Whole Life Policies have been around for decades and are considered to be the most conservative type of Permanent Insurance that you can buy.
And since more clients are searching for low risk, conservative insurance products with stable returns, Whole Life sales have been on the rise and producers are positioning these plans as a way to deliver their clients tax-favored income.
As a producer, it is your responsibility to educate your client about how the withdrawals and policy loans can affect their policy.
Simply put, direct recognition refers to the carrier crediting a different dividend rate to the outstanding policy loan than they do to the non-loaned portion of the policy. This is important, especially in short pay schedules where the policy will rely on dividend performance and internal cash value to sustain the policy performance long-term.
If the dividend performance falls short of the anticipated schedule because of a considerable policy loan and the policy is not being reviewed on a regular basis, the client runs the risk of lapsing the plan and receiving a tax bill for any gains in the outstanding policy loan.
While direct recognition is not reason enough to sell away from Whole Life, it’s important to understand this aspect of the policy. Remember that maintaining contact with your client post-sale and periodically reviewing their plan to ensure the policy is in good standing and will not lapse unexpectedly is key.
Our Sales Team can help you to better understand the different loan options available and determine whether direct recognition will be applied to the Whole Life policy in question.
If you have sold a Whole Life policy where the client will likely take income out of the plan, call us today and we can help you to better understand how the loan will affect the dividend crediting and also the long-term policy performance.