How to Leverage Your Whole Life Insurance Policy as Collateral for a Loan in Canada
Did you know that you can use a whole life insurance policy as collateral for a loan?
This can be a great option to finance your business or other investments.
View on Youtube: https://www.youtube.com/watch?v=HLwzqp_VZQc
Two Loan Source Options
- The first way you can borrow is from an insurance company, where you got the policy in the first place. This is called a policy loan, and it’s relatively simple to do. You fill out a 1-page-form and send it to the insurance company. After the insurance company reviews the form, they send you the money. This usually takes 2 to 3 days for direct deposit, and 7 to 10 days if you ask for a cheque.
- The 2nd way to leverage your policy is from a 3rd party like a bank. This takes a bit longer to set up, but it's still very convenient. When you get a loan from the bank you will use insurance policy as collateral. A whole life insurance policy is an excellent form of collateral because it contains tons of cash value. If you offer up this policy as collateral, banks may lend you 80% - 100% loan-to-value (or LTV).
Pros & Cons of Borrowing from Insurance Companies
To get started we’ll look at the simplest and easiest way to leverage your whole life insurance policy. Here are 5 reasons why you would borrow from the insurance company.
- Fast & Less Involved: First, it’s super easy. It takes, literally, only a 1-page-form that you send in and get the money. There is no credit check involved and the loan is private.
- Low Financial Requirements: Second, you can ask for any amount you want, including as low as $1,000. Some companies will give you a policy loan as soon as you have cash value in the policy. Others will give you a policy loan after your policy has been in-force for 12 months or more. A good advisor will know the specific details and recommend the right policy for you.
- Set Your Own Terms: Third, you set the repayment terms - you can pay the loan back how you like. The insurance company is holding your money, plus they have life insurance on you, so they are fully secured. As a result, you can pay these loans back in a lump sum, none today, monthly, some now, some later, or whatever fits your needs.
- Pay Yourself, Not the Bank: When you pay interest on the loan, the funds go into the Participating Account. The Participating Account is what pays your dividend and makes your policy grow. In a roundabout way, you sort of pay yourself back, and that feels good.
- This has Nothing to do With Your Credit: Policy loans you take from an insurance policy are private and don’t show up anywhere, except on the insurance company’s books. They don’t show up on your credit and aren’t reported anywhere. There is a ton of value to having financial privacy these days.
Here are the 2 main reasons you might not want to use an insurance company.
- Higher Interest Rates: The first is that the interest rate is a bit higher, but the ease, privacy, and convenience can be worth it. The interest rate changes annually, please speak with your advisor for today's policy loan interest rate.
- Less Loan Types: A policy loan is a policy loan. There aren’t any other types of loans you can get from the insurance company.
Pros & Cons of Borrowing from Banks
Now that you know the pros and cons of taking policy loans from the insurance company, let’s look at the pros and cons of borrowing from a bank.
- Low Interest Rates: The biggest reason to borrow from a bank is that the interest rates are generally lower than policy loans from the insurance company. Depending on the bank, lending against a whole life insurance policy is priced around Prime or Prime + 0.5% or Prime + 1%. For policies with larger annual premium deposits, some banks will offer Prime -0.5% or Prime -1% – but it really all depends on loan underwriting.
- Variety of Loan Types: Another reason is that you can get different types of loans like lines of credit and demand loans. This all depends on the bank you work with – they all offer different types of loan facilities against an insurance policy. A good advisor will know which banks offer which types of loans and will work with you to secure the correct type for your situation.
- Different Loan Terms: Just like a bank offers different loan types, they also give you access to different loan terms. This can include Immediate Financing Arrangement or IFA, Cash Surrender Value lending or CSV Lending, Insured Retirement Plans or IRP and others. All of these have different terms and conditions – and we work with you to figure out which option is most suitable for your situation.
- Build Relationships: Finally, because the loan is done through private banking, you build a better relationship with your bank. A good banking relationship helps with all other lending needs, including loans for cars, homes, and business. This really helps with real estate investors who can step up into a different world of lending that can help them build their property portfolio bigger and more quickly.
Basically, you give the bank this loan business, and they may treat you better by giving you way more money.
What about the cons of borrowing from a bank?
- More Involved: First, it’s much more involved. There is full personal and corporate financial underwriting.
- Time Consuming: It takes some time to set up in the first place – like a couple of months, but once the loan facility is set up things run much quicker.
- High Financial Requirement: There are much higher minimum requirements. Banks usually don’t want to see these loans unless you are putting a minimum of $100,000 per year or more into your insurance policy. $100,000 is the bare minimum – some banks won't look at these loans unless you are depositing at least $300,000 annual premium into your insurance policy.
- Fees, Fees, Fees: Bank fees are the last point. There are bank and lawyer fees to set up the accounts and the loans. There’s also annual maintenance, and all this has to be reported. These fees are not outrageous and we can help you find a way to get them covered, but bankers love to charge fees.
Here's a link to the EQ Bank page on Insurance Lending Solutions so you can see it from the bank's perspective.
Conclusion
Now you should have a solid understanding of insurance-policy-leveraging in Canada. Whether you go with a bank or insurance company depends on your unique circumstance.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
Related Insights
Your Corporation Has Accounts You've Probably Never Seen
Executive Summary Your corporation tracks three notional accounts, the Capital Dividend Account, RDTOH, and GRIP, that never appear on a statement but directly determine how...
What Happens After You Reach Out to Safe Pacific?
Executive Summary When you reach out to Safe Pacific, a real person from our team emails you within 24 hours with a link to book...
The Protection Playbook for High-Income Employees
Here's something that surprises a lot of people. Some of the most financially fragile households we see are actually very high-income families. Not because they're...
Whole Life Insurance: The Strategy Most People Miss
Most investment portfolios are built around three pillars. You have equities, you have fixed income, and here in Canada, a lot of people have real...
Why High Earners Are More Vulnerable Than They Think
Most people assume that earning more money makes life simpler. More income, more security, more options. But the uncomfortable truth we see every day is...
How to Protect Your Income in Canada with Disability & Critical Illness Insurance
What would happen to your savings, your retirement plan, and your finances in general if you were sick or injured tomorrow and couldn't work? How...
The Decisions Your Future Self Will Thank You For
Most financial plans assume that life stays ordinary and orderly. Your income continues, the markets recover on schedule, your health holds up. But future you...
Liquidity: The Missing Piece that breaks most Financial Plans
Most financial plans look great on paper. Strong net worth, solid investments, a growing business. But here's an uncomfortable truth: a lot of plans don't...
Why Your Finances Feel Disorganized (Even When You're Doing Well)
Here's something we've been hearing a lot in client meetings recently, almost word for word: "I know I should have a better handle on all...
The Estate Tax Bill Most Business Owners Never See Coming
What actually arrives in the estate from a corporate investment portfolio versus a corporately owned life insurance policy. Every projection a business owner sees starts...
Use the Capital Dividend Account to Distribute Tax-Free Wealth
Eventually, every Canadian business owner asks the same question. How do I get this money out of my corporation without getting crushed by taxes? There...
Stop Under-Saving: How to Max Out Your FHSA
Everyone is talking about how expensive Canadian real estate has become. Almost no one is talking about how badly the average Canadian is underusing their...
