Blog 88 – Effect Of Higher Interest Rates On Non-Direct Recognition Contracts

Pedro Policio On The Infinite Banking

Based on the way that dividend rates are treated when you have a policy loan outstanding, there are two types on life insurance contracts: direct recognition and non-direct recognition. 

Direct recognition contracts adjust the declared dividend rate on the portion of your cash value that is collateralizing the loan, while the remaining cash value that is not collateralizing your loan receives the declared dividend rate. Non-direct recognition contracts receive the same declared dividend rate on

both, the portion of the cash value collateralizing the loan and the portion of the cash value not collateralizing the loan. It follows, that in general, declared dividend rates would be lower if the insurance company were non-direct recognition than if it were direct recognition.

We have always explained to our clients that 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 insurance companies and marketing organizations themselves 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. What is important to you as a consumer is what the insurance contract will provide you in cash values at any points in time that are of relevance to you, and this is more specific to the internal design of your policy than the fact that the insurance contract is direct or non-direct recognition. In fact, dividend recognition is not the most important factor when selecting the best insurance contract for your needs.

Taking the above explanation into consideration, interest rates are on the rise due to inflation and therefore, dividend rates will also increase. Given the fact that insurance companies manage a lot of assets, it will take time for them to cycle assets and begin to obtain increased yields to the degree necessary to increase dividend rates and we may see a time delay of 18 to 24 months. 

Increasing interest rates and eventually higher dividend rates create a special problem for insurance companies with non-direct recognition contracts: how do they balance the loan interest they collect from policy loans with the pressure to pay higher dividends? The result may be that they keep dividend rates low and this by itself, may entice policyholders to take policy loans to purchase higher yielding financial instruments at best, and the possibility of policy surrender at worst.

If you own a non-direct recognition insurance contract, you should remain calm. There is no reason to worry. Also, remember that you most likely purchased your high cash value contract as a long-term wealth accumulation plan and what could happen is only temporary. Nevertheless, this is a shining example of a major non-direct recognition weakness that you will have to consider in the future.

If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at or feel free to email us your questions at or call us toll-free at 1-844-443-8422.

Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners

We are experts in designing high cash value dividend-paying whole life policies.

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