Can You Cash Out Life Insurance? How It Works in Canada
If you have a whole life or universal life insurance policy, it may have accumulated cash value that you can access. But cashing out isn't always straightforward — and there are tax implications. This guide explains your options.
Updated February 24, 2026
Which policies have cash value?
Only permanent life insurance policies build cash value:
- Whole life insurance: Builds guaranteed cash value on a fixed schedule. Participating policies also earn dividends that can increase cash value.
- Universal life insurance: Cash value grows based on investment returns within the policy. Growth varies depending on the options you selected.
- Term life insurance: Has no cash value. If you cancel, you get nothing back. Term life is pure protection.
4 ways to access your life insurance cash value
1. Full surrender (cancel the policy)
You can surrender your whole life or universal life policy and receive the cash surrender value — the accumulated cash value minus any surrender charges. This terminates your coverage permanently.
Surrender charges are highest in the early years (first 10–15 years) and decrease over time. After 15–20 years, many policies have minimal or zero surrender charges. Your insurer provides the current cash surrender value on your annual statement.
2. Policy loan
You can borrow against your policy's cash value without surrendering it. The policy stays active and your beneficiaries retain the death benefit (minus the outstanding loan balance). Policy loans typically charge 5–8% interest.
Policy loans are generally not taxable as long as the policy remains in force. If the policy lapses with an outstanding loan, the loan may become taxable. This makes policy loans an attractive way to access cash without triggering immediate tax consequences.
3. Partial withdrawal
Some universal life policies allow partial withdrawals from the cash value. This reduces both the cash value and, potentially, the death benefit. Partial withdrawals may have tax implications if the amount exceeds the adjusted cost basis of the policy.
4. Reduced paid-up insurance
Instead of fully surrendering, you can use your accumulated cash value to purchase a smaller, fully paid-up policy. You stop paying premiums and retain a reduced death benefit for life. This is a good option if you can't afford premiums but want to keep some coverage.
Tax implications of cashing out
When you surrender a life insurance policy in Canada, the CRA taxes the gain above your adjusted cost basis (ACB). The ACB is roughly the total premiums you've paid minus the "net cost of pure insurance" (the mortality component).
If the cash surrender value exceeds the ACB, the difference is taxed as ordinary income in the year you surrender. This can result in a significant tax bill. Policy loans, by contrast, are generally not taxable while the policy remains active.
For more detail on life insurance taxation, read our guide: Is Life Insurance Taxable in Canada?
Should you cash out your life insurance?
Consider cashing out if:
- You no longer need the coverage (no dependents, debts paid off).
- The cash value is substantial and you have a better use for the money.
- You can't afford the premiums and want to recover value.
Consider keeping the policy if:
- You still have dependents who need the death benefit.
- The policy is part of your estate plan.
- Surrendering would trigger a large taxable gain.
- A policy loan could meet your cash needs without losing coverage.
Frequently asked questions
Can you cash out a life insurance policy?
Yes, if it's whole life or universal life with accumulated cash value. You can surrender the policy, take a loan, make a partial withdrawal, or convert to paid-up coverage. Term life has no cash value.
Is cashing out life insurance taxable in Canada?
If the cash surrender value exceeds the adjusted cost basis, the gain is taxable as income. Policy loans are generally not taxable while the policy remains active.
Can you cash out term life insurance?
No. Term life has no cash value. If you cancel, you receive nothing. Only whole life and universal life build cash value.
Need better coverage at a lower cost?
If you're cashing out because premiums are too high, consider switching to more affordable term life insurance. Compare free quotes from 50+ providers.
Related reading: Life Insurance as a Savings Account · Converting Life Insurance to an Annuity · Is Life Insurance Taxable? · Term vs Whole Life