How does the cash value of life insurance work in Canada?
In just a few steps, you can view personalized life insurance quotes from Canada's top providers. Find the best rate for your needs today.
let's get started
Jordan Lavin
This article was originally published on January 2, 2023 and was updated on January 30, 2026.
Life insurance is a valuable tool to ensure your loved ones are financially cared for after you die. It can also be used as a savvy financial strategy for building and transferring wealth while you’re living.
Some permanent types of life insurance have what’s known as a “cash value”. This is money that builds over time as you pay your premiums and can be withdrawn, surrendered or used as collateral for a loan, among other things.
Keep reading to learn more about the cash value of life insurance and how it works.
Key takeaways
- Cash value is a component in many permanent life insurance policies. As you pay regular premiums, you also build out a reserve which you can access during your lifetime.
- Different policies will accumulate in cash value in different ways. A whole life policy, for instance, has a guaranteed cash value determined by a preset formula.
- There are many ways to access the cash value. This includes withdrawing the money, using it as collateral, and even allocating it toward your premium payments.
- Withdrawing the cash value may come with downsides, including tax implications, decreased savings, and a lower death benefit.
What is the cash value of life insurance?
Cash value is a component of many permanent life insurance policies. As you pay the premiums, a portion goes into a “cash value” that you are free to withdraw or use as collateral for a loan. Withdrawals usually reduce the death benefit your beneficiaries will receive when you die.
How does a life insurance policy build cash value?
The way your life insurance policy builds cash value differs among insurers and plans – let’s take a look at three common options.
| Type of insurance | How cash value works |
| Whole life insurance | The cash value grows based on a formula or set schedule determined by your insurer. It is guaranteed. |
| Universal life insurance | The cash value grows based on investments and current interest rates. |
| Variable life insurance | The cash value grows based on the performance of the subaccount. |
As a simple example, let’s say you take out a non-participating whole life insurance policy for $150,000 when you’re 40 years old. This particular policy includes a guaranteed cash value that begins accumulating in the third year and grows evenly until it reaches 50% of the death benefit when you reach age 65.
In this example, your cash value will grow by $3,125 every year, starting the year you turn 42. At age 65, the cash value will reach $75,000.
| Age | Cash value | Death benefit |
| 40 | $0 | $150,000 |
| 41 | $0 | $150,000 |
| 42 | $3,125 | $150,000 |
| 43 | $6,250 | $150,000 |
| 44 | $9,375 | $150,000 |
| 45 | $12,500 | $150,000 |
| 46 | $15,625 | $150,000 |
| 47 | $18,750 | $150,000 |
| 48 | $21,875 | $150,000 |
| 49 | $25,000 | $150,000 |
| 50 | $28,125 | $150,000 |
| 51 | $31,250 | $150,000 |
| 52 | $34,375 | $150,000 |
| 53 | $37,500 | $150,000 |
| 54 | $40,625 | $150,000 |
| 55 | $43,750 | $150,000 |
| 56 | $46,875 | $150,000 |
| 57 | $50,000 | $150,000 |
| 58 | $53,125 | $150,000 |
| 59 | $56,250 | $150,000 |
| 60 | $59,375 | $150,000 |
| 61 | $62,500 | $150,000 |
| 62 | $65,625 | $150,000 |
| 63 | $68,750 | $150,000 |
| 64 | $71,875 | $150,000 |
| 65 | $75,000 | $150,000 |
This example policy pays $150,000 no matter when you die, but doesn’t accumulate its full cash value until you turn 65.
How can I use the cash value of my life insurance policy?
If your life insurance policy has cash value, you can access it in a number of ways:
- Withdraw cash. You can withdraw cash from your life insurance policy and use it however you see fit. Note that there may be tax consequences for making a cash withdrawal.
- Borrow against it. You can borrow against your policy by taking a loan from the cash value reserve. This often comes with lower interest rates than other forms of borrowing. You don’t need to repay the loan in a specific time frame, but interest will accrue on the unpaid balance.
- Use as collateral for a loan. When you get a mortgage, the home is used as collateral to secure the loan. Similarly, you can use the cash value of your life insurance policy to secure a loan. This strategy may help reduce the immediate tax consequences of accessing your cash value.
- Surrender for cash value. You may also have the option to “surrender” your life insurance policy and take the cash value. By doing this, you end your responsibility to make payments, but also give up your death benefit. Surrendering a life insurance policy has tax implications for you and your estate, so it’s best to consult with a financial advisor before making a decision.
- Use cash value to pay premiums. As you get older, you may prefer to let your policy pay its own premiums from its cash value rather than continue to pay them yourself. Your policy will likely include an option to do this automatically, known as “paid up” insurance.
- Purchase more insurance. If your cash value is derived from investments, you may be able to use it to buy more insurance and increase your death benefit, which could reduce the tax burden on your beneficiary.
Compare life insurance quotes from Canada's top providers today.
In just a few steps, find out how much you could be paying for a personalized life insurance plan.
What are the downsides of withdrawing life insurance cash value in Canada?
Withdrawing cash from your life insurance policy has consequences. Consider the following before dipping in:
- You may have to pay tax on the life insurance cash value withdrawal. When you withdraw cash from your policy, you may have to pay income tax on the money you take out. The tax burden may be substantially lower if you leave the cash value to be inherited.
- Fees may eat into your savings. In addition to taxes, your insurance company may charge you fees to access your cash value, which can undo your hard work.
- Withdrawals usually reduce the death benefit, lowering the amount your loved ones will receive.
Check with your insurance broker or financial advisor before withdrawing cash from your life insurance policy to make sure you’re using the best strategy for your current needs as well as your estate.
How does participating life insurance work?
Some life insurance plans are labelled as “participating”. These participating life insurance policies essentially offer an extra form of cash value through dividends. Your insurer allocates your regular premiums to a professionally managed account, which then has the potential to generate dividends. Dividends can then be taken out as cash for your needs, supplemented towards your cash value, or used to pay your policy premiums. You may also be able to use the money to increase your policy's death benefit, leaving your loved ones with more coverage after your passing.
Frequently asked questions
Do all life insurance policies have a cash value?
Is cash value the same thing as cash surrender value?
The bottom line
Getting a life insurance policy with a cash value component can be a useful way to balance estate planning with your own future. Compare life insurance quotes online to find the right permanent life insurance policy for you.