Direct Recognition

What Does Direct Recognition Mean?

Direct recognition is a strategy used by insurance companies to manage the loaned cash values of life insurance policies. Unlike non-direct recognition, where the earning rates remain unchanged regardless of the cash value being used as collateral for a loan, direct recognition allows those rates to be either negatively or positively affected when the cash value is accessed.

Insuranceopedia Explains Direct Recognition

Essentially, life insurance companies that offer dividends and employ a direct recognition method acknowledge when a loan is taken out against the cash value of a policy. This acknowledgment can affect the amount of dividends a policyholder receives, often resulting in a reduction.

However, not all life insurance companies adopt this approach. Some prefer to use non-direct recognition, maintaining the same dividend amounts regardless of whether a loan is taken out against the policy.