here we're gonna take a look at a non direct recognition case study and what this is going
to represent or display is a policy on a 45 year old male where he funds a policy for five years
and the funding can really be anything we want what we want to look at is what is the impact of
loans on a non direct recognition company rather than just talk about it conceptually so what we
have here again is a 45 year old male a non direct recognition policy he contributes fifty thousand
dollars per year for five years nothing thereafter again this policy we don't want to focus so much
on the returns it's not maximized for performance here the purpose of this is to display how loans
work for it is strong though your three breakeven point now what we have on the right is the exact
same policy the difference here is we're going to look at policy loans so the first thing we have
here is a policy loan coming out in year five what I want to know as a consumer is what is the impact
that that loan has on my life insurance policy because I have a non direct recognition policy
that means the company is telling me I take out this 200k I the insurance company I'm still going
to pay you dividends on that as if you never touched it okay let's see so I've got the 200k
loan outstanding here's my cash value view that as my line of credit that's the actual amount
of money I can pull from the policy now they're they are going to continue to pay me dividends
here and how and why an insurance company would do that because they are good at making money
is what we want to look at is the death benefit here this is the amount or the figure I should
say that the company is going to hold as call lateral so if I take a loan outstanding and the
insurance company says to you I'm still gonna pay you a dividend as if you never pulled your
money out in the first place that sounds great that's like in a piece of real estate that does
nothing but appreciate forever how and why they do that is they collateralized our death benefit
you will always see a dollar-for-dollar reduction on the death benefit when I pull out a loan the
the upside for the insurance company there is remember their life insurance company first and
foremost claim or responsibility is to pay out life insurance claims so if we die with a loan
outstanding they've got to pay at that much less now let's look at the loan repayment here here we
are repaying it at $50,000 per year we can repay it however we want but what I want to tally up is
the repayments so I borrowed out two hundred four years of fifty another year of twenty eight nine
seventy five I paid back call it an extra twenty nine K an interest the interest rate on this
account by the way was five percent this was money that went to who the insurance company now when I
had that loan outstanding and when I am paying it back again this is a non direct recognition
company and policy meaning my dividends never changed exactly the same all the way through
and really the proof of that what I want to see if I'm looking at a non direct recognition
policy here's my cash value and death benefit in year ten over here on the right we pay this loan
back by year ten what are my values they're they're exactly the same fully restored to
what they would have been as if I never touched the money in the first place again the company
did not recognize the fact that I had a loan outstanding if I progress on to the second loan
you're gonna see the same thing here you're 12 pulls on a 300k loan cash values in my line of
credit that's why you see the reduction here and then look at my death benefit as well dollar for
dollar reduction went from 933 down to 633 same repayment schedule there's my loan interest
there's my loan balance once it is repaid my values and what I have we've got it highlighted
here in yellow fully restore to exactly what they would have been again as if I
never touched it in the first place I mean take away non direct recognition the company does not
recognize that I have a loan outstanding on my policy from a borrowing standpoint
and how loans work it is easier to follow or easier to understand because again no matter
what happens I'm going to get the same dividend on any money in cash and any money loaned out