How to Withdraw Money from Your Life Insurance Policy
If the idea of withdrawing money from your life insurance policy while you’re still alive sounds strange to you, you’re not alone. But the reality is, whole life insurance can act like a savings or investment tool, or even an emergency fund.
That’s right, when it comes to participating whole life insurance, there are two main benefits – and one of those you have access to during your lifetime:
- the death benefit – a lump sum of money your beneficiaries (i.e., the persons you choose to receive your life insurance payment in the event of your death) will inherit, tax-free, after you’re gone
- the living benefit – a “cash value” you can dip into when you need it most.
Whole life insurance with a cash value – what is that?
Think of the total cash value as an investment tool that comes with your participating whole life insurance policy. It’s a nice blend of safe and higher risk investing, one that results in a nicely balanced portfolio, with the opportunity for long-term growth.
It looks a little something like this:
Total cash value = guaranteed cash value¹ + non-guaranteed dividends²
(Note: While dividends are indeed higher risk than the cash value, they are still considered a low- to medium-risk investment. Just as importantly, Serenia Life has consistently paid out dividends members since launching this product in 1972.)
Can I withdraw money from my life insurance policy in Canada?
Yes, you can withdraw³ money from your life insurance policy from the dividends portion of the total cash value mentioned above. This will simply reduce your death benefit by the amount you withdraw.
For example, if you purchased $500,000 of whole life coverage, your beneficiaries will receive this amount after you pass away. Let’s say the investment component of your policy grows by nearly $45,000 over a period of 10 years⁴. If you withdraw that $45,000, your beneficiaries would still receive the $500,000 – they would simply not benefit from the growth.
Pro Tip! If the amount you withdraw is less than what you’ve paid into the policy, you may not have to pay income tax.
Can I get a loan on my life insurance policy in Canada?
Yes, you can take out a loan⁵ on the guaranteed cash value of your life insurance policy.
As with any loan, you will need to pay this back; otherwise, the amount you owe (plus interest) will be deducted from the death benefit. In this case, if you took out a $100,000 loan on your $500,000 life insurance policy and – worst case scenario! – died tomorrow, your beneficiaries would receive a reduced death benefit of $400,000. Now if you happened to pass away a few months later, they would receive the $400,000 less any interest owed.
The good news is, that unlike the bank, you can pay this loan back at your own pace – but the quicker you pay it off, the less interest you will owe. The bad news? If you haven’t paid the loan back, and the interest you’re accumulating is higher than the dividends you are earning, your policy could lapse.
Can I cancel my life insurance and get money back?
Yes, you can cancel your life insurance policy and get your money back. The technical name for this is a full surrender⁶.
In this scenario, you will no longer have life insurance coverage in the event of your death, potentially leaving your loved ones in a financially stressful situation when the time comes.
If you cancel, you will receive your $500,000 (minus a “surrender fee,” taxes owed on any interest earned, and any unpaid premiums or outstanding loan balances, if any.) But your beneficiaries will receive $0 when you die – and may not have enough money to pay off your debt, make mortgage payments, or simply keep up with the lifestyle they are used to.
It’s important to note that while surrendering your policy to claim the cash value isn’t the wisest way to make use of your life insurance, it may be the best choice for you if one or both of the following apply:
- You no longer need a life insurance policy
- You can no longer afford to make the payments
In both of these situations, you’re better off cancelling your life insurance. And depending on how long you’ve had the policy, you may be able to keep a good chunk of the cash value.
Note that you also have the option of a partial surrender⁶, which will reduce the value of the death benefit by the amount you’ve withdrawn.
Is cash surrender value of life insurance taxable in Canada?
Yes, cash surrender value is taxable if this value is more than what you’ve paid for your policy so far.
In this case, the money you receive as the policyowner will be treated as taxable income, and includes any interest the cash value has earned or any dividends paid into it.
Looking for the best cash value life insurance in Canada?
While we can’t promise ours is the absolute best, it’s certainly up there – in fact, Serenia Life’s cash values are highly competitive here in Canada.
The living benefits of life insurance
While it may seem strange to make use of your life insurance policy while you’re still living, remember that accessing the cash value after several years of growth is a great option if you need an emergency fund, help paying for a child’s post-secondary education, a down payment on a home, and more!
Ready to start building up your cash value in a whole life policy? Want to withdraw your money from your life insurance?
Speak with your Serenia Life advisor today! Don’t have an advisor? Fill out this short form to get the ball rolling.
¹Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
²Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
³Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
⁴Example only, as of December 2024. Participating whole life insurance policy for male, non-smoker, age 40, with Paid-Up Addition dividend option.
⁵Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
⁶Policy surrender can either be partial or full surrender of the cash value of the policy. A partial surrender will reduce the value of the policy. A full surrender means cancelling the policy and receiving the cash value less any surrender fees. Beneficiaries won’t receive any death benefit upon full surrender. There may be tax on the amount received that is above the adjusted cost basis.
