Direct Recognition and Non-Direct Recognition Insurance Companies
Direct recognition and non-direct recognition refer to the method that the insurance companies use to treat dividends when there is an outstanding policy loan.
When you take a policy loan, you are using your cash value as collateral for your loan. The money for the loan comes from the general account of the insurance company. That means your cash value continues to earn guaranteed interest and dividends while the loan is outstanding. Your money is doing double duty.
A direct recognition insurer reduces the dividend rate on the cash value collateralizing a policy loan, while a non-direct recognition insurer does not adjust the dividends paid on a policy when there is an outstanding policy loan.
The truth is that one method is not necessarily superior to the other. Direct recognition versus non-direct recognition is more a game of smoke and mirrors used by the insurance companies to keep your focus away from what is important. In fact, there are good and bad insurance contracts in both direct and non-direct recognition insurance companies.
What is important to you as a consumer is what the insurer will provide you as a tax-free retirement income when you are ready for retirement and that is exactly the way we determine what insurance company to use in each specific case.