|Direct & Non-Direct Recognition
There are two different methods insurance companies use to handle the loaned cash value: direct recognition and non-direct recognition. When someone takes out a policy loan, the money comes out of the insurance company’s pool of money, and the policy owner can decide how much, how quickly and when the loan should be paid back. The insurance company charges interest on that loan, which accrues every year, but the policy owner could decide never to repay the loan until the time he or she dies.
In a non-direct recognition company, it doesn’t matter if you have any outstanding loans, the earnings rate on cash value through policy dividends is totally unaffected.
In a direct recognition company, the earnings rates on loaned cash value through policy dividends is affected, typically negatively, when the policy owner has some outstanding policy loans. The company is basically saying that if you don’t pay the loans back, the money is not working as efficiently as it would in the pool of money managed by the company, and therefore will impact the dividends on your policy. This is to encourage loan repayments.
In Canada, most companies are non-direct recognition loans, but it is still worth knowing the difference.