Policy Loans in Canada

A policy loan is money the insurer lends to you, the owner of a permanent life insurance policy, out of its own funds, with the policy's cash value as security. You owe the insurer, you pay the interest to the insurer, and whatever is still owing when the person insured dies is taken out of the death benefit before the rest goes to the beneficiary. In Canada the loan is also a tax event: it counts as a disposition, so part of it can be income in the year you receive it.

Three things to hold on to before the detail:

• The lender is the insurer. The cash value stays in the policy as security. The debt is between you and the insurer, and so is the interest.
• The tax rule is exact. The part of a loan above the adjusted cost basis immediately before it is income that year, and the loan lowers the basis.
• Your contract decides the rest. The rate, the maximum, the notice terms and any effect on dividends are set by the insurer and the contract, so ask for yours in writing.

What is a policy loan, exactly?

The insurer advances money to the policyowner and takes the cash value of the contract as security for the advance.

Every important consequence follows from that sentence. The money comes from the insurer's general funds. The cash value is not removed from the contract; it stays where it is and continues to be administered under the contract's terms. What changes is that a debt now exists between you and the insurer, and the contract secures it. If the debt is not repaid, the insurer settles it out of the policy's values, either when the person insured dies or when the policy ends.

So this is a loan in the ordinary sense: the insurance company is the lender, you are the borrower, and the insurer is the party to ask about every term that matters.

What a policy loan is not

It is not a withdrawal. A withdrawal takes value out of the contract for good. The cash value falls, the death benefit can be reduced, and paying money back later does not undo it. A loan leaves the cash value in place and creates a balance you can repay.

It is not lending to yourself. You will hear the owner described as both lender and borrower. That does not hold up. The insurer advances the money, the insurer charges the interest, and the interest is paid to the insurer. Nothing circular happens, and an argument that needs the circular version is about an arrangement that does not exist.

It is not a line of credit. There is no card and no revolving account. It is a request under a contract, processed on the insurer's timetable.

It is not free money. The amount is limited, the interest is real, and the balance affects the death benefit and, depending on the figures, your taxes.

Four ways to get money from a policy

People say "access the cash value" as if it were one thing. It is four different transactions, with different parties, different tax rules and different effects on the coverage. Name the route before you make a plan.

The table is a reading of the Income Tax Act's definitions, not a ruling on your file. The insurer calculates the figures, and your accountant confirms what goes on your return.

A fifth arrangement, available only while the person insured is terminally ill, is not a loan at all; it is described at an advance of the death benefit while living. The policy loan set beside every other way a household borrows, attribute by attribute and with no verdict column, is on a policy advance and other credit.

How much can you borrow?

The insurer sets a maximum, expressed as a share of the cash value available for a loan on the day of the request. It is set out in the contract or in the insurer's administrative rules, and it exists to protect the insurer's security. It has nothing to do with the face amount of the policy.

Three things set the number in a real case.

The cash value that has actually built up. Early in a contract's life this is modest, because the costs of issuing the policy and the cost of insurance weigh most heavily in the first years. If you plan to draw on a contract early, read the case the critics make first, because the timing of those costs is the real constraint.

The maximum in your contract. The share varies by contract, so ask the insurer for your figure in writing.

Anything already owing. An existing balance, plus the interest that has built up on it, comes off what remains available. A second loan is measured against what is left, not against the whole cash value.

Some contracts also set a minimum advance. That matters more than people expect: a plan built on frequent small draws may not work if each one has to clear a floor.

Why the amount available can change over time

The limit applies to a figure that moves, so it is worth knowing how it moves.

Where dividends buy paid-up additions, the death benefit and the cash value can both rise: each addition is extra coverage, and it carries a cash value of its own. A larger cash value supports a larger loan within the insurer's limit, so the capacity to borrow is not fixed at issue.

How far the cash value and the death benefit move toward each other, and at what age, depends on the particular contract. Read its guaranteed values and its maturity provisions rather than relying on a general rule.

None of the growth above the guaranteed values is promised. The guaranteed schedule is contractual; anything above it depends on dividends, which the insurer's board declares each year and which are not guaranteed.

The death benefit works the same way. If it grows while you owe money, the beneficiary receives the larger amount less the balance; if it does not, the balance comes off the amount in force.

How is the interest rate set and charged?

Interest runs on the balance from the date your contract states.

The rate. The insurer sets it and may change it, within whatever the contract allows. Some contracts state a fixed rate. Some tie the rate to a published benchmark, so it moves. Some let the insurer set it within stated limits. Which applies to you is written in your contract, and it is worth reading before you borrow, because a plan that works at one rate may not work at another.

How it builds up. How often interest is calculated, and when unpaid interest is added to the balance, vary by contract; some add it on the policy anniversary. Once unpaid interest joins the balance, the next year's interest is charged on the larger figure. A loan left alone does not sit still.

Who receives it. The insurer. Loan interest is payable to the insurer and is not credited back to your policy. Any dividend is decided separately under the insurer's own dividend practice and is not guaranteed, so a dividend should not be counted on to cover the cost of borrowing.

Unpaid interest has a tax side as well. In a technical interpretation dated 31 May 2017 (file 2016-0658641E5), the Canada Revenue Agency treated capitalised policy loan interest as a further policy loan, so capitalising it is itself a disposition. It added that where the capitalised interest is being deducted, the amount capitalised is included in income, and where it is not deductible there is no inclusion and no effect on the adjusted cost basis. It is a 2017 interpretation and may not reflect the CRA's current position. Interest you pay in cash before it is capitalised does not raise the question. The details are on a policy loan higher than the ACB.

Does an outstanding loan change the dividends?

It can, and the only reliable answer is the one your insurer gives you in writing. Ask two questions: does an outstanding loan change the dividend credited to this policy, and where is that stated, in the contract or in the insurer's dividend practice?

The background is simple. While a loan is outstanding, part of the cash value is securing it. The question is whether the insurer treats that part differently when it works out the dividend.

You may hear two labels borrowed from American usage. "Non-direct recognition" describes a dividend calculated as though no loan existed. "Direct recognition" describes one where the insurer takes the loan into account on the part of the value securing it, which can move the dividend up or down. The labels are handy, but they are not Canadian legal categories, and they tell you nothing about a particular contract until the insurer confirms how its own practice works.

Neither answer is better in the abstract. What matters is that you know which one applies before you plan around it, and that you keep the larger point in view: dividends are declared by the insurer's board and are not guaranteed, with or without a loan.

What a loan does to the death benefit

While a loan is outstanding, the amount owing plus accrued interest is deducted from the death benefit. When the person insured dies, the insurer settles the debt out of the proceeds and pays the rest to the beneficiary.

Two practical consequences follow. First, the amount a beneficiary receives is not fixed while the contract is being borrowed against, so any plan that depends on a set sum reaching a person has to allow for whatever may be owing at the time. Second, the reduction is by the balance, not by the original advance. A modest loan left for many years, with interest added each year, can take much more off the death benefit than the amount first borrowed.

Loans also count if an insurer ever fails. Assuris, the not-for-profit protection plan that every life insurer authorized in Canada must join, protects a whole life policyholder up to $1,000,000 or 90% of the promised death benefit, whichever is higher, and up to $100,000 or 90% of the promised cash value, whichever is higher (as read on assuris.ca on 28 September 2026). Those limits are calculated on net values, after policy loans are deducted. The insurer's solvency is supervised according to its charter: OSFI for a federally incorporated insurer, the home province (the AMF in Quebec) for a provincially incorporated one.

Do you have to repay, and what happens as the balance nears the cash value?

Many contracts set no schedule of instalments. That does not make repayment optional. The loan and its interest remain owing, the balance grows while it is left alone, and the policy can lapse if what you owe exceeds the value securing it. The notice the insurer gives before that happens, and how long you have to act, are set out in the contract. Ask the insurer to confirm those terms in writing.

The balance is measured against the cash value, not against your income. As long as it stays comfortably below the value securing it, the contract carries on. You can repay when the contract allows, in the amounts it allows, and a partial repayment reduces the balance and so the interest that runs on it.

If nothing is repaid, the sequence is slow and visible:

1. The balance grows. Unpaid interest joins it, so it grows faster each year.
2. The margin narrows. The cash value may grow too, and for a long time it may grow faster than the balance. Whether it keeps doing so depends on dividends, which are not guaranteed, and on the loan rate, which may change.
3. The insurer gives the notice the contract provides when the balance approaches the value securing it.
4. The choices narrow: repay part of the balance, pay more premium, reduce the coverage, or let the contract end. The last one brings the tax consequence described below, at a moment defined by not having money.

Every stage shows up on your annual statement. Three figures tell you nearly everything:

• Cash value. What has accumulated. Compare it with the guaranteed column in your contract, not with the illustration you were shown when you bought it.
• Loan balance. The advance plus capitalised interest. If it is higher than last year and you took no new advance, interest is being added unpaid.
• Net cash value. The difference between the two. It decides what is still available and how much margin is left.

Read those three once a year and ask about any movement you did not expect. The flexibility is real, and it puts the discipline entirely on you; that risk is set out with the others in the objections raised against the approach, taken seriously.

How is a policy loan taxed in Canada?

This is where a policy loan differs most from ordinary borrowing.

A policy loan is a disposition of an interest in the policy: ITA s.148(9) lists a policy loan in paragraph (b) of the definition of disposition. Under subsection 148(1), the part of the loan above the adjusted cost basis (ACB) immediately before the loan is income in the year you receive it. The part at or below the ACB is not income when it arrives, but it lowers the ACB, so the next loan or a later surrender starts from a lower figure.

The ACB is not simply the premiums you paid. In words: the premiums you pay raise it; the net cost of pure insurance, which the insurer calculates each year under the regulations for a policy acquired after 1 December 1982, lowers it; and every loan or other disposition lowers it too, including your own earlier loans and withdrawals. That is why two contracts with the same cash value can give different tax results on the same loan, and why a contract that produced no taxable amount in its early years may behave differently later.

A repayment works in the other direction. Repaying a policy loan restores the ACB, up to the amount the loan removed. If part of the loan was included in your income, paragraph 60(s) lets you deduct repayments in the year you make them, up to the amount previously included. The deduction cannot exceed what was included.

One narrow exception applies to premiums. The part of a loan the insurer applies right away to pay a premium under the contract's own terms is excluded from the proceeds of the loan, so that part produces no income. It still bears interest and still reduces the death benefit. The detail is on when a policy loan becomes taxable.

Before each advance, ask the insurer for two things in writing: the current ACB, and an estimate of any amount it will report as income on the loan you have in mind. The insurer holds every figure the calculation needs, and nobody outside can compute it reliably.

Federal rules apply in every province. If you live in Quebec, you also file a provincial return with Revenu Québec, and your accountant handles both.

All of this rests on the contract staying exempt. The tax-deferred treatment of growth inside the contract depends on the exempt test in Regulation 306, Income Tax Regulations. Insurers administer contracts to stay within it, but the treatment is conditional, not automatic. The wider picture, including the death benefit, is on is life insurance taxable in Canada.

Illustrative example: a loan larger than the ACB

Illustrative example. Assumptions: the ACB immediately before the loan is $20,000; you take a policy loan of $30,000; between the steps no premium is paid, no other disposition happens and the net cost of pure insurance is left out; you pay the interest in cash each year, so none is capitalised; later you repay the whole $30,000. The figures are round numbers chosen to show the arithmetic, not a forecast.

What the example shows: the tax on the loan is real and immediate, but it is not permanent. A full repayment brings the ACB back to where the loan found it and gives a deduction that matches the earlier inclusion. The steps are a reading of the definitions in section 148 and paragraph 60(s), not a ruling; the insurer's statement and your accountant decide the real figures.

What if the policy lapses or is surrendered with a loan outstanding?

A lapse or a surrender with a loan outstanding is a disposition. It produces income only to the extent the proceeds exceed the ACB at that moment. If the ACB is higher than the proceeds, there is no income from it. If earlier loans have already taken the ACB down to nothing, the whole amount can be income.

That is the case to avoid, because it arrives when there is no cash. Running short of cash may be what caused the lapse, and the contract ends with a tax bill and nothing left in the policy to pay it. Every step toward it shows on the annual statement, which is why attention prevents it.

One exception is worth knowing. A lapse is not a disposition if the policy is reinstated within the period the Income Tax Act allows. Reinstatement itself is the insurer's decision under the contract, and it may ask for evidence of insurability and payment of what is owing. In Quebec, the Civil Code (art. 2434) adds that on reinstatement the two-year period for misrepresentation and any suicide exclusion start again. If a lapse notice arrives, call the insurer at once and ask what reinstatement requires and by when. Surrendering a policy on purpose is a different decision, explained on its own.

Can you deduct the interest on a policy loan?

Sometimes. The answer depends on what the money does after it leaves the insurer, not on the loan itself.

The Canada Revenue Agency allows a deduction for interest paid on a policy loan when the loan proceeds were used to earn income from a business or from property, as long as the insurer did not add the interest to the policy's ACB. Money borrowed to buy equipment for your business or to acquire a rental property can qualify. Money used for a family holiday or to pay down a personal credit card does not, however the loan is described.

Three limits sit around that rule.

The first concerns premiums. The Income Tax Act's general rule for deducting interest excludes money borrowed to acquire a life insurance policy. So interest on a loan used to pay your policy's premiums does not qualify, whatever the policy is for.

The second concerns family loans. Lending the money to a relative, especially interest free, does not by itself make the insurer's interest deductible, because the test looks at whether you use the money to earn income. You now also have two debts running: you owe the insurer, and your relative owes you. The insurer is owed its interest whatever your relative does.

The third is verification. The insurer confirms the interest you paid on Form T2210, Verification of Policy Loan Interest by the Insurer, including that it will not add that interest to the ACB, so the same dollar cannot count twice. The CRA's guidance on Line 8710, Interest and bank charges asks you to have the insurer verify the interest before June 15 of the following year; the form ties the deadline to the filing due date of your return for the year the interest was paid. For interest on money used to earn property income, the CRA points to the same form under Line 22100, Carrying charges and interest expenses. Quebec residents also use Revenu Québec's form TP-163.1-V, Interest Paid on a Loan Taken Out on a Life Insurance Policy for the provincial return.

The June 15 deadline, step by step

1. Start with the year you paid the interest. Interest you pay during 2026 is claimed on your 2026 return, so its deadline falls in 2027.
2. Know when that return is due. If you or your spouse or common-law partner carried on a business in the year, the return is due by June 15 of the following year; otherwise it is due by April 30.
3. The insurer has to sign by that same date. The form's own rule is that the insurer confirms the interest no later than the date your return is due for the year the interest was paid.
4. Ask for Form T2210 early. January or February of the following year is a good time, because the insurer needs time to prepare it.
5. Each side signs its own part. You sign Part I; the insurer signs Part II, confirming the interest you paid and that it will not be added to the ACB.
6. Keep your copy with your tax records. The insurer keeps one in case the CRA asks for it.
7. Hand it to your accountant, with the loan statement and a record of what the money was used for.
8. Filing by June 15 does not move the payment date. If you owe tax for the year, the balance is still due by April 30.

Deductible interest is still a cost, still paid to the insurer. Whether a particular use counts as earning income, and how the interest is traced to it, are questions for the person who prepares your return.

When a corporation owns the policy

When a corporation owns the contract, the loan is made to the corporation, not to you. The corporation owes the insurer, and the money lands in the corporation's account.

Moving that money from the corporation to a shareholder is a separate transaction with its own tax rules. A salary, a dividend, a shareholder loan or the repayment of an amount the company owes you each has its own treatment. Mistakes in that step tend to surface at a death or a sale, which is the worst time to find them, so settle it with your accountant before you count on the access.

The death benefit matters here too. When the person insured dies, the corporation's capital dividend account is credited with the death benefit minus the policy's ACB (s. 89(1), "capital dividend account", para. (d)). Paying a capital dividend out of that account to shareholders requires an election under subsection 83(2), made on CRA Form T2054. How an outstanding loan affects those figures is a question for your accountant, with the insurer's statement in hand. The full picture is on corporate-owned life insurance.

Irrevocable beneficiaries and Quebec spouses

If a policy carries an irrevocable beneficiary designation, your freedom to deal with the policy is limited, and that can reach a policy loan. An irrevocable designation protects the beneficiary, and a loan can reduce what that person eventually receives. So the insurer may require the irrevocable beneficiary's written consent before it makes the advance. Ask the insurer what it requires on your policy.

Quebec adds a rule that catches people. Under the Civil Code of Québec (art. 2449), the designation of your married or civil union spouse as beneficiary, made in a writing other than a will, is irrevocable unless the designation says otherwise. Many Quebec owners hold an irrevocable designation without knowing it. A divorce, a nullity of marriage or the dissolution of a civil union makes a designation of the spouse lapse (art. 2459), which changes the answer again.

A designation made years ago, for good reasons, can quietly remove the feature you are now planning around, so check each one before you rely on the loan. How designations work is explained on a contingent beneficiary.

How a request is processed, and how long it takes

The request. You send the insurer a request in the form it requires. Some insurers accept electronic requests, some require a signed document, and some require every owner to sign where ownership is joint. Where a corporation owns the contract, the signing authority has to match what the insurer has on file, which causes delay when a company has reorganised and never told its insurer.

The check. The insurer confirms the cash value available, deducts anything already owing and applies its maximum. The figure can differ from the one you hoped for.

The advance. Funds are released by transfer or cheque. How long this takes varies by insurer and by contract, and some contracts allow the insurer a longer processing period or a deferral of the advance. Ask for the terms in yours.

The record. The balance appears on the contract from the date the insurer records the advance, and interest runs from the date the contract states.

If you need money by a closing date, work backwards from your insurer's real turnaround with room to spare, and ask how long requests like yours are taking now. A mechanism you have never used, at a speed you have never confirmed, is not yet a liquidity plan.

Questions to settle in writing before you rely on it

1. How is the loan rate set, and how and when can the insurer change it?
2. Does an outstanding loan change the dividend credited to this policy, and where is that stated?
3. What share of the cash value can I borrow today, and is there a minimum advance?
4. When is interest calculated, and when is unpaid interest added to the balance?
5. What is the ACB today, and what would you report as income on the loan I have in mind?
6. What notice do you give when the balance approaches the cash value, and how long do I then have to act?
7. Does any beneficiary designation or assignment mean someone else must consent?
8. Can this contract be changed to reduced paid-up insurance if I stop paying premiums, and how would an outstanding loan affect that option?
9. If I stop paying premiums or deposits, can dividends or values carry the premium, and for how long on current, non-guaranteed assumptions?
10. How long are requests like mine taking now, and does the contract allow a deferral?

Keep the answers with the policy. Each question has a definite answer, and every one of them can be asked before a contract is issued, not only on the day you need money.

Why the design at issue matters

A contract meant for sustained borrowing is structured differently at issue from one meant only for coverage, and much of that difference is set once the contract exists.

The funding structure decides how quickly accessible value builds. A contract weighted toward base coverage builds it slowly. A contract designed with a substantial additional-deposit component can build it faster, at the cost of a smaller initial death benefit for the same outlay. Both are legitimate. They serve different purposes, and a contract built for one will disappoint anyone who bought it for the other.

After issue, the options are narrower: additional deposits within whatever room the contract allows, or a second contract. Neither undoes the first decision. That is the practical reason to be clear about purpose before the application is signed.

It is also why comparing two contracts on cash value alone tells you little: the one that looks weaker in year five may suit its purpose better. Ask whoever proposes the contract to explain the funding structure and why it fits what you want the policy to do.

Keeping the contract serviced

The contract runs for decades, and the decisions do not stop at issue.

• Repayment decisions. With no schedule, repaying is either a deliberate decision or one taken by default.
• Funding adjustments. There can be options short of ending the contract, such as reduced paid-up insurance, but they narrow with time. Ask the insurer in writing what yours are.
• The other professionals. Tax belongs with an accountant; ownership and beneficiaries with a lawyer (in Quebec, a lawyer or a notary).
• A record of what was decided and why. A decision made in year three, unexplained, looks like an oversight in year fifteen.

A contract nobody attends to can fall short of its own illustration.

Common misunderstandings, stated plainly

"The loan is tax-free." The part of a loan at or below the ACB is not income when you receive it, and the part above it is. Even the untaxed part lowers the ACB, so a later loan, surrender or lapse can produce income. "Tax-free" leaves all of that out.

"The cash value keeps growing, so the loan costs nothing." Where an outstanding loan does not change the dividend, crediting continues on the full cash value. The loan still costs interest, and whether one exceeds the other in any year depends on figures that are not guaranteed in either direction.

"I can always pay it back later." True in the sense that no schedule forces repayment, and misleading in the sense that later is when the balance is largest.

"It does not affect my coverage." It reduces the death benefit while it is outstanding. That is a direct effect on coverage.

"Any whole life contract is built for borrowing." How useful a contract is for borrowing depends on funding decisions made at issue, and those are hard to revisit later without cost.

Can you borrow against a term life insurance policy?

No. A term life insurance policy has no cash value. It is pure coverage for a defined period, and the premium pays for that coverage. There is nothing accumulated to lend against and nothing to surrender.

People who have paid term premiums for fifteen years reasonably assume something has built up. Nothing has, and the policy did exactly what it was bought to do.

A convertible term policy can become permanent without new medical evidence, within the conversion window the contract states, and a permanent contract can build value over time. That is a conversion decision, not a borrowing one, and the window can close years before the term ends. The permanent contract it becomes is described in whole life insurance in Canada.

Universal life builds value in an account, and its loan provisions can differ from those of a participating contract. Ask the insurer rather than assuming the mechanics carry over.

Why people borrow, and how it compares with other credit

A policy loan is one option among several, and it is not automatically the cheapest.

• A secured line of credit against a home may cost less. It needs equity and a lender's approval. It also puts the home behind the debt.
• An unsecured personal loan or line of credit can cost more and needs approval. It puts nothing at risk beyond the debt itself.
• Selling an investment may realise tax on a gain and removes the asset. Where the gain is small, it can be the cheaper route.
• Cash set aside for the purpose is the answer nobody wants and the right one for real emergencies.

What a policy loan offers is no application, no credit check, and timing that is yours within the contract's terms. What it costs is interest, a lower death benefit while it is outstanding, and a possible tax consequence. Compare it with what you would actually do otherwise, at the rate you would actually pay.

The reasons people borrow, and which ones hold up:

• An emergency, where speed matters and no approval is available: the strongest case.
• Paying off higher-rate debt, where the numbers really favour it. Check them. The policy rate is not always lower.
• A planned expense you would otherwise finance commercially, where you will really repay.
• Supplementing income, with care. Repeated advances without repayment grow against a value that grows at its own pace. The two lines can meet.
• Because it is there. Not a reason: the missing approval step removes a friction that exists for a purpose.

Two planned expenses are worked through route by route on paying for a renovation and on a tax bill in April, each of which names the conditions under which a policy loan is the wrong route.

When a policy loan is the wrong tool

When the money is needed permanently. If there is no realistic prospect of repayment, a withdrawal or another structure may be more honest.

When the contract is young. Value is limited early, and drawing on it early adds interest to costs that are already heaviest in those years.

When cash flow is already strained. A loan does not create income; what is missing today will still be missing at repayment, with interest on top.

When the need is larger than the value available. The loan is capped, and a plan built around it will fail when it matters.

When another source of money is genuinely cheaper, such as a line already in place at a lower rate.

When nobody has confirmed the contract terms. The rate mechanism, any effect on dividends, the maximum, the notice terms and the beneficiary position. A plan built on assumptions about any of these is a plan built on someone else's contract.

What the mechanism is for

A policy loan lets you use money lent by the insurer while the cash value stays in the contract as security. Used deliberately and repaid, it rebuilds capacity. Used casually and left unpaid, it draws the contract down while interest builds against the value securing it. The mechanism is neutral. The discipline is not.

This practice calls the result it works toward Infinite Financial Sovereignty®, a registered trademark of Jose Salloum: permanent coverage in place, access to capital under contract terms you have read and understood, and a clear record of who owes what to whom. It does not suit everyone, and the description of the approach says plainly whom it does not suit.

Whether to use a policy loan at all is a separate question from how it works. The honest alternative may simply be using savings, and that comparison is set out in the comparison question.

Participating whole life insurance is an insurance product, not an investment. The loan provision is a feature of the contract: useful in defined circumstances, costly in others, and no substitute for having money set aside in the first place.