In these times of stock market upheaval and inflation crisis, it may be worthwhile to dust off your old permanent life insurance policy, take out your calculator, and explore some surrendering options. If you need cash or leverage, the following might prove interesting…
Life Insurance Policies With a High Cash Surrender Value
Long forgotten permanent life insurance policies are now increasingly resurfacing. Taken out in the 1980’s or 1990’s, and fully paid for years ago, they were laying dormant in a safe, pending the inevitable. In those days, the cash surrender values guaranteed by insurers for this type of product were very high relative to the invested amount.
Permanent life insurance is getting more expensive on the market. There are several reasons for this cost increase. First, people are living longer. Second, Canadian insurers got their financial projections wrong over the past 15 years, in part due to low interest rates, but also because they paid out $238M in life insurance benefits between March 2020 and May 2021, further to COVID-19 related deaths1. Just like everyone else, they had not anticipated the pandemic!
The inflation experienced in 2022 could help reverse this trend, but there is still a long way to go.
Given their elevated cost, permanent life insurance policies are now rather offered to the more affluent. They are generally used for estate diversification or optimization purposes or, in some cases, to cover death-related expenses with smaller insured amounts.
However, back then, they were sold to everyone regardless of their particular needs. In fact, those needs may very well no longer exist today!
If this is your case, it might be a good idea to revisit your old permanent life insurance policy and explore the potential cash surrendering options that would actually meet your current requirements.
Access Your Cash Surrender Value!
First, ask yourself if you could use some extra cash. If not, it may not be useful to look any further, even though a bit of refresh can do no harm. But if you are financially tight or are looking for investment leverage, there are three ways to access your cash surrender value:
1. Life Insurance Policy Cancellation
Although we present it first, this is far from being the prime choice! By choosing to cancel your insurance policy, you will promptly receive the available value in your policy. Your insurer will be thrilled to hand you this money, as this will free them from paying out the death benefit later on. However, part of the amount could be taxable, based on the adjusted cost base (ACB) of your policy.
This being said, if the cash surrender value approximates the insured capital amount, this option could prove beneficial if you invest the money on the stock market, and stocks subsequently see a positive uptick.
2. Policy Loan
With this option, you can borrow the cash surrender value directly from the insurer with whom you purchased your policy. In some cases, a contractual interest rate is charged and could be particularly attractive if you took your policy in the early 2000’s when rates were low. In other cases, the current rate will be charged.
This is a very fast method that requires no banking qualifications, and the amount of the loan will be deducted from the insured capital paid at your passing. If you use the loan to generate income (such as investment income, income property, etc.), the interest you pay is tax deductible.
3. Collateral Loan
With this last option, you may secure a loan from a traditional banking institution in exchange for you life insurance policy. Rates are generally lower than with an open line of credit, as you pledge an asset as collateral. Note that the loan will rarely (if ever) exceed the cash surrender value available in the policy. Should you pass away, the insurer will reimburse the lender and pay the balance of the insured capital amount to your designated beneficiary. Just like with the policy loan, the interest you pay will be tax deductible if the loan is used to generate income.
Seek Advice Before Acting in Haste!
This article should not be construed as an incentive to cancel your policy or naively use its cash surrender value. However, when the financial world is as disrupted as it is now, it is always wise to weigh your options. A little clean up never hurts. In any case, before making a hasty decision, you should always seek advice from a professional certified by the Autorité des marchés financiers and the Chambre de la sécurité financière.
Do the math!
1 Report from the Canadian Institute of Actuaries, November 2021.
Samuel Verreault has been working in the business world, group insurance and personal insurance for over ten years. With a strong background in insurance, real estate, and online business, his experience allows him to assist his clients on many levels. Whether it is from a personal, tax, human resources or group insurance perspective, he is passionate and involved with his clients. He goes beyond the simple supplier relationship to become an essential partner in the growth of your business.
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