Hypotheticals give me a headache. Why? As a financial planner the insurance and investment companies seem to love hypothetical illustrations. These numbers mean nothing actually; nothing less than ‘theory.’
The supposedly returns built into lustration sale’s material are simply in principle only. This is why, in my opinion, historically we have seen so many investment and insurance products that we sell all too often come back to haunt us.
The line I’ve heard for years, “Past performance cannot guarantee future returns (profits).” Sadly a lot of this repeated language is a parallel philosophy and reality to hypothetical illustrations and potential sales material.
I sold my first financial plan with a life insurance policy in the early seventies to an oil man in Texas. There was no hypothetical lingo then. As sales representatives we showed clients the true numbers and let the numbers speak for themselves. The goal was to tell them what they actually could expect to see in the future. Period.
Certainly investment and insurance companies are vulnerable just like any other corporation and business. This is why they are required by the states they do business in to have the proper reserves for claims-paying funds. Hypotheticals won’t help then!
When the rubber hits the road a-conjectural-like-hypothetical-illustration won’t pay a claim or true gain on one’s investment. That money must be real, solvent and I might say spendable.
I write this article to caution anyone or any company to be careful with hypothetical predictions and presentations. All this ‘Best Interest’ crammed down our throats today is trailed by a sea of hypothetical presentations.
The returns on your money are what they are—what is, is. To drill a little bit deeper risk-based capital is based on the ratio of reserves to claims. According to investopedia, most states’ insurance legal minimum reserve requirements are somewhere from 8 to 12 percent of anticipated claims.
This means insurers must be able to take care of your claims and/or payouts no matter when they occur. Those claims, those costly payouts are not and cannot be hypotheticals. They are real, true dollars coming to you because of the hard earned dollars you’ve paid in premiums.
I often share those wise words from that 20th century humorist Will Rogers, “I'm not so much interested in the return on my money as I am in the return of my money.” Hypotheticals are like a meteorologist predicting hurricanes. They show the different potential modules (spaghetti lines), but none of are for certain—I know, I’ve lived through four the last five years on an island, and not one hypothetical came true.
Am I saying that hypothetical illustrations have no value or should never be used? No. These kinds of sales materials are simply tools in a financial planner’s tool box. However, I am saying emphatically that a client(s) should totally understand that you are just ‘chasing ghosts’ with them. This especially necessary when you’re ramping up that computer screen with more and more hypotheticals.
….and my question to you, “Have you ever caught a ghost?”
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