Direct recognition is a strategy that insurance companies employ to deal with the loaned cash values of life insurance policies. Unlike non-direct recognition, earning rates can be either negatively or positively affected when the cash value is used collateral for a loan under a direct recognition scheme.
Essentially, life insurance companies that offer dividends and who use a direct recognition method acknowledge when a loan is taken out against the cash value of a policy. This acknowledgement can have an impact on the dividend amount that a policyholder receives (often reducing it).
Not all life insurance companies do this, however. Some prefer to use non-direct recognition, and keep the dividend amounts the same, whether a loan is taken out against the policy or not.
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