Are participating policy dividends guaranteed?

How it works

What is guaranteed is set out in the policy schedule at issue: a guaranteed cash value and a guaranteed death benefit. Those are contractual obligations of the issuing insurer rather than a government guarantee, and they depend on that insurer's financial strength.

The cost or the catch

and what it ends

What a surrender actually pays

1. 01The accumulated cash valueWhat the contract holds.
2. 02Less any surrender chargeProvided by the contract.
3. 03Less anything outstandingOn an advance, with the interest on it.
4. 04What reaches youAny amount above the adjusted cost basis is taxable.

Canadian policyholders of a failed member company have protection through Assuris within its published limits. Anything above the guaranteed figures is a projection, so a plan that only works while the scale holds is a plan resting on a discretionary decision.

What to verify

and what does not change at all

What changes from one province to another

1. 01The regulator that licenses the agent
2. 02The titles an advisor may lawfully use
3. 03The cost of settling an estate
4. 04The contract itself does not change
5. 05The federal tax treatment does not change

The annual statement separates the two columns: the guaranteed value written into the contract and the value that depends on the declared scale. A policyholder who reads only the combined total does not see where the contractual promise ends and where an assumption begins. Asking for the guaranteed column on its own, apart from everything else, is the fastest way to know what a contract actually owes.

Where the amount actually comes from

A participating dividend is not a share of the insurer's general corporate profit the way a shareholder dividend is. It is a distribution the insurer's board declares out of the experience recorded inside a segregated participating account, an account that pools the premiums, claims and investment results of every participating contract the insurer has issued, measured against the assumptions the insurer priced into those contracts at issue. Where that account's actual experience on mortality, investment returns, expenses and lapses runs more favourably than the pricing assumptions, the surplus is available to distribute; where it runs less favourably, the amount available shrinks, and the board is under no contractual obligation to distribute anything at all in a given year.

The board's decision is made once a year, applies to the whole block of participating business at once, and is communicated to policyholders as a revised scale rather than as an explanation of which of the four experience factors moved and by how much. A policyholder is told the new scale, not the reasoning behind it, which is one reason the figure can look arbitrary even when it is the product of a defined internal process.

The insurer's own actuaries recommend the scale to the board based on the account's experience, but the recommendation is not the same as an audited public disclosure of that experience broken down factor by factor, and a policyholder has no independent way to check the recommendation against the underlying account without relying on the insurer's own reporting. This is not unusual among Canadian participating insurers and is not, on its own, a sign of anything irregular; it simply means the scale is the output of an internal process a policyholder is asked to trust rather than a figure the policyholder can recompute from public data.

What varies by insurer, and what does not

conceded before anything is answered

What the critics get right

1. 01Early cash value is low against the premium paid
2. 02The commitment is long and costly to abandon
3. 03Costs are not disclosed line by line
4. 04A household without durable surplus has cheaper places to hold money
5. 05The comparison usually offered is the wrong comparison

The size and composition of the participating account, the insurer's own expense management, and the mix of contract generations inside that account all differ from one insurer to the next, which is why two insurers can declare different scales in the same year even when both are managing the same broad economic conditions. Within a single insurer, older blocks of business and newer blocks are sometimes credited differently as well, since a block written decades ago carries different pricing assumptions than a block written last year, and the board's declaration can treat them as separate pools rather than as one.

What does not vary is the province in which the policyholder lives. The scale is a decision made once for the whole participating account, and provincial insurance regulation, which governs how the contract itself is sold and administered, has no role in setting or approving the figure. A household that moves between provinces carries the same scale its contract already had; nothing about the declaration changes at a provincial border.

What to ask, and of whom

read one illustration as two documents

What is guaranteed, and what is not

1. Cash valueGuaranteed: Set out in the schedule at issue. Not guaranteed: Projected totals, which assume the current scale holds.
2. Death benefitGuaranteed: Guaranteed, subject to the contract terms. Not guaranteed: Anything the declared dividends add to it.
3. The annual decisionGuaranteed: A level premium, fixed by the contract. Not guaranteed: Dividends, declared annually and never guaranteed.

An insurer will typically provide, on request, the history of scale changes it has declared over a stated period, and a policyholder comparing two proposals should ask for that history from each insurer before assuming that a scale quoted today says anything about where either insurer's scale is headed. It is also worth asking, in writing, how a scale reduction affects paid up additions already purchased with earlier participations, since the coverage those earlier additions bought is itself a form of insurance already in force and is treated differently from participations not yet declared or not yet used to buy anything at all.

A question fewer households think to ask is what portion of the current scale reflects investment results specifically, as opposed to mortality or expense experience, since a scale built heavily on one factor can be more exposed to a single kind of change than a scale drawing more evenly from all four, though the insurer's public disclosures on that breakdown vary and a straight answer is not always available for the asking. It is reasonable to ask the same question again at each annual review rather than once at issue, since the mix behind the scale can shift over the years even when the headline figure itself does not appear to move.

Who this matters to most, and who it matters to least

The distinction between the guaranteed and the declared portions of the contract matters most to a household counting on the non guaranteed layer to do specific work, whether that is accelerating the pace at which paid up coverage builds or reducing what the household expects to pay out of pocket in later years, since both of those plans depend on a scale the insurer is free to revise. It matters comparatively little to a household that bought the contract purely for the guaranteed death benefit and has no plan built around the participating side at all, since for that household the contractual guarantee was always the only figure doing the actual work the contract was bought to do, and a change to the scale in either direction changes nothing about whether that guarantee is paid.

What this page will not tell you

This page describes how a participating dividend is decided and what protects a policyholder if the issuing insurer itself fails. It cannot tell a household whether a specific insurer's scale is more or less likely to hold over the coming decades, since that judgment depends on information no page can hold in advance and is properly the subject of ongoing review with the licensed representative on the file rather than a one time reading of a single statement. Where a household wants an independent reading of how a contract's guaranteed and non guaranteed columns actually compare, without relying on the same office that sold the contract in the first place, should I get a second opinion on a policy I already own sets out how that review works.