Some people recommend taking home equity and putting it into a whole life policy or an IUL, and some life insurance companies don't like it. IUL means indexed universal life, a policy that credits interest based on a market index but never credits less than zero. A viewer asked me about both points. I took his question live, and my answer about putting home equity into life insurance covers why the carriers are careful.
Life insurance companies generally want your premium to come from income or savings. I count the equity in my home as savings, because it's where my savings sat. When I had a home equity line of credit, or HELOC, I kept my savings on it, waiting to be used. I funded my own policy from that line of credit before I refinanced and closed it, and I still think it was a good use of that money.
Your equity is sitting in the house doing nothing. Drawn from a HELOC, it can start building cash value that grows for decades, though dividends and index credits aren't guaranteed. A HELOC's rate can be low, sometimes lower than what the policy credits, though in some years it costs more, so check both numbers before you start. And as the cash value grows, it can pay the line of credit back. A policy loan against the cash value can clear the HELOC balance, which puts the equity back in the house while the policy keeps growing.
So why would an insurance company care where the premium comes from? Because carriers have watched this go badly with the wrong kind of policy. A typical whole life policy, designed with nearly all of its premium going to the base policy, has little or no cash value you can reach in the first couple of years. Now put that policy together with a HELOC. You borrow from the line of credit to pay the premium. Home prices drop, and the bank freezes your line of credit. The economy slows, and you lose your job. Now you can't pay the line of credit back, you can't keep up the premium, and you can't reach the money you already put in. Carriers see policies like that lapse all the time, so their financial underwriting, which means their review of whether you can afford the premium, is strict.
The fix is the design. A policy built for high early cash value has a small base and puts most of the premium into paid-up additions, which means extra premium that buys small pieces of fully paid-up insurance and shows up as cash value almost right away. I've designed policies where around 87% to 90% of the first-year premium was available as cash value in year one, though that depends on the carrier, your age, and your health. With a design like that, a bad year doesn't trap you. You can borrow from the policy to pay the line of credit, or pause the extra premium, and the policy works for you instead of against you.
The application will ask where your premium is coming from, and it may ask whether any of it is borrowed. Answer every question accurately. If some of your premium will come from a HELOC draw, tell your agent before the application goes in, so the carrier can decide how it wants to treat it. Carriers don't all see it the same way, and it's their call to make.
Once it's running, treat the HELOC draw like any other chunk, which means a lump sum off the line of credit that your paychecks pay back. Pay it back steadily, and don't let the balance sit for years. If you pay it back with a policy loan instead, plan to pay the policy loan's interest every year so it doesn't compound on you. A policy loan reduces your cash value and death benefit while it's outstanding, and interest you don't pay gets added to the loan. Running a HELOC and a policy side by side covers how the two work together once both are open.
I'm a licensed insurance broker, and illustrations are projections, not promises. If you're considering this, ask for an illustration showing the cash value you could reach at the end of year one, and compare it to what you'd owe on the line of credit. The closer those two numbers are, the less a bad year can hurt you.