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

If, as an insurance company I want to minimize the risk involved in offering policy loans—loans that let policyholders borrow against the cash value of their life insurance—there are really two ways to manage that risk:

1. I can spread the risk across all policyholders, regardless of whether they take out a loan. This is what non-direct recognition companies do.

2. Or, I can adjust dividend payouts so that only policyholders with no outstanding loans receive a larger share. This is the approach used by direct recognition companies.

Either way, the insurance company protects itself from the financial impact of policy loans. But from the policyholder’s perspective, the difference matters.

In a non-direct recognition model, everyone shares the risk. If you take out a policy loan, the impact of that loan is absorbed by the entire group—meaning everyone receives a slightly lower dividend. That might sound appealing if you’re the one taking the loan. After all, your payout isn’t directly affected. But it’s important to recognize that you’re relying on others to absorb your risk.

In contrast, direct recognition companies apply more of that impact directly to the person taking the loan. That policyholder may receive a lower dividend, but others are unaffected. Here’s the key: If the direct recognition policy also offers higher guaranteed values—like guaranteed cash value and guaranteed death benefit—that can easily outweigh any perceived “penalty” tied to dividends when a loan is taken.

When evaluating a whole life policy, don’t let the dividend approach—direct vs. non-direct recognition—be your only focus. Dividends aren’t guaranteed, but guaranteed values are. Choosing a policy with stronger guarantees gives you greater financial certainty. It’s the classic case of “a bird in the hand is worth two in the bush.”

And over time, those guarantees can make a huge difference. Direct recognition policies often provide higher guaranteed death benefits and cash values. Plus, the more paid-up death benefit you accumulate, the greater your participation in future dividend allocations—because the insurer shares dividends based in part on how much of the death benefit you own.

So while it might be tempting to chase potentially higher dividends from non-direct recognition policies, you could be giving up long-term value and stability. Ultimately, policies with stronger guarantees tend to provide greater benefits for both you and your beneficiaries—regardless of how the dividends are structured.

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This isn’t a knock on non-direct recognition companies. They have their merits. The real issue is how one-sided the conversation around direct vs. non-direct recognition has become. Far too often, consumers are fed a simplistic narrative: “Non-direct is good, direct is bad.”

This oversimplification does more harm than good—and frankly, it’s become a sales pitch mantra rather than a thoughtful analysis. It’s reminiscent of George Orwell’s Animal Farm, where the animals were taught to chant “Four legs good, two legs bad” anytime someone questioned authority. And when the pigs eventually started walking on two legs? The chant was conveniently changed to “Four legs good, two legs better.”

The parallel here isn’t just literary—it’s real. Marketing slogans often drown out nuance. But when it comes to your finances, nuance matters. Direct and non-direct recognition policies each have strengths and weaknesses. What matters most is how a policy aligns with your goals, how it’s designed, and the guarantees it offers—not a chant someone memorized at a sales seminar.

At McFie Insurance, we believe in giving you the full picture—so you can think for yourself and choose what’s truly best for your financial future.

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.

Tomas P. McFie DC PhD

Tom McFie is the founder of McFie Insurance and co-host of the WealthTalks podcast which helps people keep more of the money they make, so they can have financial peace of mind. He has reviewed 1000s of whole life insurance policies and has practiced the Infinite Banking Concept for nearly 20 years, making him one of the foremost experts on achieving financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.