Borrowing Against Life Insurance Canada: Money Hack or Risky Move?
How does borrowing money against life insurance work in Canada?
Borrowing against your life insurance policy is only an option with whole life insurance or universal life insurance policies.
Here’s how borrowing against life insurance works in Canada:
1. With each premium you pay, part of the payment goes toward building a cash value for your policy.
2. Your policy’s cash value grows at an interest rate set by your terms. After you’ve accumulated enough cash value, you have the option to borrow against it.
3. A loan against your life insurance is not taken from your death benefit or cash value.
4. A loan against your life insurance is borrowed from your insurer directly, and they use the value your policy has built up as collateral.
You should probably reconsider if the main reason you want whole or universal life insurance is to borrow against it. It isn’t a good fit for the majority of Canadians for two main reasons.
- Cost: Whole life insurance coverage is 5-15x more expensive than a term policy
- Duration: You’ll be locked into paying steep premiums for life, and since most people can’t keep up with the costs, the majority of whole life policies lapse before ever paying out.
Erik Heidebrecht is the customer service manager and licensed advisor at PolicyMe. Erik has a Bachelor of Business Administration from the University of Wilfrid Laurier University with a minor in Financial Mathematics. Erik has broad exposure to the personal finance world after working at Fidelity Investments Canada as well being an advisor with Sunlife Financial, one of Canada's largest individual insurance providers. Erik is now focused on taking that experience to improve the customer journey and provide the best advice to Canadians looking for life insurance.
Erik Heidebrecht is the customer service manager and licensed advisor at PolicyMe. Erik has a Bachelor of Business Administration from the University of Wilfrid Laurier University with a minor in Financial Mathematics. Erik has broad exposure to the personal finance world after working at Fidelity Investments Canada as well being an advisor with Sunlife Financial, one of Canada's largest individual insurance providers. Erik is now focused on taking that experience to improve the customer journey and provide the best advice to Canadians looking for life insurance.
Despite what TikTok financial influencers might say, “Whole and universal life insurance aren’t worth it for the majority of Canadians” according to Erik Heidebrecht, a Certified Life Insurance Advisor.
Is borrowing against life insurance a good idea?
No, borrowing against your life insurance is generally not a good idea. Look at it this way—you should not borrow against your life insurance policy if your primary reason for having a policy is to protect your loved ones.
Financial experts have different takes on whether you should borrow against your life insurance policy. For Dave Ramsey, it’s a hard no:
“[It is] the worst thing you can do … you’ll have to pay interest on the loan, and if you don’t pay all of it back, your death benefit will decrease. Think about how crazy this is – you’re paying interest on a loan made up of your own money.”– Dave Ramsey, Personal Finance Expert
In comparing whole and term life insurance, remember: There’s a huge price difference in the life insurance premiums. Term life insurance costs less and the premiums don’t last your whole life.
For the average Canadian family, term life insurance is a better idea because it frees up more cash now that can be invested in that is basically guaranteed to earn more money than an expensive life insurance policy.
Pros & cons of borrowing against life insurance
The decision to borrow against your life insurance policy has some advantages — but do the pros outweigh the cons?
Pros of borrowing against your policy
1. Quick access to cash
Fewer days, fewer steps: You simply file a form with your insurer for a policy loan. They already have your cash value as collateral, so your loan approval process will be a lot easier.
2. No impact on your credit score
Zero credit check, zero impact on your credit: Low credit may prevent you from borrowing from other lenders, but not against your own whole life insurance policy.
3. Flexibility in when you pay it back
No rush: When it comes to borrowing money against your life insurance policy, you don’t have a set repayment schedule. Of course, hefty interest charges will accumulate on outstanding loans.
Cons of borrowing against your policy
1. You have to wait for cash value to build up
Long wait, lower returns: In most cases, it’s 10 years until your cash value is high enough to become collateral for a loan. Other investment options provide higher rates of return and easier cash access for withdrawals. Here's the average rate of return on a whole policy compared to other avenues:
2. You can lose your coverage if you don't pay
Your debt, your loss: If the amount you owe becomes higher than your cash value (through accumulated loan interest), then your insurer will dig into your policy’s death benefit to recoup their loss. That’s less money for your beneficiaries when they need it.
3. Only available with whole or universal life insurance
You can only borrow against whole and universal life insurance policies. These types of life insurance policies cover you for your whole life, but you’ll pay very high premiums for more coverage than the average Canadian needs.
Why you should consider term life insurance instead
Term life insurance is the best option for most Canadians.
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.
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. Why tie up your funds in permanent policies that may not be worth it long-term?
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.
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. It typically takes at least 10 years for policyholders to accumulate enough cash value, but the exact timeframe depends on the type of policy.
What is the interest rate on a life insurance loan?
Interest rates on a life insurance loan are typically between 5-8%. However, the rate varies depending on the life insurance company you’re with, your policy’s terms, and whether your interest rate is fixed or variable.
How much can you borrow against your life insurance policy?
Most providers allow you to borrow up to 90% of your cash value of the policy. Every insurer has different rules for the loan amounts available with policy loans.
Make sure to do your research. Look up the best life insurance in Canada; our guide to the best whole life options is a good place to start.
Borrowing 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.