Borrowing Against Life Insurance in Canada

Peer reviewed by
Erik Heidebrecht
Certified Life Insurance Advisor
In This Article

Key takeaways

  • You can borrow against life insurance in Canada if you have a whole or universal life insurance policy
  • The loan is taken out with your insurer using your policy’s cash value as collateral 
  • Loan repayment is flexible, but interest charges mean your policy’s payout could be drastically reduced
  • It can take upwards of 10 years to build up enough cash value to borrow from.
  • While TikTok financial influencers may tell you whole policies are the ticket to paying off debts, the truth is not that simple

How does borrowing money against life insurance work?

Borrowing against your life insurance policy is an option exclusive to whole life insurance or universal life insurance policies. 

Here’s how it works:

  1. As you pay your  premiums, part of your payments go toward building a cash value for your policy. 
  2. This cash value grows at an interest rate determined by your policy’s terms. Once you’ve accumulated enough cash value, usually after about 10 years, you then have the option to borrow against it. 
  3. This loan is not taken from your death benefit or cash value.
  4. Instead, you borrow from the insurer directly, who uses the value your policy has built up as collateral. 

You should probably reconsider if the main reason you want whole is to borrow against it. Whole life insurance isn’t the best fit for everyone. Remember: the main purpose of getting life insurance in the first place is to financially protect your family.

And whole life insurance costs 5 to 15 times more than a term policy. On top of that, you’ll be paying those sky-high premiums for your entire life. Choosing it just for the loan option may be a financial headache. Don't get caught up in policy features that may not be right for you.

Curious about how much term might cost? Get a quote online in just a few minutes. No strings attached:

Should you borrow against your life insurance policy?

Many people seek out whole or universal life insurance policies over term life insurance so that the option to borrow from their policy is available to them. 

It might seem like a no-brainer: financial protection for your family if you pass away and the option to use your policy while you’re alive if you need the extra cash.

Different financial experts have different takes on whether you should borrow against your life insurance policy. For Dave Ramsey, it’s a hard no:

If borrowing against your life insurance policy is of interest to you,  it’s crucial to speak to a financial advisor. It can be tricky to grasp the nuances of a life insurance loan, but an advisor can help you understand how your policy works and the risks and benefits of borrowing against life insurance for your personal financial goals.

How soon can I borrow against my life insurance policy?

You can borrow against your life insurance policy as soon as your policy has built up enough cash value to do so. While the exact timeframe depends on your policy’s terms, it typically takes at least a decade to accumulate enough cash value to borrow against.

What is the interest rate on a life insurance loan?

The interest rate on a life insurance loan varies depending on the life insurance company you’re with, your policy’s terms, and whether your interest rate is fixed or variable. That said, interest rates for borrowing against life insurance are typically between 5-8%.

How much can you borrow against your life insurance policy?

It’s different for every insurer, but you can typically borrow an amount close to the total cash value, with most insurers allowing you to borrow up to 90%.

Do you have to pay back borrowed money from life insurance?

Unlike a typical loan, you don’t have to pay back the borrowed money from life insurance. 

This might seem like an added benefit, but keep in mind that if you don’t pay back the loan, it will simply continue accruing interest. 

After the interest on your loan exceeds the cash value of your policy, one of two things can happen:

  • Your insurer can take the remaining money out of the policy’s death benefit or coverage amount
  • Your policy can lapse and you will lose coverage altogether

Remember: how life insurance works is by acting as a financial cushion for your dependents after loss. 

If your policy lapses or if the death benefit is significantly reduced due to non-repayment of the loan, your loved ones may be left with less of a financial safety net than they’ll need.

Next, let’s walk through the pros and cons of borrowing against your life insurance policy.

Advantages of borrowing against your life insurance policy

1. Quick access to cash

Borrowing money against your life insurance policy is a quick process. 

You fill out a form with your insurer and the money is typically deposited into your account within a few days, making it a great option for those looking to access funds quickly. 

And since your insurer is using your policy’s cash value as collateral, you don’t have to jump through hoops of approval. You can access this cash at any time and for any reason.

2. Doesn’t affect your credit score

Borrowing against your life insurance policy also means no credit check, since the cash value is the insurer’s collateral. 

This makes it an appealing option for those with low credit scores who may not be able to borrow money otherwise. It also means that this loan will not affect your credit, even if you don’t pay it back right away.

3. Flexibility in when you pay it back 

When it comes to borrowing money against your life insurance policy, there’s no set time limit for when you pay it back, or if you do at all. 

That said, you’ll still want to consider paying the loan back at your earliest convenience to avoid hefty interest charges.

Disadvantages of borrowing against your life insurance policy

1. You have to wait for cash value to build up

Since your life insurance policy’s cash value is the loan’s collateral, you have to wait for the cash value to build up enough for you to borrow against. 

It can take a long time for this to happen, often upwards of 10 years, meaning the option to borrow won’t be available right away. To give you an idea, here's the average rate of return on a whole policy compared to other avenues:

comparing rate of return on whole life insurance to other investments - borrowing against life insurance canada

2. You can lose your coverage if you don’t pay

The flexibility of the loan payment can be tempting, but can easily become a problem if you’re not careful. 

It can seem like you’re borrowing from just yourself, you’ll want to make sure you don’t also end up borrow from your loved ones later on when they need the financial help most. And since life insurance is meant to protect your dependents, you want to make sure you don’t accidentally jeopardize their safety net.

Because the interest on your loan continues to accumulate if you don’t pay, it will eventually exceed the cash value of your policy. In this case, your insurer will have to dig into your policy’s death benefit to recoup their loss. 

This means that your family could easily find themselves with a much smaller life insurance payout than they might need later on, or no payout at all.

3. Your only options are whole or universal life insurance

If you want to take advantage of this option, you need to have a whole or universal life insurance policy in place. 

These types of life insurance policies cover you for your whole life. But universal and whole life insurance premiums are expensive and provide more coverage than most Canadians need. 

This is especially true if your main reason for getting life insurance is to protect your financial dependents rather than passing down large assets.

Why you should consider term life insurance instead

For most Canadians, term life insurance is the way to go. Whole life insurance may offer perks like borrowing against your policy later on, but it's not necessarily the best choice for your finances. 

The premiums for term in Canada are significantly cheaper than whole, which means you can use the extra money at your discretion instead of worrying about repaying interest on your own money!

With term, you invest or put the difference in a TFSA or RRSP account, giving you more control over your cash.

borrowing against life insurance - whole versus going with term and investing the rest

And your insurance needs will change as your family's situation does. Why tie up your funds in a policy that may not be worth it long-term?

With term life insurance, you're covered for the term length you need, like when your kids are young and financially dependent on you. See just how much more affordable term is:

FAQ: borrowing against life insurance in Canada

Can you take out a loan against your life insurance policy in Canada?

Yes, you can borrow against your life insurance policy in Canada, as long as your policy is a universal or whole life policy.

Is money borrowed from life insurance taxable in Canada?

Money borrowed from life insurance is not taxable as long as the policy is still in force. Your loan will become taxable, however, if you surrender your policy or your policy lapses and the amount owing on the loan exceeds what was paid into the policy.

Laura McKay

COO & Co-Founder

About the Author

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