What Is Cash Value in Life Insurance?
Cash value is a savings portion within some types of life insurance—like whole life or universal life insurance. Unlike term life, permanent life insurance policies build value over time.
This cash value grows tax-deferred and can be used while you’re still alive.
In Canada, many permanent life insurance policies build cash value that can be accessed during your lifetime, subject to policy terms.
How Long Before You Can Access Cash Value?
Typically, you’ll need to wait 2 to 5 years before you can tap into your policy’s cash value. Why?
Because in the early years, most of your premium goes toward fees and the cost of insurance. It takes time for enough cash value to accumulate.
The exact timing depends on:
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The type of policy you have
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How much you pay in premiums
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Your insurer’s growth model
3 Ways to Access the Cash Value
Once the funds grow, you’ve got a few options:
1. Policy Loan
You can borrow against your cash value. It’s fast and doesn’t require credit checks.
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You’re charged interest.
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Your death benefit may reduce if the loan isn’t repaid.
This is one of the most common methods because it keeps the policy active.
2. Direct Withdrawal
You can also withdraw cash directly from your policy.
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It’s tax-free up to the amount you’ve paid in.
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But withdrawals can reduce your death benefit.
This may be ideal if you only need part of the money.
3. Surrendering Your Policy
If you no longer need life insurance, you can fully cancel (surrender) your policy.
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You’ll get the entire cash value.
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However, surrender charges may apply.
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Any gains above your total paid premiums are taxable in Canada.
This is a big decision, so consider alternatives before surrendering.
Tax Considerations in Canada
Withdrawals are generally tax-free up to your basis (the total of your paid premiums). However:
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Policy loans aren’t taxable unless the policy lapses.
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Surrendered policies may trigger a tax bill.
Before You Withdraw, Think About This:
Withdrawing from your cash value can:
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Reduce or cancel your death benefit
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Trigger taxes (in some cases)
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Cost you long-term growth in the policy
Always weigh the short-term need against the long-term protection.
Final Thoughts
Withdrawing cash value from life insurance is possible—but timing is everything.
Most policies take 2–5 years to grow before withdrawals make sense. Once that happens, you’ve got flexible options.
Just be sure to understand the impact before you act.
For personalized guidance tailored to your financial situation, consider reaching out to Zahid Syed, founder of Orooj Financial Group. With over 23 years of industry experience, Zahid holds credentials such as Chartered Life Underwriter (CLU) and Master Financial Advisor in Philanthropy (MFA-P).
