When people think of life insurance, they usually think of death benefits — but some policies offer living benefits too. In Canada, certain types of permanent life insurance allow you to borrow against the cash value while you’re still alive.
Here’s how it works, what your options are, and why it’s important to plan carefully.
Which Life Insurance Policies Can You Borrow From?
You can only borrow from permanent life insurance policies that accumulate cash value. These include:
1. Whole Life Insurance
- Offers guaranteed cash value growth
- May also pay dividends (in participating policies)
- You can borrow through policy loans or withdrawals
2. Universal Life Insurance
- Offers flexible premiums and investment options
- Cash value grows based on performance of selected investments
- You can borrow or withdraw from the investment portion
3. Participating Life Insurance
- A type of whole life policy that pays dividends
- Dividends can be used to increase cash value, reduce premiums, or be withdrawn
How Does Borrowing Work?
There are two main ways to access your policy’s cash value:
1. Policy Loan
- Borrow money from the insurer using your policy as collateral
- Interest is charged (usually lower than unsecured loans)
- No credit check required
- Loan does not need to be repaid during your lifetime, but unpaid amounts reduce the death benefit
2. Withdrawal or Partial Surrender
- Withdraw funds directly from the cash value
- May trigger a taxable event depending on the amount withdrawn
- Reduces both the cash value and the death benefit
Pros and Cons of Borrowing Against Life Insurance
Pros:
- Access to cash without credit checks or loan approval
- Useful for emergencies, education, or investment opportunities
- Keeps your other financial accounts intact
Cons:
- Reduces your policy’s death benefit
- May result in taxable income
- Overuse could jeopardize the policy’s long-term performance
When Borrowing Makes Sense
- Temporary cash flow needs
- Strategic tax planning in retirement
- Avoiding withdrawals from RRSPs or investments
- Helping with business or estate liquidity
The Role of an Insurance Broker
Navigating the complexities of borrowing from a life insurance policy can be tricky — especially when it comes to understanding loan interest, tax consequences, and how it affects your death benefit. That’s where a licensed insurance broker adds real value.
How a Broker Helps:
- Explains borrowing options clearly, including policy loans and withdrawals
- Recommends the right policy structure if access to cash value is a goal
- Compares policies across providers to find the most flexible and tax-efficient options
- Advises on repayment strategies to minimize impact on your beneficiaries
- Coordinates with tax and financial advisors to keep your long-term plan intact
Because brokers work with multiple insurers, they can offer unbiased guidance that’s tailored to your unique situation — not just what one provider offers.
Real-Life Examples of Borrowing from Life Insurance
Example 1: Emergency Medical Costs
Tina, a 62-year-old retiree from Ontario, faced an unexpected medical procedure that wasn’t fully covered by her provincial health plan. Instead of dipping into her RRSP and triggering taxes, she took a $20,000 policy loan from her whole life insurance. The loan had a low interest rate and didn’t affect her credit score. She repaid it gradually, and her death benefit was only minimally impacted.
Example 2: Helping a Child Buy a Home
Mark and Elaine, a couple in their 50s, used the accumulated cash value from their universal life policy to help their daughter with a down payment on her first condo. They withdrew $50,000 from the policy’s investment component. Their broker helped them structure the withdrawal to minimize taxes and ensure their coverage stayed intact.
Example 3: Supporting a Business
Amir, a self-employed contractor in B.C., had a slow season and needed funds to cover payroll and equipment costs. Instead of applying for a high-interest business loan, he borrowed $30,000 from his participating life policy. With his broker’s help, he structured the loan with a repayment plan that would keep his policy in good standing.
These stories show how flexible and useful permanent life insurance can be beyond just providing a death benefit.
Final Thought
Borrowing against life insurance in Canada can be a smart, low-risk way to access capital — but it must be done thoughtfully. A licensed broker or financial advisor can help you decide if it’s the right move, and how to do it without compromising your long-term goals. If you would like for a licensed professional to help you explore your options, fill in a quick form below to get connected to a Canadian Insurance Broker.
