How Much Can You Borrow From a $500,000 Life Insurance Policy? The Loan Follows the Cash Value

You cannot borrow $500,000 against a $500,000 life insurance policy. You cannot borrow against the $500,000 at all. That number is the death benefit, and a death benefit is paid when the person insured dies, not before. What you can borrow against, if the policy has one, is the cash surrender value, and only part of it.

The question sits in Google's "People also ask" box for a reason. People ask it at real moments: a business needs working capital, a down payment falls short, a tax bill arrives, or someone has heard that a life insurance policy can be a source of credit and wants to know what theirs could do. A wrong answer leads to a wrong plan. A household that counts on borrowing a large sum against a policy, and then learns the loan value is a small part of what it expected, finds out at the worst possible time.

This page explains what sets the amount you can borrow, why the face amount says nothing about it, what a loan costs and does to the policy, how it is taxed in Canada, and how to get your own figure. It is general information from a licensed insurance professional, not tax, legal or investment advice.

It starts with two numbers that people mix up.

What is the $500,000, and what is the cash value?

The $500,000 is the face amount. That is the death benefit, the sum the insurer pays to the beneficiary when the person insured dies. It is set in the contract on the first day.

The cash surrender value is a different figure. It is what the insurer would pay an owner who ends the policy while the person insured is alive. The Autorité des marchés financiers, Quebec's regulator, describes it as the amount you can receive when you cancel your insurance. It also says plainly that on death the amount of insurance is payable, not the cash surrender value. The two numbers sit side by side in the same contract. They are not added together.

A policy loan uses only the second number. The insurer lends against the cash surrender value because that is what the insurer would owe you if you walked away. It does not lend against the death benefit, because the death benefit is not yours to take while the person insured is living.

So the honest answer to "how much can I borrow from a $500,000 policy?" begins with a different question. What is the cash surrender value today?

How does the contract set the most you can borrow?

The contract's loan provision does it. Most whole life contracts, and many other permanent policies with a cash value, contain a clause that lets the owner borrow from the insurer, with the policy as security, up to a maximum the contract defines. The Income Tax Act describes a policy loan the same way: an amount advanced by an insurer to a policyholder in accordance with the terms and conditions of the life insurance policy. The terms of your own contract are what count.

The maximum is usually written as a share of the cash surrender value, less what you already owe. In broad terms it works like this:

1. Start with the cash surrender value on the date of the loan.
2. Apply the share the contract allows.
3. Subtract any policy loan already outstanding and the interest owing on it.
4. Subtract any premium that is due and unpaid, if the contract says so.

The clause may also subtract other amounts it names, such as interest that will fall due. That is one reason the "maximum loan available" on a statement can differ from a simple percentage of the cash value. Your own loan clause says whether yours does.

How large is that share? The pages that rank on Google for this question today give ranges of 50% to 90% of the cash value, 75% to 95%, and up to 100% depending on the contract. Those ranges come from different insurers, different products and different dates. None of them is your contract. Whole life and universal life contracts can work the limit out differently, and a universal life contract may allow a smaller share. How the two kinds of contract differ is set out on participating whole life and universal life.

Here is what actually happens. You do not calculate the limit yourself. The insurer does, on the date you ask, using the clause in your contract. Your job is to read the clause and check the figure.

Why can a new $500,000 policy lend so little?

Because a new policy has little cash value to lend against.

In the first years of most whole life designs, the cash surrender value is small, and on some designs it is nothing at all for a time. The early premiums pay for the insurance itself, the insurer's costs of issuing the policy, premium tax and the commission paid to the professional who arranged it. Most of that falls in the first years. The cash value builds later, along a schedule written into the contract. The AMF notes that the method and table used to set the cash surrender value must be included in the policy.

So a $500,000 policy bought two years ago may have a loan value of a few thousand dollars, or none. The same face amount on a policy that has been in force for twenty years may support a much larger loan. The face amount did not change. The years did.

The design matters as much as the years. A policy built to give the largest death benefit for each premium dollar puts little into cash value early. A specially designed, high-cash-value, participating whole life insurance policy is built the other way: more of each early premium goes to cash value, often through paid-up additions, so its loan value rises sooner. That design has its own trade-offs, including a smaller death benefit for the same premium. How it is put together is explained on high cash value life insurance in Canada, and why the face amount cannot tell you the cash value is explained on the cash value of a $100,000 policy.

Term life insurance is the simplest case. A term policy has no cash value, so there is nothing to borrow against, whatever its face amount. A $500,000 term policy lends nothing. More on term coverage is on term life insurance.

Why does the amount you can borrow change from year to year?

Because every number in the calculation moves.

The cash surrender value rises along the contract's table as the years pass, so the room to borrow usually grows too. On a participating policy, dividends that buy paid-up additions add their own cash value, which can raise the limit further. Dividends are not guaranteed, so that part of the growth is not either.

What you owe moves as well. Interest added to an existing loan uses up room that would otherwise be available, year after year. A premium left unpaid, or paid by the contract out of the cash value, can reduce it. A partial surrender or a withdrawal of paid-up additions lowers the cash value that secures the loan.

So the figure you read on last year's statement is not this year's figure. A household that plans to borrow on a certain date should ask for the figure close to that date, and should not assume the room will be there because it was there before.

There is one more difference worth knowing. Because the loan is a right written into the contract, the insurer generally does not ask what the money is for or check your credit before advancing it. That makes the loan simple to obtain. It does not make it cheap or harmless, which is why the next sections spend more time on what a loan does than on how to get one.

A worked example in round numbers

Illustrative example. The numbers below are round figures chosen to show the arithmetic. They are not the values of any contract or any insurer, and your own contract may set its limit in a different way.

Say your $500,000 whole life policy shows a cash surrender value of $60,000 on today's statement. Say the loan clause allows 90% of that value, less any loan outstanding, and you have no loan yet. Then 90% of $60,000 is $54,000. Nothing is owing, so the most you could borrow is $54,000, before any other amount the clause subtracts.

Now say you already owe $20,000 on an earlier loan, with $1,000 of interest added since. The same $54,000, less the $21,000 you owe, leaves $33,000 that could still be advanced.

Notice what is missing from the arithmetic. The $500,000 never appears. It is not part of the limit. It matters only at the end, because whatever is still owing when the person insured dies comes off it.

The AMF gives its own example of that last step. On a $100,000 policy with a cash surrender value of $15,000, the owner borrows $7,000. If the person insured dies years later with $2,000 of interest accrued on the loan, the insurer pays $91,000: the $100,000, less the $7,000 loan, less the $2,000 of interest.

What does borrowing do to the policy?

A policy loan is a loan, and it behaves like one.

The insurer charges interest on it, at a rate the insurer sets under the terms of the contract. On many contracts that rate can change. Interest accrues on the amount borrowed, and the AMF notes that you will eventually have to repay the amount borrowed plus interest. Interest you do not pay is usually added to the balance, and then it carries interest too. The interest is paid to the insurer.

The loan stays in place until you repay it or until it is settled out of the policy. There is often no fixed repayment schedule, which can feel like freedom. It is also the risk. A balance that grows quietly for years can come close to the cash surrender value that secures it. When the amount owing goes past that value, the policy can end, on the terms and after the notice set out in the contract. A policy that ends that way has stopped protecting anyone.

At death, the balance comes off the death benefit, as the AMF example shows. A family that expected the full face amount receives less.

On a participating policy, an outstanding loan can also affect the dividends credited to the policy, depending on the contract and on the insurer's practice. It is one of the questions to ask in writing. The subject is covered on policy loan interest and dividends, and the mechanics of the loan itself are on policy loans in Canada.

How is a policy loan taxed in Canada?

This is where the amount you can borrow and the amount you can borrow without reporting income part ways.

Under subsection 148(9) of the Income Tax Act, a policy loan is a disposition of an interest in the policy. The proceeds of that disposition are the lesser of two amounts. The first is the loan itself, leaving out any part applied immediately to pay a premium under the policy. The second is the cash surrender value just before the loan, less any policy loans already outstanding. Subsection 148(1) then includes in your income the amount by which those proceeds exceed the adjusted cost basis of your interest in the policy.

The adjusted cost basis. In plain terms, that is roughly what the tax rules count as your cost in the policy. A loan up to that amount creates no income. The part of a loan above it is income in the year you receive it.

So two numbers matter, and they are not the same. The contract tells you the most you can borrow. The adjusted cost basis tells you how much of that you can borrow before part of the loan becomes taxable. On an older policy, the loan limit can be well above the adjusted cost basis. Ask the insurer for both figures on the same date. When a loan becomes taxable is set out on when a policy loan becomes taxable, and how to check your own position is on is my policy loan over my ACB?.

How a later repayment of a taxable loan is treated is a question for your accountant, with the insurer's figures in hand.

Could a lender let you borrow more?

Sometimes, and on different terms.

The AMF notes that you could also borrow from another financial institution using your insurance as collateral. That is a collateral loan. The policy is assigned to the lender as security, and the lender, not the insurer, decides how much it will advance. Lenders usually set their own share of the cash surrender value, and they look at your income, your credit and the rest of your situation as they would for any loan.

The Income Tax Act treats the two arrangements differently. Under subsection 148(9), an assignment of an interest in a policy to secure a debt is not a disposition. A policy loan is. So a collateral loan does not create a policy gain the way a policy loan above the adjusted cost basis does. That difference comes with its own costs: the lender's underwriting, its interest rate, its conditions, and the risk that the lender can demand repayment or collect from the policy if those conditions are not met.

Which suits a given need is weighed on a policy loan or a collateral loan, and the wider range of credit a policyowner might use is compared on a policy advance and other credit.

How do you find your own number?

Start with what you already have. The annual statement for a whole life policy usually shows the cash surrender value, any loan outstanding with its interest, and often a line for the loan value available on the statement date. That line is the closest thing to an answer you can read without asking anyone.

Then ask the insurer for a dated figure. Get the number and check it yourself. A useful request asks for these, all on one date:

1. The cash surrender value, the loan outstanding and the interest owing.
2. The maximum new loan available, and how it was worked out under the contract.
3. The current loan interest rate, how often it is charged, and whether it can change.
4. The adjusted cost basis, and how much of the maximum loan would be taxable income.
5. What happens, and what notice you receive, if the balance comes close to the cash surrender value.

Ask for it in writing. Then compare the answer with the loan clause in your contract and with its cash value table. How that table is read is explained on reading the cash value table, and what the surrender value itself includes is on cash surrender value.

If a corporation owns the policy, the corporation is the policyholder. The loan is the corporation's, the tax result is the corporation's, and the corporation's accountant needs the same figures.

Who should not plan on borrowing against a policy?

A policy loan does not suit someone who needs a large sum in the first years of a new policy. The loan value is not there yet. It does not suit someone who means to borrow and never repay, unless they have accepted in writing what the growing balance will do. It will reduce the death benefit, and it can end the coverage. It does not suit a household that bought the policy for the protection and cannot afford to see the death benefit cut. And it does not suit anyone who has not asked for the adjusted cost basis before signing a loan request.

Now take the owner of a policy that has been in force for years. This owner understands the interest, keeps the balance well below the cash surrender value and has a plan to repay. For that owner, a policy loan can be a simple source of credit with no application to a lender. Whether that describes you is a question about your own contract and your own cash flow. It is not a question about the face amount. The wider context is on whole life insurance in Canada.

What this page will not tell you

It will not tell you how much you can borrow against your own policy. Only your contract, your statement and a dated figure from your insurer can do that. It will not quote any insurer's loan percentage, interest rate or values. Each belongs to one company, one product and one date, and each changes. And it will not tell you whether to borrow. That depends on what the money is for, how and when you will repay it, your tax position and what the policy is meant to protect.

What it can leave you with is the right question. Not "how much can I borrow against $500,000?" but "what does my contract let me borrow today, what will it cost, and how much of it would be taxable?" Ask that, in writing, and you will have your answer.