Policy Loans are the preferred way to access money from your Whole Life insurance policy. By accessing your money through policy loans (as opposed to cash withdrawals), you allow the policy to continue to grow at its full potential, as if you never took your money out of it in the first place. For example, think of a Registered Retirement Income Fund (RRIF) where constant cash withdrawals eventually cause the account to decline, sometimes significantly, not only due to the withdrawals themselves, but also because of the lost opportunity cost (see “Opportunity Cost”) on those withdrawals. In Canada, most Whole Life policies contractually allow for the policyholder to borrow against the policy’s cash value from the insurer (insurance company). Borrowing money from the insurer allows all of your money to continue to grow at its full potential, free of taxes, within the policy. The maximum amount that can be borrowed through a policy loan is usually around 90% or 95% of the net cash value (“net” means your cash value adjusting for any existing outstanding loans).
When contemplating any policy loans or cash withdrawals, please consult your advisor first to see what impacts each option will have on your policy or on your income taxes payable. Policy loans can trigger a taxable event if the loan balance exceeds the Adjusted Cost Basis or ACB (see “Adjusted Cost Basis”). Policy loans will reduce the ACB of your policy by the amount of the loan requested, but the repayment of the loan will replenish the ACB back to its current full accessible balance. Accessing your money through a series of policy loans is a unique benefit of this type of policy. This concept can be hard to grasp initially but can provide much more efficiency with the growth of your money over time. Also, please note that some insurance companies do not allow policy loans if the premiums are offset (see “Premiums Offset”), or do not allow premium offset if there are some outstanding policy loans.