# Sell whole-life insutrance policy to pay down mortgage?



## jd1655 (Nov 19, 2012)

Good day,

I wonder if you could help me with one question. The situation is this:

1)	I am 39 and have a whole life insurance policy that is 20 years old. I also have another life insurance policy through my work. 
2)	I can cash out the whole-life policy which is worth $11,500. I hope to pay down my mortgage with these funds. 
3)	If I cash out the policy, the capital gains tax on the policy is somewhere around $3000 or $4000. Much of the life insurance policy value has been accrued through dividends from what I understand.
4)	Outside of the insurance policy, I have investments (stocks) that are in the negatives and I’d potentially like to get rid of them.

The question: Can sell my ‘loser’ stocks and apply a ‘tax loss’ toward the capital gains on the life insurance policy? (and hopefully bring the capital gains tax to $0)

Thanks for you input.

Jeff


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## marina628 (Dec 14, 2010)

I too have a older life policy (26 years old) .I did the math and not good idea for me to cash mine in at this stage.To get your own answer you need to see what it will cost you to buy a term policy for same face value ,then figure out the savings each month plus the interest savings on the mortgage.What would happen if you died suddenly ,that $11,000 wont mean as much as a full insurance payout.I am lucky with my policy being so old i have guarantee of 8% a year on dividends and cash value .The mid 80s were good interest rates .


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## Sampson (Apr 3, 2009)

marina628 said:


> The mid 80s were good interest rates .


But only if you compare the interest rates to those on cash now. If you compare real returns of cash back then to other asset classes, equities included, then that 8% all of a sudden is quite low.


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## marina628 (Dec 14, 2010)

I am referring to cash values and dividends on life policies onlyState Farm has tried a few times to get us to switch policies while we enjoy 8% compounded interest on our dividends and cash values.


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## the-royal-mail (Dec 11, 2009)

I disagree with the overall idea of cashing in this policy to put money on your mortgage. Have you forgotten what this type of insurance is supposed to be protecting you from? Do you no longer need that protection? 

If you want to pay off your mortgage, then save up the money and pay it off.


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## jd1655 (Nov 19, 2012)

the-royal-mail said:


> I disagree with the overall idea of cashing in this policy to put money on your mortgage. Have you forgotten what this type of insurance is supposed to be protecting you from? Do you no longer need that protection?
> .



I have a life insurance policy through my work. I am thinking of cashing out the whole-life policy not included in my work benefits (I have two policies - probably need only one). Eliminating my debt faster is the objective - by retirement age that might be a good thing

I hope to find out if I can apply tax loss selling to the gains made on this insurance policy before doing anything


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## OptsyEagle (Nov 29, 2009)

jd1655 said:


> I hope to find out if I can apply tax loss selling to the gains made on this insurance policy before doing anything


No. The gain in a whole life policy's cash value is distributed to you as "other income". It is fully taxable with no offsetting deductions, from losses on other investments, allowed.

The dividends they speak of, with respect to life insurance, are not the same as the dividends you receive from owning Canadian stocks, with no tax credits are generated from them. 

As for the capital gain, there is none. The amount that is taxable is "Proceeds minus the ACB of the policy" and it is taxed as other income. It is the ACB that is interesting when it comes to life insurance. One would think that it is the amount invested or the premiums paid. It is not. The ACB of a policy is actually "Premiums paid minus the Net Cost of Pure Insurance". The NCPI is the price of yearly renewable term insurance. Since that amount keeps going up as you age, over time it becomes larger then the premiums you have paid, usually in and around the 20 year mark, and at that time your ACB will equal zero. So in essence, the entire cash value proceeds will be deemed as the gain and fully taxable.


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## kcowan (Jul 1, 2010)

and the only way to dodge the tax is to use RRSP room.


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