By Harpreet Puri
Partial withdrawals allow access to the cash value in a permanent Life Insurance Policy without cancelling it. The blog explains how Universal Life Insurance and Whole Life Insurance Policies in Canada offer flexibility through accumulated cash value. It outlines the risks, tax implications, and impact on the death benefit. Term Life Insurance Policies are excluded, and real-life uses like retirement income, education, and emergencies are covered.
You may feel like the more successful your business, the more at risk you are of losing everything you’ve built. Corporate-Owned Life Insurance can provide a means to secure key people, fund continuity plans and house retained earnings.
No matter if you prefer cheap Life Insurance products or permanent tax-deferral solutions, the important thing is to know your choices.
Corporate-Owned Life Insurance is an attractive solution for Canadian business owners who want both protection and performance. The average Canadian doesn’t realize just how much value is tucked inside his or her Life Insurance Policy. Canadians currently have over $5.3 trillion in Life Insurance in force, according to CLHIA. And a lot of that is thanks to policies with cash value — policies that quietly accumulate wealth over many years, often offering tax relief, sitting there as financial buffers which many families never invade.
But sometimes, life hits hard. Emergencies pop up. And that’s where partial withdrawals get tricky. For those with a Life Insurance Policy in Canada that has accumulated cash value, drawing on that reserve can help — without destroying the whole contract.
Let’s take a closer look at how partial withdrawals work, what they mean for your Life Insurance Coverage and what the true tax implications are.
A partial withdrawal (also called a partial surrender) means accessing a portion of your Life Insurance Policy’s cash value without cancelling the entire policy. You’re not borrowing the money. You’re literally withdrawing it—like dipping into savings.
But this option is only available on Permanent Life Insurance Policies, such as:
Term Life Insurance Coverage, on the other hand, doesn’t have a cash value. So partial withdrawals? Not an option there.
Canadians use partial surrenders for a variety of reasons, often tied to life’s curveballs or strategic planning. Here’s what we’ve seen:
When borrowing money from a bank is either impossible or expensive, the policy owner might access their Life Insurance cash value to:
Many Canadian parents use their Whole Life Policy or Universal Life Insurance Policy as a backup RESP. If RESP limits are maxed out, the accumulated cash value can be withdrawn to help with tuition, books, or even a student apartment deposit.
In tight mortgage markets, people look at all angles for liquidity. Tapping into a Life Policy might provide that extra $10K–$20K they need to meet the lender’s minimum.
Many retirees withdraw funds from the policy’s cash value as part of a broader retirement plan, especially when market volatility makes RRIFs risky in the short term.
Let’s break it down.
Step 1: Contact The Insurance Company
You (or your insurance agent) contact the insurance company to request a partial withdrawal. They’ll give you a breakdown of:
Step 2: Specify The Amount You Need
You don’t have to withdraw the full cash value. You can request a specific lump sum amount.
Step 3: Submit The Paperwork
The policy owner signs the necessary forms. The funds are usually deposited or sent by cheque within a few business days.
Note: If you have an outstanding loan balance against the policy already, the insurance company might require that to be paid off first or deducted from your available value.
This is where things get spicy.
Are Partial Withdrawals Tax-Free?
Not always. If the amount you withdraw exceeds the adjusted cost basis (ACB) of the Life Insurance Policy, then yes, you may have to pay income tax on the excess.
What Is The Adjusted Cost Basis?
It’s a formula set by the CRA that factors in your premium payments and any previous policy loans or surrenders. Once the cash surrender value exceeds this ACB, taxes kick in.
What About Policy Loans?
Taking a policy loan against the Life Insurance cash value is typically tax-free. But if the policy lapses or is surrendered while there’s an unpaid loan, you may owe taxes.
Tip: Always consult a tax advisor or financial advisor before making withdrawals.
Every dollar you withdraw:
Your insurance costs might also increase over time if the remaining cash value can’t support the internal charges of the Universal Life Policy.
So if you withdraw too much or too often, your policy might:
Partial withdrawal not giving you enough liquidity? There’s another door.
A life settlement lets you sell your Life Insurance Policy to a third party in exchange for a larger lump sum. You give up the policy altogether, and the buyer becomes the new policy owner and pays the premiums going forward.
In some cases, a life settlement can yield 4x–6x more than a partial surrender.
There’s no universal answer. It depends on:
Most policy owners can access 60–90% of the accumulated cash value depending on age, policy type, and premium payments.
We’ve guided more than a few hundred clients through education on Permanent Life Insurance – be it a Universal Life Insurance Plan, a Whole Life Insurance Policy in Canada or even one of the custom hybrids.
Our job is to present to you the real math on your policy—the tax impact, how the cash flow benefit works, and how it’s possible that making a partial withdrawal or taking out a policy loan can actually aid without blowing up the future.
Because life is like that sometimes, but your Life Insurance shouldn’t be.
Contact us today or schedule your strategy session online. Let’s check out your policy, run down your surrender charges and make sure you aren’t left with thousands of tax-sheltered dollars sitting in your Life Insurance Policy — doing no one any good.
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