What is Cash Value Life Insurance? How does it work? Is it for you?
verified information
Information verified by Adeline Harmant
Our articles are written by experts in their fields (finance, trading, insurance etc.) whose signatures you will see at the beginning and at the end of each article. They are also systematically reviewed and corrected before each publication, and updated regularly.
Discover the methodologyCash value life insurance is a type of permanent life insurance that not only provides a death benefit for your loved ones but also builds savings over time. This savings component called the cash value, can be used to borrow money, make withdrawals, or even pay your policy premiums while keeping your coverage active.
But how does it work? When can you access the cash value? How is it calculated, and is the surrender value taxable? Our guide covers all this and more. Once you're informed, explore the best cash value life insurance policies in Canada, compare options, and get free quotes with our easy-to-use comparator.
Cash Value Life Insurance in Canada: Key Points
- Permanent life insurance, like whole life and universal life, builds cash value over time.
- Cash value life insurance combines lifelong coverage with a savings component.
- You can borrow against the cash value, often at lower interest rates.
- Borrowing or withdrawing cash reduces the death benefit paid to your loved ones.
- Withdrawals are generally tax-free, but any interest or gains may be taxable.
- Cash value life insurance policy costs more than term life insurance.
- Unlike term life insurance, cash value policies don’t expire after a set number of years.
How does Cash Value Life Insurance work?
Cash value life insurance is a type of permanent life insurance because it provides coverage for the policyholder’s entire lifetime. Unlike term life insurance, which only offers coverage for a specific period, cash value policies include a savings component, making them more versatile—and often more expensive.
When you pay your premiums, a portion goes toward covering the cost of insurance (the death benefit) and administrative fees, while the rest is deposited into a cash value account. This account grows over time, earning interest or returns depending on the type of policy (e.g., whole life guarantees a fixed rate, while universal life may allow market-linked investments).
Taxes on this growth are deferred, meaning you won’t pay taxes as the cash value accumulates. Over time, as the cash value builds, it offsets part of the insurer’s risk. For example, if you have a $500,000 policy and a $50,000 cash value, the insurer’s liability is only $450,000.
How You Can Use Cash Value:
- Withdrawals: Access your savings for emergencies or big expenses.
- Loans: Borrow money at lower interest rates, using the cash value as collateral.
- Premium Payments: Use the cash value to pay your premiums, keeping the policy active.
Example of Cash Value Life Insurance Policy
Imagine you have a whole life insurance policy with a death benefit of $500,000. You’ve paid into the policy for 10 years, and the cash value has grown to $50,000. This $50,000 is yours to use—you can borrow against it for a low-interest loan, withdraw part of it to cover unexpected expenses, or let it continue growing.
However, if you withdraw $20,000 and pass away, your family will receive a reduced death benefit of $480,000.
If you're already aware of how this works, you can use our comparator below to access the best cash value life insurance Canada policies in the market, compare them, and get free quotes right here in seconds.
Compare the best life insurance companies
What is cash surrender value of life insurance?
The cash surrender value is the amount you receive if you cancel your permanent life insurance policy before passing away. It’s essentially the cash value of your policy minus any surrender fees, outstanding loans, or interest owed. This value represents the savings component you’ve built up over time.
Is Cash Surrender Value different from Cash Value?
Cash surrender value and cash value are related but not the same:
Cash Value: This is the total savings or investment component of your permanent life insurance policy. It grows over time based on premiums paid and interest or investment returns.
Cash Surrender Value: This is the amount you actually receive if you cancel your policy. It’s the cash value minus any surrender fees, outstanding loans, or interest owed.
Is cash surrender value of life insurance taxable in Canada?
Yes, the cash surrender value of life insurance can be taxable in Canada if the amount you receive exceeds your policy’s adjusted cost basis (ACB). The ACB is essentially the total premiums you’ve paid into the policy, minus the cost of insurance and fees. The taxable portion is the difference between the cash surrender value and the ACB.
For example
Let’s say you cancel your life insurance policy and receive a cash surrender value of $50,000. Over the years, you’ve paid $35,000 in premiums, which is your ACB.
- Cash Surrender Value: $50,000
- Adjusted Cost Basis (ACB): $35,000
- Taxable Amount: $50,000 - $35,000 = $15,000
This $15,000 is considered taxable income and must be reported on your tax return for the year.
If your cash surrender value is less than or equal to the ACB, you won’t owe any taxes. For instance, if the surrender value is $30,000 and your ACB is $35,000, no tax applies.
It’s always a good idea to consult with your insurer or a tax advisor before surrendering a policy to understand the tax implications fully.
How to maximize Cash Value growth?
- Choose the Right Policy Type: Opt for policies like participating whole life insurance or universal life insurance that offer higher cash value growth potential through dividends or investment options.
- Pay Higher Premiums: Consider overfunding your policy by paying more than the required premium (if allowed). Extra payments go directly into the cash value and can accelerate growth.
- Start Early: The earlier you purchase the policy, the more time the cash value has to grow, benefiting from compounding over decades.
- Use Dividends Wisely: For participating policies, reinvest dividends to buy additional coverage, which increases the cash value and death benefit.
- Minimize Withdrawals and Loans: Avoid frequent withdrawals or loans against your cash value. These reduce the amount available for growth and can impact your death benefit.
- Monitor Policy Performance: Regularly review your policy with your insurer or financial advisor. Adjust investment options (for universal life) or make additional contributions to optimize growth.
Maximizing cash value growth requires planning and commitment, but it can provide substantial long-term benefits for financial flexibility and estate planning.
Is it a good idea to take the cash surrender value?
Cash value is a great resource in an emergency or to pay for something unexpected. The lack of a credit check or set repayment limits allows for flexibility that traditional loans cannot provide. That said, cash value life insurance is neither as cheap as term life insurance nor as effective a way to invest as ETFs or RRSPs.
Cash value takes a long time to build up. For the first few years of paying your premium the amount that you can borrow will be minimal. As a way of investing, a cash-value life insurance policy is disadvantaged as not all of your premium is invested. Part of it goes towards purchasing life insurance. This means that less money is invested and returns will be lower.
Another disadvantage is that withdrawing your cash value can lead to the termination of the policy, leaving you without life insurance. Therefore cash value life insurance only makes sense as a way to invest if you have already maxed out other options.
You can see for yourself and decide if a cash value life insurance policy is for you right here using our comparator below. Compare plans from the best Canadian providers and get free quotes in seconds.
Compare the best life insurance companies
What is High Cash Value Life Insurance in Canada?
High cash value life insurance is a type of permanent life insurance designed to prioritize the growth of the cash value component. These policies allow you to build significant savings faster than standard cash value policies, making them ideal for individuals who want to use their policy as a financial tool during their lifetime.
Key Features of High Cash Value Life Insurance
- Accelerated Growth: More of your premium goes toward the cash value, so it grows faster, especially in the early years.
- Tax Advantages: Cash value growth is tax-deferred, and borrowing against it is typically tax-free.
- Flexibility: You can access the cash value for retirement, investments, or large purchases without affecting the coverage as much as traditional policies.
- Higher Premiums: These policies require larger premium payments, but they are designed to maximize cash accumulation.
Who is high cash value life insurance best for?
High cash value life insurance is ideal for Canadians looking to:
- Build wealth over time.
- Use the policy as a tax-advantaged savings or investment tool.
- Access substantial cash reserves for financial flexibility.
For example
Suppose you pay $10,000 annually into a high cash value policy. By the 10th year, your cash value might reach $90,000, which you can use to borrow, invest, or fund retirement, all while maintaining life insurance coverage.
What are the pros and cons of Cash Value Life Insurance in Canada?
Cash value life insurance can be a great way to invest money that you can withdraw without paying tax on it. It can also be used as an asset to secure a loan. However, there are ways in which traditional term life insurance could be better. Let's take a look at the advantages and disadvantages.
Why do we like cash value life insurance?
- Lifelong Coverage: Provides coverage for your entire life, ensuring your loved ones receive a payout no matter when you pass away.
- Builds Savings Over Time: A portion of your premium goes into a cash value account, which grows tax-deferred.
- Access to Cash Value: You can withdraw or borrow against the cash value for emergencies, retirement, or other financial needs.
- Flexible Premiums: Some policies, like universal life, allow you to adjust premiums and death benefits as your needs change.
- Wealth Transfer Tool: Allows for estate planning, providing a tax-free payout to beneficiaries.
Why is cash value life insurance bad?
- Higher Costs: Cash value life insurance is more expensive than term life insurance due to its savings component.
- Slow Growth: Cash value builds slowly in the initial years, as more of the premium goes toward insurance costs.
- Tax Implications: Withdrawals exceeding the premiums paid (adjusted cost basis) are taxable.
- Reduces Death Benefit: Loans or withdrawals reduce the payout your beneficiaries receive unless repaid.
- Complexity: Policies can be complicated to understand, requiring careful management and regular reviews.
How to borrow against your cash value life insurance in Canada?
Insurers charge an interest rate of around 6% to borrow against the cash value of a life insurance policy you hold with them. This is cheaper than the interest rate offered by most banks. Some insurers will let you borrow as much as 95% of the cash value of your life insurance.
There are great advantages to borrowing against your cash value:
- Borrowing against your cash value does not affect your credit score
- There is no credit check that you have to pass
- The loan is tax-free
- There are no terms or limits on repayment
- If you do not pay it back, the insurer will repay themselves from your death benefit
For these reasons borrowing against your life insurance can seem like a great option in a crisis. A wise move would be to speak to your insurance company and ask how borrowing the money would affect your policy with them.
What types of life insurance have cash value options?
Cash value is an option for several different types of permanent life insurance, however different policies generate different amounts of cash value and invest it in different ways. Let's take a look at which life insurance policies have cash value options.
Whole life insurance
Whole life insurance is a type of permanent life insurance. The policyholder agrees to pay a fixed premium in return for being covered for the rest of their life. The cash value interest rate is guaranteed in the policy and the policyholder does not need to make decisions about investing.
| Policy | Pros | Cons |
|---|---|---|
| Whole life insurance |
|
|
If you want to explore cash value life insurance policies, you can do it right here using our comparator below. Compare multiple plans and get free quotes in seconds.
Compare the best life insurance companies
Universal life insurance
Universal life insurance is a type of permanent insurance: it protects you for the rest of your life. These policies often have cash value options, allowing you to withdraw early from your policy. There are different types of universal life insurance policies, compare the features of different policies in the table below.
| Policy | Premiums | Risk | How is cash value grown? |
|---|---|---|---|
| Guaranteed universal life insurance | The cheapest option | Low | Savings level interest rates |
| Indexed universal life insurance | Flexible | Mid | Investment tied to an indexed fund |
| Variable universal life insurance | Flexible | High | Invested in stocks and bonds |
Whole life insurance calculator cash value
Guaranteed issue life insurance
Guaranteed life insurance is a type of permanent life insurance that is also known as funeral insurance. Providers cannot refuse you a policy and there is no medical exam.
The coverage is usually limited well below the level of other policies and the death benefit is also limited. The cash value option will also likely be small, and the amounts the policyholder can withdraw are minimal.
The death benefit will be reduced if the purchaser dies within a period agreed in the contract, typically the first few years after signing. This type of insurance is aimed mainly at people who want to avoid putting the responsibility of their funeral costs onto their dependents.
What is the best cash value life insurance in Canada?
Several top insurers in Canada provide strong policies with different benefits. Here are the best options:
- Sun Life Financial
- Offers whole-life policies with guaranteed cash value growth.
- Participating policies provide dividends, which can enhance the cash value over time.
- Manulife Financial
- Provides flexible universal life insurance options with investment opportunities.
- Policyholders can choose from various investment accounts to grow their cash value.
- Equitable Life of Canada
- Offers participating whole-life policies with strong cash value accumulation.
- Dividends can be used to purchase additional coverage or reduce premiums.
- Canada Protection Plan
- Specializes in simplified and non-medical whole life insurance policies.
- Suitable for individuals seeking coverage without medical exams while building cash value.
- BMO Insurance
- Provides non-participating whole-life policies with guaranteed cash value.
- Focuses on stable growth without relying on dividends.
Each insurer has unique strengths, so it’s essential to compare policies based on your financial goals, budget, and coverage needs. Use our comparator tool or consult a financial advisor to make an informed choice.
Compare the best life insurance companies
What are the best alternatives to a cash value life insurance Canada plan?
- Term Life Insurance: Term life insurance offers straightforward coverage for a specific period, typically at a lower cost than cash value policies. It's a good choice for those who want pure protection for a set term.
- Investing in Tax-Advantaged Accounts: Consider contributing to tax-advantaged accounts like Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs) for long-term savings and tax benefits.
- High-Yield Savings or Investment Accounts: Instead of the savings component of cash value insurance, you can put money into high-yield savings accounts or invest in stocks, bonds, or mutual funds for potential growth and flexibility without insurance fees.
FAQs on Cash Value of Life Insurance in Canada
Cash value life insurance is a type of permanent life insurance that includes both a death benefit and a savings component. The cash value grows over time as part of your premiums is invested. You can use this cash value while alive through withdrawals, loans, or by surrendering the policy entirely.
The cash value itself grows tax-deferred, meaning you don’t pay taxes as it grows. However, if you withdraw more than what you’ve paid in premiums (called the Adjusted Cost Basis or ACB), the excess amount will be taxed as income. Loans against the cash value are tax-free but must be repaid.
Yes, you can borrow against the cash value of your life insurance policy. These loans are tax-free and don’t require credit approval. However, they accrue interest, and unpaid loans reduce both the cash value and the death benefit. Borrowing can be a flexible way to access funds but should be managed carefully.
Cash value life insurance is more expensive than term insurance and takes years to build significant cash value. If you withdraw funds or borrow against it, it reduces your death benefit. Also, withdrawals above the premiums paid (ACB) may be taxable.
With cash value life insurance, your premium payments are split into three parts: one for the death benefit, one for administrative fees, and one for the cash value. The cash value grows tax-deferred and can be accessed while you’re alive. However, withdrawals, loans, or policy lapses can reduce the death benefit and may have tax consequences.
The cash value depends on factors like the policy's design, how long you’ve paid premiums, and the insurer's investment performance. Typically, the cash value grows slowly in the early years because more of the premium goes toward insurance costs, but it accelerates as the policy matures.
The cash value of a $10,000 policy depends on the policy type, how long you’ve owned it, and how much you’ve paid in premiums. Typically, smaller policies like this may take years to accumulate significant cash value. Contact your insurer to get an exact figure for your policy.
Yes, you can withdraw from your cash value, but it may reduce your death benefit or even cancel the policy if too much is taken out. If you withdraw more than what you’ve paid in premiums (the ACB), the excess amount will be taxed. Always consult your insurer before withdrawing.
