Life Health > Health Insurance > Annuities

Don't predict ... sell future insurance

Your article was successfully shared with the contacts you provided.

If you take a monthly look at annualized Dow Jones returns from 1930 to 1950, you find 28 percent of the periods produced an annual loss of greater than 10 percent. Monte Carlo simulations made in 1950 would have reflected this, resulting in a rather dismal forecast for the 1950s. But in reality only 2 percent of 1950s’ annualized returns had losses greater than 10 percent. Indeed, 48 percent of the periods produced double digit gains in the ’50s. However, if your portfolio allocation was based on this predictive tool, your performance would have suffered.

If you take a monthly look at annualized Dow Jones returns from 1980 to 2000, you find 59 percent of the periods produced an annual gain of greater than 10 percent. Asset allocation models using Monte Carlo simulations in 2000 reflected this optimism going forward into the 21st century (Dow 30,000, anyone?). However, we now know that optimism was misplaced.

Wall Street often persuades clients to give them money by indirectly hinting they can predict the future, but they can’t, because humans don’t know what will happen tomorrow. The past is used as a predictive tool because it is easier to show a number rather than describe a concept and, frankly, we are all searching for the person who can predict the future, even though we realize the futility of doing so. However, there is a way to stand apart from the crowd of false soothsayers.

Stand out by not predicting
Tell your clients you can’t predict the future because we live in an unpredictable world, and this is why you sell future insurance. Your future insurance locks in a specified interest rate for a specified time period, just like a certificate of deposit, but unlike a CD, you guarantee they will at least earn a minimum rate of interest afterward.

Your future insurance gives them a shot at earning more than the bank might pay by linking the interest to an equity index but guarantees they won’t be bear food in the next market crash. Of course, they have to pay for this insurance so they probably won’t get all the upside in good years–so unless they’d prefer their market risk to be uninsured… Your future insurance guarantees a minimum income they can receive for as long as they live and lets them keep control of the money. You can tell them to the penny the minimum lifelong check they will receive in five or 10 years. Of course it could be a higher amount. You can’t predict the future, but you can insure what will happen.