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Direct vs Non-Direct Recognition

Knowledge Vault > Loans > Direct vs Non-Direct Recognition

Non-Direct Recognition companies operate this way:

  • A Non-Direct Recognition company does not recognize that a loan has been taken and will credit the current dividend rate to any money that is in a policy’s cash value AND outstanding in loans (amazing, but true). Here is an example:
  1. Cash Value: $100,000
  2. Dividend: 6.20%
  3. Loan Rate: 5%
  4. Cash Value: $50,000
  5. Dividend Credit to unborrowed funds: 6.20%
  6. Loan Balance: $50,000
  7. Dividend Credited to borrowed funds: 6.20%

Direct Recognition companies operate this way:

  • A Direct Recognition company will recognize that you have pulled a loan and adjust the dividend credited to borrowed funds. This is often labeled as “bad” by many agents that prefer Non-Direct Recognition companies. It is important to study the individual insurance company’s loan treatment. It is not uncommon for an insurance company to lower, or raise, the dividend rate on borrowed funds. This functions very similarly to a Non-Direct Recognition company/policy. Here is an example:
  1. Cash Value: $100,000
  2. Dividend: 5.65%
  3. Loan Rate: 6%
  4. Cash Value: $50,000
  5. Dividend Credit to unborrowed funds: 5.65%
  6. Loan Balance: $50,000
  7. Dividend Credited to borrowed funds: 5.65%
Below is an example of a Mass Mutual policy comparing paying into it and letting the cash grow with what it would look like if you took a loan out. As you can see highlighted in yellow, the cash values are identical, and the dividends stay consistent even when the cash value is borrowed from the policy.
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