How much does this method cost?

How it works

a notional account, not a bank balance

The Capital Dividend Account

1. A notional tax account of a private Canadian corporation
2. It records amounts the corporation received without tax
3. A death benefit less the adjusted cost basis credits it
4. Balances can be paid to shareholders as capital dividends
5. The credit depends entirely on the ownership structure

The mortality charge accounts for more of the premium than any other component, because the contract is first of all coverage. Compensation is weighted heavily to the first year. The fees and the premium tax are smaller and are rarely mentioned in a presentation.

Each of the five parts is set and administered by a different party. The insurer's underwriting file, built from the age, sex, health class and any rating applied to the life insured, fixes the mortality charge and reprices it as the coverage ages. The insurer's compensation grid fixes what the representative and the distributor receive, and it is the insurer, not the representative, who pays it out of the premium collected. Policy and administration fees are set by the insurer and disclosed in the contract itself. Provincial premium tax is set by the province where the contract is issued and is remitted by the insurer and not billed separately. Interest on an advance, if one is ever taken, is set by the insurer's own loan rate in effect at the time, and it is charged only in the years an advance is outstanding.

The cost or the catch

two different questions about one dollar

Recovery is not the same as return

1. 01Return asks what the money earned
2. 02Recovery asks whether the money came back
3. 03Capital returns through the income an asset produces
4. 04Capital returns through the eventual sale
5. 05Capital returns through the deductions its cost permits

Now here's the key. None of it is itemised the way a fund's management expense ratio is, and that criticism is correct and not unfair. What remains measurable is the outcome: set cumulative premiums paid beside guaranteed cash value and read the gap.

The bad news is concentrated in the first year and not spread evenly across the life of the contract. Because compensation and much of the acquisition expense are loaded early, a household that cancels in year one or two has already incurred most of that cost regardless of how little cash value has accumulated to show for it. This is not a fee refunded on request. It is built into the pricing of every contract of this kind, disclosed or not, and it is the reason a decision made quickly and reversed soon after is the most expensive way to interact with this method.

What to ask the insurer

Asking the insurer, in writing, for a breakdown of the fees and premium tax applicable to the proposed design before signing produces a figure the presentation itself usually does not show. Some insurers respond in detail to this specific request even without being required to under a general disclosure regime.

What varies from one proposal to the next is not the existence of these five parts but their size. One insurer's mortality charge for the same age and coverage can differ from another's, provincial premium tax differs by the province of issue, and a contract carrying additional riders carries an additional charge for each one. None of this is guesswork available to compare in general terms, since the actual figures belong to the specific design being proposed, which is exactly why the request for a written breakdown has to be repeated for each new proposal and not assumed to be similar to the last one.

Who this matters to, and what it leaves out

each one is wrong, and correctable

Claims that should never be made

1. 01That you are borrowing your own money
2. 02That you pay the interest to yourself
3. 03That an advance leaves the contract untouched
4. 04That it replaces a registered plan
5. 05That the dividends are guaranteed

The exact size of these costs matters most to a household comparing more than one design or more than one insurer, since a difference invisible in a sales conversation can be significant once set against guaranteed cash value over time. It matters least to a household that has already settled on the coverage it needs from a single insurer and is not weighing alternatives, since for that household the relevant question becomes affordability of the premium and not the composition of what the premium contains.

What this page does not tell the reader is the dollar total for a specific contract, since only the insurer's own breakdown, requested in writing, supplies that. It also does not judge whether the total cost is reasonable for the coverage obtained, since that judgment depends on the coverage need and the alternatives available to a particular household, a question for the reader's Financial Security Advisor, and where the contract is held by a corporation, a further question for the company's own accountant on how that cost interacts with the corporation's other affairs. That advisor is compensated by commission from the insurer on the contract placed, part of the cost structure this page has just described.

Step by step, from the proposal to the premium receipt

The sequence begins before the application is even signed, when the insurer's underwriting file assigns the mortality class that will set the largest of the five cost components for the life of the contract. At the same time, the Financial Security Advisor's compensation for that specific sale is set by the insurer's own compensation grid, a schedule the advisor does not set personally and cannot negotiate upward. Once the policy is issued, each premium payment is split automatically inside the insurer's administration system: a portion covers the mortality charge for that year, a portion covers policy and administration fees, a portion covers premium tax remitted to the province, and, in the early years, a portion has already gone toward compensation paid out when the contract was placed.

None of that split appears on the premium receipt the household actually receives, which typically shows only the total amount due and the date it is payable. Getting the underlying breakdown requires a specific written request to the insurer, addressed to its administration or client services department and not assumed from a general product brochure, since a brochure describes the product in general terms while the breakdown describes the one contract actually in force. Where an advance is taken against the contract in a later year, the interest charged on it is calculated separately from these five components and appears on its own line on the annual statement rather than folded into the premium itself.

A household that receives the requested breakdown and finds the mortality charge alone exceeds what was expected for the age and health class involved has a specific, answerable question to put back to the insurer or the Financial Security Advisor: what rate class was actually applied, and does it match the underwriting decision communicated at issue. Ratings applied for health, occupation or a hazardous pursuit raise this one component specifically, and confirming the rate class in writing, separately from the total premium, isolates that variable from the other four so a genuine pricing question does not get lost inside a broader complaint about cost overall. Where the breakdown instead reveals a fee or a rider charge nobody remembers agreeing to, the contract's own schedule of benefits, not memory, is what settles whether that charge was disclosed at issue. A household weighing whether the total cost of a proposed design is reasonable should also ask what happens to that same breakdown if the coverage amount is later increased or a rider is added, since each addition typically carries its own separate charge rather than simply scaling the existing five components proportionally. Getting that forward looking answer in writing, at the same time as the initial breakdown, saves a second round of questions if the design changes before the application is finalized. Understand that much and you will not be misled.