7 Ways to Access the Cash in Your Life Insurance Policy

If you have purchased a whole-life or universal life insurance policy, you will have built up some form of cash value in the policy over the years. The cash inside the policy grows on a tax deferred basis. Here are some ways you can access that cash sitting inside your policy:

Get a policy loan from the insurance company

You can get a policy loan from your insurer who will charge interest on the loan. The benefit of this is you still have life insurance and the policy will continue to grow. Upon death if the loan is still outstanding, it is deducted from the death benefit and the remaining amount is paid to the beneficiary tax free.

You can’t borrow the full amount and the amount borrowed is first drawn against the ACB built up in the policy.  If there is ACB in the policy of 100K with cash surrender value of 200K and you borrow 150K, there is a taxable income to you of 50K (borrowed amount less ACB). If you then repay the full loan of 150K back, you receive a tax deduction in the amount that you paid tax on (50K).

Elect to receive the policy dividends

You can receive what is known as “policy dividends” and get a cash payment each year from your life insurance policy. The amount of payment is based on a dividend scale each year (not just based on investment return in the year but also fund expenses and mortality claims). You can be taxed on these policy dividends if they are greater than your return of premium for the year. 

Take a Cash Withdrawal

You can withdraw the cash from your policy if you wish. Provided you don’t go over the ACB there will be no tax consequence. However, this will affect future cash value growth and can’t be put back or repaid to the insurer.

Pay the premiums on the policy

If you have enough cash value in your policy, you can direct your insurer to have some or all of the cash value made towards the premium payments. This keeps the policy in place while freeing up after-tax disposable income in your pocket.

Cash out and cancel the policy

The downside of this option is you will no longer have life insurance. The upside is you will have all the cash in your life insurance now in your bank account. There might be surrender fees you will have to pay the life insurance company for doing this. There will also be potential taxes owing by doing this. If, over time, the ACB of the policy is 100K and your cash value is 300K when you go to pull it and cancel, there will be a policy gain of 200K that you will owe tax on. This gain will come in the form of a T5 from your insurance company to report on your tax return.

Take a partial surrender

If you don’t need all the cash in your life insurance policy, just surrender a portion of it. This way you still have some life insurance at a reduced death benefit. You will still get taxed based on the ACB of the policy but it won’t be as big of a hit had you taken it all as a full surrender.

Use it as collateral for a loan from a financial institution

You can take the policy and leverage it to get access to a loan from a bank. Banks will typically loan 75%-90% of the cash value. The loan proceeds will be tax free but the downside is you have to get approved for the loan. If you then invest the proceeds to generate any business or property income, the interest on that loan is tax deductible.

There’s obviously many ways to access the cash value that’s built up inside your policy each with differing tax consequences. You need to be sure that whichever method you take is the most tax-efficient and best suits your situation.

DISCLAIMER: The articles posted on TaxCrunch should not be considered specific advice to anyone readying. Please reach out to a professional advisor to seek guidance on any issues mentioned in this post before acting upon anything written here. All posts are time sensitive to what is law at the time written and are subject to changes in legislation.