Borrowing against a whole life policy in Canada: how policy loans work

Under the hood · By Penny Hughes · Published November 2, 2026 · Last updated November 2, 2026

Is a policy loan really tax free, with no credit check, no repayment schedule, and no effect on the policy? Parts of that pitch are true, and the parts left out are the ones that cost money. A policy loan in Canada is treated as a disposition for tax purposes, only the portion up to a limit called the adjusted cost basis is tax free, interest starts accruing as soon as the money is issued, and an unpaid balance is taken out of the death benefit before your beneficiaries see a dollar. None of that makes a policy loan a bad tool. It makes it a loan, with loan mechanics, and it should be read that way.

What a policy loan actually is

A policy loan is a loan from the insurer, secured by the cash value inside a permanent life insurance policy. Cash value is the savings component that accumulates over time in permanent policies. Whole life typically provides stable growth with guaranteed cash value accumulation, Sun Life notes. Term insurance has no cash value, so there is nothing to borrow against.

PolicyMe puts two practical conditions on borrowing. The policy must be a cash value policy, such as whole life or universal life, and it must have built up enough value to borrow against, which often takes several years. A new policy with little cash value has little borrowing room, whatever the brochure says about the feature.

The borrowing process itself is light. Sun Life describes its policy loan as secured by the policy's cash value, with no application process and no fees for creating the loan arrangement. PolicyMe adds that the insurer reviews the available cash value but does not usually verify income or perform credit checks, and Sun Life notes a policy loan can be taken without credit checks. The amount is also capped by the policy: Sun Life states you can borrow a percentage of the cash value, not the full amount. The percentage, the minimum, and the interest rate are set by the insurer and the contract, so no single figure applies across Canada.

Loan, withdrawal, or surrender: three different doors

Sun Life draws the loan and withdrawal line clearly. Borrowing charges interest, and unpaid loans reduce the cash value or, depending on the policy, the final death benefit. A withdrawal, also called a partial cash surrender, reduces the final death benefit and cannot be repaid, while a loan can be repaid to restore the policy's cash value and death benefit amounts. Surrendering the whole policy is the third door: it pays out the available cash value and cancels the policy, so the death benefit is no longer available to beneficiaries at all.

A separate arrangement also exists, borrowing from a bank or another lender with the policy assigned as collateral. That is not a policy loan from the insurer, it involves a lender's own process, and its mechanics sit outside a basics guide. Name which arrangement you are actually signing before comparing costs.

The ACB worked example: the same loan, two tax outcomes

The adjusted cost basis, or ACB, is the non taxable part of a policy's cash value. Sun Life explains that it is calculated according to a formula in the Income Tax Act, and that the Canada Revenue Agency uses a policy's ACB to decide whether accessing the cash value creates tax.

A policy loan counts in that system from the first dollar. Sun Life states that a policy loan is considered a disposition for tax purposes, under paragraph (b) of the definition of disposition in subsection 148(9) of the Income Tax Act. Amounts equal to or less than the policy's ACB are tax free. Amounts greater than the ACB are taxable, and Sun Life will issue a T5 slip to report the taxable gain.

Here is Sun Life's own worked example, which shows why two neighbours can borrow the same amount and face different tax bills.

The arithmetic is the whole lesson. In Policy A the $30,000 loan sits below the $40,000 ACB, so no part of it is a taxable gain. In Policy B the same $30,000 loan exceeds the $20,000 ACB by $10,000, and that excess is the taxable gain. The loan did not change. The policy's tax history did. That is why the first question before borrowing is not how much cash value exists, but what the ACB is today. Only the insurer can give that figure for your policy.

How to take a policy loan, step by step

1. Confirm the policy qualifies. It must be a permanent policy with cash value built up, such as a whole life policy. If the policy is term, stop here, there is no cash value to borrow against.
2. Ask the insurer for three numbers in writing: the current cash value, the maximum loan the policy allows, and the current adjusted cost basis. The ACB, not the cash value, decides the tax free room.
3. Size the loan against the ACB first and the need second. A loan kept at or below the ACB avoids a taxable gain on the borrowing itself, under the Sun Life guidance above.
4. Ask how interest works on this policy. Sun Life notes policy loan interest is often charged at a variable rate, and PolicyMe notes interest starts accruing once funds are issued and is either paid as you go or capitalised, meaning added to the loan balance. Choose deliberately, because capitalised interest grows the balance every year it is left alone.
5. Sign the insurer's loan form and receive the funds. Keep the loan statement with the policy, not in a general paperwork pile.
6. Set a repayment habit even though no schedule is imposed. A loan can be repaid at any time, and repaying restores cash value and death benefit amounts. A yearly check works: compare the loan plus accumulated interest against the cash value, and pay at least the interest if the balance is growing.
7. Tell the people who would claim. If the insured person dies with a loan outstanding, Sun Life states the death benefit first pays the policy loan plus accumulated interest, and the remainder is paid to the beneficiary. A beneficiary who expects the full face amount should not learn about the loan from the claim letter.

What success looks like: the loan amount, the ACB, and the interest treatment are all known in writing before the money arrives, the balance is checked against the cash value at least once a year, and the death benefit your family expects is the amount after the loan, not the amount on the original policy cover page.

The risk that grows quietly: lapse

No repayment schedule sounds like freedom, and for a short, planned loan it can be. Left alone, the mechanics turn. Interest accrues, capitalised interest is added to the balance, and the balance is secured by a cash value that the loan itself is reducing. PolicyMe warns in plain terms that borrowing incurs interest and can eat into the death benefit if it is not repaid.

The end point of that path is a policy that can no longer support its own loan. At that point the household can face the loss of the coverage the policy was bought for, on top of any tax that arises when a policy with a loan ends. Sun Life flags tax consequences in general terms for accessing cash value, and the ACB section above shows why a tax slip can arrive in a year when no new money was received. If a loan balance is approaching the cash value, that is a conversation to have with the insurer and a licensed professional promptly, while repayment, a smaller loan balance, or other policy options are still available.

When borrowing against the policy is the wrong tool

A policy loan suits a defined, temporary need where the borrower has a realistic repayment path and the death benefit can bear a temporary reduction. It is the wrong tool when the need is permanent spending with no repayment source, when the loan would exceed the ACB by enough to create a tax bill the household has not budgeted for, or when the coverage itself is the point, for example a policy held to pay final costs or support a dependent for life. In those cases the loan spends the protection to fund the present, and the protection does not come back on its own.

Read the feature as what it is: convenient borrowing, secured by your own policy, at an insurer set rate, with a Canadian tax threshold that has a name and a number for your policy. Get the number first. The loan decision gets much simpler after that.

, Penny Hughes, Money Writer. Saving Desk