There are situations where you find yourself and begin to consider cashing out your life insurance policy. You might be in debt, trying to make a large purchase, or may not need the coverage anymore. Either way, cashing out your life insurance policy can provide financial cushioning when you need immediate funds.
Your permanent life insurance has an invested cash value feature that grows over time. You can access your policy’s cash value through policy loans, withdrawals, partial or total surrender.
While cashing out your life insurance policy might be helpful and necessary during tough financial times, there are unwanted consequences that you might face when you access the cash value funds.
This article discusses how cashing out your life insurance policy works, how and when to use it, and other alternatives you might consider when you need funds.
Can You Cash Out Your Life Insurance Policy in Canada?
Yes. You can cash out your life insurance policy.
Cash-value insurance policies like whole or universal life insurance contain a cash accumulation component within the insurance policy that holds excess premiums and earnings.
In times of financial turmoil and you need cash for yourself or your family, you can cash out from your policy’s accumulated cash value.
The cash value of a life insurance policy is the value (dollar figure) that your policy has accumulated over time since the policy issue date.
However, you should know that cashing out your life insurance has tax implications. There are several methods of accessing the cash value of your insurance policy. Each of these methods has its pros and cons.
How to Cash Out Your Life Insurance Policy
There are five ways you can cash out your life insurance policy in Canada to your advantage. Take note of the tax implications of each method. Talk with an insurance professional while you decide which option is the best fit.
1. Cash Value Withdrawals
You have the option of taking money from the cash value of your insurance policy when you need cash. Some insurance companies compel you to use your cash value while alive. Otherwise, you will lose it.
You can withdraw any amount from the insurance policy up to the cash value of the policy. However, because you have no intention of repaying the money you take from your policy’s cash value, the policy becomes depleted, reducing the death benefit payout your beneficiaries will receive when you die.
When the amount you withdraw exceeds the Adjusted Cost Base (ACB), your withdrawal will be taxed.
2. Policy Loans
If you have a temporary need for cash and intend to repay, you have the option of borrowing from the cash value of your life insurance policy. The only difference between this option and the first option is that you intend to pay back.
Since you are borrowing from your money, you can enjoy some awesome perks, like low-interest rates, flexible repayment terms, and no required monthly payments.
However, you will have to pay back your full loan on time; otherwise, it would affect your death benefit. If you don’t fully repay your loans before you die, your family will receive less money after deducting the loan amount and the accumulated interests.
You also risk lapsing your insurance policy if you don’t fully pay on time. Your loan interest could accumulate over time, and your policy will lapse when it exceeds your policy’s cash value.
Also, if your loan amount exceeds your insurance policy’s Adjusted Cost Base (ACB), the loan amount is taxable.
3. Collateral Loans
Another way to cash out your life insurance policy is to approach a financial institution or credit union and apply for a loan assigning the cash value of your life insurance policy as collateral security.
Using your policy’s cash value as collateral, the loan will be paid back to the lender from your death benefit if you die without paying the loan in full.
Using your policy’s cash value as collateral for a loan might get more favorable loan interest rates. However, your beneficiaries will receive less payout if you don’t fully repay your loan.
Generally, financial institutions may lend you about 75-90% of your policy’s cash value. Loans are repayable at any time, and the interests may be taxed depending on the use of the borrowed funds.
4. Opt for Partial or Full Surrender
If you no longer need your life insurance coverage or are tired of paying premiums, you can surrender your policy and receive the cash value.
The Cash Surrender Value (CSV) is your accumulated cash value minus any surrender charge or fees from the insurer. When you cancel your insurance at any time, you will receive your CSV.
Don’t surrender your policy in the first few years because the surrender fees will be high at this time, and the fees may eat up a large part of your cash value. Ensure to pay off any outstanding loans and interests before surrendering if you still want to get any money after deducting the surrender fee.
Your Cash Surrender Value will be taxed. However, only the interest earned on your premiums will be taxed.
5. Life Settlements
You can also cash out your life insurance policy by selling your insurance policy to a third party for a one-time lump sum payment.
While most Canadian provinces do not allow the selling of insurance policies, Quebec, New Brunswick, Nova Scotia, and Saskatchewan allows it.
Some insurance companies in Canada also do not allow the sale of an insurance policy, so check with your insurer and know their stance on selling life insurance policies.
When to Consider Cashing Out Your Life Insurance
Everyone buys life insurance to provide a lifetime of financial protection for themselves and their loved ones. However, certain situations will make you consider cashing out your life insurance policy.
Here are a few.
- You no longer need coverage because your beneficiaries have passed away or don’t rely on your financial support
- You are in debt, and you need the cash to get out of your debt
- You want to reduce your premiums, so you take out a loan to pay premiums or surrender the policy.
- You have large financial responsibilities like buying a new home, funding your child’s education, etc.
- You found a better insurance provider with better options
- You have a poor credit score and need cash immediately
Alternatives to Cashing Out Your Life Insurance Policy
Instead of cashing out your life insurance policy because you urgently need cash, you can apply for personal loans.
Financial institutions, credit unions, and personal lenders can provide you with immediate cash at reasonable interest rates.
So, you can consult your financial advisor and pick another alternative instead of cashing out your policy.
Final Thoughts on Cashing Out Your Life Insurance Policy In Canada
Financial tough times may make you contemplate liquidating your assets for immediate cash. Sometimes, you might begin to see cashing out your life insurance policy as the only option.
However, consider why you bought the coverage. Do you still need it? Should something happen to you, are your beneficiaries still depending on the death benefit? Consider these carefully.
Exploring other alternatives might just be the way to go.
FAQs on Cashing Out Your Life Insurance Policy In Canada
How do I find the cash value of my life insurance policy?
Contact your insurer and they will pay you whatever cash value your policy has accumulated. The net cash value is the actual surrender value of the policy. You will find the net cash value listed separately in your life insurance statements.
How to withdraw money from life insurance policy
You can withdraw money from your life insurance policy by making withdrawals from your accumulated cash value. It’s your money and you can withdraw from it.
What are the tax consequences of cashing in a life insurance policy?
If you choose to cash out your life insurance policy, you will pay taxes on the interests the policy has made over time. Any amount that exceeds the investments (premiums) you paid will be taxed.
How long does it take to cash out life insurance policy?
It is advisable to leave your insurance policy for the first 10-15 years before you tap into the cash value. This will give the cash value enough time to grow and the surrender fees will be lesser at this time. Generally, it takes 14-60 days to process your cash out request when you apply.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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