27 Jul What to consider before cashing out insurance
If you need access to cash, you may be tempted to cash out your permanent life insurance policy.
And while it won’t affect future insurability, there’s a tax hit if you surrender your policy prior to death. That’s because permanent insurance policies (Universal Life or Whole Life) have an investment component that’s tax-sheltered. Pulling out cash early means you’ll have to pay tax on that income.
Elli Schochet, an associate at Al G. Brown & Associates in Toronto, says the amount of tax you have to pay depends on the ACB of the policy. The ACB is determined through a complex CRA calculation, but in short, it’s made of the premiums put into the policy, less the net cost of pure insurance.
If the ACB is $20,000, and there’s $100,000 built up in a policy, the client would pay tax on the remaining $80,000.
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