A woman received a tax slip from her insurance company. I’ll call her Grace. The policy had been in force for 45 years. She had never missed a premium. The annual dividend payment — which had been arriving in cash every year — had become fully taxable. The policy’s adjusted cost basis, built from total premiums paid, had quietly reached zero. Nothing had changed in how the policy was administered. The same dividend that had always arrived was now triggering a tax consequence without any warning.
Grace was fortunate. A tax slip is at least a signal. It arrives in the mail. It demands a question. Many policyholders never receive any kind of cue. Their first notification is a letter telling them their policy is failing, or that a significant deposit is required to keep it in force.
The advisor whose name was still on the file told her he couldn’t help — the original carrier had changed hands. He was still in contact with the client, 45 years after the original sale. He responded when she reached out. Whether he had the capacity, the specialized knowledge or the contractual relationships with the acquiring carrier to go further than he did was unclear.
That acquiring carrier was Manulife. It explained what had happened, but the client didn’t understand what her options were.
By the time I became agent of record, it was clear that a gap existed. That is not necessarily a judgment about him. It is a description of what the system produced.
Grace’s options had narrowed. A diagnostic should’ve been run years earlier, when the policy still had flexibility and she still had choices.
This gap is structural, not the result of advisor neglect. There is a design failure at the centre of how this industry handles in-force business. Nobody was required to make a recommendation to the client.
The structure of the problem
The life insurance industry compensates advisors for bringing consumers into the system. The commission is earned at the point of sale. The work of identifying a need, proposing a solution, navigating underwriting and placing a policy is real work. The compensation is earned.
The industry doesn’t compensate advisors for follow-up reviews: the call 45 years later when a tax slip arrives and nobody can explain it; the review that surfaces an internal cost structure heading toward collapse as interest rates fall; the conversation that takes 20 minutes and saves a client’s $400,000 death benefit from expiring before they do.
Continued servicing of in-force business is, in most cases, voluntary. The original writing advisor retains a residual on the book. There is no corresponding obligation to keep watching. Nobody is required to call when the interest rate environment changes and the policy math shifts. Nobody is required to read the contract when a tax slip arrives. Nobody is required to look.
And so, most people don’t.
What the gap actually costs
Grace had purchased a $100,000 whole life policy in 1980 on a newborn child. The premium was $347 a year, funded by the old family allowance cheque. A friend in the insurance business had suggested she not spend it. Put it to work. She trusted that advice. She paid every premium for 45 years without missing one.
The policy is what the industry calls a G1 policy — issued before Dec. 2, 1982, when the tax rules governing life insurance changed permanently. On post-1982 policies, an annual mortality charge grinds the adjusted cost basis toward zero over the life of the insured. On a G1 policy, that grind does not exist. The cost basis is the total premiums paid — in Grace’s case, approximately $15,615 over 45 years.
The policy had by now paid out in cumulative dividends everything it had ever collected in premiums. The cost basis had reached zero. Every annual dividend going forward — the policy now pays $1,575 a year — triggers a taxable gain. That is what nobody had explained to Grace.
When I looked — properly, at the actual governing documents, rather than just the illustration — four options emerged.
- Change the dividend option to paid-up additions, which eliminates the annual taxable gain.
- Transfer the policy to the daughter at adjusted cost basis under a provision that has existed in the Income Tax Act since before this policy was issued. No tax would be triggered at transfer, and the annual deemed gain would land on a potentially lower marginal rate.
- A premium offset, given that dividends now exceed the annual premium by more than four to one.
- A non-smoker rate adjustment that may have been available since age 18 and was never applied.
None of these options required purchasing anything new. None of them required spending another dollar. They required reading the contract and the governing documents — including Manulife’s published dividend policy for the closed Zurich sub-account. It states that dividends shall be paid with the objective of exhausting assets to the final remaining policy.
Grace’s daughter could be in that pool for another 40 years. The proportionate implications of that structure have not yet been fully quantified. But they are real and material, and they exist in a public document that nobody had read.
None of this was hidden. None of it required unusual access or privileged information. It required someone willing to look.
The in-force review as practice standard
To be clear, the advisors whose clients end up in this gap are not, in the main, negligent or dishonest. They operate exactly as the system was designed. The sale was made. The commission was earned. The policy was placed. The client’s needs at the time were addressed.
What the system did not build was a mechanism for what happens when 45 years passed, the company changes hands three times, the tax rules evolve, the interest rate environment shifts and the client receives a document nobody can explain.
The industry cannot be satisfied with a practice model in which a 45-year client can reach that moment without a single person being required to call.
I am not. And I think most advisors reading this are not either.
The constructive alternative is a structured in-force review — what I call a policy contract review (PCR) — conducted with the same rigour we are expected to bring to a new sale.
It starts with the annual statement, if there is one. It goes to the contract, and the governing documents behind the contract. It identifies the options available to the client inside the policy they already own. It puts the recommendation, the math and the rationale in plain-language writing the client can read, question, share with their accountant or lawyer and keep.
This is not exotic practice. It is the application of the standard we already hold ourselves to at the point of sale. The client trusted us then. The policy is still in force. The trust is still on the table.
Manulife’s role
Manulife answered the tax slip question. Their answer was technically correct — the annual dividend payment had exceeded the policy’s adjusted cost basis, resulting in a taxable disposition under current tax rules. That answer came from what is, in my view, the most skilled in-force advisory service in the Canadian life insurance industry. Manulife has no peer on the taxation of life insurance. They wrote the book, literally. Their answer was accurate, complete and delivered by people who genuinely know this material.
Grace didn’t know what her options were. She didn’t know what she could do differently to avoid paying tax on future dividends. She didn’t know that the dividend option could be changed. She didn’t know that a policy transfer provision existed in the Income Tax Act. She didn’t know what questions to ask.
And Manulife, for all their expertise, was practically limited in how far they could go with her on a 45-year-old individual policy acquired from another carrier. The business reality of administering an inherited book of legacy business — policies from companies acquired years ago, products that predate current illustration software, contracts whose specific provisions require document-level research to surface — constrains what even the most skilled in-force team can deliver on a per-policy basis.
That is not a criticism. It is a description of a genuine operational constraint that any institution of that scale navigates.
The gap is not between what Manulife said and what was true. The gap — the translation from accurate information to actionable choice — is where the advisor’s role begins. The companies will honour every word in the contract. Someone has to read the contract first, find the options it contains and show the client what they mean in plain language.
Three standards worth adopting
The in-force servicing gap is a design failure. The constructive response is a practice standard. I would suggest three, drawn from the same principles I apply at the point of sale and extend to the life of the policy.
- Compared to what? When recommending any change to an existing policy — or when documenting why no change is warranted — record the alternatives considered and why this path was chosen over the others. The client paid for that analysis at the point of sale. They are entitled to it every time the policy’s circumstances change.
- What does the contract actually say? Show the client where to find what is guaranteed versus what is projected. The annual statement is a summary. The contract is the truth. The governing documents behind the contract — dividend policies, closed block structures, product-specific provisions — are where the real picture lives. Read them. Show the client where to find them.
- Is this in writing? Not the compliance forms. The recommendation, the math, the rationale — in a form the client can read, question, hand to their accountant or lawyer and keep. The compliance forms protect the advisor. The written analysis serves the client. Both matter. Only one of them is consistently produced.
Grace paid into her policy for 45 years. The contract is being honoured. What it needed — and what it is getting now, late but not too late — was someone willing to read it. That is not a heroic act. It is a practice standard. It is the job.
Jeff Cait, MBA (Finance), CFP, TEP is an independent life insurance consultant and founder of the Trusted Advisors Network. He has more than 40 years in the industry.