Am I a shareholder of the insurance company when I own a participating policy?

How it works

A participating policy is a life insurance contract that is eligible to share in the experience of a pool the insurer keeps apart from the rest of its business, called the participating account. Owning such a contract gives you rights under the contract: the guaranteed values written into it, the death benefit, the loan provisions, and eligibility for whatever policy dividends the insurer declares from that account. None of those rights is a share of the company that issued the contract.

A share is a unit of ownership in a corporation's capital. A shareholder supplies equity, stands last in line if the company is wound up, and is entitled to whatever remains after every creditor and every policyholder has been paid. A policyowner stands somewhere else entirely. Under the contract the insurer owes you its guaranteed obligations, which places you closer to a creditor of the company than to an owner of its capital, and a policy dividend is a return of part of the participating account's favourable experience, not a distribution of corporate profit to investors.

Two kinds of insurer, two kinds of relationship

the cost that never appears on a statement

Opportunity cost, and why it stays invisible

1. The value of the alternative you gave up
2. The one real cost that never appears on a statement
3. A comparison is incomplete until the alternative is named
4. Every decision about capital carries one

Canadian life insurers are organized in one of two ways, and the answer sharpens depending on which kind issued your contract.

A mutual company has no share capital at all. There is nobody holding shares, so the people with an ownership interest are its participating policyowners. As a participating policyowner of a mutual you hold a membership in the company, with the voting rights its bylaws and the governing legislation provide, which generally include voting at meetings of members and taking part in electing directors. That membership is real, but it is not a share. It carries no capital, no market value and no claim on the company's surplus beyond what the board declares to the participating account.

A stock company, by contrast, is owned by its shareholders. Many stock companies also issue participating contracts and are required to keep a separate participating account for them. If a stock company issued your participating policy, you are a policyowner with contractual rights and eligibility for policy dividends, but you are not a member and not an owner of the company. The shareholders own it. You are one of the people it serves under contract.

Several of the largest Canadian life insurers are stock companies today. A smaller number remain mutual. Which kind issued a given contract is a matter of public record, and it is the first fact to establish before relying on anything said about ownership.

How the participating account is kept apart

Whichever form the company takes, the participating account is a separate ledger inside it. Premiums from participating contracts go in, and the claims, expenses and investment results attributable to those contracts are recorded against it. The board declares policy dividends from that account's experience, following a written dividend policy, and the legislation limits how much of the account's earnings can be moved to the company's shareholders where there are any. The separation is what gives a participating policyowner something to participate in. It does not turn the policyowner into an owner of the account's assets, which remain the insurer's assets, held to meet the insurer's obligations to every policyholder.

The cost or the catch

planning one leaves the other open

Two halves of an owner's retirement

1. 01No pension and no employer match
2. 02Most of the wealth sits in one illiquid asset
3. 03Building assets outside the business
4. 04Arranging an exit that turns the business into money
5. 05Planning only one half leaves the harder one open

The misunderstanding is not harmless. A reader who believes a participating policy makes them a part owner of the insurer may expect what a shareholder has: a stake that grows with the company, and the ability to sell that stake to someone else. Neither exists. A reader who believes policy dividends work like shareholder dividends may also assume they rise with the company's profits. They do not track corporate profit. They reflect the experience of the participating account, measured on mortality, expenses and investment results, and they are declared, not guaranteed.

The other catch runs the opposite way. Being a policyowner rather than a shareholder is not a lesser position in every respect. In the order of payment, the insurer's obligations to its policyholders rank ahead of its shareholders' equity. Equity absorbs the first loss. That is why the role is described elsewhere on this site as the Participant, what a bank calls its shareholder, rather than as a shareholder: it shares in results without carrying the first loss the way equity does.

Where the confusion comes from

what a rider actually buys

The paid-up additions rider

1. 01A small block of fully paid whole life coverage
2. 02Bought with a declared dividend or an extra deposit
3. 03It needs no further premium once it is purchased
4. 04It adds to both cash value and death benefit
5. 05The rider carries a maximum set by the exempt test

Part of it is vocabulary. The same word, dividend, names a distribution to shareholders and a distribution to participating policyowners, although the two come from different sources and mean different things. French keeps them apart more clearly, calling the policy distribution a participation rather than a dividende. Part of it is loose description, where a participating policyowner is called an owner of the company without any mention of which kind of company, or of what kind of ownership. And part of it is history. When several large Canadian mutuals converted into stock companies around the turn of the century, eligible policyowners received shares or cash at that moment, which led some people to assume that a participating policy always carries a share entitlement. It does not.

What changes if a mutual converts

When a mutual becomes a stock company, a process called demutualization, the members' ownership interest ends and eligible policyowners are compensated under a conversion plan that the legislation requires to be approved before it takes effect, usually with shares, cash or additional policy benefits. That is a single event governed by statute, not a feature of the policy and not something a policyowner can trigger. After it, the contract continues with the same guaranteed values, and the participating account continues to be managed for the participating policyowners, but the company is owned by shareholders from then on.

What to ask, and of whom

a pooled account, managed by the insurer

What stands behind a participating contract

1. 01A participating contractOne account stands behind every contract of this class.
2. 02Premiums are pooledInto one account, not one of your own.
3. 03The insurer manages itInvestment, claims and expenses run through it.
4. 04Policyholders may share in the resultWhat the account earns after claims and expenses.
5. 05The share is declared annuallyAt the board's discretion, and never guaranteed.

Ask the insurer, or the licensed professional presenting the contract, three questions and ask for the answers in writing. Is the issuing company a mutual company or a stock company? If it is a mutual, what membership rights does a participating policyowner hold under its bylaws, and how are those rights exercised in practice? And where are its participating account management policy and its policy dividend policy published? Insurers maintain these documents, and a participating policyowner is entitled to ask for them.

Who this matters to most, and least

It matters most to a reader who has been told that buying a participating policy means owning the insurer, and to anyone comparing a participating contract with an investment on the basis of ownership. It also matters to anyone who expects policy dividends to follow the insurer's share price or published earnings. It matters least to a household buying the contract for its guaranteed values and its death benefit, for whom the membership question changes nothing in the contract itself.

What this page will not tell you

This page explains the difference between a shareholder and a participating policyowner in general terms. It cannot tell you the membership rights set out in a particular company's bylaws, the terms of any past or future conversion, or which company suits your situation. Those answers are in the company's own documents and in advice given for your circumstances.