The Nationwide Defined Protection Annuity has an interesting design to it and in certain situations can be a great option for those wanting to participate in the market and have a predetermined stop-loss built into the contract. Since the design is somewhat unique, I wanted to take you through the product options and what they really mean.
First, we have the downside protection options. The Nationwide product provides three floor options that your client can choose from or combine to create a dialed in max loss number. These floor options are 100% protection, 95% protection, and 90% protection. If your client was only comfortable with a 3% max loss each term, you could put 70% of the client’s money in the 100% option and 30% of the client’s money in the 90% option, thus creating a 3% max loss on the overall account for that index term. This means that the client is always responsible for the first 3% in each index term, and then the insurance company is responsible for everything else over that amount.
Next, we have the index term. Nationwide offers two index term options to choose from. These index term options are 1-year and 3-year term options. This is not to be confused with the contract period/term. The contract is a 6-year contract, but the investment options within the contract are 1-year and 3-year term options. For example, over the 6-year contract period, you could choose to have two 3-year investment terms, three 1-year terms and one 3-year term, six 1-year terms, and so on. We just need to make sure that however we design the index terms, the total number equals six years.
That brings us to the investments in the 1-year and 3-year index term options. There are eight different “index strategy” investment options to choose from in both the 1-year and 3-year term options, and you can just choose one of them or a combination. Each index strategy option will have a listed participation rate and a spread. The participation rate is not a “cap” on earnings as there are none; it is how much of the index earnings that you get to keep. The spread is just a fancy word for a “fee” on earnings in a specific index term. The spread is taken from the earnings in the account before they are passed on to the client, and anything that you earn and do not get to keep is a fee in my book, so that is why I say it is a fancy word for a “fee” on earnings. If there were no earnings during a specified index term, there would not be a “spread/fee” charged in that index term.
Listed above are the nuts and bolts of the contract, now let’s put it together in simple English to see how it works. If your client chooses to invest in the J.P. Morgan Mozaic II (Strategy A) for six 1-year terms, with the 90% protection option, the current participation rate is 200% and the spread is 1%. So, each year they get to double their earnings for the cost of 1% of their earnings. If they did not like the idea of paying a spread or “fee” on their earnings in each term, using the same parameters as above, you could substitute the J.P. Morgan Mozaic II (Strategy B) for the J.P. Morgan Mozaic II (Strategy A) and have a 150% participation rate without a spread or “fee” charged to the client.
There are many different ways to design this contract to address many different client situations. If you would like to learn more about this contract, please give me a call or click on the links below. I have also attached a one-page fact sheet for your review as well.
View Current Rates Sheet.
Defined Protection Annuity Microsite.