Two Different Ways Of Charging For Loans – Episode 276

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to the Prosperity Podcast. Today we’re going to be talking about direct recognition versus non-direct recognition. And Kim Butler, you’re going to be able to provide us some insight that will hopefully provide clarity to this confusing topic. Oh, and it is confusing, which is unfortunate because the people that are causing the confusion don’t quite have the full story. And since we’re such big believers in telling the whole truth and 100% of the whole truth, etc., I’m delighted to do the best that I can, adding some clarity to this.

[00:58] So let’s first of all realize that these topics are addressing how a life insurance company charges for loans. And one way that they charge for loans is called direct recognition, and another way that they charge for loans is called non-direct or indirect, usually non-direct recognition. And the most important sentence is to know that there’s not a good or a bad, there’s just two different ways of charging for loans. And some companies even have both, which really tells you that there’s not a good or a bad. So let’s start with direct recognition. And first of all, I want to just identify how I absolutely positively know this information. And I also want to identify that the direct recognition method indicates that the

[01:55] borrowed cash value against life insurance will be affecting the dividend. And us human beings immediately think that that effect or that impact, if you will, is negative. And yet, direct recognition can actually have a positive impact or a positive effect on borrowed cash value. And this is why I know what I know, because I’ve actually literally seen it. So I have Guardian as a life insurance company, and I have borrowed cash value on some policies. And of course, I have other policies that don’t have any loans. And so I can see in a particular year what the dividend gets paid is. And so we’re talking about loans. Now we’re talking about dividends. Well, because direct recognition, literally the word is accurate, it

[02:48] directly recognizes the loan and it impacts the dividend. But it’s so minor that it really does not make any difference. And as I’ve indicated, in some years, that impact is positive. In some years, it’s negative. But we’re talking pennies. And I can see it on my very own policies, because again, I’ve got policies with loans, policies without. Is all that making sense so far before I get into the next one? It does. It does make sense. But I think what will really clarify it is as we understand what non-direct is, and then we can compare those two and that will help clarify and give a good summary. Yeah. So non-direct recognition is where they don’t directly recognize the loan cost or the loan structure, meaning they do not

[03:36] impact the dividend with the knowledge that there’s a loan on the policy. And so it is something that is a choice by the insurance company. I reiterate again, there’s one company in particular, MassMutual, that offers both. And they do tie it in to the loan rate and whether it’s fixed or variable. Not the rate itself, but whether it’s fixed or variable. And so typically, if you see a direct recognition, you’re going to see a fixed loan rate. And if you see non-direct recognition, you’re going to see a variable loan rate. And again, it’s just different methods. And there are some companies that literally let you choose, not like each loan, but at the outset of your policy, you can choose whether to have

[04:27] a fixed loan rate or a variable loan rate. Again, fixed is often direct, variable is often non-direct. And again, it’s a minor, minor, minor difference. And really, if it’s really, really bugging you, what I suggest is just have both, like go find a company that has direct and buy from them. Next time you buy life insurance, buy from a company that has non-direct, or as I’ve indicated, you could buy from Mass, and then it would be either. And Emma Dogg just has said, yes, it doesn’t matter. Really, she’s quite sure of it. I think Emma just agreed that you should do both. So I think we’re set. Now with the direct, is it true that a lot of times if we’re in a marketplace with a lot of volatility?

[05:12] So let’s go back to like the 1980s, interest rates were crazy. The director approach of taking something that’s fixed would perhaps make someone feel better for the long term. Is that appropriate to say? Absolutely. And I’m going to just go ahead and say that I usually recommend fixed if somebody is unclear, because fixed is fixed. Yep. And again, right now, if we look at the big scope of interest rates and how things are, money is cheap currently. It’s really, really cheap. Yes. And so that’s something that we can take advantage of, be grateful for, kind of. I mean, yes, we could get into political discussion about whether they’re impacting the economy with that or not. But it is something that we can be aware of.

[05:56] And it also makes us be on the lookout sometimes for more efficient places to borrow against our cash value rather than using the life insurance company. OK. Now, how about the buyer of the policy and their actual upstandiness, their credit worthiness, and their health and all of that? Does that fit into the mix that all of the decisions of going direct or non-direct? No. So credit worthiness doesn’t matter at all with life insurance loans. They don’t check your credit. And they don’t check your credit per se when you apply. Some companies are starting to just because they want to make sure that you actually have the ability to continue with the policy. But as a general rule of thumb, life insurance companies

[06:44] don’t check credit when you’re buying a life insurance policy. And they definitely do not check it when you’re getting the loan. So that’s not really an impact. Really, again, what you’re looking for is the person that you’re talking to, someone that you can be comfortable with in helping you for the rest of your life with these life insurance policies. That matters way more than whether your company that you’re currently starting to buy a policy from is direct or non-direct recognition, or whether they’re a fixed or variable loan rate. All those things in my mind are secondary because they truly long term are not going to make a big, big difference. Okay. So for our listeners that are right now, they’re in the driver’s seat.

[07:26] They want to make a decision. They’re not sure what’s the best thing that they can do to take the next step, Kim. Always learn, learn, learn, right? So my little live your life insurance book has a very quick description at the end of direct and non-direct recognition. So if they want to read it instead of just hear about it, they can go there. And then I’ll let you put in show notes. We have a blog post partners for prosperity.com slash collateral that gives them sources that they can borrow against their cash value separately from the insurance company, which is important because if you do have a fixed loan rate, it’s probably at six or eight percent, which is a little on the high side right now.

[08:09] And there will be times when you’re really glad that you have that six or eight percent, but you might want to use another source for borrowing in today’s marketplace because it might be a little bit lower interest rate. And then if they have questions, please reach out to me. We have a special email for our podcast listeners. It’s hello at partners, number four, prosperity.com. And I’m more than happy to answer questions. If I can do so quickly, I’ll do it on email. If it’s longer, we’ll probably put it on a podcast. And sometimes people are actually ready to start to look at the life insurance. And I can grab a birthday in the state of residence and send you an illustration to actually start to look into it more thoroughly.

[08:46] Wonderful. That sounds pretty easy. So for all of our listeners, again, if you have questions, you can go to partners for prosperity dot com forward slash collateral or send Kim an email to that special email address. Hello at partners for prosperity dot com. Thanks for spending time with us again today. And we look forward to getting you another episode, answering your pressing questions. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.