What happens if the dividend scale goes down?

How it works

three omissions and one misplaced emphasis

Where a compound projection gets oversold

1. 01A constant rate is assumed where returns actually vary
2. 02Tax is left out of the arithmetic
3. 03Fees are left out of the arithmetic
4. 04Time matters more than rate for most households

A design that assumed distributions would carry the premium after a given year may then need premiums to continue. That is a change in what the household must pay rather than a change in what the contract guarantees.

The scale itself is set once a year by the insurer that issued the contract, not by the household and not by whoever sold it. An actuarial committee reviews the participating account's investment return, mortality experience, expense experience and lapse experience for the year just closed, and the board then approves a scale that applies to every participating contract in that block. That scale reaches an individual contract through the dividend option chosen at application. A household that elected paid up additions sees the reduction as smaller additions purchased that year, one that elected cash sees a smaller cheque or a smaller reduction in the amount otherwise due, and one that elected an addition offset intended to eventually eliminate premium sees that date pushed later. Nobody at the household's end of the file performs this calculation. The household only receives the result, on the annual statement.

The sequence, step by step, runs in this order. First, the insurer's participating account closes its financial year and the results are compiled. Second, the actuarial committee translates those results into a scale, expressed as a set of factors rather than a single percentage. Third, the board approves the scale for the coming period. Fourth, the insurer applies the approved scale to each in-force contract according to that contract's own age, risk class and dividend option. Fifth, and only at that point, the household sees the outcome on the next annual statement, well after the decision that produced it was made.

The cost or the catch

The real exposure is not the reduction itself but a plan that depended on the projected scale being met year after year. The test to apply before signing is whether the arrangement still works when only the guaranteed column is read. That same test belongs in the annual review of a contract already owned, and how do I review a policy I already own sets out what that review should include.

The bad news, stated plainly, is that a reduction compounds rather than standing alone. A smaller distribution buys fewer paid up additions this year, which means next year's scale, even if it holds steady, is applied to a smaller base and produces a smaller dollar amount again. A household whose plan assumed premiums would stop being paid out of pocket by a stated year can find that year arriving later than illustrated, or not arriving at all while the contract is held as designed. Resuming premium payments after a household had stopped them is administratively possible on many contracts, but it is a request made to the insurer, not a right assumed in advance, and it is easier to arrange while a payment is still being made than after one has already been missed. None of this means the contract has failed. It means a plan built around one column of an illustration has to be reread against the column that was always the promise, and that rereading is worth doing sooner rather than later.

What to ask before signing

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.

Asking the insurer how many years a plan would hold up if the scale stayed fixed at the guaranteed level alone, rather than the projected one, gives a measure of the real margin before a decrease forces payments to resume. This question belongs at the design stage, where the answer can still change the design itself.

Asking that same question again whenever a scale changes materially keeps the real margin current rather than resting on an answer given years earlier.

Recording the answer in writing makes it possible to reread it the following year without asking the same question again.

What changes the size of a reduction from one contract to another?

five components, each behaving differently

What a participating contract costs

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

Four things decide how a lower scale is actually felt. The insurer matters, since each company manages its own participating account and moves its own scale on its own timetable, so a reduction announced by one insurer says nothing about what another insurer will do. The dividend option recorded on the contract matters, for the reason described above. The contract's own wording and generation matter, since an older series can carry different guarantees and a different starting scale than a contract issued this year at the same insurer. The year in which a reduction lands matters too, because a scale that falls during a period of low investment returns behaves differently from one that falls after a change in mortality or expense assumptions. Two households holding what looks like the same contract can watch it respond differently once these four variables diverge.

What else is worth asking, and of whom?

The three questions already set out above belong at the point of signing. Once a contract is in force, the same questions belong to whoever conducts its annual review, addressed to the insurer directly rather than assumed from an old illustration. Asking for the current scale in writing, asking how it compares to the scale in force when the contract was issued, and asking what dividend option is presently recorded are three separate answers that rarely arrive in the same sentence. A household working with a Financial Security Advisor can ask that person to request all three from the insurer in one letter, so the answers can be compared side by side rather than gathered piecemeal over several calls.

Who does a scale reduction matter to most, and who barely notices it?

five products, one decision

The permanent and temporary contracts

1. 01Term, coverage for a fixed period and no cash value
2. 02Whole life, permanent with a guaranteed cash value
3. 03Participating whole life, which may receive dividends
4. 04Universal life, where the owner carries more of the decision
5. 05A life annuity, capital exchanged for income for life

It matters most to a household or a company whose funding plan already sits close to the edge of the illustrated column, since that plan has the least room to absorb a smaller distribution before a decision has to be made. It matters least to an owner who is paying, and intends to keep paying, the full contractual premium regardless of what the participating account produces, since the guaranteed values standing behind that premium do not move when a scale does. Between those two positions sits most households, for whom a reduction is noticeable on the statement but does not by itself force an immediate choice.

What this page will not tell you

This page does not say whether the scale currently in force on a specific contract is likely to hold, rise or fall again, since that judgment belongs to the insurer that declared it, not to a general explanation written for many contracts at once. It also does not say whether a particular design, once affected by a reduction, still serves the household or the company that holds it. That reading belongs to whoever reviews the contract against today's numbers, and where the contract sits inside a corporation, the tax consequences of any change belong to a CPA rather than to this page.