Damien Burleigh, CFP®, CLU® — Senior Analyst, Financial Planning Canada
Michael Callahan, CFP®, CIM® CHS, ABFP — Senior Analyst, Financial Planning Canada

Permanent life insurance, such as a whole life or universal life insurance policy, whether owned personally, or owned by a corporation, can serve two purposes: providing a guaranteed death benefit, and accumulating cash value on a tax-deferred basis. While many policies are purchased primarily for estate protection or business planning, the cash value inside the policy can function as a source of funds during the policyholder’s lifetime.

Accessing this cash, however, is not as simple as withdrawing money from a bank account. There are several different methods available to access the cash value in a permanent life insurance policy, and each method may affect the policy’s death benefit, investment performance, and tax treatment. Importantly, some strategies permanently reduce or terminate the policy, while others preserve coverage and defer taxation. The “best” option depends on the policyholder’s objectives and priorities, such as long-term tax efficiency, insurance protection, or estate preservation.

This strategy report discusses four methods of accessing the cash value of a permanent life insurance policy: policy loan, surrendering the policy, a partial surrender, and a collateral loan. Each approach is outlined with its key advantages, disadvantages, and potential tax implications, along with an illustration of how a collateral loan works in practice.

Given the complexity and long-term implications of these options, working with an experienced financial advisor can help you navigate the nuances of accessing your policy’s value — ensuring your approach aligns with your broader goals, and supports both your immediate needs and future priorities.

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Key terms

TermDefinition
ACBThe Adjusted Cost Basis (ACB) of a life insurance policy is the amount of after-tax money that a policyholder has invested in the policy, including premiums paid, adjusted for policy expenses, withdrawals, or certain policy loans. It is used to calculate the taxable portion of policy gains when a policy is surrendered, partially withdrawn, or when certain policy benefits are received.
CSVThe Cash Surrender Value (CSV) of a life insurance policy is the amount of money a policyholder would receive if they voluntarily terminated (surrendered) the policy before a death claim. It represents the accumulated savings component of the policy, minus any applicable surrender charges or outstanding loans.
IRPAn Insured Retirement Plan (IRP) is an insurance strategy designed to allow individuals to accumulate tax-deferred wealth within a life insurance policy and subsequently access this wealth as a source of retirement income through a loan obtained against the cash value of the insurance policy.
CIRPA Corporate Insured Retirement Plan (CIRP) is similar to the IRP strategy except the insurance is owned by an incorporated business, the loan is obtained using the insurance cash value as collateral, and the proceeds are used to supplement cash flow for the shareholder(s). 
CDAThe Capital Dividend Account (CDA) is a notional account that tracks the amount of tax-free capital a private corporation can pay to its shareholders on a tax-free basis. It generally includes the non-taxable portion of a capital gain, life insurance death proceeds in excess of the policy's ACB, and capital dividends received from other corporations. The CDA can be reduced by realized capital losses and by capital dividends being paid out to shareholders.

How to access the cash value of a permanent life insurance policy

These four strategies exist on a spectrum, from policy-native mechanisms that keep the arrangement within the insurance contract itself, to external financing structures that leverage the policy's cash value as collateral, each carrying distinct implications for coverage, taxation, and long-term financial planning.

Policy loan: Borrowing against your life insurance cash value

A policy loan involves borrowing directly from the insurance company using the policy’s cash value as collateral. The loan does not need to be repaid during the policyholder’s lifetime if the policy remains in force. Although interest accrues on the loan, repayment schedules are typically flexible. A policy loan may appeal to policy owners who have a temporary need for cash and intend to repay the loan.

Full surrender: Cancelling your life insurance policy for immediate cash

Surrendering a permanent life insurance policy means cancelling it entirely in exchange for its cash surrender value. The policy then ceases to exist, premiums stop, and no death benefit is payable. The insurer pays out the net cash value after deducting any surrender charges or outstanding loans. This appeals primarily to policy owners who no longer need the insurance coverage and have an immediate need for cash.

Partial surrender: Accessing some cash while maintaining coverage

A partial surrender allows the policyholder to reduce the policy coverage and withdraw a portion of the policy’s cash value, while maintaining some level of coverage. Depending on the policy design, the withdrawal may reduce the death benefit, the cash value, or both. This may be suitable for policy owners who no longer need the full amount of coverage but have cash needs, and/or may also want to reduce their overall premiums.

Collateral loan: Using your policy as security for third-party financing

While the previous 3 three options use built-in features of a life insurance policy, a collateral loan uses the cash surrender value of the policy as security for a loan from a third-party lender. As the policy's cash value grows over time, it can be assigned as collateral for a loan (usually a line of credit), allowing the owner to borrow up to 90% of the policy's cash value depending on the type of permanent insurance policy, the age of the client, and the timing of how they want to access the loan.

Although the policy is assigned as collateral, ownership typically remains with the policy owner. As long as both the insurance policy and loan remain in good standing, and the loan falls within the required limit relative to the insurance cash value, the loan can continue until it is either paid off, or the person insured under the policy passes away. When they pass away, the proceeds are then used to re-pay the outstanding loan balance, and any residual death benefit is paid to the policy's named beneficiary. This strategy may be suitable for policy owners with large cash values who require access to it over a longer period.

Many affluent Canadians make use of permanent life insurance to address estate planning and financial legacy goals. In addition, those that are already maximizing contributions to RRSPs and TFSAs may benefit from the tax-preferred growth of the policy's cash value. Borrowing against this cash value after it has accumulated over time can provide a meaningful source of tax-efficient retirement income.

 

Example: Collateral loan opportunity
 

Michael Simpson is a 50 year-old non-smoker. He is a high-income earner and maximized his RRSP and TFSA contributions annually. He recently reviewed his financial plan with his advisor and it was determined that he would benefit from permanent insurance to mitigate potential estate issues at death. While discussing insurance options, Michael's advisor explained that in addition to providing estate planning benefits, Michael could also access the cash surrender value of the insurance policy to supplement retirement cash flow by using it as collateral for a loan. Michael would pay insurance premiums of $25,000 per year for 20 years to fund a permanent insurance policy with an initial death benefit of approximately $338,500. Based on current dividend scales, the death benefit could grow to almost $1.3 million after 20 years. At this point, Michael could choose to assign the cash value of the insurance policy as collateral on a loan to supplement retirement cash flow by up to $54,000 per year for 16 years. This would provide tax-efficient retirement cash flow, in addition to helping Michael meet his estate planning needs.

 

Illustration based on a Manulife permanent insurance policy for an age 50 male non-smoker, assuming 50% marginal tax rate, 35% dividend tax rate, 6.35% loan interest rate, and current dividend scales.

Making the choice that's right for you

Choosing to access the cash value of your permanent life insurance policy is a financial decision that affects your retirement income, estate planning and tax situation. Taking a thoughtful approach can help you make a confident choice — and you don’t have to do it alone. An Edward Jones financial advisor can help you navigate your permanent life insurance withdrawal options with clarity, confidence, and a long-term perspective tailored to you.

When you speak with a financial advisor, you’ll have the opportunity to:

  • Discuss your personal priorities, including your desired lifestyle, family needs, and legacy goals, to ensure your retirement plan aligns with what matters most to you.
  • Understand the potential tax considerations associated with each withdrawal method, including the role of your policy's Adjusted Cost Basis (ACB), and seek guidance from a qualified tax professional regarding your specific tax situation.
  • Determine whether a policy-native strategy — such as a policy loan or partial surrender — or a third-party collateral arrangement best serves your long-term insurance and estate planning objectives.
  • Model different retirement scenarios with professional guidance, helping you understand which life insurance withdrawal strategy could impact your personal or corporate financial security.

Speak with an Edward Jones financial advisor today to assess which withdrawal strategy — policy loan, surrender, partial surrender, or collateral arrangement — may be best positioned to support your retirement income, estate legacy, and tax efficiency.

Important information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.

Insurance and annuities are offered by Edward Jones Insurance Agency (except in Québec). In Québec, insurance and annuities are offered by Edward Jones Insurance Agency (Québec) Inc.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.