Direct vs. Non-Direct Recognition

Direct Recognition vs. Non-Direct Recognition: Does it Matter?

Are you considering whole life insurance and want to know which is better: Direct vs. non-direct recognition life insurance companies? What does it mean? Why does it matter? How does it impact you? And should it be a part of your decision-making process?

In this episode, we discuss the why, how, and what of direct recognition vs. non-direct recognition, so you have the knowledge you need to decide.

So if you want to know how a life insurance company’s treatment of dividends when you have a policy loan affects your policy’s cash value growth over time and your future ability to borrow against your policy for Infinite Banking, find out whether it matters, and most importantly, tune out the biased opinions of some who say you should ALWAYS have it one way, and NEVER the other, and really understand it, so you can get the best dividend-paying whole life policy, tune in below!

Where Whole Life Insurance Policies Fit Into the Bigger Picture

Privatized Banking with whole life insurance is just one part of the bigger journey.

Privatized Banking

That’s why we’ve developed the 3-step Cash Flow System. It’s your roadmap to go from just surviving, to a life of significance, purpose, and financial freedom. 

The first stage is the foundation.  You first keep more of the money you make by fixing money leaks, becoming more efficient and profitable. 

Then, you protect your money with insurance and legal protection and Privatized Banking. 

Finally, you put your money to work, increasing your income with cash-flowing assets.

What Does Direct or Non-Direct Recognition Mean?

When you’re shopping for a life insurance policy, you’re likely going to hear an insurance agent use the terms direct and non-direct recognition thrown around often. The terms have roots in the relationship between dividends and policy loans. Whole life insurance dividends are the non-guaranteed part of the life insurance contract, though historically companies have an excellent track record of paying dividends. Each year, companies will declare their dividend rates. 

However, companies handle dividends differently depending on whether you have an outstanding policy loan. Direct recognition companies directly acknowledge outstanding policy loans and will pay dividends accordingly. This often means that they have a different, unpublished rate for any money that is being borrowed against. 

On the other hand, non-direct recognition companies pay dividends at the same rate, regardless of any policy loans. The trade-off is that Non-Direct Recognition companies only have one dividend rate, which often seems lower than direct recognition dividends. 

However, companies all declare dividends differently, so it’s not an apples-to-apples comparison. It’s tempting to see a higher dividend and jump on it, however, these rates are projections. Factors such as the age of your policy and your paid-up additions can affect whether you get more or less than the projection. Whether or not you will use your policy as a family bank will also change which option you go with.

Direct vs. Non-Direct Recognition Companies

With non-direct recognition vs. direct recognition insurance companies, there are strong opinions on either side of the argument. We truly believe that there is a middle ground, and caution you against anyone who explicitly states that one or the other is ALWAYS or NEVER better. This simply isn’t the case.

If one of these things was truly better by a significant margin, they would not both exist today. And yet both models are going strong. In truth, there are no deals in the life insurance industry—it’s all a balancing act. If a company projects a dividend, there’s always a trade-off to balance it out.

A whole life insurance contract should be mutually beneficial. You benefit from having lifetime coverage, a compounding cash value, and other guarantees. However, the company can only offer these guarantees because of premiums, dividend structures, and other balances.

You should want them to be successful and stable too because it directly benefits you. Would you want a company that can’t hold up their end of the contract?

How Policy Loans Affect Dividends

Direct vs. Non-Direct Recognition

The ability to be your own banker by taking loans against your cash value is the cornerstone of Infinite Banking strategies created by Nelson Nash. The value is that you never reset your compounding interest because you’re not making a withdrawal. So your money can grow uninterrupted, while you can still use it. 

With policy loans, the direct versus non-direct argument comes into play. direct recognition means that although you have cash value accumulation, any collateralized portion will have lower dividends paid. Non-direct recognition means that the cash values are not impacted by policy loans. 

Say “Insurance Company A” declares a 5.5% dividend, and “Insurance Company B” declares 4.5%. It is tempting to think that Company A has a better deal. However, that company could be a direct recognition company, and that loan interest rate may not accurately reflect your rate if you plan on borrowing against your policy.

To understand this, we have to step into the shoes of the company. They want to get the highest rate while remaining conservative, so they have longevity. So it makes sense that to project higher dividends, they balance it somewhere. 

Fixed vs. Variable Loan Rates

The rate at which you’re loaned money correlates to the dividend rates. Some companies will offer both fixed and variable loan interest rates, which you can decide at the time of your loan. Often, a fixed rate is higher than a variable rate, yet offers certainty that your rate is locked in. A variable rate tends to be lower, yet gets adjusted each year based on costs. 

It’s important to note that the dividend rate will usually stay higher than the loan rate. 

The dividend and the loan are both interest-rate environment driven components, and one won’t change independently of the other. This means that even though your loan rate could change from year to year, it will almost always be lower than the dividend rate. This stabilizes your policy.

Should You Choose Direct or Non-Direct Recognition?

When you look at direct vs. non-direct recognition, neither is significantly better than the other. Direct recognition companies may offer slightly higher dividends, however, they compensate with a lower rate by offering a direct recognition loan. Non-direct recognition companies often have lower projected dividends, however, all of your money, collateralized or not, will earn the same rate. 

It’s also important to note that companies won’t advertise whether their dividend projections are gross or net. In the grand scheme of things, the performance of your policy will be more or less the same no matter what you choose. Companies don’t guarantee dividends, and the projections don’t fully represent how your account will grow. So though a non-direct Recognition company may make more sense from a privatized banking strategy, research shows accounts will average about the same, regardless.

There are no deals in the life insurance industry, everything is a trade-off, and everything balances out. When looking for the best company, we recommend looking instead at financial ratings and their dividend history. Current dividend rates and future projections won’t tell you much—they’re not guaranteed. However, you can learn a lot from what has happened, and how companies manage their finances and dividends accordingly. 

Check the company ratings through Standard and Poor, Moody, and other rating companies. Research the overhead costs of each company, which can tell you a lot about a company. Look at customer service, as you’ll be working with this company for life. A trustworthy company will be worth more to you in the long run—and whole life insurance is all about the long run. 

Choosing the Best Life Insurance Company

There’s so much more to choosing a life insurance company and policy than direct or non-direct recognition. The wisest thing you can do is to be confident in the values of your advisor team. Remember, life insurance products are one piece of your financial picture, and it can help all of your assets work better. The best decision you can make is the one you make today. The decision that helps you advance yourself, do the most with your money, and move one step closer to time and money freedom. 

Ready to Start Your Life Insurance?

Are you ready to move forward with Privatized Banking, alternative investments, or cash flow strategies to coordinate your finances so that everything works together to improve your life today and accelerate time and money freedom?

Book a free introductory call with our advisors. https://themoneyadvantage.com/calendar

Rachel Marshall

Rachel Marshall is the Co-Founder and Chief Financial Educator of The Money Advantage and President of Marshall's Insurance and Financial Services. She is known for making money simple, fun, and doable. Rachel has built a team of licensed professionals (investment advisors, insurance agents, attorneys, tax strategists) to help her clients create time and money freedom with cash flow strategies, Privatized Banking, and alternative investments. Rachel is the co-host of The Money Advantage podcast, the popular business and personal finance show. She teaches how to keep more of the money you make, protect it, and turn it into cash-flowing assets.
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