Borrowing Money from Your Life Insurance Policy – Pros and Cons
Hi, WealthTrack founder David Pipe here. When people think of life insurance, they often imagine it as a safety net for loved ones — something that comes into play only after death. But what many Canadians don’t realize is that some life insurance policies offer access to real, usable money while you're still alive.
If you have a permanent life insurance policy (such as whole life or universal life), there’s a good chance it builds cash value over time — and you may be able to borrow against it. This strategy can be useful in times of financial need, opportunity, or emergency. However, like any loan, it comes with potential drawbacks.
Let’s break down how borrowing from your life insurance works, the advantages it offers, and what to watch out for — especially for residents of Ontario, Canada.
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What Is a Life Insurance Policy Loan?
A policy loan is money you borrow from your insurance provider using the cash value of your life insurance policy as collateral. You're not withdrawing from the policy directly — you're taking a loan, and your insurer holds the policy's value as security.
You continue to own your policy, and it remains in force — as long as certain conditions are met.
Only permanent life insurance policies (not term insurance) offer this feature, because they accumulate cash value over time.
How Does It Work in Canada?
In Canada, policy loans are regulated under federal and provincial insurance law and overseen by the Office of the Superintendent of Financial Institutions (OSFI). When you borrow against your life insurance:
The loan amount is limited to a percentage of your policy’s cash surrender value (usually 90% or less).
Interest accrues on the borrowed amount, and you choose whether to pay it or let it accumulate.
The loan does not affect your credit score or appear on your credit report.
If unpaid, the balance is deducted from your death benefit when the policy pays out.
Pros of Borrowing from Your Life Insurance Policy
1. Fast Access to Cash
Unlike traditional loans, a policy loan doesn’t require a credit check, income verification, or lengthy approval process. It’s typically processed quickly — sometimes within days.
2. No Tax on the Loan
Because you’re not withdrawing income, policy loans are not considered taxable in Canada — unless the policy is surrendered or lapses. This makes them a tax-efficient way to access funds.
3. Flexible Repayment
You’re not locked into a strict payment schedule. You can repay the loan on your own timeline, or even choose not to repay it at all (though the balance and interest will reduce your eventual death benefit).
4. Preserve Policy Ownership
Your coverage remains active as long as the loan doesn’t cause the policy to lapse. You’re still insured, and your beneficiaries will still receive a benefit — minus any outstanding loan.
5. No External Lender Involvement
Since you’re borrowing from the insurer, you avoid the paperwork and scrutiny that comes with banks or private lenders. It’s a private, internal transaction.
Cons of Borrowing from Your Life Insurance Policy
1. Reduced Death Benefit
If the loan isn’t repaid before you pass away, the insurer will deduct the loan balance (plus interest) from the payout to your beneficiaries. This can significantly reduce the legacy you leave behind.
2. Interest Accrual
Policy loans aren’t free. Interest compounds over time — and if unpaid, can eat away at the value of the policy. If interest builds up too much, the policy could lapse, terminating your coverage entirely.
3. Risk of Taxable Event
If the policy lapses or is surrendered with an outstanding loan, it could trigger a taxable gain. That means you could owe taxes on the difference between the loan amount and your adjusted cost base (ACB), based on CRA rules.
4. May Affect Policy Performance
In participating or investment-linked policies, borrowing against your policy may reduce dividend payments, investment growth, or future policy value. It can also limit your ability to make changes to the policy later on.
5. Not Available with All Policies
If you hold a term life policy, you won’t be able to take a loan. Even some permanent policies in Canada may not offer loan provisions or may have restrictive rules around accessing cash value.
Real-Life Example: Business Opportunity or Emergency Cushion
Imagine a 50-year-old business owner in Ontario who purchased a whole life policy 20 years ago. The policy now holds $60,000 in cash value. Rather than applying for a business loan through a bank (with interest, approval delays, and credit checks), they opt for a $30,000 policy loan to cover a short-term cash flow issue.
The funds are tax-free, the loan is secured with minimal paperwork, and the policy remains intact. Once the business stabilizes, the owner starts making repayments to preserve the full death benefit for their family.
This kind of liquidity can be a powerful planning tool — but only when used with a clear strategy.
Policy Loans vs. Using Your Policy as Collateral with a Bank
There’s another option: using your policy as collateral for a third-party bank loan (also called a collateral assignment).
Here’s how it compares:
FeaturePolicy Loan (Insurer)Collateral Loan (Bank)LenderYour insurance providerA financial institutionCredit checkNot requiredUsually requiredPolicy ownershipRemains unchangedMay be tied to loan termsTax implicationsTypically noneMay vary by structureCommon use caseQuick personal borrowingLarge investments, estate planning
For high-net-worth individuals or business owners, the collateral loan route can provide large sums of money while keeping the policy growing in the background.
Should You Borrow from Your Life Insurance Policy?
It depends on your financial goals, the structure of your policy, and your repayment ability.
It may make sense if:
You need quick, tax-efficient access to cash.
You understand how it affects your death benefit.
You have a plan to repay or minimize long-term impact.
It may not be ideal if:
You rely on the full death benefit for family support.
You don’t have a strategy to manage interest accrual.
Your policy is still early in its growth phase and doesn’t have much cash value.
Final Thoughts
Borrowing from your life insurance policy can be a smart, strategic move — or a risky shortcut. For Canadians with permanent policies, especially those in Ontario where costs of living and entrepreneurship are high, it can offer a helpful financial cushion.
But like any financial tool, it needs to be used wisely. A professional insurance advisor can help you evaluate whether a policy loan fits into your broader wealth plan, and a tax professional can clarify any CRA implications before you act.
If you think your life insurance might have untapped value, consider revisiting your policy. You may have more flexibility and financial power than you realized — right in your back pocket.
