Is he WRONG about borrowing against policy and compounding?

[SParker]

Hi All, am new to this, trying to learn as much as possible about permanent Life products.

Came across this video that talks about policy loan against a permament life policy



About 1 min into the video, he talks about the following for those who are borrowing against the policy, he said:

"....if you look at the statement and the Net Surrender Value will be lower if you had $100K in cash value and say if you borrow $80K, it may show up as you only have $20 in Net Surrender Value but actually the full balance will still compound for you including the amount you borrowed."

Is it true that the Loan you borrowed will continue to compound for you in the policy as if you had not taken out the loan ? I recall (thought not 100% sure) seeing an illustration that shows a drop in dividend after borrowing....which is the opposite of what the above video suggests.

Thanks

 

[DHK]

Direct recognition vs non-direct recognition.

 

[SParker]

Ah, thank you!

 

[Lloyds of Lubbock]

I recall (thought not 100% sure) seeing an illustration that shows a drop in dividend after borrowing....which is the opposite of what the above video suggests.
A Direct recognition loan has not caused a dividend to be lower for over 10 years.
Direct Recognition has paid a higher dividend in the current low interest rate environment.
Now if you look at a policy (Guardian) that lowers the loan rate at age 65 and 20 years to be 4%, this will result in a lower dividend.
I forget where it is on Penn"s website but they have a great video on Direct Recognition.
Love the dog!

 

[SParker]

Thanks Lloyds.

NDR sure looks superior on paper, is there a catch? There is always a trade off with one option vs another in the financial world. Are there circumstances where it makes more sense to have a DR participating whole life policy?

 

[Lloyds of Lubbock]

Penn is direct recognition, they look great.
Guardian gives you a choice, NML and Penn do not.
10 years ago NML killed the market on illustrative values, today not so much.
Dont make the mistake of thinking variable loan interest rates never surpassed dividend crediting rates, they have.
Guardian has a 4% guaranteed loan rate at the age of 65 and policy inforce for 20 years.
This could be attractive but interest rates were to spike, not so much.
The point is, DR or NDR is is not a deal maker or breaker.
If you are going to buy a policy based on the illustration, it probably will not live up to your expectations.
I think any whole life you buy from a mutual (not MHC) will turn out to be a good purchase for you.
You are beating a dead horse at this point.

 

[scagnt83]

Some DR policies (such as Guardian) still credit a smaller Dividend to the Loaned Values. Its just not the same Dividend the rest of the policy receives. I think Mass's DR option is like that as well.... cant remember off the top of my head right now. Many of the top mutuals are like that, its a reduced Dividend, but it's not something they talk about a whole lot.

 

[DHK]

Mass has non-direct recognition when taking a variable interest loan. Otherwise it's direct recognition for a fixed interest rate loan.

 

[Lloyds of Lubbock]

It is not a reduced dividend.
Guardian on older policies uses an 8% loan rate.
They have a 100 basis point spread giving you dividend rate of 7%, higher than the current 5.65.
NML uses a rate of 8 with a 75 basis point spread. Their dividend crediting rate on loaned money is 7.25 considerably higher than their non loaned rate.
Direct Rec got iit's bad press when dividends were above 8%, then you got a reduced dividend.
In a low interest rate environment Direct Recignition produces a higher dividend on loaned money.
The whole theory of direct recognition of a mutual company is that loans should be self supported.
If interest rates are high a loan theorticall would bring down the yield of the portfolio, so loaned values get a lower dividend t be self supporting.
In a low interest rate environment a loan is a good thing for the company so the dividend crediting is higher.
If you are dealing wiyth an agent who says direct recognition pays smaller dividends...find another agent.

 

[Lloyds of Lubbock]

file:///C:/Users/User/Downloads/Pub4615+FAQ-+Loan+Interest+and+Direct+Recognition.pdf
The article is not current but read the bottom line