Permanent life insurance, whether it be universal life or whole life, can be a valuable tool for clients looking for tax-efficient capital accumulation of their “never money.” By never money, I mean money they will never spend in their lifetime and wish to pass on to their families or to charity after they’re gone.
One of the safety features built into most, if not all, permanent life insurance products is the ability to access the funds growing inside the policy by obtaining a policy loan from the insurer. Alternatively, it may be possible to pledge the life insurance policy as collateral to obtain a loan of up to 90% of the cash value from a willing financial institution.
A case (Neszt v. The Queen, 2019 TCC 139) decided this past summer, however, shows that there can be a dramatic difference from a taxation point of view between taking a policy loan versus taking a loan against the policy.