexes and each index has 2 strategies. All in, it gives us an option to allocate our contract to a maximum of 5 out of 10 strategies. The company displays four types of rates across all strategies. The index allocation rate (participation rate) and the strategy spread are the most important. The definition of all four rates is mentioned in the screenshot.

Note that strategies where the index allocation rate is high, a strategy spread also exists. The S&P 500 strategy A has an index allocation rate of just 45%, still, a spread of 1.95% exists. It means if the index earns 30% over the 3 year period, the earnings that will be credited to the annuity account would be just (30% * 0.45) – (1.95% * 3 years) = 7.65% over the three year period or an annual return of just 2.5%. On the face of it, it seems that we are potentially earning the S&P 500 return, but in reality, we are nowhere close. Thus, it is very important to check rates before choosing your preferred index.

Out of all these indexes, I prefer the J.P. Morgan Mozaic II index the most because of its decent historical data, a good performance over a relatively long period of time, and a high index allocation rate offered by the company.

Surrender Charge

Should your needs change unexpectedly and you need to take an excess withdrawal (a withdrawal that is above the free withdrawal amount available in a given contract year) you may be entitled to access additional monies; although certain charges and penalties may apply. Any amount withdrawn in excess of the remaining free withdrawal amount is subject to a Surrender Charge. For all excess withdrawals, you will only receive a prorated amount of interim strategy earnings-to-date. Below is the Surrender Charge schedule.

Note that this surrender charge schedule is only valid for the New Heights Select 9 product for select states. For complete details about each state, you may visit the product’s rate card here.

The surrender charge schedule is different for the different tenure of annuities. For a quick comparison of surrender charges across different products of Nationwide, you may visit their fixed indexed annuities product page here.

The surrender charge of New Heights Select fixed indexed annuity is pretty much in line with all the other annuity issuers.

Contract/Administrative Charge

The New Heights Select levies no annual contract or administrative fees

Optional Rider Charge

The New Heights Select plan gives you an option to select any one optional rider from four available riders (2 living benefits and 2 death benefits).

The cost of each of them is illustrated in the table below.

Note that these charges are calculated on the accumulated value of the contract, are assessed quarterly, and reduce the contract value and the minimum guaranteed contract value. All of these four riders are discussed briefly in the next section.

Riders

In an insurance policy, riders are an additional provision that can be added to enhance the benefits of the base policy. The New Heights Select Fixed Income Annuity offers the annuitant to choose any one additional rider from the four riders it offers. It offers two riders for living benefits and two riders for death benefits. We will briefly go through each of them.

Living Benefits

The New Heights Select offers the annuitant two additional living benefit riders. 

1. Nationwide High Point 365 Select
2. Nationwide High Point 365 Select with Bonus

1. Nationwide High Point 365 Select

The Nationwide High Point Select rider offers the annuitant an enhanced guaranteed lifetime income. Before diving into the fine print of the rider, it is important to first understand the Income Benefit Base. The Income benefit base is the amount on which the lifetime income amount is calculated. The income benefit base is NOT an income that is accrued to you. It is only used for calculating the lifetime income amount or the death benefits. In this case, the income benefit base at any point in time is the greater of:

• High Point Daily Accumulation Value (It is calculated daily based on the index strategy you chose. The high point of the index is automatically locked; even if the index falls after locking in a high point, the high point value will be considered for the DAV calculation). Refer to the figure after this section to get more clarity on the High Point Daily Accumulation Value

• The Minimum Income Benefit Value, which guarantees daily growth of your purchase payment at a 1% compound annual rate for 10 years or until the first lifetime income withdrawal, whichever comes first

Now, the guaranteed lifetime income is calculated by multiplying:

{High Point Income Benefit Base} X {Payout Percentage} = Guaranteed Lifetime Income Amount

The payout percentage is based on the age of the covered life at contract issue and the number of completed contract years when lifetime income payments begin. If the joint option is elected, the payout percentage is based on the age of the younger spouse and will result in a lower payout percentage. When your contract is issued, the range of payout percentages applicable to your contract will not change; however, payout percentages will increase within that set range every year income is deferred until the maximum payout percentage is reached. When your lifetime income payments begin, the payout percentage will not change.

The Nationwide High Point 365 Select rider costs an annual charge of 0.95% of the accumulated value and reduces the contract value and the minimum guaranteed contract value quarterly.

2. Nationwide High Point 365 Select with Bonus

The Nationwide High Point 365 Select with Bonus is similar to the High Point 365 Select, but it offers a more generous calculation of the Income Benefit Base.

First, it directly applies a bonus of 10% to your purchase payment for calculating the minimum income benefit value. Second, it guarantees the daily growth of your purchase payment at a 7% compound annual rate for 10 years or until the first lifetime income withdrawal, whichever comes first. (As compared to 1% in the former)

To summarize, the income benefit base at any point in time in this rider is the greater of:

• High Point Daily Accumulation Value 
• The Minimum Income Benefit Value, which guarantees the daily growth of your purchase payment at a 7% compound annual rate for 10 years or until the first lifetime income withdrawal, whichever comes first.

The Nationwide High Point 365 Select with bonus rider costs an annual charge of 1.10% of the accumulated value and reduces the contract value and the minimum guaranteed contract value quarterly. In my opinion, it is better to opt for the bonus (if you are thinking to opt for the income rider), because it provides for a high-Income Benefit Base at a low incremental cost (1.10% vs 0.95%)

Death Benefits

The New Heights Select offers the annuitant two additional death benefit riders. 

1. Nationwide High Point Select Enhanced Death Benefit Rider
2. Nationwide High Point Select Enhanced Death Benefit Rider with Purchase Payment Bonus

1. Nationwide High Point Select Enhanced Death Benefit Rider

If you believe that you don’t require a lifetime guaranteed income, and want to leave the money for your loved ones, the Nationwide High Point Select Enhanced Death Benefit is the suitable rider for you. 

The death benefit riders offer the annuitant an enhanced death benefit based on the following calculation. The rider guarantees that the death benefit will grow in value equal to the greater of:

• High Point Daily Accumulation Value
• The Minimum Enhanced Death Benefit Value, a daily guaranteed increase of the purchase payment at a 4% compound annual rate until the earliest of:
  • The date, if any, the enhanced death benefit reaches 200% of the purchase payment
  • The contract anniversary after the older annuitant reaches age 80

The Nationwide High Point Select Enhanced Death Benefit rider costs an annual charge of 0.50% of the enhanced death benefit value and reduces the contract value and the minimum guaranteed contract value quarterly.

2. Nationwide High Point Select Enhanced Death Benefit Rider with Purchase Payment Bonus

The Nationwide High Point Select EDB with Bonus is very similar to the former one, with just one difference that it offers a 4% bonus that is immediately credited to your purchase payment and provides a greater EDB growth.

The Nationwide High Point Select Enhanced Death Benefit rider costs an annual charge of 0.95% of the enhanced death benefit value and reduces the contract value and the minimum guaranteed contract value quarterly.

Note that rider costs are different for different tenure annuities. You can check rider costs for all tenures here.

In my opinion, the quarterly costs almost offset the bonus, so you may consider giving this rider a pass.

What makes this product stand out?

The Nationwide New Heights Select offers some of the features that not many fixed indexed annuities offer. The ones that I like the most are:

1. It allows daily tracking

With the New Heights Select FIA, you get access to an online portal where you can track your potential earnings in real-time. It is known as the Daily Accumulation Value (DAV). Now, the DAV doesn’t mean that you can cash out that value on any given day; it is just a tracking feature. Still, the daily tracking feature helps you to be informed about the value you are deriving from your annuity. In addition, the DAV helps to complement two other features that are discussed as follows:

2. Optional Lock-in of Positive Performance

As this is a Fixed Income Annuity, you are naturally protected from market downturns. But you may have a high chance of missing out on some of the one-off index gains between the two earnings crediting points. This is where the Optional Lock-in features come in handy. 

Generally, Index gains are automatically locked in at the end of the strategy term, but this feature gives you an option to manually lock in index gains once per strategy term. It means you can lock in index gains when you feel that index is peaked. The below figure explains the feature graphically.

This is my favorite feature of the New Heights Select Annuity, and the even better news is that this option is available to annuitants free of cost!

1. Earnings Capture on Withdrawals

Another unique feature of New Heights Select is that you will receive earnings to date on withdrawals for retirement expenses or if you need to take Required Minimum Distributions (RMDs). In simple terms, it means that you will also earn the index gains on the amount of withdrawal you make. These earnings are calculated on the DAV.

What I don’t like

This product is generally good on all fronts, still, there are some features that I don’t like about this annuity.

1. Low Participation Rate on the S&P 500 Index – The July 2021 rate sheet mentions that the participation rate on both the strategies of the S&P 500 Index is very low. Even with the low participation rate, the company still applies a strategy spread. The S&P 500 is the most popular index in the world, and I believe that the annuitant should be given a decent opportunity to participate in the S&P 500 index.

2. High, Single premium minimum investment – The New Heights Select requires a minimum purchase amount of $25,000 in one shot. The annuitant can’t add money in the annuity later. 

3. Above-average optional rider cost – The cost of riders in the New Heights Select is slightly above average the peers offering similar benefits.

4. No free withdrawal in the first year – You must keep this term in mind while purchasing the New Heights Select annuity.

Comparison with New Heights

As said earlier, the Nationwide New Heights Select is the revamped version of the then-popular New Heights annuity. The New Heights Select has TWO additional features that the New Heights didn’t have.

1. More Index Options: The New Heights Select has FIVE Indexes to chose from while the New Heights had FOUR. The New Heights Select includes the SG Macro Compass Index that the New Heights didn’t have.

2. Additional Death Benefit Option: The New Heights Select has an additional death benefit rider that contains a purchase bonus. It was not available in the New Heights plan.

All in, the New Heights Select and the New Heights are mostly similar in all aspects. The New Heights was a very popular policy and the company decided to add few enhancements in the form of New Heights Select.

Company Details

You must always keep in mind that, unlike CDs, annuities are not guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other federal insurance agency. An annuity’s “guarantee” is only as strong as the insurance company that issues the annuity, so it is always important to assess the issuing company before buying an annuity.

Nationwide

Nationwide Mutual Insurance company is one of the oldest life insurance companies and has been in the business for over 9 decades. It is a Fortune 100 and 500 company with a ranking of #74 as of 2021. 

It is rated as follows by the rating agencies:

Nationwide has managed to maintain strong ratings for many years. Nationwide is considered to be strong and stable financially. In 2020, the company paid out nearly $17 billion in claims. As of year-end 2020, some of the other financial highlights for Nationwide include its:

• $47 billion in total sales / direct written premium
• $126 billion of a total investment portfolio
• $797 million in net operating income
• $274 billion in total assets

Thus, going by the operating history and financial numbers, we can safely gauge that you can trust your savings with Nationwide. 

Conclusion

With the advancement in healthcare and technology, an average American today is living longer than ever. So, it’s very important to have a stream of income that can grow safely, steadily and provide a fixed guaranteed income during the retirement years. This not only helps you to mitigate the risk of outliving your income but also ensures that you continue to live a decent life even in your retirement.

The Nationwide New Heights is one such annuity that almost delivers on all fronts; be it principal protection, or opportunity to participate risk-free in the market index, or providing a stream of guaranteed income, or even legacy planning. If you are considering buying a Fixed Income Annuity, the Nationwide New Heights Select is an ideal product to look after.