Dividends

[James]

All I know is that I've been told some companies, (NM) being one of them, pay less dividends on policies that have loans. I know it happens, I know what it's called - it's called Direct Recognition, I was wondering what the company's reason is for doing this. I think JMO Fan is probably correct.

Don't know about other companies but I know that Ohio National and NYL do not use Direct Recognition.

LGilmore-I am.

You might be correct, I'm not all that familiar with NM since they only sell via company as totally Captive and I can not seem to find a specimen contract for there WL Policies. They have a reputation as being one of the best WL Dividend paying companies out there. As I stated before, they have a corporate culture within themselves that NM is God and should not be question. So why are you questioning them?

 

[David C]

James, Boy are you right about the culture there! And you're right about the strong dividends.

 

[James]

The dividend scale of a life policy is not affected by the existence (or non-existence) of a loan. However, many years ago, this was not the case.

As an example, if two identical policies were issued in 1997, and one owner takes out a large loan...both of their dividends will be identical.

Guardian does this, so far the top two companies have this and they claim it has greatly increase their Dividend Payout to all policies. They claim that before Direct Reconignition a 100 grand paid up WL would of created a dividend of $2,121, but since DR that same policy is earning a dividend of $5,812. They adopted DR in 1983, at the time it was common for double digit interest rates but a policy holder could borrow at 5% creating a serious problem for those policy holders that were not borrowing money from their cash value.

 

[JMO Fan]

All I know is that I've been told some companies, (NM) being one of them, pay less dividends on policies that have loans. I know it happens, I know what it's called - it's called Direct Recognition, I was wondering what the company's reason is for doing this. I think JMO Fan is probably correct.

Don't know about other companies but I know that Ohio National and NYL do not use Direct Recognition.

LGilmore-I am.

The fairness of Direct Recognition was debated when it was introduced in the 1970s. It's now a well-established practice for most par business. It means your dividends reduce if you have policy loans.

Some argue that it effectively raises the loan interest rate. I assume that's why some companies don't do it. But I don't know of any state that prohibits Direct Recognition.

 

[LGilmore]

"The amount borrowed from the cash value affects the amount of dividends you will receive."

My less than educated guess would be that since dividends are based on face amount and you via loan have reduced your face amount (DB- loans) your dividends would be less than a policy with no loan. Any nwesterners out there?

 

[James]

"The amount borrowed from the cash value affects the amount of dividends you will receive."

My less than educated guess would be that since dividends are based on face amount and you via loan have reduced your face amount (DB- loans) your dividends would be less than a policy with no loan. Any nwesterners out there?

Dividends are valued/set on profits of the Mutual then passed to members, the reasoning is that loans back in the 80's weren't paying nearly what other investments (of the mutual) were at the time. Back in the late 70's and early 80's the economy was seeing double digit interest rates. Now today with 5-8% being likely average interest being earned by Mutuals, one would think they could adjust the direct recognition since they are not losing any Value in policy loans compared to other investments they have.

Yet on the other hand, companies using direct recognition is likely to be paying dividends or interest higher then those that don't. Guardian is claiming nearly doubling the value of dividends since going to direct recognition. Let us not forget that NML, last I heard the highest paying Mutual out there, obviously for most of their clients this works out good.