Key takeaway
You can’t literally ‘convert’ a life insurance policy into an annuity in one step in Canada, but you can use life insurance to support annuity-style income: by surrendering cash value and buying an annuity with the proceeds, or by choosing a settlement option that pays the beneficiary over time. Tax and product rules apply; a licensed advisor can outline the best approach for your situation.
Using cash value to buy an annuity
If you have a permanent policy (whole life or universal life) with cash value, you can surrender it and use the after-tax proceeds to buy an annuity from an insurer. The surrender may trigger tax on the gain (cash surrender value minus adjusted cost basis).
An annuity then pays you a guaranteed income for a set period or for life. Whether this is better than keeping the policy depends on your need for death benefit, health, other income, and tax — so get advice before surrendering.
Settlement options for beneficiaries
When the insured dies, many policies let the beneficiary choose how to receive the death benefit: lump sum (most common, tax-free) or a series of payments (interest option or instalments). The latter can work like annuity-like income over a number of years.
These settlement options are in the policy contract. The beneficiary doesn’t buy a separate annuity; they use the insurer’s payment options. Tax is generally the same as for a lump sum (death benefit is tax-free), but the timing of receipt changes.
Tax and practical considerations
Surrendering permanent life for cash value can create taxable income (gain over ACB). Using that to buy an annuity means you’re trading one set of tax rules (insurance) for another (annuity income). Compare after-tax outcomes before deciding.
If the goal is lifetime income and you don’t need the death benefit, an annuity might be simpler. If you want both income and a death benefit, keeping the policy or using a policy loan might be better than surrendering.
Frequently asked questions
Can I convert my life insurance to an annuity?
There’s no single ‘conversion’ product. You can surrender permanent life for cash value (subject to tax) and use the proceeds to buy an annuity, or use the policy’s settlement options so the beneficiary receives payments over time.
Is the death benefit taxable when paid as instalments?
Life insurance death benefits are generally tax-free to the beneficiary in Canada whether paid as a lump sum or in instalments. The instalment option only changes how and when the money is received.
When does converting to an annuity make sense?
It can make sense when you no longer need the death benefit, want guaranteed lifetime income, and the after-tax annuity income is better than keeping the policy. Each situation is different — get professional advice.