Life Insurance Policy Loan Canada — How It Works (2026)

How a policy loan works

Permanent life insurance builds cash value over time. The insurer allows you to borrow against that value — it’s a loan from the company, not a withdrawal. You pay interest (at the rate in your contract). The loan reduces the net cash value and, if it grows large enough, can reduce the death benefit. Term life has no cash value, so there is no policy loan option. For “life insurance like a savings account” see life insurance as a savings account; for cashing out see can you cash out life insurance.

Repayment and interest

You typically don’t have to make regular repayments — interest is added to the loan. If you don’t pay interest, the balance grows and can eventually exceed cash value, which can cause the policy to lapse. Repaying the loan (or at least the interest) keeps the policy in force and preserves the death benefit. Rates are set in the contract; compare with other borrowing options.

Policy loan vs surrender vs cash out

A policy loan keeps the policy in force (as long as the loan doesn’t get too large); the death benefit continues. Surrendering or cashing out ends the policy — you receive the cash value (minus any loan), and coverage stops. Surrender can trigger tax on gains. See surrender life insurance policy Canada and can you cash out life insurance.

FAQ

Can you borrow against life insurance in Canada?

Yes — on whole life or universal life with cash value. Term life has no cash value, so no policy loan.

Do you have to repay a policy loan?

You don’t have to make scheduled payments, but interest accrues. Not repaying can shrink or eliminate the death benefit.

Is a policy loan taxable?

The loan itself usually isn’t taxable. Surrendering or lapsing with an outstanding loan can create taxable income. Get tax advice.

More on permanent life and cash value

Compare life insurance including whole and universal life. Also see term vs whole life, can you cash out life insurance, and life insurance Canada.