What is the difference between a dividend scale and an interest rate?

How it works

the designation exists to avoid the estate

Why a contingent beneficiary matters

1. 01What happens to the proceeds if the primary beneficiary cannot receive them?
2. 02They receive the proceedsA contingent is named. The designation carries the proceeds past the estate.
3. 03The proceeds generally fall into the estateNo contingent is named. An estate exposes them to delay and cost, and creditors of the estate may then reach them.

A rate has one input and one output. Take the balance, apply the percentage, read the credit. A scale has neither. It is a set of factors the actuary uses to allocate what the pooled account produced last year, and the allocation runs through your contract's size, issue year and design. Whatever the scale turns out to be, the premium itself still falls due, and who pays the premium if I become disabled explains who covers it when a policyholder cannot.

The declaration itself is made once a year by the insurer's board of directors, acting on a recommendation from the appointed actuary who oversees the participating account. That recommendation follows a closed and audited year of results, so the scale used on your next statement was set only after the year it describes had already ended. The actuary applies what is usually called the contribution principle, which tries to return each block of contracts roughly what that block contributed to the surplus, rather than pooling every contract issued in different years into one figure. That is why a scale described in a single sentence in the news still reaches different contracts differently, and why the sentence and the statement can both be accurate at once. A statement that only shows the resulting dollar amount, without stating the scale itself as a percentage of face amount or as a factor applied to paid up additions, does not by itself tell you which of these two mechanisms produced the figure printed on the page, and that is worth noticing the first time an annual statement is opened.

The cost or the catch

five components, each behaving differently

What a participating contract costs

1. 01The mortality chargeBuys the death benefit.
2. 02CompensationWeighted to the first year.
3. 03Policy and administration feesGenerally stated.
4. 04Provincial premium taxAlmost nobody mentions it.
5. 05Loan interestOnly if capital is actually accessed.

The cost of the confusion is that two contracts under one declared figure receive different amounts, and an owner expecting the percentage on their value reads the statement as a shortfall. No arithmetic outside the company can check it either, which is a reason to treat the guaranteed schedule as the verifiable part. Confirming which of the two a given statement is actually describing costs nothing beyond a phone call to whoever administers the contract, and it settles the question faster than any amount of comparing statements against each other.

The scale is also not a promise about the future. It can be raised or lowered from one year to the next, and an insurer that lowers it is not breaching the contract, because nothing in the contract fixes that number. An illustration prepared at application uses a scale that was current on the day it was printed, and every page of a compliant illustration states as much, yet the assumption is easy to forget once the paperwork is filed away. A household that plans around the illustrated column rather than the guaranteed one is planning around a figure the insurer remains free to change, and the years in which that figure moves downward are rarely announced with the same attention a favourable year receives.

What to ask for

Asking the insurer for the scale applied to your own contract, rather than a figure announced for the company as a whole, gives the one number that actually describes what your statement will show. Two contracts issued the same year by the same insurer can receive different allocations depending on their design, which makes comparing one policyholder against another less useful than reading one's own statement.

Asking the same question again after a change is announced, rather than assuming the announced figure applies uniformly, catches a reduction that might otherwise only show up as a smaller number on next year's statement with no explanation attached. An advisor with access to the insurer's in force illustration system can usually produce a current in force illustration on request, showing the scale as it stands today rather than the one printed when the contract was issued, and that document is worth requesting every few years whether or not anything seems wrong. Putting the request in writing, and keeping the reply with the rest of the contract's paperwork, means the answer does not depend on remembering a conversation from several years earlier when the same question comes up again.

What causes the scale to move

five products, one decision

The permanent and temporary contracts

1. Term, coverage for a fixed period and no cash value
2. Whole life, permanent with a guaranteed cash value
3. Participating whole life, which may receive dividends
4. Universal life, where the owner carries more of the decision
5. A life annuity, capital exchanged for income for life

Three broad sources of experience feed the number: the yield earned on the assets backing the participating account, the mortality and morbidity experience of everyone insured in it, and the expenses of running the block, including lapses. A year of higher investment returns does not automatically raise the scale by the same amount, because the insurer typically smooths the figure over several years rather than passing a single good or bad year through in full. That smoothing is a design choice made by the company, not a rule fixed by legislation, and different insurers smooth over different periods, none of which is disclosed in a marketing brochure and all of which sits in the actuarial memorandum the company files with its regulator rather than in anything sent to a policyholder.

Province plays almost no role in the calculation itself, since the participating account is not divided by province of residence. What does matter is which block of business your contract belongs to, and insurers can and do run more than one block with more than one scale in force at the same time, often tied to the era in which the underlying contracts were designed. A contract issued decades ago under an older design may carry a different scale from one issued last year under a current one, even inside the same company, and neither owner has grounds to expect the other's figure simply because both hold a contract with the same insurer's name on it.

Who this matters to most

where the structure usually goes wrong

Corporate-owned life insurance

1. 01The company owns the contract and pays the premium
2. 02Premiums are generally not deductible
3. 03The advantage lies in the rate the premium was funded at
4. 04A benefit received credits the Capital Dividend Account
5. 05Ownership and beneficiary structure is where it fails

The distinction matters most to an owner who has been paying into a contract for many years and holds a meaningful balance in paid up additions, since the annual allocation is what buys those additions and a change in the scale changes how much each year's allocation buys. It matters least to someone in the first year or two of a new contract, where the guaranteed schedule still accounts for most of the value and the allocation from surplus is a small piece of a small figure, so a change in the scale in either direction is barely visible against the guaranteed values the contract already owes.

It also matters more to a household using the contract's cash value as part of a broader plan than to one holding it purely for the death benefit, because a plan that assumes a certain pace of growth is more exposed to a change in the figure driving that pace. Neither position is wrong. They simply call for reading the annual statement with different questions in mind, and for keeping that reading as a habit rather than a once off exercise done only in the year the contract was issued.

What this page will not tell you

This page does not tell you whether a given scale is generous or thin for the type of contract you hold, because that judgment depends on the contract's design, its guaranteed schedule and the assumptions used at issue, none of which a general answer can see. It also does not evaluate whether the scale currently declared by your insurer is a reasonable one, since that requires access to the actuarial memorandum behind it, a document written for a regulator and not published for a policyholder to compare against another company's.

The professional positioned to answer both questions is whoever currently administers your file at the insurer, or an advisor with access to that insurer's in force illustration tools, and the annual statement itself remains the one document that shows what actually happened to your contract rather than what a general description can promise. A question about whether a particular scale, once known, changes what a household should be doing with the contract belongs to that same conversation, since this page describes the mechanism rather than advising on what to do about it.