Direct Recognition

Direct Recognition is a method that permanent life insurers use to calculate dividend payments when policy loans are outstanding. This method deducts policy loans out from your dividend payments. This stands stands in contrast to the older more traditional Non Direct Recognition method.  In the Mutual Participating whole life world their stands a long held debate about Direct Vs Non Direct and their efficacy.

Whole life insurance is a fantastically complicated method of both having life insurance and personal savings.  In fact it is one of the major reasons often against buying it:  ITS TOO complicated. My opinion on the subject is that unless you are both one of the exclusive few that can benefit from it (often wealthy people) AND have the time to fully research it, it often does not make sense to buy permanent insurance.

A case in point exists is the debate about Direct Recognition and Non Direct Recognition Whole Life Insurance policies, which is truly better?  In our piece about participating life insurance we reviewed this very concept.  Now I feel that this subject deserves further exploration.

Just to quickly recap though, Whole Life Insurance can be broken down first into Participating Vs Non Participating.  Then participating policies can be broken down into Direct and Non Direct.

1.  Non Participating Whole Life Insurance (Does not Pay Dividends.)

2.  Participating Whole Life Insurance (Dividends, Mutual Insurer.)

         2A.  Direct Recognition Participating Whole Life.

         2B.  Non Direct Recognition Participating Whole Life.

Chance are if you started your own whole life insurance company and set your own rules, direct recognition would be the way you would set it up.  Direct recognition essentially accounts for the loans taken out on your policy. It more or less makes sense.  Since participating insurers are mutually held. That is to say that the policy owners are the company owners.  They are one and the same.  

Direct Rec came into being in the early 1980s.

A simple definition of direct recognition is: A method that some participating whole insurers utilize to account for policy loans outstanding, when calculating annual dividends.

Non Direct recognition is the exact and polar opposite.  Within limits, it essentially ignores the loans taken out on a whole life insurance policy.  Therefore for those consumers that are planning on taking out lots of loans than the Non Direct method would seem to be their best bet.

Consumers that are researching whole life insurance, should always find out if their future insurer is direct or non direct. Unfortunately this fact does not seem easy for consumers to find.  Non Direct is the type of policy that many purveyors of infinite banking suggest.

So who writes direct recognition whole life products?  Here are some:

Mass Mutual: Mass Mutual actually writes both direct and non direct.

Thrivent Financial (formerly Thrivent Lutheran): An A++ rated carrier.

Mutual Trust: Part of the Pan-American Life Insurance Group Stock Company.

Ameritas: The Ameritas Life Co of Lincoln Nebraska.

Country Financial: A Bloomington IL company.

Minnesota Life: Now part of Securian Financial.

Penn Mutual: A very high paying and successful dividend history.

Northwestern Mutual: The old direct writing well known name brand.

The Guardian: The original Direct Recognition Company.

It might reason to assume that all the whole life insurance companies out there that are not direct recognition insurers are thereby non direct recognition companies.  That is partially true. With some caveats.  First off, no list is ever complete or 100% accurate. Second the companies have to be participating and not non participating carriers.

If an insurer's contract allows for policy loans that do not affect dividend payout... guess what?  You do not have to be a rocket scientist to imagine that the insurer will be flooded with people that want to use it as a piggy bank.  Up to a certain point, this is not an issue.  But when too many loans are taken out, I believe that the insurer both loss access to capital for investment AND spends too many resources and tools monitoring all of these loans.  After all its an insurer and not a bank.  

I am certain that most consumers have heard of the concept of low cost investing.  What about low cost insuring?  The more work and time that an insurer spends on all of this has got to lower the dividend payout, at some point. All things considered.  Consider the aspect yourself.

For starters, you should read my opinions about whole life insurance, Does Participating Whole Life Insurance make Sense?  OR BTITR. Or even the Outrageous things that Whole Life Insurance Agents claim. If after reading two or even three of them you are still interested, than I will share with you my opinion on direct recognition.

For those that believe that whole life insurance makes sense for them and their families, I would suggest that you investigate both types of companies.  Compare their dividend rate history going back as far as you can.  Since recessions come about every eight or ten years, looking back for decades can be useful. I would also review Financial Strength Ratings and Policyholder Surplus rankings. 

Then analyze the exact type of contract that you are looking for, such as true lifetime whole life policy, a limited pay contract, or even a Permanent Mutual Insurance policy with Living Benefits.

After all of that is complete then and only then would I review the direct vs non direct status of the Mutual. All things being equal, I would generally prefer the direct recognition company.  My reasoning for this is that I believe that cash loans taken out of whole life insurance policies are only a good idea for emergencies.  They are not a good idea for day to day use.  I just do not believe that whole life insurance is good for paying for college, at least when compared with a 529 plan.

1.  Confirm you are a true whole life candidate.

2.  Compare Dividend Rate Paying History.

3.  Confirm the exact type of policy that you are interested in.

4. Narrow down your list.

5.  Then compare Direct and Non Direct status.