What happens if I cancel my policy?

How it works

where the structure usually goes wrong

Corporate-owned life insurance

1. 01The company owns the contract and pays the premium
2. 02Premiums are generally not deductible
3. 03The advantage lies in the rate the premium was funded at
4. 04A benefit received credits the Capital Dividend Account
5. 05Ownership and beneficiary structure is where it fails

You sign a surrender request, the insurer closes the contract, and it releases the figure its schedule shows for that policy year less anything owed against it. The coverage ends on that date. A new contract later is a new application at your present age and health, priced accordingly. None of that makes canceling and starting again evidence that the original arrangement was unsound, a point addressed under is this method a scam.

The request itself has to come from the owner of the contract, since the insurer will not act on an instruction from the life insured alone if that is a different person, nor from a representative without written authorization on file. Once the signed form arrives, the insurer's administration system calculates the surrender figure as of that specific date, applies whatever balance is outstanding against the contract, and issues a cheque or transfer for the remainder within the timeframe its own procedures set out, typically a matter of weeks and not days.

The tax slip, where one is owed, follows separately from the payment itself. The insurer reports the taxable portion to the Canada Revenue Agency for the calendar year in which the surrender occurred, and the household receives its own copy of that slip the following winter, well after the money has already arrived and, in many cases, well after it has already been spent.

What can vary

a cost criticism has to state a period

When the cost bites, and when it eases

1. 01Acquisition is front loadedEarly years. The guaranteed schedule is low across the same years.
2. 02Charges fall against the accumulated baseMiddle years.
3. 03The contract is inexpensive to carryLater years.

With that settled, the next question follows. The surrender schedule itself is each insurer's own, filed with its own actuarial basis, and two contracts issued the same year by different insurers, for the same face amount and the same premium, can surrender for different figures because the schedules behind them were never the same to begin with. The contract's own wording matters just as much: a contract carrying paid up additions or an outstanding loan surrenders for a different net figure than an otherwise identical contract without either feature.

Provincial law changes some of the procedure around surrender and not the tax result, which is federal and applies the same way everywhere. Quebec's Civil Code sets its own rules on notice and on a contract's early cancellation period, while the common law provinces describe a similar early period through their own Insurance Act, so a household reading the fine print should expect the label used, though not the underlying tax treatment, to differ by province. The year matters too, since a contract's surrender figure grows with time in the schedule filed for it, so identical contracts surrendered five years apart never return the same amount relative to what was paid in.

The cost or the catch

Nothing here is reversible, and the money is very often less than the premiums that went in. That is the plain position, not an argument against leaving. Have the surrender figure and the taxable figure in front of you, in writing, before the form is signed.

The catch that catches households off guard is not the surrender figure itself; it is the tax figure sitting beside it. A contract can produce a taxable amount even when the cash actually received is small, because an outstanding balance against the contract is subtracted from the proceeds before the household ever sees them, while the full gain above the contract's tax cost is still what gets reported. A household can therefore owe tax on money it never held in its hands even for a day.

There is also no partial undo once the form is signed. A household that surrenders and later regrets it cannot ask the insurer to reverse the transaction and reinstate the old contract on its old terms, even a day later, which is the reason the figures belong on the table before signing rather than after.

Who this matters to most

the option changes how the contract behaves

Where a declared dividend can go

1. Buying additional paid-up coverage inside the contract
2. Reducing the premium payable that year
3. Accumulating on deposit with the insurer
4. Paid out in cash to the policyholder
5. Left unexamined, the default option is rarely the right one

This matters most to a household surrendering a contract still relatively early in its life, since the surrender figure in the early years is typically the smallest relative to premiums paid, and to any household with a loan outstanding against the contract, since that balance shrinks the cheque without shrinking the taxable amount reported for the year.

It matters least to a household that has held a contract for many years, funded it without a loan, and is surrendering for reasons unrelated to disappointment with how it performed, since a longer held, unencumbered contract typically returns a larger share of what was paid in and produces a more predictable tax result.

It also matters more to a household that needs the cash for an immediate purpose, since surrender is often the fastest way to reach the money, than to one weighing the decision purely on whether the contract is still worth keeping, since the second household has time to gather the figures for the alternatives before committing to any one of them.

What to ask, and of whom

reviewed annually, never guaranteed

The dividend scale, and what rests on it

1. 01The assumptions used to set what is credited
2. 02Set by the insurer's board of directors
3. 03Reviewed annually and never guaranteed
4. 04Every non-guaranteed figure on an illustration rests on it

Ask the insurer, in writing, for both figures before signing anything: the exact amount the surrender will pay and the exact amount that will be reported as taxable income for the year. A verbal estimate given over the phone should never be the basis for a decision this permanent.

Ask an accountant to confirm what the tax slip will mean once it arrives, particularly if the household has other income in the same year, since a surrender that lands in a high income year costs more in tax than the identical surrender would in a lower income year. This is a timing question the insurer cannot answer, because it depends on facts outside the contract entirely.

Ask the insurer as well for the figures on the alternatives to a full surrender before signing anything, since a partial reduction or a smaller paid up amount can sometimes meet the same need without closing the contract entirely, and comparing the actual numbers costs nothing while a signed surrender form cannot be taken back.

What this page will not do

This page describes what happens on surrender. It does not compare surrendering against the other paths available on the same contract, such as reducing the coverage, converting the value into a smaller paid up amount, or drawing against it instead, each of which produces a different figure and a different tax result that only the insurer's own numbers, requested for that specific contract, can show.

It also does not say whether surrendering is the right decision for a particular household, since that judgment depends on goals, other assets, and a tax picture this page cannot see. An accountant reviewing the actual figures is the professional positioned to weigh that decision, not a general page describing the mechanism.

Nor does this page advise on whether money that would otherwise have gone toward a registered account should instead have gone here, or the reverse, since both can serve a household in different ways, and this site is not registered to weigh that particular choice for any individual reader. Nobody can answer this one for you.