Does Cash Value Grow Whatever the Markets Do? How the Participating Account Works

A presenter puts up a chart. One line zigzags: the stock market, up and down for twenty years. Another climbs in a smooth curve: the cash value of a participating whole life policy. "Your cash value grows every day," the presenter says, "whatever the markets do."

Many participating policies really do show a curve like that. But the sentence explains it badly, and a family that believes it will misunderstand the policy it owns.

Part of that curve is a promise written into the contract. Part of it is the result of an insurer's investment portfolio, passed through slowly. The two look the same on a chart. They are not the same in a bad decade.

Why does this matter? Because a family that buys a participating policy is relying on two different things at once, and it deserves to know which is which. The guaranteed values are a contractual obligation of the insurer. The dividends are a share in the results of a pool of assets the family does not see, managed by people it will never meet, under rules most owners never read. When markets fall or interest rates stay low for years, the first part holds and the second part moves. A family that understood this at the start is calm when its dividend falls. A family that was told "whatever the markets do" feels misled, and may make a costly decision, such as surrendering in the early years, at the worst moment.

This is one of the sixteen statements examined on seminar claims about participating policies, checked. That page gives a short verdict. This one opens the machine.

It starts with the account behind the dividend.

What does "your cash value grows every day, whatever the markets do" actually claim?

It makes two claims at once. The first, that the guaranteed cash values follow the contract and do not move with markets, is accurate. The second, that all of the policy's growth is insulated from markets, is not. Dividends come from the insurer's participating account, and that account's results do depend on interest rates and markets.

A participating whole life policy grows in two layers.

The first layer is the guaranteed schedule. The contract contains a table of guaranteed cash values, year by year. Those numbers are fixed when the policy is issued. They do not depend on the stock market, the bond market or the economy. They depend on the premiums being paid and on the insurer being able to pay what it owes.

The second layer is what dividends add. Each year, the insurer's board may declare a dividend. Depending on the option the owner chose, that dividend may buy paid-up additions, which carry their own cash value and death benefit, or it may be paid in cash, left on deposit with the insurer, or used to reduce premiums. In a policy designed to accumulate value, much of the growth people point to after the early years comes from this second layer.

So the claim is right about the floor and wrong about the ceiling. The floor does not move with markets. What is built on it does, more slowly than the markets themselves, but it does.

The rest of this page explains why.

What is the participating account?

It is a separate set of accounts an insurer keeps for its participating policies. Premiums from those policies, a share of investment income and losses, and a share of expenses are recorded in it. Claims and dividends are paid from it. It belongs to the insurer; the policyowner owns a contract, not a share of its assets.

Think of it as the ledger of a large, shared arrangement. Participating policies are priced on cautious assumptions about investment returns, deaths and expenses, and those assumptions produce the guaranteed values. Each year, the insurer compares what happened with what it assumed. When experience is better, a surplus arises, and part of it can be returned to participating policyholders as dividends.

Three sources of experience feed that comparison:

1. Investment results. What the assets supporting the account actually earned, compared with what pricing assumed.
2. Mortality. Whether insured people died earlier or later than assumed.
3. Expenses and lapses. What the insurer actually spent, and how many owners kept their policies, compared with assumptions.

How much each source contributes differs by insurer, and OSFI asks every insurer to disclose the approximate share of its dividends based on investment experience. Investment results are where markets and interest rates enter. That is exactly why they matter to dividends, and why the phrase "whatever the markets do" cannot describe the whole policy.

Here is the distinction that matters most. The participating account's assets belong to the insurer. A participating policyowner does not own units of a fund and cannot point to a share of the bonds. The owner holds a contract: guaranteed values, a guaranteed death benefit, and a right to participate in dividends the board declares. A participating policy is life insurance first, as the Autorité des marchés financiers puts it. It is not an investment account, and its premiums are not deposits.

How participating and non-participating policies compare is set out on participating and non-participating whole life insurance. How mutual and shareholder-owned insurers differ in policyowner rights is the subject of a separate page and is not repeated here.

What does the Insurance Companies Act require?

For a federally incorporated life insurer, sections 456 to 464 of the Insurance Companies Act require participating accounts to be kept separately, require investment income and expenses to be allocated to them by methods the actuary finds fair and equitable, limit what can be transferred out, and require the directors to consider the actuary's report before declaring dividends.

The rules are short, and each one does a specific job. As consolidated on Justice Laws to 30 September 2026, they read in substance as follows.

Read together, these sections answer a careful owner's first question: what stops the insurer from simply moving the account's surplus elsewhere? Separation, actuarial fairness opinions, filing with the regulator, a closed list of transfers, and a board that must consider a written report before it declares anything.

They also answer a second question: does the law guarantee the dividend? It does not. Section 464 says the directors "may" declare one. The law governs how the account is kept and how fairly results are shared. It does not promise what the results will be.

One limit of scope. These sections and OSFI's guideline apply to life insurers incorporated under federal law. If your insurer is incorporated under a province's law, ask its compliance office which statute governs its participating account and how it reports on it.

What does a participating account typically hold?

Mostly fixed income: public and private bonds and commercial mortgages. Many accounts also hold some equities and real estate, and insurers may use derivatives to hedge. The mix differs from insurer to insurer and changes over time, and OSFI asks each insurer to disclose its target and actual mix every year.

Insurers publish participating account management policies, and they describe the assets in general terms. I read two published policies for this page. One, effective November 2025, describes the assets supporting participating policies as fixed income, including public and private bonds and commercial mortgages, together with long-duration assets, including equities and real estate, with derivatives allowed for hedging. The other, approved November 2023, describes a combination of fixed income assets, equity, real estate and other assets, with derivatives allowed for risk management. The first describes the investment income of its participating sub-accounts as "a direct pass through" of the return on the assets supporting them.

That phrase matters. What the participating assets earn, or lose, is what the participating account records.

Why this mix? Because the account supports promises that can last fifty years or more. Long-term bonds and mortgages produce predictable income that can be matched against them. Equities and real estate, in smaller proportions, seek higher long-term returns at the price of more movement.

In general terms:

The account is neither "in the stock market" nor insulated from markets. It is a portfolio, mostly of fixed income, whose results reach the dividend scale over time. For a particular insurer's current figures, OSFI's Guideline E-16 asks it to show its target and actual asset mix in its annual financial statement. Ask for that page.

How do markets and interest rates reach the account?

Through three channels: the yield on new money the account invests, the market value of assets it already holds, and credit losses when borrowers fail to pay. Interest rates matter most because fixed income dominates the account. Equities and real estate add movement where the account holds them.

The first channel is the slowest and often the most important. Each year, bonds and mortgages mature and premiums arrive, and that money is invested at the yields of the day. When rates are high for years, the account gradually fills with higher-yielding assets. When rates are low for years, it gradually fills with lower-yielding ones. The effect builds slowly, because only part of the portfolio turns over each year, and it lasts for years after rates change.

The second channel is market value. When rates rise, the market value of existing bonds falls; when rates fall, it rises. Equities and real estate move with their own markets. How quickly these movements reach the dividend depends on the insurer's accounting and its smoothing method.

The third channel is credit. A bond issuer or a mortgage borrower that fails to pay creates a loss for the account. In a recession, credit losses can rise.

Notice what is missing: a direct line from the account to your guaranteed cash value. There is none. A bad year for the account is absorbed by its surplus and, over time, by the dividends. It does not rewrite the guaranteed table in your contract.

That is the real structure behind the smooth curve. Markets reach the dividend. They do not reach the guarantee.

What is smoothing, and why do dividends move more slowly than markets?

Smoothing means reflecting investment gains and losses in the dividend scale gradually instead of all at once. OSFI's guideline says it should only be used to avoid undue yearly fluctuations in the dividend scale. It explains why a participating policy's curve looks calm while markets zigzag. It delays and spreads market effects; it does not cancel them.

One published participating account management policy defines smoothing in a single sentence: the practice of reflecting experience gains and losses gradually in the dividend scale. Another describes surplus as serving, in part, to avoid undue fluctuations in dividends, a use it limits to unusual events. OSFI's Guideline E-16 allows smoothing, says it should not result in cross-subsidization between groups of policyholders, and says it "should only be used to avoid undue yearly fluctuations in the dividend scale." OSFI expects insurers to disclose whether they use it and, if they do, its objective and the factors they consider.

A hypothetical illustration shows what smoothing does. It is built for this page and is a simplification; no insurer uses this exact method.

Consider a hypothetical participating account that earns, over eight years, 9%, -2%, 7%, 4%, 11%, 1%, 6% and 5%. Its dividend scale starts at 6% and, each year, moves one fifth of the way from its current level towards that year's return.

The returns range over 13 percentage points, from -2% to 11%. The smoothed scale ranges over 1.72 points, from 4.88% to 6.60%. The average of the eight returns is 5.125%, and after eight years the scale, at 5.28%, has drifted towards it from its starting 6%.

Three lessons sit in that small table.

First, the calm line is real. Year 2's loss of 2% did not turn into a negative scale. It pulled the scale down by 1.72 points, not by the 8.6 points that separate year 1's scale from year 2's return.

Second, the calm line is not immunity. The scale did fall in year 2. Year 5's strong return lifted it briefly to 6.23%, but it ended the eight years at 5.28%, below where it started, because the account's returns averaged 5.125%, less than 6%. Over time, a smoothed scale follows what the account actually earns.

Third, smoothing works in both directions. Year 5's 11% raised the scale by less than 1.2 points. Owners give up part of the good years' immediate benefit in exchange for less of the bad years' immediate harm.

This is why a participating policy's dividend history often looks remarkably steady beside a stock index. The steadiness is earned by the design of the account and by surplus held in reserve. It is not a promise that the next ten years will look like the last ten. Whether a long dividend history tells you anything about the future is examined on a separate page and is not repeated here.

Which parts of the policy are guaranteed, and which are not?

The basic death benefit and the schedule of guaranteed cash values are guaranteed by contract, provided premiums are paid. Paid-up additions already bought carry cash values insurers describe as guaranteed once purchased. Future dividends, future paid-up additions and terminal dividends are not guaranteed. Every guarantee depends on the insurer's ability to pay.

The Autorité des marchés financiers states plainly that dividends under a participating policy are not guaranteed, that the insurer may reduce them, and that an owner may receive no dividend in some years. OSFI's guideline gives the reason in one sentence: since actual levels of experience cannot be known in advance, dividends cannot be guaranteed.

The paid-up additions line is where the two layers meet. A dividend, not guaranteed before it is declared, becomes, once used to buy paid-up additional coverage, a block of insurance with its own cash value. One insurer's consumer brochure puts it this way: coverage bought with dividends has cash value, which is guaranteed. That is why a policy's guaranteed floor rises over time when dividends buy additions. Each year's dividend, if declared, adds to the floor. A lower dividend adds less. No dividend adds nothing. How additions work is set out on paid-up additions.

And every guarantee in the table is a promise by one company. It is not a government guarantee and not deposit insurance. Assuris, which every life and health insurer authorized to sell insurance in Canada is required to join, protects policyholders if a member insurer fails: for whole life, up to $1,000,000 or 90% of the death benefit, and up to $100,000 or 90% of the cash value, whichever is higher, calculated after any policy loans. That protection is a safety net under the guarantee, not a substitute for the insurer's strength.

What does "grows every day" get right, and what does it get wrong?

It gets right that guaranteed values do not fall with markets and that a dividend, once used to buy additions, adds permanent value. It gets wrong that all growth is independent of markets, that growth is steady from the first year, and that it continues whatever the owner does with premiums and loans.

The honest version of the sentence is longer, and better: "Your guaranteed values follow a schedule the insurer has promised in the contract, and they do not fall when markets fall. Your dividends come from the results of the insurer's participating account. Smoothing makes them move slowly, but they can go down, and when they do, your future growth slows."

That sentence sells nothing. It also leaves no one surprised in ten years.

What did a long period of low interest rates do to dividend scales?

It put steady downward pressure on them. One Canadian insurer's published history shows its dividend scale interest rate falling from 7.15% in 2012 to 6.75% in 2014, 6.25% in 2017 and 6.00% in 2021, a cut it attributed to continued low interest rates, before rising to 6.25% in 2023 as rates rose. Guaranteed values were not affected.

Remember the first channel: new money is invested at current yields. When interest rates stay low for many years, bonds and mortgages bought in earlier, higher-rate years mature and are replaced by lower-yielding ones. The account's income falls slowly, year after year. Smoothing does not stop this; it only spreads it out.

One Canadian insurer publishes its dividend scale interest rate history on its public website. Its published figures, read for this page, show the pattern.

I show this history because it is published in full and explains itself, not to compare insurers. Others differ.

Three cautions keep this table honest.

First, the dividend scale interest rate is not the return on a policy. The same insurer states that it "isn't the return that a Client can expect from their policy." It is one input into the dividend formula. A policy's actual growth also reflects mortality charges, expenses, the design of the policy and its age. OSFI's guideline asks insurers to show the dividend scale interest rate beside the participating account's actual investment return, which is a different figure.

Second, a lower scale affects dividends and illustrated values, not guarantees. Dividends can come in below earlier illustrations, and features that depend on dividends, such as premium offset dates, can move later. The guaranteed tables do not change.

Third, the decline shows what "whatever the markets do" leaves out. Low rates are a market condition, and they reached participating policies slowly, through the account, for years. The 2023 increase makes the same point from the other side: the insurer credited rising rates and strong real estate and equity results. Markets moved the scale in both directions.

What role does OSFI play, and what does Guideline E-16 require?

OSFI supervises federally regulated life insurers. Its Guideline E-16, on participating account management and disclosure, sets out how it expects insurers to apply the Insurance Companies Act rules and the Policyholders Disclosure Regulations: fair allocation, documented dividend and smoothing practices, and public disclosure of the account's results, asset mix and rates.

OSFI's Guideline E-16 is titled "Participating account management and disclosure to participating policyholders and adjustable policyholders." The version on OSFI's site is dated January 18, 2023. It applies to Canadian-incorporated life insurers. The 2023 update aimed, in OSFI's words, at greater transparency and consistency of policyholder disclosures.

It does three things that matter to an owner.

It sets expectations for managing the account: allocations fair and equitable in the appointed actuary's written opinion and approved by the board, a dividend policy applied consistently and equitably over time, and smoothing within limits.

It requires a public description of practices. Insurers are to publish their dividend policy and participating account management policy, or a summary, on a publicly accessible website. The disclosure covers how experience is shared, the principal factors affecting dividends, how often experience and the scale are reviewed, whether smoothing is used, whether terminal dividends are paid, the investment strategy and asset quality, and whether specific policyholder behaviour, such as policy loans, affects dividends.

It requires numbers in the annual financial statement. Among them:

1. A statement of changes in each participating account for the two preceding years, including dividends paid and transfers to shareholders.
2. The approximate share of dividends based on investment experience, as opposed to mortality, expenses and other factors.
3. The current-year and 5-, 10- and 20-year average dividend scale interest rate, beside the participating account's investment rate of return, expressed as a market yield, without smoothing and net of investment expenses.
4. The target asset mix against the actual asset mix.

The third item is the most useful for this page's question. Side by side, the unsmoothed return and the smoothed scale show how much markets moved and how much of that reached the dividend. Over 10 and 20 years, the two averages show whether the scale has been supported by what the account earned.

What does the policyowner see on the annual statement?

The owner's own statement typically shows the policy's current values and the dividend credited for the year, and insurers use it to report changes in the dividend scale that affect non-guaranteed values. It does not show the participating account's asset mix or investment return; those are in the insurer's published disclosures.

Two documents answer different questions. The policy statement, sent around the policy anniversary, is about your contract. Its layout depends on the insurer; here is what to look for:

One insurer's published dividend announcements tell owners that a scale change will be reported on their policy anniversary statements, showing its effect on non-guaranteed values such as cash surrender values and premium offset dates. That is where a change in the scale reaches you.

The insurer's participating account disclosures are about the pool. They show the account's results, its asset mix, its rates and its surplus. They do not mention you, but they explain your dividend.

The statement shows what happened to the policy. The disclosure shows why. How to read the guaranteed and illustrated columns of the original contract is set out on reading the cash value table.

What questions should you ask about the participating account?

Ask what the account holds, whether and how the insurer smooths, how the scale and the actual return have compared over 10 and 20 years, what share of dividends comes from investment experience, how loans affect dividends, and what your policy would look like on guaranteed values alone.

1. What does the participating account hold? Ask for the latest target and actual asset mix from the annual financial statement.
2. Does the insurer smooth, and how? Ask for the smoothing section of the dividend policy: its objective, the factors it considers, and whether an internal guideline governs it.
3. How have the scale and the return compared? Ask for the current-year and 5-, 10- and 20-year averages of the dividend scale interest rate and the participating account investment return.
4. How much of the dividend depends on investments? Ask for the disclosed approximate share of dividends based on investment experience.
5. What happens to my dividends if I take a loan? OSFI expects the insurer to state whether policy loans affect dividends. How that interacts with the loan rate is explained on policy loan interest and dividends.
6. What does my policy look like on guarantees alone? Ask for the guaranteed-only values beside the illustrated values, and for an illustration at a lower dividend scale than the current one.
7. Which statute governs the account? Ask whether the insurer is federally incorporated, and if not, which rules apply.

I would not skip the sixth. A family that can live with the guaranteed column is in a strong position whatever the dividends do. A family that needs the illustrated column has taken on a risk it may not have noticed. Other ways a participating policy can disappoint are set out on risks and failure modes.

Who should help you read the participating account?

A licensed insurance professional with years of hands-on experience servicing participating policies, who can obtain the insurer's participating account disclosures, run guaranteed-only and reduced-scale illustrations, and explain your annual statement; and an accountant when tax, loans or a corporate owner are involved; and a lawyer or notary when the policy is part of an estate plan.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. Someone who has serviced policies through rising and falling scales can show what a scale change does to real statements. In Quebec, the insurance professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent.

I should be plain about my own position: I am paid by insurer commissions when a policy is bought. That is a conflict of interest, and it is one reason this page separates what the contract promises from what it does not.

How should you read the figures on this page?

The smoothing table is a hypothetical illustration computed for this page, with invented returns and a simplified method. The dividend scale history is one insurer's published figures, read on 30 October 2026, shown to illustrate an effect, not to compare insurers. Neither is a forecast.

In the smoothing table, the yearly returns of 9%, -2%, 7%, 4%, 11%, 1%, 6% and 5% are assumptions, not the results of any account. The scale starts at 6% and each year moves one fifth of the distance to that year's return; the figures were computed exactly and rounded to two decimals. Real insurers use their own methods, surplus and review cycles, which they describe in their published policies.

The dividend scale interest rates are as published by one insurer for the years shown. A dividend scale interest rate is not the return on a policy. Dividends are not guaranteed, are declared each year by the insurer's board, and can be reduced or not paid. Past scales do not indicate future scales. The statutory references are to the Insurance Companies Act as consolidated to 30 September 2026. Amounts are in Canadian dollars.

What this page will not tell you

This page explains how a participating account works and how markets reach a participating policy. It does not tell you what any insurer's dividends will be, which insurer's account is stronger, or whether a participating policy suits your family. It does not assess your contract's guaranteed values, its loan provisions or its dividend option. Those answers depend on your contract, your insurer's current disclosures and your circumstances, and they come from your insurance professional and, where tax is involved, your accountant.

Who this does not suit

A participating whole life policy does not suit a family that needs its values to grow at a specific rate, that will be harmed if illustrated dividends are not paid, or that cannot sustain the premiums through the early years when cash surrender values are low. It does not suit someone who wants direct exposure to markets, or someone who wants no exposure to them at all in the non-guaranteed part.

It can suit a family that needs permanent life insurance, values a guaranteed floor that does not move with markets, can keep the policy in force for many years, and accepts that the growth above the floor will follow, slowly and imperfectly, what the insurer's participating account earns.

The floor is promised. What sits on it is shared.