Direct or Non-Direct Recognition: What Difference Does it Make?

If, as an insurance company, I want to reduce my risk associated with providing loans to policyholders who leverage their death benefit to take policy loans, I have two options.  I can,

1. Force all policyholders to assume the risk associated with someone taking a policy loan against their policy, as in non-direct recognition companies. Or I can,
2. Give policyholders that don’t have an outstanding loan against their policy a greater share of dividends declared, as in direct recognition companies.

Either way, as the insurance company, I will have protected myself against the risk associated with policy owners borrowing against their policy’s paid up death benefit.

However, as a policyholder, you may prefer all the other policyholders to subsidize your policy loan.  This is what happens in non-direct recognition.  Everybody takes a hit on what could have been received in dividends rather than the policyholder giving up a larger share of the dividend when they have an outstanding loan against their policy.  This may sound enticing for those who don’t want to assume all that risk themselves as can happen with direct recognition.

However, if an insurance company using direct recognition provides significantly higher guaranteed values compared to a non-direct recognition company, how the dividends are doled out should not be your deciding factor on which product to purchase. And that is because, when higher guarantees are available, dividends become less significant in the overall growth of a Participating Whole Life Policy.  Choosing to purchase the higher guarantees, is like having a bird-in-hand versus assuming the risk and purchasing a policy with lower guarantees while hoping for higher dividend payouts.  Remember dividends are not guaranteed.

Direct recognition policies often provide higher guaranteed death benefits as well as higher guaranteed cash values, compared to non-direct recognition policies.  And because the death benefit that you have paid up (ie, own) becomes a factor in determining how much the insurance company will share of the dividend they declare each year, over time, having more paid up death benefit is of greater value for you and your beneficiaries.

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This in no way denigrates non-direct recognition companies.  It only proves that there are more ways to look at direct and non-direct recognition than typically is shared with you as a consumer.  Despairingly, too many have been sold on the idea that “non-direct is good and direct is bad”.  In fact, “Non-direct good, direct bad” has become a sales mantra much like “Four legs good, two legs bad” became in George Orwell’s, Animal Farm, where the farmyard animals were brainwashed by Napoleon to chant loudly and incessantly when any new idea or thought was proposed that opposed Napoleon’s ideas or thoughts.  At least up until the pigs learned to walk upright on their two hind feet.  Then the farm animals were reprogrammed to chant, “Four legs good, two legs better” so that all animals would feel the superiority of the pigs.

Moral of the story.  Don’t be brainwashed by chants or sales slogans. Learn the reasons why one Participating Whole Life Insurance Policy is better for your specific needs over another.  And don’t base that decision on whether it is a non-direct or direct recognition.  Doing so, will keep you from having to be reprogrammed in the future, plus you’ll keep more of your money.  And that is what we want you to be able to do because that is what makes the real difference.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.