What is my contract's adjusted cost basis, and where do I find it?

How it works

different timelines, different failures

Two questions inside a succession plan

1. A succession planThe two run on different timelines, and they fail in different ways.
2. Who will lead the businessA plan covering only leadership leaves the harder one open.
3. Who will own the businessThe ownership question is the one that is usually left open.

Two forces pull the figure in opposite directions. What you pay in raises it. What the coverage costs the insurer each year lowers it. Early on the first outweighs the second, so the figure grows; later the second outweighs the first, so it falls.

The insurer is the only party that actually tracks this figure, transaction by transaction, inside its own administration system, because the components that move it, the premium paid in and the net cost of pure insurance charged each year, are both numbers only the insurer calculates under the contract's own terms. A policyholder does not receive a running total on typical correspondence; the number appears, when it appears at all, on request or on specific documents such as a T5 slip triggered by a particular transaction. Anyone else, including a representative who did not issue the contract, is estimating rather than reporting when they state a figure, and an estimate is not the number a tax filing can rely on.

The pace at which the figure rises and falls is not the same from one contract to the next. It depends on the insurer's own cost of insurance schedule, which differs by company, on the amount and timing of premiums actually paid rather than merely scheduled, and on riders attached to the base contract, each of which can add its own charge against the same running total. Two contracts issued in the same year, for the same coverage amount, from two different insurers, can carry two different adjusted cost basis figures within a few years of being issued, for reasons that have nothing to do with either policyholder's choices. Riders such as a waiver of premium or an accidental death benefit each carry their own charge, layered on top of the base contract's own cost of insurance, and none of those layers is visible from the death benefit or the premium alone.

A corporately owned contract adds a further layer, since the corporation's own accounting records the premium separately from the insurer's own adjusted cost basis calculation, and the two are not always reconciled until the corporation's own adjusted cost basis question comes up at year end or at a sale. A personally owned contract has no such second layer, which is one of the few places where corporate and personal ownership genuinely diverge on this specific figure.

The cost or the catch

four rules that are frequently mixed up

Tax when a benefit is paid on death

1. 01A life insurance benefit reaches a named beneficiary untaxed
2. 02The public pension death benefit is taxable to the recipient
3. 03Employer death benefits are exempt up to a stated limit
4. 04Canada has no estate tax
5. 05The deemed disposition at death can still be large

The catch is timing. Because the figure moves, the tax result of ending a contract or drawing against it differs from one year to the next, and the difference can be large. Nobody outside the insurer can compute it, and asking in writing before acting is the whole protection.

Because only the insurer holds the current figure, a household planning a transaction around it is planning around a number it cannot independently verify in the meantime. A request made today can take days or weeks to be answered, and the figure it returns is only accurate as of the date it was calculated, not the date the eventual transaction actually happens. For a transaction with a tight deadline, such as a year end distribution or a filing date, that lag is itself part of the cost, and it is rarely mentioned until the request is already late. A request submitted the same week a transaction is meant to close is, in practice, a request submitted too late.

The annual statement does not solve this by itself. It reports the contract's values as of its own effective date, which is rarely the exact day a transaction actually happens, so even a household that reads its statement every year should still request a fresh figure before signing anything that depends on it, rather than working from last year's page.

What to ask, and of whom

Ask the insurer, in writing, for today's adjusted cost basis before any transaction that depends on it, rather than relying on a figure calculated for a different purpose months earlier. State the exact date the figure is needed for, since insurers calculate it as of a specific date rather than as a constantly updating live number. Confirm, too, whether the answer will arrive by mail, by a secure portal or by fax, since the slowest of the three is often the default unless a faster method is specifically requested.

For what a particular transaction will actually cost in tax once the figure is known, the question moves to a CPA, since the adjusted cost basis is only one input into that calculation and the applicable tax treatment depends on the kind of transaction, the taxpayer's other income for the year, and, where a corporation owns the contract, on further rules a CPA applies on top of the insurer's number. Ask, too, whether the figure quoted already reflects any pending premium not yet processed or any recent policy advance not yet recorded, since a figure calculated before either of those settles can be stale within days of being issued.

Who this affects most, and who it barely touches

the obligation is postponed, not removed

Tax deferred is not the same as untaxed

1. 01What the exemption givesNo annual taxation while the policy stays exempt; An exemption resting on Regulation 306.
2. 02What it does not giveRemoval of the obligation, which is postponed; Freedom from tax on a disposition or a surrender.

The figure matters most to anyone planning a surrender, a large policy advance, or a transfer of ownership, since each of those can be a taxable event measured against exactly this number. It matters far less to a household that intends to hold the contract until a death benefit is paid, since a death benefit is not measured against the adjusted cost basis in the same way a lifetime transaction is, and the figure's movement over decades has little bearing on that outcome. A corporation holding the contract sits between these two, since the same figure feeds into the corporation's own capital dividend account calculation at death, which is a separate and equally exact number only the insurer and the corporation's own accountant can finalize together.

It also matters more the longer a contract has been held, since the gap between the accumulated value and the adjusted cost basis tends to widen over decades as premiums taper relative to the coverage's own cost, and a contract only a year or two old rarely has enough of a gap for the distinction to change any practical decision yet. That is one more reason a figure quoted early in a contract's life should not be assumed to still apply much later.

What this page will not tell you

This page does not state your contract's current adjusted cost basis, and no general page could, since the figure is specific to one contract's own premium history, its cost of insurance charges and any riders attached to it. That number comes from the insurer alone, on request. What a particular transaction against that number would cost in tax is a question for a CPA, working from the insurer's figure and your own tax situation for the year, not from this page. It also does not say how quickly your own insurer typically responds to such a request, since response times vary by company and by season, and that, too, is a fact only the insurer itself can confirm.