All right we are going to look at a interesting topic here always generates a ton of interest
around the subjects of Non-Direct and Direct Recognition and specifically
we're talking about policy loans here we're still in the policy loan series.
So we've got Direct Recognition but you'll notice to the left of it it reads fixed specifically I'm
referring to a fixed loan interest rate whereas Non-Direct Recognition we have a variable loan
interest rate. Now what I will note here is if an insurance company has a variable
loan interest rate that does not automatically mean that they practice Non-Direct Recognition
There are companies out there, one specifically comes to mind that has a variable loan rate but
guess what, they practice Direct Recognition with their contracts so I want to be aware of that
the example we're going to show you in this video is an insurance company that practices both
Non-Direct and Direct Recognition they actually give the policy holder the option when
they first open a policy hey do you want to go with a fixed loan rate and have your contract
be Direct Recognition or would you like a variable loan rate and have the policy be
Non-Direct Recognition so let's get into it. With the fixed rate we have a loan interest rate of 6%
and again Direct Recognition variable we've got 5% . The dividend rate with
the insurance company we are going to demonstrate here is 6.2% for 2020 I probably
gave away the insurance company to a couple of you here so what we've got is a nice little chart here
apples to apples scenario here's what's going to happen is if I have a hundred
thousand dollars in Cash Value what that means is if I just let the money sit and grow I don't
touch it that 6.2% dividend I'm going to earn that on my money if I don't
touch the money in cash value it doesn't matter if I go with non-direct or direct recognition, has
zero impact when I loan it that's where I will see the difference so let's start with a non-direct
recognition company and it's kind of in the name here a Non-Direct Recognition company does not
recognize that I take a loan out in respect to how they pay dividends and interest on my money
so if I were to loan out fifty thousand dollars so I've got fifty thousand dollars in cash value
I'm yielding the 6.2% dividend here
and I also loan fifty thousand dollars out they are a Non-Direct Recognition company
so they are going to continue to pay the exact same dividend on any money in Cash Value
and what I loaned out they collateralize the death benefit we covered that in an earlier video
but what they're going to do is charge me loan interest in this case at 5%
that again goes to the insurance company always want to be very clear when we talk
about that the loan interest on any policy goes to the insurance company not back to ourselves
now with a direct recognition company here's how this works
is exact same dividend rate of 6.2% I borrow out half of my Cash Value
the money still remaining in Cash Value receives a dividend of 6.2% the unborrowed portion
is not impacted at all now I take a $50,000 loan out 6% cost to borrow again goes to the
insurance company what happens here the 50k that I loaned out direct recognition they directly
recognize the fact that I take a loan from the life insurance policy
they still pay me a dividend I'm still earning dividends on this entire bucket of money this
particular insurance company that we are referring to actually raises the dividend
you're gonna find that it's over six and a half percent
on borrowed funds. How on earth and why on earth would they do that and can you demonstrate that
for me? That's what I asked I'm like okay let me see it which they do do that we're going to look
at a chart in an example in an example here but what I want to touch on here is here's a direct
recognition company or a company that offers Direct Recognition and Non-Direct Recognition
where they actually raise the dividend rate on borrowed funds what's so interesting about that
is how many times have you done research and I'd say probably about 80 percent of
material out there states direct recognition is bad because they do not pay a dividend on
borrowed funds or they reduce dividends in borrowed funds well that's not true
a lot of our videos we've used the term it depends on the insurance company guess what
it depends on the insurance company direct recognition recognizes the fact that we take
out a loan and they make an adjustment I'll also add that I really don't think that it matters
which one you go with especially if you are using a quality company
so let's look at a nice flow chart here man I love this stuff
that's why I'm doing this at 10:15 at night but let's continue so non-direct recognition
growth example we've got a payment of fifty thousand dollars for five years
any time we look at a loan scenario kind of like our overview video
I love to show what it looks like if I just pay money in and let it sit and grow first
and foremost this way I can see what the actual impact is of the policy when I borrow
and then repay or maybe I don't repay so here paying in 50 for five years exact same thing
over here this is similar to that overview video we looked at before so as we look at this guy here
what do I want to look at so this is our non-direct recognition study perfect
I've got my payments going in 50 for five loan of $200,000 just like our overview video what
happened when you borrowed what happened to the death benefit that's what collateralized
meaning they're still going to pay me dividends and interest on my entire bucket of money
and they do that by collateralizing my death benefit I will see a dollar for dollar
reduction there the cash value is the gauge I can borrow refer to it
in this manner really as your line of credit simple way to simple terminology to use in my
in my opinion now in this example we borrowed at $200,000 and then started to repay it at $20,000
per year so Non-Direct Recognition here this specific example is non-direct we are
repaying it at 20k per year we can repay it however we want how the dividends look
compared to the example when I just let it sit and grow they don't change Non-Direct
Recognition is way easier to understand of the two because nothing changes if I let it sit and
grow or if I borrow and repay if I repay I'm going to see it 100 restored the cash value
and death benefit that is to what it would have been as if I never touched it in the first place
I circled a year too early
541 and 575 541 and 1575 fully restored when it's paid back to exactly what it would have
been in the first place dividends have been the same all the way through all that good stuff
right and that's good to be aware of again this is not to say
Non-Direct or Direct recognition one's better than the other because it's
not again if we're using top-tier quality companies we use them both in our practice
now if we continue on let's look at the direct recognition policy here's where it gets really
interesting Direct Recognition same thing 50 for five years here's what I want to look at
let's capture everything here 200k loan there's your death benefit reduction drops by about 200k
you'll see the loan interest is not 10k here one is 12k because it's a 6% rate on
the Direct Recognition example but here's really what I want to touch on look at the year that you
borrow that $200,000 out the year prior it's 4,879 the year you loan
it's 6,804. So specifically what's happening here is I'm still receiving the basic
6.2 dividend on the money still in Cash Value and a higher dividend rate on my loan balance
whereas over here where I didn't touch it to 6.2 percent dividend rate so
same repayment amount here's what I'm interested in
which one's higher interesting isn't it? The reason why is these illustrations on the direct
recognition example the loan balance all the way through assumed a higher dividend crediting rate
than what the standard dividend rate is I know this can be a little complex
and we always want to assess different situations different scenarios based on what we are trying
to accomplish but it's good information to have you know we often hear in the industry oh one
option's bad or just go with this one and there's really not concrete data or reasons
provided behind it other than the knowledge in an agent's head which is good that an agent has
that knowledge but still if we're the consumer we want to see it I wanted to see it and that's
why I drove people nuts at home offices when I asked for this stuff back in the day but
there we go you see the Direct Recognition example is higher what we also did here
and this is a little small we just put Non-Direct side by side with direct
when it's paid back if I just look at 860 this might be small
656 on the Non-Direct example
683 in the Direct Recognition example so 25,000 a little bit more
additional cash value in the Direct Recognition example makes it sound better right the
thing is if you were to tally up the loan payments you've paid more over here because
I've got a 6% cost to borrow over here and only a 5% cost to bar over here but
then again this is fixed this is variable to take it a step further the contract language and the
way you have to construct this policy is a little bit different than this one it's the same company
but you give up some flexibility over here point being is the Non-Direct or Direct Recognition
should not refine our decision-making process the purpose of this video was really to show if
I select a different loan interest rate that's going to impact if the policy is Non-Direct or
Direct Recognition which does impact everything overall so this one as you can tell from me going
a mile a minute here I really enjoy I enjoyed going through this topic but as always I hope
this was helpful reach out with any questions and we will talk to you on the next video
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