The Software that Tells the Whole Truth about All Things Financial

How to tell the whole truth about Direct Recognition.

How to tell the whole truth about Direct Recognition.

There are two different methods insurance companies use to handle the loaned cash value — direct recognition and non-direct recognition. In a non-direct recognition company, the earnings rate on cash value is totally unaffected by any loans against cash value. In a direct recognition company, the earnings rates on loaned cash value are affected both positively and negatively when the cash value is used as collateral.

Generally, the loaned cash value has a dividend rate that is a certain number of basis points lower than the interest charged on the loan. So if the current-dividend-crediting rate is less than the direct-recognition-crediting rate, then the cash value is affected positively. If the current-dividend-crediting rate is greater than the direct-recognition-crediting rate, then cash value is affected negatively.

For example, let’s say the current-dividend-crediting rate is 6.5 percent, and the loan rate is 8 percent with all loaned cash value getting a “100 basis point” (1 percent) reduction from the loan rate (bringing it down to 7 percent). That being the case, since 7 percent is obviously greater than 6.5 percent, borrowing against your cash value actually improves your situation because your dividend-crediting rate will be at 7 percent for the borrowed cash value and 6.5 percent for the non-borrowed cash value.

After all the analysis we’ve done on many companies and policies, we’ve found either way works just fine. Maybe consider having both!

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