Can You Borrow From Your Life Insurance Policy in Canada?
Yes, you can borrow from your life insurance policy in Canada, provided it's a permanent policy, such as whole life or universal life, that has accumulated cash value. Term life insurance policies don't have a cash value component and therefore can't be borrowed against.
That distinction matters. When you take out a policy loan, you're not withdrawing money you've set aside in a savings account. You're borrowing from the insurer, using your accumulated cash value as collateral. According to Aflac's overview of life insurance borrowing, the insurer continues to hold your cash value while advancing you the loan amount, which is why the process requires no credit check and comes with no fixed repayment schedule.
From a tax perspective, policy loans are not considered taxable income in Canada, as long as the policy remains in force. That makes this feature quite different from other ways of accessing cash, such as surrendering a policy or making a withdrawal. Progressive's guide to life insurance loans explains it clearly: the loan proceeds aren't treated as income because you're technically borrowing against an asset, not receiving a distribution.
If you're still deciding whether life insurance is the right fit for you, it's a good idea to first understand when and why to get covered before exploring the borrowing features that permanent policies offer.
How Borrowing From Life Insurance Works in Canada: What You Need to Know
Which Policies Qualify?
Not every life insurance policy allows borrowing. Only permanent life insurance policies, specifically whole life and universal life, build cash value over time. Term life insurance, by contrast, provides pure death benefit protection with no savings component, so there's nothing to borrow against.
Whole life policies accumulate cash value at a guaranteed rate set by the insurer, while universal life policies typically tie their investment account growth to market performance or declared interest rates. Both types can eventually support a policy loan, but the timeline and the amount you can access will vary depending on how long the policy has been active, your premium payments, and the specific terms your insurer applies. If you want a deeper look at whether whole life insurance makes sense as an investment in Canada, that's worth reading before you commit to a policy type.
How the Loan Actually Works
When you request a policy loan, your insurer advances you funds up to a set percentage of your current cash surrender value, typically up to 90%. The insurer uses your accumulated cash value as collateral but doesn't touch it directly. Your cash value continues to earn interest or dividends (depending on policy type), and your death benefit remains in place, at least until the loan changes the picture.
Guardian Life's explanation of policy loans confirms that the process is straightforward: you contact your insurer, confirm your available cash surrender value, and submit a policy loan request. Most Canadian insurers process and disburse these loans within a few business days. There's no credit check, and you don't need to explain what you plan to do with the money.
Interest on a Canadian policy loan typically runs between 5% and 8% per year, and it compounds if you don't pay it. The insurer adds unpaid interest directly to your outstanding loan balance. This is where things can get complicated, particularly if you treat the loan as a long-term arrangement without a repayment plan.
The Tax Picture in Canada
Policy loans from Canadian life insurance are not taxable as income under CRA rules as long as the policy doesn't lapse. That's a meaningful advantage over other options, such as surrendering the policy outright. If you surrender, you'll owe tax on any amount above the policy's adjusted cost basis. A loan keeps the policy intact and keeps the CRA out of the picture, at least for now.
The risk is what happens if the loan balance plus accrued interest grows to exceed your policy's total cash value. At that point, the insurer may terminate the policy. A lapsed policy can trigger a taxable disposition in Canada, meaning those loan proceeds could suddenly become subject to income tax. CG Law Offices' 2024 analysis of policy loans makes this point clearly: the tax efficiency of a policy loan only holds as long as the policy stays active.
What Happens to Your Death Benefit
Here's what you need to keep in mind for your beneficiaries. Any outstanding loan balance plus compounded interest is deducted from your death benefit when you pass away. If you borrowed $30,000 against a $200,000 policy and never repaid a cent, your beneficiaries receive $170,000, minus any further interest that accumulated. This is why policy loans work better as a short- to medium-term tool rather than a permanent financial strategy.
A Reddit discussion among policyholders with large whole life policies illustrates this point vividly: many borrowers underestimate how quickly compounding interest can erode both the available cash value and the eventual death benefit, especially when repayments are inconsistent or skipped entirely.
For whole life policies that pay participating dividends, such as those offered by major Canadian insurers like Manulife and Sun Life, having an outstanding loan can also reduce or adjust the dividends credited to your policy. That can slow down cash value growth at the exact time you may need it most. You can compare how Manulife and Sun Life structure their permanent life products at HealthQuotes.ca's comparison of the two insurers.
Alternatives to Borrowing
Borrowing isn't the only way to access the value inside a permanent life insurance policy, and it's not always the best option. The main alternatives are:
Surrendering the policy. This gives you the full cash surrender value right away, but it permanently ends your coverage and may result in a taxable gain. If you're weighing this option, our guide on whether it's time to surrender your life insurance policy walks through the considerations carefully. Surrendering makes more sense when you no longer need the death benefit and want clean access to the funds, while borrowing preserves the policy and the benefit for your beneficiaries.
Partial withdrawals. Some universal life policies allow partial withdrawals from the investment account without treating the full amount as a loan. The tax implications differ from a loan, so confirm the specifics with your insurer or a licensed advisor.
Purchasing separate coverage. If you're considering a policy loan because your current policy doesn't fully meet your needs, it may be worth exploring other types of coverage instead. For context on how life insurance compares to final expense insurance, that can help you think through whether a different policy structure makes more sense for your situation.
Special Situations Worth Knowing About
Retirees and near-retirees. Policy loans can be especially useful for people approaching or already in retirement. Since loan proceeds aren't classified as income by the CRA, they won't affect income-tested government benefits or push you into a higher tax bracket. For a broader look at how insurance fits into your financial picture after work ends, our article on what happens to your benefits after retirement covers the key considerations.
Transitioning from group benefits. If your employer-sponsored group life insurance is ending, converting your group life insurance to an individual permanent policy is one pathway to eventually building cash value with borrowing features. This conversion often doesn't require medical underwriting, which makes it accessible even if your health has changed.
No medical exam options. For Canadians who want permanent coverage that builds cash value but don't want to go through extensive medical underwriting, life insurance without a medical exam is a viable route. Keep in mind that guaranteed issue policies may take longer to accumulate meaningful cash value, which affects how soon you can borrow. For a detailed look at one such option, the Manulife CoverMe Guaranteed Issue Enhanced plan is worth reviewing.
Is Borrowing From Your Life Insurance Policy the Right Move?
Borrowing from a permanent life insurance policy can be a smart, tax-efficient way to access funds in Canada, particularly for retirees or anyone who needs flexible financing without a credit check or income verification. There's no application process to stress about, no fixed payment schedule, and as long as the policy stays active, the CRA won't treat the proceeds as income.
That said, the risks are real. Interest accumulates whether you pay it or not, and if it compounds to the point where it exceeds your cash value, the policy lapses. A lapsed policy doesn't just end your coverage, it can also create an unexpected tax bill. CG Law Offices recommends treating policy loans as a deliberate financial tool, not a casual source of funds, and staying on top of the interest charges throughout the loan period.
If you don't yet have a permanent life insurance policy, or you're not sure which type of coverage fits your needs and budget, comparing quotes from multiple Canadian insurers at once is the most efficient starting point. HealthQuotes.ca lets Canadians instantly compare permanent and term life insurance options from major providers like Manulife, Sun Life, and Blue Cross, helping you find a plan with the features, including cash value accumulation, that match your long-term goals.
Frequently Asked Questions: Borrowing From Life Insurance in Canada
Q: Is it a good idea to borrow from your life insurance?
It can be a smart financial move in the right circumstances. In Canada, policy loans are not considered taxable income as long as your policy stays active, there is no credit check required, and no fixed repayment schedule. However, if you don't repay the loan, the outstanding balance plus compounded interest will be deducted from the death benefit your beneficiaries receive. If loan interest accumulates to the point where it exceeds your cash value, your policy could lapse, potentially triggering a taxable event with the CRA. Borrowing works best as a short- to medium-term financial tool, not a long-term strategy, and only after you've considered lower-cost alternatives.
Q: What is the cash value of a $10,000 whole life policy?
The cash value of a $10,000 whole life insurance policy depends on how long the policy has been active and the specific terms set by your Canadian insurer. In the early years, typically the first five to ten years, the cash value accumulates slowly, often amounting to only a few hundred dollars, because a significant portion of your premiums covers the insurer's administrative costs and the pure cost of insurance. Over time, as more of each premium contributes to the savings component, the cash value grows more meaningfully. After 20 or more years, a $10,000 face-value policy could have a cash surrender value of several thousand dollars, but the exact figure depends on your insurer, dividend performance (for participating policies), and any previous loans or withdrawals. Progressive's overview of policy loans offers additional context on how cash value builds over a policy's life.
Q: How do I borrow money from my life insurance?
To borrow from your Canadian life insurance policy, start by confirming that it's a permanent policy, either whole life or universal life, with accumulated cash value. Term life policies don't qualify. Next, contact your insurer directly by phone, through your online account portal, or through a licensed advisor. Request a policy loan application form, specify the amount you want to borrow (up to the insurer's maximum, typically 90% of your cash surrender value), and submit the completed form. According to Guardian Life's breakdown of the process, most Canadian insurers process policy loans and disburse funds within a few business days. No credit check is required.
Q: How much money can you borrow from your life insurance policy?
In Canada, most insurers allow you to borrow up to 90% of your policy's current cash surrender value, as confirmed by Aflac's resource on borrowing against life insurance. The cash surrender value is what your policy has built up in its savings or investment component after any applicable surrender charges. For example, if your whole life policy has a cash surrender value of $50,000, you may be eligible to borrow up to $45,000. The remaining 10% is retained by the insurer as a buffer. Interest on the outstanding loan typically runs between 5% and 8% annually in Canada, and unpaid interest compounds and is added to your loan balance, further reducing your available cash value and your eventual death benefit.