Whole Life Dividends: Non Direct Recognition

non direct recognition

In the interest in filling in some obvious knowledge gaps, we figured we’d do a quick piece on non-direct recognition. In fact, we’ve decided to do a series on dividend recognition this month. Hopefully, this will satisfy anyone who wandered upon our whole life dividend piece and walked away without a confident understanding of the concept.

Policy Loans: Details, Details, Details

To be clear, if we’re talking about non-direct recognition or its counter option, direct recognition (how creative), we’re talking about policy loans. More specifically, we’re talking about how policy loans affect the payment of dividends on a whole life contract. Now, there is a form of non-direct recognition and direct recognition consideration when it comes to universal life insurance, but that’s a topic for another day.

The Old School Method

Non-direct recognition is the original form of policy loan dividend treatment. Prior to the 1980s, it was the only method used by companies that issued participating whole life insurance. There are purists who claim it’s the only way to go.

Non-direct recognition is also a key feature of Infinite Banking® and Bank on Yourself®. And, it’s generally accepted as the key concept behind the Life Economic Acceleration Process (LEAP®) and the Private Reserve System under Circles of Wealth® (COW – hehe). We’re not totally convinced that non-direct recognition is the be-all and end-all that some of these “systems” would suggest, but we’ll leave that for our discussion later in the week.

Dividends are NOT Affected by Loans

So, the big deal concerning dividend recognition and policy loans is whether or not a policy loan affects the payment of dividends.

Under non-direct recognition, the answer is no: dividends remain the same regardless of outstanding policy loans.

At first glance, this looks great, and to some extreme degree, it can be advantageous. If a policyholder takes a policy loan, the portion of the cash value that acts as collateral for the loan will receive the same dividend as the portion of the policy that is not pledged as collateral.

However…

I’ve noted it before, and I’ll mention it here as well: policy loans do not remove cash from the policy. The loan itself comes from the insurance company, and the cash value is merely pledged as collateral for the loan (i.e., if you don’t pay it back and lapse the policy, the insurance company keeps the collateral to repay the loan).

What Companies?

This is a popular question. What companies practice non direct recognition?

In no significant order:

  • Massmutual
  • New York Life
  • Ohio National
  • Met Life
  • Lafayette Life

It's a much shorter list than the direct recognition companies out there (we'll hit them next time).

Is it Better?

Again, this will be the topic of a post coming later this week. But, we’ll give you a little peak into where we’ll be going in that post. The important thing to know is that the devil is really always in the details.

That’s just about everything you need to know – for now – about non-direct recognition.

 


3 Responses to “Whole Life Dividends: Non Direct Recognition”

  1. Tom Yaeger says:

    Thank you for the insight. As a lender for the acquisition of WL and UL policies we really appreciate reading the Pods. We are not agents so being able to have access to this level of information is helpful.

  2. How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself” – Fast Track Credit Gurus says:

    […] Recently popular life insurance loan strategies like “Bank On Yourself” and “Infinite Banking” rely heavily on the idea that when an insurance policyowner borrows from a life insurance policy, they are “borrowing from themselves”, often at a very low net loan spread. Some even have the potential that the underlying cash value may outearn the borrowing cost anyway (between the growth in cash value and potential dividends from a non-direct recognition equity-indexed universal life policy). […]

  3. James says:

    You left at least one non direct recognition company off the list. COUNTRY Life (COUNTRY Financial). Just as an FYI.

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