Direct vs Non-Direct Recognition Mutual Insurance Dividend Calculations. Is there Really a Difference?

My Personal Experience of Tracking What Happens in Our Policies When I Take a Loan

I own policies in both Direct Recognition and Non-Direct Recognition insurance companies.

When I take a loan from any one of our Direct Recognition policies the death benefit is not lowered at that time. Only when I die and the death benefit is passed on to my beneficiaries will the outstanding loans be deducted from the death benefit before the difference is paid out. So, to make up for the loan, when it is time to pay the dividends, the rate that will be used to determine what my dividend on the amount of that has been loaned to me will be, will be slightly less than on the portion that has not been loaned.

With my Non-Direct Recognition policy, when I take a loan they immediately lower the death benefit accordingly. The amounts differ and are not necessarily matching the amount of the loan but reflects how much that amount of money was actually buying in death benefit at that time. So this company can say they do not lower the interest rate of their dividends if you take a loan, which is the selling point of the non-direct recognition company agents.

However, what determines our ownership within a mutual insurance company? The death benefit is one determining factor. And what are our dividend rates based on? One thing is how much death benefit / ownership we have.

Therefore, my conclusion is this: The difference between direct and non-direct recognition in regards to outstanding loans is zero. They just figure the numbers out slightly differently. They are both based on your ownership which is based on your death benefit.

so: 1/ Direct Recognition –  Death Benefit is unchanged so dividend rate is slightly lowered or

      2/ Non-Direct Recognition – Death Benefit is lowered so dividend rate can stay the same.

One more point is that the actual loan interest rate on each type of policy is different.

The direct recognition company charges me 5.21% and

the non-direct recognition company charges me 5.3% at the moment.

It is really that simple as far as I can see.


Another scenario I would like to share is this, if a non-direct recognition insurance company does not lower the death benefit they may instead lower the actual dividend rate on all policies, whether a policy owner has taken a loan or not. That way their costs are defrayed equally by all policy owners. Now I ask you, is this fair? Doesn’t Nelson Nash talk about not stealing the peas? Doesn’t he talk about being an honest banker? How would you like it if you were the policy holder who took no loans but had your dividend reduced because someone else did? These are the questions one must contemplate when deciding whether a direct or non-direct recognition argument is being used to SELL a life insurance policy to you where the focus is being placed on the club (the product) instead of the swing, (teaching the process of how to use the policy for banking).

What the Direct Recognition company does is usually pays a higher rate dividend than the non-direct recogntion company rate due to the over all reduction, but then charges a reduced rate on the loaned portion of the policy. This can have three different outcomes. Either it works out to be better for the direct recognition policy, it can be equal in both policies or it could be better for the non-direct recognition policy.

You see, all companies are going to make a profit no matter how they determine the dividends, their expenses or anything else.


It also amazes me that most people only want to track loans taken from their policies as if that is the only valuable part of their privatized banking system. I track every part of my policy, including the death benefit, which to me is a very valuable component of my policy seeing as the amount of cash value I have access to to collateralize is based on how much death benefit I own. If you want to use a financial software system that makes tracking every part of your private financing system easy, give me a call. Jennifer Hansen 845-649-7487 or email at


June 17, 2012 · Jennifer · 14 Comments
Tags: , ,  · Posted in: Direct & Non-Direct Recognition, L22) Direct vs Non-Direct, Uncategorized

14 Responses

  1. Michael - June 3, 2013


    I am still in the process of researching this with a very patient adviser… Very patient.

    Can someone clarify a point to aid in my understanding…?

    On the surface it would appear that with a Non-Direct Recog­ni­tion pol­icy, take a loan, they lower the death ben­e­fit accord­ingly. But if your IRR remains the same, you are able to harness the compounding more effectively rather than a slower rate at a reduced rate.

    If your goal is to maximize cash value, a Direct Recognition loan seems counter productive.

    Do I understand this correctly?

    Thank you.


  2. Jennifer - June 5, 2013

    Maybe your very patient adviser can help you with the math and deeper understanding, Michael?

    The IRR obviously is not the same because the calculations are not like they are for investments when it comes to insurance.

    Each company calculates their dividends a little differently but the amount of ownership you hold with the company definitely comes into play. Your ownership has to do with the amount of death benefit you own. So if that is lowered when you take a loan, then your dividend will be lower over all than what it would have been had you not taken the loan. The calculation is based on a lower amount of ownership.

    It really is a mute point and should not really be a concern for anyone because how each company figures it out will not be revealed and the advertised ROR for dividends cannot be compared either due to some companies quoting gross rates while others are quoting net of investment expenses only and others take additional items into consideration.

  3. Is the Infinite Banking Strategy Using Whole Life Insurance Right for You? — My Personal Finance Journey - June 12, 2013

    […] outfits).  However, it actually turns out not to be so straight forward. As pointed out by this person who has both direct and non-direct whole life insurance, there is essentially zero difference mathematically between the two at the bottom line. It just […]

  4. Jennifer - July 2, 2013

    It is a sad thing that the above post on My Personal Finance Journey has so much incorrect information in his post that it will just add to the confusion rather than help decipher what is fact.

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  6. Allon U. - March 10, 2014

    Jennifer, your explanation of the differences between Direct (DR) and Non-Direct Recognition (NDR) is perfect!!!! I almost rolled over $2 million of whole life from my DR into a NDR insurance company thinking it was so much better. The agent never explained about the lower death benefit. I will never lower my death benefit! My Death benefit is the last gift I can give to my family.

  7. Jennifer - March 11, 2014

    Hi Allon,

    Glad I could be of service. Having someone roll over to a newer policy is not always the best thing for the client. In fact quite often it just is not a wise choice. Especially if you are moving from WL to WL. You would most likely lose out due to the time value of money, you are now older than when you first took out the policy therfore the insurance cost will have increased. Also, the upfront charges will have to paid all over again, could be more expensive now due to the economy etc., and the policy design would really need to be studied to make sure it is better rather then worse for you.
    Now, if you have a Universal Life that some agents call Whole Life and they are suggesting you roll that over to a properly designed and real whole life, that is another story. Universal Life increases in cost of insurance every year and will most likely not last your whole life, unless you die younger. The age of your current policy and type are all factors to consider. However, if the reason was just due to the Direct or Non-Direct philosophy, then that is not a reason in my book.

  8. Oren P - September 1, 2014


    I have never seen such an explanation on Direct Recognition vs. Non Direct Recognition!

    The bottom line is that when a policyowner takes a loan against his or her cash value, that loan comes from the company, and a lien is placed against the policy.

    This loan is an ASSET to the company which earns a return, just like any other investment in the company’s portfolio.

    Direct Recognition usually goes along with FIXED loan rates. Since the rate on the loan is fixed and is likely to differ from the prevailing rates of return on portfolio assets, the company will adjust a portion of the dividend to account for the difference in returns.

    Non-Direct Recognition will charge a Variable Interest rate, so that rate can be very close to the portfolio rate, and no adjustment to the dividend is required.

    The big difference occurs when people leverage other funding sources and pledge the policy as collateral. For example, certain banks will lend against up to 90% of the Cash Surrender Value of a Whole Life policy and only charge a (variable) 4% rate!

    As for the company lowering your death benefit… That is simply inaccurate! While your NET death benefit would be lowered, that is true for all insurance companies, whether direct recognition or not, as the loan gets paid back from death benefit proceeds before anything remaining get paid to the beneficiaries. However, the GROSS death benefit is UNCHANGED by the loan!

  9. Jennifer - September 8, 2014

    Hi Oren P.

    Thanks for commenting on this blog post. This topic is rather tricky as the information does not seem to be easy to come by.

    Keep digging around and you will find more info. than what your current understanding is.

    Yes it is true that when you take a loan you are collateralizing the amount of cash value that has been determined by the insurance company so the money actually comes from the insurance companies general fund and not your actual policy.

    I have a policy with a direct recognition company and my loan rate is variable, not fixed as you mention above.

    I know non-direct recognition companies that offer both fixed or variable loan rates.

    You must be working with different companies than I as your explanations are not the way the companies I know of work.

    One advantage of utilizing your own policy company for a loan rather than a different lending course is that your monthly repayments are repaid at your own leisure. Their are no late fees or penalties due to late or no payments. That can be a huge benefit. Also, many other lenders will not lend for what you want to borrow for or if you are in a tight spot for some reason. You do not have to qualify for a loan by proving you do not need a loan before you can get a loan.

    I’m sorry that you have not yet experienced an insurance company that has done exactly what I have described, but that doesn’t give you the right to say it is inaccurate.

  10. k.d.reade - November 27, 2014

    In my 70’s; is there any advantage to converting universal life to whole life with similar death benefits?

  11. Jennifer - December 7, 2014

    Hi K.D. Sorry I just found your comment. I will reply via email shortly.

  12. Jennifer - February 2, 2015

    Hi K.D.Reade

    That question is a little like going to doctor and asking them if you should have a heart operation. Without a thorough study of your financial circumstances, we could not advise you. If you would like us to consult with you for no charge, please call me on 845-649-7487 or email me at

  13. Bob Aylor - February 25, 2015

    Hi Jennifer,

    I am an Insurance Agent in Virginia and am familiar with
    IBC. I have read several of Nelson Nash’s books. What
    Insurance Companies do you use for IBC.


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