Jayson Lowe explains when whole life insurance loans become taxable in Canada. Any loan amount exceeding the policy's cost basis creates a taxable gain, though repayments generate dollar-for-dollar deductions. Lenders offer cash-surrender-value lines of credit instead, lending 50-90% of the policy's cash value, similar to home-equity lines of credit but less risky because the insurer guarantees the collateral.
What about when you get to the point where any policy loan you take out becomes fully taxable income? Awesome question. So would be referencing Canada, not the United States. So in Canada, when you borrow a policy, when you request a policy loan from life insurance company and it exceeds the cost basis of the policy, any amount that you borrow above that cost basis triggers a taxable gain. Any amount that you repay, regardless of when it's repaid, triggers a corresponding income tax deduction dollar for dollar. And if the policy owner said, well, I just want to avoid that altogether. I don't want to be managing that process because any amount that I'm going to access is going to be fully taxable. Lenders in Canada have created cash surrender value lines of credit where the lender will lend to the borrower up to a maximum of 100% of the ever-increasing cash value of that insurance contract. Now, it is an underwritten line of credit, so you have to apply for it. You have to go through a very similar application process that you would to otherwise borrow through a different mechanism from that bank. Banks understand the collateral value of this asset. So I'll give you an example. So if you had a home that was valued at $1 million and it was fully unencumbered, you had no mortgage on it, no debt against it, and you went to a conventional bank and you wanted to put into place first position secured line of credit, a home equity line of credit, the bank will lend to you generally somewhere around 60% loan to value. They might go up to a higher amount in the form of a principal and interest component if you wanted that capital. Now that should tell you something, that if a policy owner is able to access 90% or more of that ever-increasing cash value. There are some lenders that have less. Uh, some lenders will only lend you 75%. Some lenders will only lend you 50%. And so that's why there's choice. But if you tap into a lender that will lend to you a maximum of 90% of the ever-increasing cash value of that insurance contract, because they know that the life insurance company itself is guaranteeing the collateral so that the lender completely de-risked the lending, what does that tell you about the strength of the asset in the eyes of the lender? Want to learn more? Just visit watchibc.com. That's watchibc.com.
