Should I Cash Out My Life Insurance Policy or Keep It?

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Article Contents
By Matthew Roberts
Updated on June 04, 2025

3 minute read

Article Contentstable-of-contents

Deciding whether to surrender your life insurance policy or keep it depends on your financial situation and family needs. In Canada, you can cash out permanent life insurance policies, but not their term life counterparts, unless you purchased the return of premium option.

But the question is, should you cash out your life insurance policy under any circumstances? We’ll explore the reasons why you should or shouldn’t.

Cashing Out Life Insurance At a Glance

  • You might cash out a life insurance policy for retirement needs, during financial hardship, or if you no longer need coverage.
  • Cashing out permanent policies can trigger taxable income.
  • It’s best to consider alternatives before deciding to cash in your life insurance policy. 

Reasons to Cash Out Your Life Insurance Policy

If you’re reading this guide, there’s probably a reason why you’re considering cashing out your life insurance policy, and it might be one of these. 

You Need Cash Urgently

One of the most common reasons for cashing out a life insurance policy is financial issues, such as losing a job, needing money for medical bills, or covering emergency expenses. Especially for people without healthcare coverage, the average hospital stay can cost between $5,000 and $15,000, which isn’t always manageable and can be covered by your cash value amount.

You No Longer Need Coverage

If the reason you bought your life insurance policy no longer exists and you don’t want to transfer ownership, you can surrender it and liquidate your assets for other purposes. 

Your Policy Has Built Significant Cash Value

If your policy has built up significant cash value and better suits your financial goals now, you might consider cashing out your savings component. Remember, however, that it takes most policies between 10 and 15 years to accumulate a substantial cash value. 

You Have Better Investment Opportunities 

Many people purchase permanent life insurance policies for investment purposes. However, most whole life cash values grow at a slow rate. If you find another investment opportunity with higher returns, you might use the cash surrender value to invest in it instead. Popular investment options in Canada include bonds, index-linked deposits, stocks, and mutual funds. Dividend funds are also an excellent investment option, with companies like Lundin Gold gaining 206.5% since mid-2024. Alternatively, you could use the money to buy property or fund a retirement fund.

You Can’t Afford the Premium Costs

To make your cash value grow faster, you need to pay more in premiums. If you can no longer afford these premiums and want to improve your cash flow, surrendering your policy is one way to eliminate that expense and get some of your money back.

Top Reasons to Cash Out Your Life Insurance

When You Shouldn’t Cash Out Your Life Insurance Policy

While cashing out your life insurance policy can give you what feels like instant finances, there are some cases in which this can do more harm than good.

Your Family Still Needs Coverage

While a cash-out can provide immediate funds for a family emergency, you also eliminate your family’s safety net. Cashing out ends your coverage immediately, and your family won’t receive a death benefit if the insured person dies. 

There May Be Heavy Tax Implications

One significant downside of cashing out a policy is the tax bill it can create. While the cash value remains tax-deferred within the policy, withdrawing it can turn it into taxable income. Any amount above the adjusted cost basis (ACB) becomes a taxable policy gain, which can significantly erode the benefit of cashing out.

You May Struggle to Replace Coverage

Once you surrender a policy, you can still get a new one. However, reapplying can be difficult, especially if you’ve developed health complications. You could even become uninsurable. 

You Can Lose Money Fast

If you’re cashing out your life insurance policy for a significant expense, such as a hefty medical bill or major purchase like a car or home, your money will disappear in an instant. After that, it can be difficult to recoup what you’ve spent.  

Alternatives to Cashing Out Your Life Insurance Policy

If you’re struggling to maintain your policy or need a significant amount of cash fast, don’t assume surrendering your life insurance is the only option. Here’s what you can do instead.

You can still take cash value from your policy while keeping it active by taking a policy loan. Interest rates are relatively low, and it doesn’t trigger immediate tax if the loan amount is within the ACB limits. 

Being unable to afford your premiums doesn’t mean you should cancel your life insurance. Instead, you can reduce the policy’s amount to lower premiums and take out some cash value as a result of the reduction.

Suppose your cash surrender value isn’t as high as you want it to be. You can sell it as a life settlement instead, as a third-party buyer will pay you a lump sum higher than the cash surrender value. However, life settlements are restricted in many Canadian provinces, so you should always do your research first.

Key Advice from MyChoice

  • Consult with a financial advisor before making a decision. They can help you understand the implications of each choice.
  • Meticulously weigh the reasons to cash out versus the reasons for keeping your policy.
  • Always review whether the surrender amount will become taxable.

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