Accessing the Cash Value of Life Insurance While You're Alive – Explained (Ontario, Canada)
Hi, WealthTrack founder David Pipe here. When most people think of life insurance, they picture a cheque delivered to loved ones after they've passed. But what if we told you that some life insurance policies can actually be used while you're still alive — not just as protection, but as a living asset?
In this post, we’ll break down how Ontarians can access the cash value in their life insurance policies while alive, what kinds of policies allow this, and the key tax and financial implications you should know under Canadian law.
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What Is the “Cash Value” in a Life Insurance Policy?
Not all life insurance policies are created equal. In Canada, there are two main types:
Term Life Insurance – pure insurance, no cash value.
Permanent Life Insurance – includes whole life and universal life policies.
The key difference? Permanent policies accumulate cash value over time.
Cash value is a tax-deferred savings component built inside your policy. A portion of each premium you pay is invested (either at a guaranteed rate or market-linked, depending on the policy), growing slowly over the years. This money doesn’t disappear — it’s yours to access, under certain conditions.
How Does Cash Value Grow?
In a whole life policy, your premiums are fixed and the cash value grows at a steady, guaranteed rate. If you have a participating policy, it may also earn dividends from the insurance company’s profits, which can further accelerate growth.
Universal life insurance gives more flexibility, letting you choose how much to contribute over and above the cost of insurance, and often lets you choose investment options within the policy.
Importantly, in both cases, the growth of your cash value is tax-deferred, meaning you don’t pay taxes on it as long as it stays inside the policy.
Ways to Access the Cash Value While You're Alive (In Ontario)
Here’s where things get interesting. If you hold a permanent life insurance policy, here are four ways you can tap into the accumulated cash value:
1. Policy Loans
You can borrow money directly from the insurer, using your policy’s cash value as collateral. This is a popular option because:
There’s no credit check.
The loan is fast and private.
You don’t pay tax on the loan (as long as it remains a loan).
But be warned: If the loan isn’t repaid, it will reduce your death benefit. And interest accrues on the borrowed amount.
2. Withdrawals from the Policy
You can withdraw part of your cash value directly. This puts real cash in your hand — but it’s not always tax-free.
Withdrawals are generally taxable if they exceed what you’ve paid into the policy (called the adjusted cost base, or ACB). This is calculated based on CRA formulas and varies over time.
Also, withdrawals reduce both the death benefit and the potential future growth of your policy.
3. Surrendering the Policy (Partial or Full)
You may surrender (or “cancel”) part or all of your life insurance policy and receive the cash surrender value. This is often used as a last resort if you no longer need the insurance coverage.
This can result in a taxable gain and terminates your coverage — so it should be carefully considered.
4. Using It as Collateral for a Bank Loan
Some Ontarians, especially business owners, use their policy as collateral for a third-party bank loan. Unlike policy loans, the funds come from a financial institution — not your insurer.
Why is this powerful?
It keeps your policy intact.
Loans are not taxed as income.
In some cases, the interest paid on the loan may be tax-deductible (consult a tax professional).
This strategy is often used in corporate-owned life insurance and high-net-worth estate planning.
What About Taxes?
This is where Canadian policyholders — especially in Ontario — need to be cautious.
Growth inside your policy is tax-sheltered (like an RRSP or TFSA).
Withdrawals or policy surrenders can trigger income taxes.
Loans against your policy are typically not taxable unless the policy lapses or is canceled.
Large loans or withdrawals may impact government benefits, such as the Guaranteed Income Supplement (GIS) or Old Age Security (OAS) clawbacks.
Bottom line? Always speak with a licensed tax advisor before accessing your policy funds.
Pros and Cons of Accessing Your Life Insurance Cash Value
Pros:
Fast, easy access to capital.
No need for traditional loan approval.
Can be used for emergencies, education, business investment, or retirement funding.
Tax efficiency (in some scenarios).
Cons:
Reduces your death benefit.
Potential tax consequences.
Interest may compound quickly if taking a loan.
Could affect eligibility for government income-tested benefits.
Real-Life Example: Janet’s Decision
Let’s say Janet from Kitchener has had a participating whole life policy since she was 30. She’s now 52 and has $45,000 of accessible cash value. Her daughter is heading to university, and rather than take on a high-interest student loan, Janet takes out a policy loan.
She pays no taxes, keeps her policy in force, and plans to repay it over 10 years. Her daughter avoids debt, and Janet keeps her long-term coverage intact.
So, Should You Access Your Cash Value?
That depends. Cash value can be an excellent tool if you:
Need liquidity.
Are comfortable reducing your death benefit.
Have a repayment or tax strategy in place.
But it's not a decision to make lightly. Make sure to speak with:
A licensed Ontario-based insurance advisor.
A tax professional familiar with CRA policy rules.
Final Thoughts
Life insurance isn't just about protecting others after you're gone — with the right type of policy, it can be a financial asset while you're still living.
If you’re in Ontario and wondering how your life insurance policy might help fund your goals today, it’s worth revisiting your policy with a professional. You might be sitting on a source of capital you didn’t know you had.
🔎 Have Questions?
At WealthTrack, we help Ontarians make the most of their insurance and financial plans. If you’d like to know whether your policy has cash value — or how to access it tax-efficiently — reach out to us for a free consultation.
