What Is Adjusted Cost Basis?

Adjusted cost basis (ACB) is the amount used to calculate the taxable gain when a Canadian life insurance policyholder withdraws money, surrenders a policy, or completes certain other transactions involving their policy.

In Canada, adjusted cost basis is particularly important for permanent life insurance policies, including whole life and universal life insurance, because these policies may accumulate cash value over time.

Understanding your policy's ACB can help you estimate potential tax consequences before accessing its cash value.

How Is Adjusted Cost Basis Calculated in Canada?

For life insurance policies, adjusted cost basis generally starts with the premiums paid and is reduced by the net cost of pure insurance (NCPI).

NCPI is a tax calculation representing the cost of the insurance protection provided by the policy.

Other adjustments may apply, including previous withdrawals and certain policy loans.

For example, suppose an Ontario resident owns a whole life insurance policy with:

• Total premiums paid: $40,000
• Accumulated net cost of pure insurance: $12,000
• Other applicable adjustments: $0

The policy's adjusted cost basis would be $28,000.

This simplified example illustrates how ACB works. Your insurance provider calculates the actual amount according to Canadian tax rules.

Why Does Adjusted Cost Basis Matter?

Adjusted cost basis can affect several financial decisions:

• Policy surrender: If you cancel your policy, a taxable gain may arise when the surrender proceeds exceed its ACB.
• Cash withdrawals: Partial withdrawals may trigger taxable gains based on the proportion of ACB allocated to the withdrawal.
• Policy loans: Borrowing directly from your insurer may have tax implications depending on the loan amount and ACB.
• Estate planning: ACB can affect certain tax calculations involving corporate-owned life insurance.

Adjusted Cost Basis vs. Cash Value

Adjusted cost basis is a tax calculation, while cash value represents the accumulated value available under your policy, subject to its terms.

The two amounts are not necessarily equal.

Explore Whole Life Insurance in Canada

Before withdrawing funds or surrendering a permanent life insurance policy, request an updated ACB statement from your insurer and consider professional tax advice.

At PolicyNinja, Canadians can explore permanent life insurance options suited to their financial goals.

Get a Life Insurance Quote to compare available coverage options.