Borrowing Against Life Insurance in Canada (Pros & Cons)
Quick answer: can you borrow against life insurance in Canada?
You can borrow against life insurance in Canada if you have a cash value policy and it’s accumulated enough value to be borrowed against. You need to check your policy’s specific guidelines.
Generally speaking, you’d be able to borrow from your policy if:
- You have a life insurance policy that has cash value (whole or universal).
- Your cash value policy has built up enough value for you to borrow (depends on the insurer).
Borrowing incurs interest, and can even eat into your death benefit if you don’t repay it. So, even if you are allowed to borrow against your policy, you also need to consider whether borrowing against life insurance is worth the costs and risks.
How does borrowing money against life insurance work in Canada?
Borrowing against life insurance means that you are either taking out a loan using the cash value of your existing permanent life insurance policy as collateral.
First, you must wait 3-10 years for your policy to build up enough cash value.
- Step 1: You request to borrow money from the insurer itself, offering your policy as collateral. The insurer will review the available cash value but they do not usually verify your income or perform any credit checks.
- Step 2: You sign a form and the insurer issues the funds to you. You can now use the cash, but interest immediately starts accruing on the balance of your loan. Interest is either pay-as-you-go or capitalized.
- Step 3: You must either repay the loan or reduce your death benefit. You’ll owe more than you borrowed due to interest. If you cannot repay the full amount you borrowed, then the outstanding balance will eat into your death benefit or even overcome it, which would cancel your policy.
Who is the lender? Your insurer or some other third-party lender can issue the loan.
What types of policies can you borrow against? Only whole life and universal life policies (permanent life insurance) accumulate cash value that can be borrowed against.
How much can you borrow? How much you can borrow depends on how much cash value your policy has built up, which can take many years. Part of your premiums may contribute to building cash value, depending on your policy design. That cash value can grow over time based on your policy's terms.
What are the drawbacks of borrowing against life insurance? If you don’t pay back what you owe or it could cut into the policy’s death benefit or cancel your coverage altogether.
You can only borrow against permanent life insurance
Term life insurance cannot be borrowed against. That’s because term policies do not include any investment or savings component that accumulates cash value.
Permanent policies (whole and universal) are the only life insurance policies that accrue a cash value over time and that can be borrowed against. Your life insurance premiums add up and a portion of them are invested, and you can technically make withdrawals or borrow against the value.
For most Canadians’ financial needs, life insurance is about protection, not investment. While you can borrow against permanent life insurance, you may have access to lower-risk ways of accessing cash or loans.
“Despite what TikTok financial influencers might say, whole and universal life insurance aren’t worth it for the majority of Canadians” – Erik Heidebrecht, Certified Life Insurance Advisor
When does borrowing against life insurance make sense?
It may make sense to borrow against life insurance if you have no other credit options available but you need fast cash and you’re confident you can repay the loan.
Retirees and self-employed people, especially, may not have access to other forms of credit. However, borrowing is usually only a good idea as a strategic short-term solution when you need temporary access to cash.
When is borrowing against life insurance a bad idea?
It’s generally not a good idea to borrow against life insurance if the loan is for non-essential spending or if you’d struggle to repay it. Borrowing from a policy is not a sustainable ongoing debt management solution.
Think of it like this: You should not borrow against your life insurance policy if your primary reason for having a policy is to protect your loved ones.
Borrowing against life insurance vs. other options
Besides a policy loan, Canadians have lower-cost borrowing options like HELOCs, TFSA withdrawals, and personal loans. The best choice for you depends on your repayment flexibility, assets, and long-term financial goals.
To sum up, if your concern is “I need money,” then you may be better off accessing money from TFSAs or HELOCs compared to a policy loan or a personal loan.
But if your concern is “I need money without affecting my overall estate strategy,” then borrowing against a life insurance policy could be a strategic, tax-sensitive solution for accessing funds without disturbing your investments.
It is strongly advised to consult a financial advisor to understand all your borrowing options.
Policy loan vs withdrawal
If you choose to access the money in your cash value policy by taking out a policy loan, withdrawing the cash, or surrendering the policy, then you need to understand the tax implications and death benefit impacts.
A policy loan may be worth considering if you plan to repay the money and want to avoid triggering taxes by withdrawing cash value.
Pros & cons of borrowing against life insurance
The decision to borrow against your life insurance policy has some advantages, like access to cash. However, there are serious risks, like reducing your death benefit.
Is whole life insurance worth it?
Borrowing against whole life insurance is possible, but for most Canadians, it may not be the best financial strategy to take out a permanent life policy.
Permanent policies can make sense for people with lifelong dependents, estate planning goals, wealth transfer needs, or certain business planning needs.
The chart below explains the cash access part of this (and why other investments might be better, depending on your needs).
Why you should consider term life insurance instead
Term life insurance is the best option for most Canadians who want to purchase life insurance to protect their loved ones from financial hardship if they were to pass away.
With a term life insurance policy, you don’t have to worry about repaying interest on your own money or losing a death benefit because you find yourself unable to pay back what you borrowed. Plus, whole and universal life insurance policies cost more upfront, leaving you with less money to invest today in more profitable options.
In other words, term insurance can be paired with other savings and investment strategies (like TFSA/RRSP) to build borrowable cash value over time.
Take a look at the difference in returns.
In the bigger picture, term insurance gives you more control over your cash as your family’s needs change. Permanent life insurance has legitimate uses, but many Canadians don't need lifelong coverage. For those focused on protecting their family during their working years, term life insurance is often the more practical choice.
With term life insurance, you're covered for the term length you need, such as when your kids are young and financially dependent on you.
FAQ: Can you borrow against life insurance in Canada?
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.