With regard to direct vs non-direct recognition, I was told that while with non-direct recognition I can take a loan out on my policy, but will still be payed a dividend on the entire amount. I was told that with direct recognition (like NWM) it allows to company to ultimately pay higher dividends.
If that is the case, is there any way of figuring out about how much more a direct recognition company could pay?
Additionally, with a non-direct recognition company, when I take out a loan on my cash value, what is a common interest rate will I typically have to pay out of my own money?
The NWM agent said that with NWM all loans are taken out at an 8% interest rate, then they credit you back 7.5%, so ultimately I am paying 0.5% to take a loan out on my own money. How does this usually work with a non-direct recognition company?
The current loan interest rate at ONL is 4.40% and is variable tied to the Moody's Corporate Bond Index (this is standard among variable rate carriers).
So, the policy loan will have interest due of 4.40% per year while paying the declared dividend rate on the portion of the policy that is pledged as collateral for the loan, currently 6.15%.
As you've noted Northwestern uses direct recognition which allows NML to adjust the dividend. Currently the fixed loan rate at NML is higher than the dividend interest rate and they pay a higher dividend rate on portions pledged as collateral for a loan. They contractually guarantee it to be a 50bps below the loan interest rate. They will pay their regular dividend rate on non pledged portions, currently 5.60%
If NML had a dividend interest rate that was higher than 8%, this would cause direct recognition to lower the dividends paid on portions pledged as collateral for a loan.
Do not make the assumption that ONL's 615% dividend interest rate is better than NML's 5.60% dividend interest rate.
This rate is paid off the policy reserve, it's similar to the cash surrender value, but not necessarily the same.