What happens when you surrender a whole life insurance policy in Canada?

What is a surrender charge on whole life insurance?

A surrender charge is the fee your insurer charges when you surrender your whole life insurance policy during its early years. 

Surrender charges in Canada are:

• More common in certain universal life policies; many participating whole life policies don’t show an explicit charge but have low early cash surrender value (CSV)
• Highest in the first few years and decline gradually over time as your cash surrender value builds. Most insurers in Canada apply surrender charges during the early years. The surrender charges vary from one insurer to another

In short, the longer you keep the policy, the more cash surrender value you’ll get upon terminating your coverage.

How is the cash surrender value calculated?

Cash surrender value is calculated by subtracting any surrender charges, outstanding loans, or other deductions from your total cash value.

Cash Surrender Value (CSV) = Cash Value – (Surrender Charges + Outstanding Loans + Other Deductions)

Let’s take an example that you own a $100,000 whole life policy that you’ve held for eight years. Your cash value has grown to $12,000, but there’s a 20% surrender charge and a $1,000 policy loan.

What are the tax implications of surrendering?

The main tax implication of surrendering a whole life insurance policy in Canada is that any gain you make on the policy is taxable as income.

While no tax is directly deducted from your surrender payout, the taxable portion is the profit your policy has earned over time. 

The Canada Revenue Agency (CRA) defines this as: Taxable Policy Gain = Cash Surrender Value (CSV) + Any Repaid Loans – Adjusted Cost Basis (ACB)

For example, if your policy has a CSV of $25,000 and ACB of $18,000, then you’ll pay income tax on $7,000 (if no loan).

When should you surrender your whole life policy?

You should consider surrendering your whole life insurance policy only when keeping it no longer fits your financial needs or goals.

While surrendering should be your last resort, it can make sense in the following cases:

• You no longer need the coverage (no dependents, sufficient assets elsewhere)
• You can’t afford the premiums, and other options don’t work for you
• You want to reallocate funds to other priorities or investments after comparing net outcomes
• You need immediate cash to repay a debt or major expenses
• Your cash value has grown enough that accessing it supports your financial goals

A whole life Insurance policy is a long-term valuable asset. Surrendering ends protection and may reduce value due to fees, loans, and taxes.

Key considerations before you decide

Before surrendering your whole life insurance policy, it’s important to weigh how ending your coverage could impact your long-term financial security and goals.

Here are key factors to review before making your decision:

• Loss of lifelong protection: Once surrendered, your beneficiaries lose the death benefit, and reinstating coverage later may be costly or impossible
• Reduced payout value: Early surrender often leads to lower cash surrender value because of fees, outstanding loans, or surrender charges
• Potential tax impact: Any policy gain is taxable as income in the year you surrender your policy
• Impact on future insurability: If your health has changed, you might not qualify for new life insurance at affordable rates
• Long-term financial goals: Consider whether surrendering supports or disrupts your broader estate, retirement, or liquidity plans.

What are the key alternatives to surrendering your whole life insurance policy?

The key alternatives to surrendering your whole life insurance policy include options that let you access its cash value without giving up your lifelong coverage.

Before you surrender your policy, it’s worth exploring these choices, they can help you meet short-term financial needs while preserving your policy’s long-term value:

• Take a policy loan: If you need quick access to funds, you can borrow against your policy’s CSV or dividends. Most whole life and universal life policies in Canada and universal life policies allow policy loans. However, it’s important to note that the interest rate accrues over time, unpaid loans reduce death benefit, and still may have long term tax consequences. You can also consider a collateral loan, where you borrow against your policy’s cash value from a bank or another financial institution instead of the insurer
• Withdraw funds: You can withdraw funds from your policy, but keep in mind that withdrawals (also called partial surrenders) may be taxable if the amount you take out exceeds your policy’s Adjusted Cost Basis (ACB). Withdrawals always reduce your cash surrender value and may lower your death benefit. Rules can vary by policy, so check with your insurer for details
• Use premium offset: If you’re struggling to keep up with the premiums, consider redirecting dividends/CSV to cover premiums. It’s important to note that dividends in a participating whole life plan are not guaranteed and coverage growth may slow down
• Choose a partial surrender: Withdraw a portion of CSV. However, this reduces future values and may reduce the death benefit, depending on the contract
• Choose reduced paid-up insurance: Use CSV to purchase a smaller, fully paid-up policy. In simple terms, you’ll no longer pay premiums but have lifelong protection. This is a smart way to keep a portion of your coverage active without additional costs

 For short-term cash needs, borrowing or withdrawing may be better than surrendering.

How to surrender a whole life insurance policy?

To surrender your whole life insurance policy, you’ll need to contact your insurer, complete a surrender request, and confirm how much cash value you’ll receive after deductions.

Here’s how the process typically works:

• Contact your insurer or advisor: Ask about your current cash surrender value (CSV), surrender charges, and any unpaid loans or premiums
• Review tax implications: Check how much of your payout will be taxable
• Complete the surrender request form: Submit it with required identification or policy documents
• Confirm the payout details: The insurer will calculate your final CSV after deductions
• Receive your payment: Once processed, your coverage officially ends and the insurer issues your payout
  

Before proceeding, ensure you’ve reviewed all other options, surrendering is permanent and cannot be reversed.

The bottom line on surrendering a whole life policy

You should only surrender your whole life insurance policy if it no longer fits your financial goals or protection needs. While surrendering provides immediate cash, it permanently ends your coverage and forfeits future dividends and growth potential.

Before taking this step, review alternatives such as policy loans, partial withdrawals, or reduced paid-up insurance, these options can offer liquidity while keeping your protection intact.

Surrendering your policy is a major financial decision. A PolicyAdvisor licensed expert will help you understand your options and find the best way to access your policy’s value, without losing your protection.

Can  I get my money back if I surrender my whole life insurance policy?

Yes, when you surrender your whole life policy, the insurer pays you its cash surrender value (CSV), the amount that has built up over time through your premiums and investment growth. However, the actual payout will be lower than your total cash value because insurers deduct any surrender charges, policy loans, or unpaid premiums before issuing your payment.

How long do surrender charges last on whole life insurance?

The surrender charges are typically highest in the first few years of a policy and decrease gradually as your cash value grows. The timeline can vary depending on the policy’s structure and the insurer’s terms.

Are surrender proceeds taxable in Canada?

Yes, if your cash surrender value (CSV) is higher than your adjusted cost basis (ACB), the difference is taxable as income. Your ACB is the total premiums you’ve paid into the policy, minus certain adjustments. You’ll need to report the taxable amount in the year you surrender the policy.

What’s the difference between surrender value and death benefit?

The surrender value is what you receive if you voluntarily cancel your policy before death, it represents the savings portion of your plan. The death benefit, on the other hand, is the tax-free payout your beneficiaries receive when you pass away. However, there can be exceptions, for instance, if the payout goes to your estate or if the policy is owned by a corporation.Once you surrender the policy and take its cash value, your coverage and death benefit both end.

Can I borrow from my policy instead of surrendering it?

Yes, most whole life and universal life insurance policies in Canada allow you to take a policy loan using your cash value as collateral. This can give you quick access to funds without giving up your coverage. But remember, interest accrues on the borrowed amount, and if you don’t repay it, the outstanding balance (plus interest) will reduce your death benefit and could have tax implications down the road.

What happens if I stop paying premiums instead of surrendering?

If you stop paying premiums, your insurer may use the accumulated cash value to cover future payments and keep the policy active for a limited time. Eventually, if the cash value runs out, the policy will lapse, ending your coverage. Some policies offer a reduced paid-up option, which allows you to keep permanent coverage but with a smaller death benefit and no further premiums.