Permanent life insurance can do more than provide a death benefit. If your policy has accumulated cash value, you may be able to use it to access money while you’re still alive.
One option is a policy loan, where you borrow against the policy’s value rather than cancelling it or withdrawing the money outright. You may also be able to withdraw cash or use the policy as collateral for a bank loan, depending on the policy and lender.
These options can provide useful access to capital, but they come with interest, fees, tax considerations, and potential consequences for your coverage.
Here’s how to borrow against life insurance in Canada – and when it may or may not make sense.
When people talk about borrowing against life insurance, they usually mean borrowing against the cash value of a permanent life insurance policy.
Cash value is the value that accumulates inside certain permanent policies over time. It is separate from the policy’s death benefit.
So, can you borrow from life insurance without giving up the policy? In many cases, yes, provided the policy has sufficient cash value and its terms allow borrowing.
For example, suppose you have a permanent life insurance policy with $500,000 death benefit and $100,000 cash value.
Depending on the policy’s terms, you may be able to borrow a portion of that $100,000.
Important: You are not borrowing part of your death benefit. You are borrowing against the value that has accumulated inside the policy.
With a policy loan, the insurance company advances you money and records it as a loan against the policy. Interest is charged on the outstanding balance. If you don’t repay the loan, the outstanding balance can reduce the amount ultimately paid to your beneficiaries.
Permanent life insurance can also sometimes be used as collateral for a loan from a third-party lender. In that case, the bank or other lender – not the insurance company – is providing the money.
Borrowing is generally associated with permanent life insurance policies that have accumulated cash value.
Two of the main types are Whole Life Insurance and Universal Life Insurance. Let’s take a closer look at each.
Whole life insurance provides permanent insurance coverage and builds cash value. Depending on the policy, some of that value may be guaranteed.
Participating whole life policies can also receive dividends. These dividends are not the same thing as interest paid on a bank account, and they are generally not guaranteed. Depending on the policy’s dividend option, they can be used in several ways, including purchasing additional paid-up insurance or accumulating value.
You can generally borrow against whole life insurance once the policy has accumulated sufficient cash value, although the exact options depend on the policy contract.
Universal life is another type of permanent insurance that can accumulate cash value.
Universal life generally gives the policyholder more flexibility over premiums and investment choices. Universal life does not have the participating whole-life dividend mechanism.
However, the absence of dividends does not mean that you cannot borrow against the policy. Many universal life policies allow policy loans or withdrawals against the accumulated policy value.
| Life insurance type | Cash value? | Can you borrow against it? | Key considerations |
|---|---|---|---|
| Whole life | ☑ | ☑ |
|
| Universal life | ☑ | ☑ |
|
| Term life | ☒ | ☒ |
|
If you’re wondering how to borrow against life insurance, the process is generally straightforward:
Step 1: You own a permanent life insurance policy with sufficient available cash value.
Step 2: You request a policy loan from the insurer.
Step 3: The insurer determines how much you can borrow under the policy’s rules.
Step 4: You receive the loan proceeds.
Step 5: Interest accrues on the outstanding loan.
Step 6: You can repay the loan according to the policy’s repayment terms.
Step 7: If a balance remains outstanding, it can reduce the amount of money paid to your beneficiaries when the insured dies.
Example:
Suppose your policy has $100,000 of available cash value and you borrow $50,000.
You now have: Policy cash value: $100,000 and Policy loan: $50,000
If interest accumulates and you do not make payments, the loan balance could become $53,000, $56,000, or more over time.
The exact effect on the policy’s cash value can depend on the type of policy and the insurer’s accounting and loan provisions. This is particularly important with participating whole life policies, where policy loans can interact with dividend and cash-value calculations.
A policy loan is therefore best thought of as debt secured by the policy, rather than as simply withdrawing money from a savings account.
There is no single borrowing limit that applies to every life insurance policy.
The amount available depends on factors such as:
Most importantly, the borrowing limit is generally tied to the cash value, not the death benefit.
Example:
A $1 million life insurance policy does not mean that you can borrow $1 million. If the policy has accumulated only $50,000 of available value, your borrowing capacity will be based on that value instead.
The amount available can also be considerably lower during the early years of a policy. Permanent life insurance can take time to build meaningful cash value, and some policies have surrender charges that affect how much value is actually available.
The best way to determine the borrowing capacity of a particular policy is to check its current policy statement or ask the insurer or broker for the available loan value.
Policy loan interest rates vary by insurer and policy. Some policies use fixed rates, while others use variable rates or another formula, so there is no single rate for life insurance loans in Canada.
Interest accrues on the outstanding balance, meaning an unpaid loan can grow over time. For example, a $50,000 loan can become substantially larger if interest continues to accumulate.
When comparing a policy loan with other borrowing options, consider both the interest rate and how the loan affects the policy. Don’t assume that growth in the policy’s cash value automatically offsets the loan interest – they are separate components governed by the policy’s terms.
A policy loan may not require the same regular monthly payments as a conventional personal loan. Depending on the policy, you may be able to repay the principal and interest at your own pace or leave the balance outstanding.
However, “no fixed repayment schedule” does not mean “no consequences.”
If interest continues accumulating, the outstanding loan can become larger. A growing loan balance can:
If the policy lapses or is surrendered while a significant loan is outstanding, Canadian tax rules can become particularly important. The tax treatment depends on the policy’s adjusted cost basis and the details of the transaction.
Yes. Some permanent life insurance policies allow you to withdraw part of their cash value. Unlike a policy loan, a withdrawal doesn’t create a debt, but it can reduce the policy’s value or death benefit and may have different tax consequences.
Here’s how the main ways of accessing policy value compare:
| Policy loan | Withdrawal | Collateral loan | |
|---|---|---|---|
| Who provides the money? | Insurance company | You access your policy’s value | Bank or other lender |
| How does it work? | Borrow against the policy’s value | Remove value from the policy | Pledge the policy as security for a loan |
| Debt created? | Yes | No | Yes |
| Interest charged? | Yes | No loan interest | Yes |
| Effect on the policy | Outstanding balance can reduce benefits | Can reduce policy value and, potentially, the death benefit | Policy remains in place but is pledged as collateral |
| Credit underwriting | Generally, not conventional bank underwriting | Not applicable | Usually required |
| Repayment | According to policy terms | None | According to lender’s terms |
Yes. A permanent life insurance policy can potentially be pledged as collateral for a loan from a bank or other lender.
Unlike a policy loan, the money comes from the lender rather than the insurer, and conventional lending requirements such as creditworthiness and loan-to-value limits may apply. The policy remains in place, subject to the terms of the collateral arrangement.
This structure can be useful when you want to access financing while keeping the life insurance policy in force, but it’s still important to compare the loan’s total cost and terms with those of a policy loan.
The best source of financing depends on your circumstances. A policy loan, bank loan, and specialized lending arrangement each work differently.
| Policy loan | Bank loan | Specialized lender | |
|---|---|---|---|
| Who provides the money? | Insurance company | Bank or other financial institution | Specialized lender |
| What secures the loan? | Policy value | Collateral and/or borrower’s creditworthiness | Depends on the lender and arrangement |
| Credit underwriting | Generally, not the same as conventional bank borrowing | Usually required | Usually required |
| Interest rate | Set by the policy | Depends on the loan and borrower | Depends on lender and risk (might be higher than banks) |
| Repayment | Often flexible | Usually has defined terms | Depends on arrangement |
| Effect on life insurance | Outstanding balance can reduce benefits | Policy remains pledged as collateral | Depends on arrangement |
The comparison should ultimately focus on the total cost and risks, rather than just the advertised interest rate. Fees, repayment requirements, collateral requirements, tax consequences, and the effect on the insurance policy can all matter.
Infinite Banking is a financial strategy that uses permanent life insurance – most commonly participating whole life insurance – as part of a long-term financing system.
The basic concept is to build substantial cash value inside a life insurance policy and then use policy loans to access capital for purchases, investments, business expenses, or other financial needs.
The process may look like this:
Step 1: Fund a permanent policy (typically associated with participating whole life)
Step 2: Build cash value
Step 3: Borrow against the policy (this could involve a policy loan from the insurer or borrowing from a financial institution using the policy as collatera).
Step 4: Use the money (e.g. for a business, investment, major purchase, emergency, etc.)
Step 5: Repay the loan
Step 6: Continue building and accessing the policy over time (i.e. to deliberately use the policy as part of an ongoing personal financing system).
The idea is sometimes described as “becoming your own banker.”
However, Infinite Banking is not a separate type of insurance product. It is a strategy for using an existing type of financial product in a particular way.
Participating whole life is commonly used for Infinite Banking because it combines permanent coverage, cash-value accumulation, and the potential for policy dividends. Depending on the dividend option, those dividends can help build additional policy value, including through paid-up additions.
Universal life can also accumulate cash value and allow policy loans, but it has a different structure and investment profile. For this reason, participating whole life remains the traditional vehicle for Infinite Banking.
Not literally. When you take a policy loan, the insurance company is still lending you the money.
The “bank” analogy refers to using a permanent life insurance policy as a recurring source of financing: you build cash value, borrow against it when needed, and repay the loan over time.
The strategy may provide flexibility, but the loans still carry interest and the policy still has costs and risks.
Infinite Banking and a Home Equity Line of Credit (HELOC) share a similar basic concept: both allow you to access borrowed money using an asset you own as security, without having to sell that asset. With a HELOC, you borrow against the equity you have built in your home, while with an Infinite Banking strategy, you access borrowing supported by the cash value accumulated in a participating whole life insurance policy.
Infinite Banking is a long-term strategy, not a shortcut to cheap financing.
Some of the main considerations include:
Infinite Banking can be useful for some people with long-term financial goals and sufficient cash flow, but it is not automatically superior to conventional investing or borrowing.
Borrowing against life insurance can make sense in some circumstances, but it is not automatically the best way to borrow.
It may be worth considering if you:
It may be less attractive if you:
The key question is not simply “Can I borrow against my life insurance?” It is:
“What will this borrowing cost me, and what happens to my policy if I leave the loan outstanding?”
That comparison should include interest, fees, tax consequences, repayment requirements, and the effect on the policy’s death benefit and long-term value.
Borrowing against life insurance can provide access to the cash value of a permanent policy without necessarily giving up the coverage. You may borrow directly from the insurer, withdraw cash, or use the policy as collateral for financing from a bank or other lender.
Each option has different costs, tax implications, and effects on the policy. Before borrowing, compare the available options and make sure you understand how an outstanding balance could affect your coverage.
Need help deciding whether borrowing against life insurance makes sense for you?
If you would like to discuss your personal circumstances and life insurance needs, you are very welcome to connect with us – just complete a quote on this page.
Our team includes experienced life insurance brokers and specialists who work with more insurers than most other brokerages in Canada, allowing us to help find solutions tailored to your health profile and financial goals.
Generally, no. Term life insurance normally does not accumulate cash value, which means there is usually nothing available to borrow against. Permanent policies with cash value are the main type used for policy loans.
An outstanding policy loan can reduce the amount ultimately paid to beneficiaries. The exact effect depends on the policy and the amount of the outstanding loan and interest.
Potentially, yes. If the policy continues to have sufficient available value and the insurer’s terms permit additional borrowing, you may be able to take additional policy loans. Existing loans and accumulated interest can affect how much additional borrowing is available.
A policy loan is made by the insurer rather than a conventional bank loan, so it generally does not work like a traditional loan reported through the credit system. However, the specific arrangement and any separate collateral financing should be checked with the insurer or lender.
A policy loan generally relies on the value of the insurance policy rather than conventional unsecured credit underwriting. However, the insurer’s policy terms determine whether and how much you can borrow.
They can be, depending on the policy and transaction. Canadian tax rules use concepts such as the policy’s adjusted cost basis to determine the tax treatment of certain policy transactions. A policy loan should therefore not automatically be assumed to be tax-free.
Potentially, yes. Universal life can accumulate cash value, and a policy may be eligible to serve as collateral for a third-party loan. The lender will determine whether the policy provides sufficient collateral and whether you meet its lending requirements.
Not exactly. Borrowing against a permanent life insurance policy is a feature available under certain policies. Infinite Banking is a broader financial strategy that commonly uses participating whole life insurance and policy loans as part of a long-term financing approach.
