An Independent Review of the National Western (NWL) Global Lookback Annuity

Wednesday, May 16, 2012 | 5 Comments

Over the past few months I’ve done quite a few annuity reviews.  They’ve all taken some time but most have been fairly easy for me to break down, test, and get complete comprehensive reviews done and online.

…But

A few weeks ago I had a blog reader want my view on The National Western Global Lookback Annuity.

And let me tell you – that one was a doozy.

The NWL Global Lookback is a Fixed Index Annuity very different than anything I’ve seen on the market.  Basically it has an option that tracks 4 different equity indexes and after a year is complete it “looks back” at the four and allocates your money retroactively toward the index that performs the best.  Which sounds really cool at first.  So I had to dig pretty deep to see exactly how that works and if it really adds value for annuity holders.

Before we dig in, let me do some customary legal disclosures:

This is a review, not a recommendation to buy or sell an annuity.  National Western Life Insurance Corporation has not endorsed this review in any way nor do I receive any compensation for this review.  This review is meant to be an independent review at the request of readers so they could see my perspective when breaking down the positives and negatives of this particular model annuity.  Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.  All names, marks, and materials used for this review are property of their respective owners.

Let’s begin.

Per the NWL Global Lookback brochure here are some key points as to how it’s marketed:

  • Globally diversified by having interest linked in part to 4 indexes (S&P 500, EURO STOXX 50, Nikkei 225, and Heng Seng Index)
  • Unique “lookback” performance weighting
  • Income Outlook – withdrawal benefit rider
  • 9 year surrender charge period
  • 10% free withdraw each year during surrender period

There’s a few more bells and whistles, but those are the basics.

The primary gist of the sales pitch (I’ve heard) is that when you choose the global lookback option each of the four global indexes will have had different performance. Instead of guessing at the beginning of the year which will be the leader  and having to choose your asset allocation the annuity instead “looks back” after the year is complete and calculates the return based on 40% of the best index, 30% from the second best, 20% the third, and 10% the fourth.  This allows annuity holders to get maximum market upside with the principal guarantee of an index annuity.

So far it sounds it sounds pretty good, as you automatically get the best allocation and you have no risk. But really that’s just part of the equation.

This is best illustrated in the video review I did on the NWL Global Lookback, which you can watch here (warning: extreme nerdiness in this review):

As you can see from the video review there are some good and not so good things about this annuity. Yes, this annuity could produce some very nice years.  Yes, it really does “look back” and choose the best allocation. But, despite the uniqueness, the end result is not too much different than other fixed index annuities.

Part of this could be because I can’t do a 50 year test of this annuity. That’s because some of the indexes have limited historical data available, which limited my test to roughly 10 years.  Even then, comparing just 10 years side by side with other annuities with no lookback feature the returns are pretty similar – in the neighborhood of 2%-5% per year.

Conclusions on the National Western Global Lookback Annuity

I would suspect this will be a pretty hot seller – especially for investors that want international exposure and don’t want market risk.  However, these folks should not expect too many 5% or better years. You really have to read the fine print, do hours of analysis, and fully understand what you’re getting into before making this (or any) investment.

At the end of the day I defer to the old (but good) saying: “If it sounds too good to be true, it probably is.”

There are plenty of solid, safe investments out there.  Many are straightforward, easy to understand, and don’t require complicated algorithms to determine your returns. The NWL Global Lookback has a nice story, is safe, and has potential to produce reasonable returns.  I’m just afraid it’s a touch too complicated for the average person to really understand.  That said, if you do understand how it works, are comfortable with the issuer, and have reasonable expectations, it might be appropriate for certain people/situations.

Have Questions on the National Western Annuity?  See any Mistakes?

I get a lot of financial advisors and insurance company home office folks who visit my blog. Like all humans – I do make mistakes. If you see one on this review please reach out and let me know. I’m always more than happy to make corrections and give credit where it is due. If you’re an investor and this review causes confusion and creates questions feel free to reach out as well. I can’t always get back right away but usually I can clear up those questions within a few days.

Best,

Jason Wenk

In Annuity review Index annuities Investor Education | | | |

5 Comments to An Independent Review of the National Western (NWL) Global Lookback Annuity

  • Andy

    Thank you very much for you efforts in the study of NWL’s “look back” interest crediting method! I am glad to have discovered your site(s)/blog and will review you other studies of index annuities.

    I have been managing index annuity portfolios since those contracts became available in the mid 90’s. Generally, the contracts’ crediting methods are easier to explain than they are to illustrate. For example, the typical “point to point” crediting method using the S&P index can be explained as: Take the carrier’s portfolio rate of return, deduct 2 points for the company and apply the balance to the purchase of “call” options on the S&P. At the end of the period, exercise the option and credit the gain to the contract or allow the option to lapse and credit the contract with zero. In other words, the underlying financial transaction(s) required to implement the crediting strategy may be described or simulated with simple “options” or “futures” contracts. (The caps, fees, and/or participation rates are the adjustments required to conform the “price” of the option contract(s) with the available option budget, i.e., the current yield on the carrier’s portfolio or new money rates of return).

    The “look back” strategy you reviewed is not unique to NWL. It has shown up elsewhere (ING, North American . . .). But, it is always difficult to explain because the underlying financial transactions required to implement the strategy are obscure.

    Now, my question: Can you explain or suggest what may be the underlying financial transactions by which a “look back” crediting stragey is implemented by the carriers that offer them to their contract holders?

    /s/ Andy

    • Jason

      Hi Andy,

      Thanks for the compliments and checking out my blog.

      You are correct – illustrating this (or many other) annuity contracts is not easy. Simple explanations usually work well, but I really think potential investors should always get a really good idea of what to reasonably expect before making the commitment.

      As for the underlying financial transactions, it’s really quite simple.

      If you look at how insurance companies manage the money annuity investors give them, you’ll find most of the money goes into highly rated bonds or mortgage notes. There is a very small portion that is used in derivatives (futures contracts, namely) which helps them protect against a rapidly rising market. Those derivatives generally come into play if the market goes up substantially and index annuity contracts have larger interest credits than what the bond portfolios produce in interest.

      Simply put, the insurance company invests into a mostly conservative bond type portfolio. If they earn 5%, they take their operating margin (usually around 30%) and credit the balance to annuity holders. So really it doesn’t matter how exotic the crediting method is, the insurance company can’t pay out more than they earn. Since rates are quite low right now, caps are subsequently low. This means most annuity holders should not expect real returns more than a 2-4% per year. If the annuities pay out more than the insurance company earns, well, you can probably figure out what will happen.

      I hope this helps, and thanks again for the well thought out comment.

      Best,

      Jason

  • billy

    Awesome video. thanks

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