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- Policy loans provide insurer-direct access to permanent life insurance cash value
- Most insurer loans allow flexible repayment (interest-only, partial, or full)
- Best for strategic liquidity (retirement gaps, education, business) while preserving long-term coverage
- Loans are generally tax-free while the policy remains in force, though surrender or lapse may trigger tax, based on the policy’s Adjusted Cost Basis (ACB)
Your permanent life insurance can do more than protect your family, it can fund real needs while you’re alive. If your policy has built enough cash value, a policy loan can deliver quick, tax‑efficient liquidity without surrendering your coverage. This can be used for needs like retirement income, education costs, or business financing.
In this guide, we will cover how policy loans work, eligibility, repayment options, and tips for Canadians.
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What is a policy loan?
A policy loan in a whole life insurance plan or a universal life policy (UL) lets you borrow against the accumulated cash value while keeping your coverage active. The policy stays in force if you manage the loan and interest; any unpaid balance reduces the death benefit.
Two ways to borrow from your policy:
- Direct policy loan from your insurer: Borrow against your cash value from the insurer. Interest accrues and is usually capitalized if unpaid. You choose if/when to repay, but any outstanding balance (including interest) reduces the death benefit and can increase lapse risk if it grows too large
- Collateral loan from a bank/lender: Assign your policy as security to a lender. Expect credit and income assessments, structured repayments, and rate quotes often expressed as Prime+. Collateral assignment typically requires the owner’s signature and, if applicable, consent from an irrevocable beneficiary before approval
Eligibility for policy loans:
- Loan eligibility begins once your policy has non‑forfeiture values (cash surrender value). Timing depends on product and funding; many policies develop accessible CSV within a few years
- Borrow up to 100% of available cash value (varies by insurer)
- Policy in good standing (premiums current). No medical exams or health questions. If your policy has an irrevocable beneficiary, their written consent is generally required before a loan is issued or an assignment is made
Eligibility for collateral loans:
- Policy with strong cash value as collateral
- Lender’s credit/income approval (standard bank process)
- Up to 100% of cash value possible, based on lender terms
- Policy must remain active with the insurer
How borrowing against your permanent life insurance works
Borrowing against life insurance Canada is one of the most practical and tax-efficient ways to access liquidity without giving up long-term protection. With a policy loan, you’re borrowing against your own growing asset. The process is remarkably simple, but understanding what happens behind the scenes can help you use it wisely.
- Wait for your policy to build value: Cash surrender values (CSV) are generally low in the early years due to acquisition expenses, reserves, and charges; over time, CSV builds. CSV may grow faster if your policy is participating and earns dividends. The longer you hold it, the more borrowing power you will have
- Check your cash value: Request a current statement showing your cash surrender value, loan value, outstanding loan (if any), interest rate and compounding frequency, and your policy’s Adjusted Cost Basis (ACB). These help you gauge both borrowing capacity and potential tax exposure at surrender or lapse
- Submit your loan request: When you’re ready to borrow, you’ll fill out a short request form with your insurer. Some companies allow digital submissions for faster processing, and some may impose internal checks
- Understand the interest and repayment: Interest starts accruing on the disbursed amount and typically compounds at the frequency stated in your contract (e.g., annual or monthly). Some insurers charge interest “in arrears” on the policy anniversary; others capitalize it to the loan. Confirm your rate, compounding, and when interest is added to the balance in your policy provisions
How borrowing against life insurance is regulated in Canada
Canada’s federal framework protects policyholders through distinct oversight for insurers (policy loans) and banks (collateral loans).
- Insurer policy loans (direct borrowing against cash value): Regulated under the Insurance Companies Act by OSFI (federal insurers) and provincial regulators. OSFI focuses on insurer solvency rather than dictating consumer loan terms
- Bank collateral loans (policy as security): OSFI issues prudential/supervisory guidance and capital rules for banks; banks set their own credit policies subject to prudential oversight and consumer protection laws
Borrowing options in Canada
Policy loan rates and terms vary by insurer, product type (participating vs. non-participating), and loan structure. Understanding these helps you compare costs before borrowing against your permanent life insurance cash value.
Two main borrowing options:
- Direct policy loans (insurer): Many policies specify a contractual loan rate (fixed or periodically adjustable). Some products use variable rates. Repayment flexibility is typical across products
- Collateral loans (banks): Many bank lines of credit are priced at Prime+/Prime-; exact pricing depends on credit profile, collateral, and bank policies and may be fixed or variable
Tax implications to keep in mind
Borrowing against your policy offers tax advantages under Canada Revenue Agency (CRA) rules, but come with limits to watch for:
Tax benefits:
- Policy loans are generally not taxable while the policy remains in force; tax can arise on a disposition (e.g., lapse/surrender) based on policy gain rules under the Income Tax Act
- Cash value growth stays tax-deferred while loan is active on “exempt” life insurance policies under the Income Tax Act (meeting ITA exemption requirements). Non-exempt policies may have taxable accrual
- Death benefit remains tax-free to heirs (minus any unpaid loan)
Tax considerations:
- Borrowing itself is not taxable; tax can arise if policy is surrendered/lapses and proceeds (often CSV applied to repay loan) exceed ACB, or in specific anti-avoidance cases
- Loan size can contribute to lapse risk and taxable disposition
- Unpaid loans reduce the death benefit payout
Repayment options and loan flexibility
With direct insurer loans, you control repayment. There are no fixed schedules, unlike bank loans. You have the following choices:
- Pay nothing: Interest accrues and compounds. Reduces the death benefit if unpaid
- Pay interest only: Keep loan balance steady by covering interest
- Partial repayments: Pay down principal when cash flow allows
- Pay in full: Clear entire balance anytime
Most bank lines of credit (LOCs) require at least monthly interest payments and are reported to credit bureaus; exact payment frequency and reporting depend on lender and product type.
If you don’t repay:
- Insurer loan: The unpaid balance is deducted from the death benefit
- Bank loan: Your credit may be damaged, and the bank may call the assignment
How borrowing affects your death benefit and policy value
Every dollar you borrow from your whole life insurance policy reduces what your beneficiaries will ultimately receive. This is the most important consideration before borrowing from your policy. While loans offer valuable flexibility, they also come with real long-term trade-offs if left unmanaged.
Let’s suppose that you own a $500,000 whole life policy and borrow $50,000. If you pass away before repaying the loan, your beneficiaries would receive $450,000, assuming no interest has accumulated.
However, policy loan interest compounds over time. If you carry that same $50,000 loan at an 8% interest rate for several years without repayment, the balance could grow to $65,000 or more. That means your family would receive closer to $435,000, and the longer the loan remains unpaid, the greater the reduction.
The risk of policy lapse
The most serious risk occurs if your loan balance and accumulated interest approach or exceed your cash value. If this happens, your policy is at risk of lapsing, which would terminate coverage and any remaining cash value.
A lapse triggers a taxable disposition, calculated as: Cash value at lapse – Adjusted Cost Basis (ACB)
The loan balance itself does not determine whether tax applies; it only affects the net cash available when the policy collapses. Even policies with no outstanding loan can create a taxable gain if the cash value exceeds the ACB.
Insurers generally notify policyholders when a policy is at risk (e.g., via grace or deficiency notices). Notice requirements and timing depend on policy terms and provincial insurance law. Most insurers issue warnings well before lapse, but it’s important to monitor your loan balance and interest growth regularly. The exact tax treatment depends on policy structure and CRA rules, so professional tax advice is recommended.
Pros and cons of borrowing against your policy
Policy loans unlock cash value fast but come with trade-offs. Here’s what to weigh:
| Pros | Cons |
| Fast access to funds (typically 3–10 business days, varies by insurer and delivery method) | Interest rates are higher than bank loans |
| Tax-free proceeds | Unpaid loans reduce death benefit |
| Flexible repayment; you decide timing | Interest compounds if it is not paid |
| Cash value keeps growing during the loan | Risk of policy lapse if debt grows too large |
| Impacts estate planning |
When should you consider borrowing against your policy?
Policy loans are commonly used to meet short-term financial needs while preserving long-term life insurance coverage.
- Retirees may use policy loans to cover income gaps during market downturns, avoiding the need to sell investments at a loss. This approach preserves portfolio growth while providing short-term liquidity
- Parents facing unexpected education costs can benefit from quick, flexible access to funds when traditional student financing falls short
- Business owners sometimes rely on policy loans for short-term working capital when conventional credit is slow or unavailable, helping them seize time-sensitive opportunities
However, policy loans are not suitable in every situation. A policy loan may not be a good fit if:
- Your cash value buffer is thin (e.g., recent policy, limited growth)
- Your premiums are behind
- You need long-term, fixed repayment discipline that a bank loan provides
When used thoughtfully within a broader financial plan, policy loans can remain a powerful and flexible funding tool for Canadians.
Before borrowing, however, you must evaluate how the loan and interest will affect your death benefit, cash value, and estate goals. Ensure you have a practical repayment plan and compare the cost with alternative financing sources.
Frequently asked questions
How soon can I borrow against my whole life policy?
You can borrow once your policy has a positive cash surrender value. Timing depends on product and funding; many policies develop accessible CSV within a few years.
Do I pay tax on money borrowed from my life insurance?
Generally, no. You’re borrowing against your own cash value, not taking income. Track your policy’s Adjusted Cost Basis (ACB) versus cash value; taxable gains at surrender/lapse are based on cash value minus ACB (not simply total premiums paid). Request your ACB annually from your insurer and seek tax advice. Unpaid loans also reduce your tax-free death benefit payout.
What happens if I don’t repay the policy loan?
If unpaid, interest is often capitalized and may be covered temporarily by available values (e.g., surrendering paid-up additions where permitted) before lapse. The loan amount plus accrued interest will be deducted from your death benefit (beneficiaries receive remaining balance). If total debt exceeds cash value, the policy lapses, causing loss of coverage and potential tax liability. Do not rely on temporary offsets; they reduce long-term value and accelerate lapse if not monitored.
Can borrowing cause my policy to lapse?
Yes. When the loan and accumulated interest surpass your available cash value, your policy terminates. Insurers usually issue several lapse warnings before this point, but it’s important to monitor your balance closely, especially if you’re not making interest payments.
Are policy loan interest rates negotiable?
Typically not. Insurers set their loan rates according to their general account performance and policy terms. If you need lower rates or fixed repayment terms, consider a collateral loan from a bank using your policy as security.
Can I take multiple loans from my policy?
Yes, you can take multiple loans as long as your combined borrowing stays within your cash value limit. Each loan will accumulate interest separately, and all outstanding balances reduce your death benefit until repaid.
Do outstanding loans affect my policy dividends?
Generally, no. While dividends are based on the par account, unpaid loan interest reduces net cash value and can indirectly affect paid-up additions and future borrowing capacity. Check your specific insurer’s par policy guide for details. However, unpaid loan interest still reduces net cash value, which impacts long-term policy performance.
Policy loans let Canadians access the cash value of their permanent life insurance without losing coverage. Loans are available once the policy has built cash surrender value. Insurers typically process requests within a few business days. Interest accrues on unpaid balances and reduces the death benefit. Repayment is flexible; you can pay interest only, make partial payments, or repay in full. Many Canadians use policy loans for retirement income, education costs, business financing, or emergency funds. Loans are generally tax-free while the policy remains in force, though surrender or lapse may trigger tax, based on the policy’s Adjusted Cost Basis (ACB).
