Glossary of Canadian Life Insurance Terms

This glossary defines the technical terms used across this site. Each entry states what the term means, where it appears in a contract or on an illustration, and which terms it is commonly confused with.

The vocabulary of participating life insurance, defined term by term

In an immediate financing arrangement the premium comes from the owner's capital first and the lender advances afterwards. Paragraph 20(1)(c) explains why.

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When one partner in a retired couple dies, income falls more than expected. Why the combined pension maximum leaves a survivor little, and how to size the gap.

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Owner, insured and beneficiary are three roles, not one. How a couple who owns rental property should set them, and what family patrimony reaches.

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A family financing system takes years to build. Learn why early policy costs matter, how to fund for an ordinary year, and when to wait before using it.

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Dividend options on a specially designed, high-cash-value, participating whole life insurance policy, and what each does to death benefit, cash value and tax.

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What a rating, a postponement and a decline each mean on a Canadian life insurance application, how a rating is priced, and what options remain afterwards.

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Withdrawal, policy loan or collateral loan: how section 148 of the Income Tax Act treats each way value leaves a participating contract in retirement.

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In Quebec, will verification replaces probate. What it establishes, its cost in delay rather than fees, and how the death benefit sits outside it.

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Opco or holdco as policyholder: which entity pays, who is named, where the capital dividend credit lands, and what a transfer does not promise.

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What personal finance covers, where the field came from, the five areas it spans, how to set your own priorities, and what changes once you understand it.

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Nine arguments made against using participating whole life insurance to hold capital, each stated at its strongest, and each given a plain verdict.

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Family Finance

Families face funding decisions across a lifetime, including education, a first home and emergency liquidity, and permanent insurance is one of several ways to hold capital for them, suited to some circumstances and not others.

Family Finance

Who owns a participating contract taken out on a child in Canada, what the owner controls that the child does not, and what changes when ownership transfers.

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In Winnipeg an ordinary income can own a house outright, which removes the usual estate problem and quietly exposes the different one sitting behind it.

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Terms are admitted here only once at least two articles need them. A definition that only one page uses belongs inside that page.

The terms

Adjusted cost basis. The tax cost of a policy to its owner, and the figure that decides how much of any amount taken out is taxable.

Capital Dividend Account. The notional account of a private corporation through which a death benefit can reach shareholders without income tax.

The exempt test. The calculation that decides whether a policy accumulates value without annual taxation, and the reason deposits are capped.

Dividend scale. The assumptions behind every non-guaranteed figure on a participating illustration.

Restricted financial vocabulary. The words Canadian law reserves when a business describes itself, and why this practice names its approach with its own mark.

Why this section is not indexed

A glossary competes with the articles that define the same terms in context. It is kept here for readers who arrive at a word they do not recognise, and it is not offered to search engines as an alternative to the pages that do the teaching.

How these entries are written

Each states what the term means, in one sentence, before anything else.

Then where it appears in a contract or on an illustration, because a reader who meets a term has usually met it on a document rather than in the abstract.

Then what it is commonly confused with, since most of the difficulty in this subject is two similar words carrying different consequences.

And which articles use it, so a reader can return to the page that does the teaching rather than staying in a list of definitions.

What a glossary cannot do

It cannot tell you whether any of this suits you. A definition is context-free by design, and every question worth deciding depends on facts about a household that no definition contains.

Nor is it a substitute for the contract. Where a definition here and a policy differ, the policy governs, and the definitions are written to help a reader understand their own document rather than to replace it.

Why terms are admitted slowly

A glossary assembled ahead of the content it serves is a keyword list.

Entries appear here only once at least two articles need them, and each runs to enough length to be worth a reader's time. A definition that only one page uses belongs inside that page, where it has the context that makes it usable.

Which means this section will stay small. Most of the terms on this site are explained where they arise, in the article that needed them, and that is the better place for them. The four here earned separate pages because they recur across sections and because readers meet them on documents before they meet them in an argument.

If a term you need is missing

It is probably defined inside an article. The search on this site covers the full text of every page, and the term will usually be found in the first paragraph of the section that uses it.

And if it is genuinely absent, that is worth telling us. The contact details are at the foot of every page, and a term that a reader had to look elsewhere for is a gap in the writing rather than in the glossary.

Where these terms come from

All four are Canadian. The adjusted cost basis and the exempt test come from the Income Tax Act and its regulations. The Capital Dividend Account is a provision of the same Act applying to private corporations. The dividend scale is an insurer's own construct rather than a statutory one.

None transfers from American material. The United States uses a different regime for the same underlying questions, and a reader who arrived here from an American article about modified endowment contracts or section 7702 has been reading about rules that do not apply.

Which is part of why the entries exist. Most of the freely available writing on these subjects is American, the vocabulary overlaps enough to be misleading, and a Canadian reader can spend a long time absorbing a framework that will not describe their own contract.

The order worth reading them in

The exempt test first, because it explains why a Canadian policy is shaped the way it is and why deposits are capped.

Then the adjusted cost basis, which decides what any of the value costs to reach.

Then the dividend scale, which governs everything on an illustration that is not guaranteed.

And the Capital Dividend Account last, since it applies only where a corporation owns the contract and is the narrowest of the four.

A thirty-minute discovery meeting

A first conversation establishes whether this fits. No illustration is prepared and nothing is arranged.

Often the answer is no, and you will hear it during the call rather than in a proposal afterwards.

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Common questions

Why does this glossary only contain four terms?

Because a term is admitted only once at least two articles need it. A definition that a single page uses belongs inside that page, where the surrounding context makes it usable, and a glossary assembled ahead of the writing it serves is a keyword list rather than a reference. The four here earned separate entries because they recur across several sections of the site and because readers meet them on documents before they meet them in an argument. The section will stay small on purpose. Most terms on this site are explained where they arise, and lifting them into a list would strip out the part that made them understandable.

Does an American life insurance glossary apply in Canada?

No, and the overlap in vocabulary is what makes American material misleading rather than merely irrelevant. The adjusted cost basis and the exempt test come from the Income Tax Act and its regulations, and the Capital Dividend Account is a provision of the same Act applying to private corporations. The United States handles the same underlying questions through a different regime, so a reader who arrived from an article about modified endowment contracts or section 7702 has been absorbing rules that will not describe their own contract. Since most freely available writing on these subjects is American, a Canadian reader can spend a long time learning the wrong framework.

What do I do if the term I need is not in this glossary?

It is probably defined inside an article rather than genuinely missing. The search on this site covers the full text of every page, and a term is usually explained in the first paragraph of the section that needed it, which is a better place to meet it than a list. Where a term really is absent, that is a gap in the writing rather than in the glossary, and it is worth telling us through the contact details at the foot of every page. The distinction is practical. A definition read alone tells you what a word means, while the article tells you what the word does to a decision.

If a definition here and my policy disagree, which one governs?

The policy governs, without exception. These definitions are written to help a reader understand a document they already hold, not to replace it, and where the wording of a contract differs from the description here it is the contract an insurer and a court will apply. Contracts also differ between insurers and between generations of the same product, so a term can carry a narrower or wider meaning in your policy than a general definition suggests. Read the entry for orientation, then find the same term in your own contract and read what it says there. Where the two appear to conflict, ask the insurer to explain the difference in writing.

In what order should I read these entries?

The exempt test first, because it explains why a Canadian policy is shaped the way it is and why deposits into one are capped. Then the adjusted cost basis, which decides what reaching any of the value actually costs. Then the dividend scale, which governs everything on an illustration that is not guaranteed. The Capital Dividend Account last, since it applies only where a corporation owns the contract and is the narrowest of the four. Read out of order the entries still work on their own, but the dependencies run in that direction, and each one answers a question raised by the one before it.

Which of these terms are set by law and which are set by the insurer?

Three of the four are statutory and one is not. The exempt test sits in the Income Tax Regulations, the adjusted cost basis in the Income Tax Act, and the Capital Dividend Account in the same Act as a provision for private corporations. The dividend scale is an insurer's own construct: no statute sets it, a board declares it annually, and it can move. The distinction matters whenever someone tells you a figure will hold. A statutory rule changes when Parliament changes it. A company practice changes when a board decides it must, which is a different kind of certainty and deserves to be weighed differently.

Why is a definition not enough to decide anything?

Because a definition is context-free by design, and every question worth deciding turns on facts about a household that no definition contains. Knowing what the adjusted cost basis is does not tell you what yours is. Knowing how the exempt test works does not tell you how much room your contract has left. These entries are written to make a document readable, not to produce a conclusion. The failure mode is familiar: a reader learns the vocabulary, reaches a decision from it, and never checks the specific figures with the insurer or the tax consequence with an accountant who has the actual numbers.

Where do these terms appear on my policy documents?

Mostly somewhere other than the illustration you were first shown. The dividend scale sits behind every non-guaranteed column on that illustration without being named on it. The adjusted cost basis is tracked by the insurer and rarely printed on an annual statement, though an owner can request it. The exempt test is performed on each anniversary and the owner never sees the calculation, only its effects. The Capital Dividend Account appears in corporate tax records rather than in the policy at all. That is the pattern worth noticing: the figures deciding the tax outcome are generally the ones the owner is never handed.

Last reviewed 2026-08-21.