Should you borrow from your whole life policy to fund an indexed universal life policy, or IUL, or lower the whole life premium and send the difference to the IUL? A viewer who already owned whole life put that question in an email, and I read it on camera in a video answering a viewer's email questions about infinite banking. My answer was that borrowing is fine, with one condition. Both policies have to be max-funded, which means funded close to the MEC limit. The MEC limit is the most a policy can take before it becomes a modified endowment contract and loses tax-free loans.
In my own family, the big premiums go into whole life, because whole life comes with guarantees. I'm not willing to take the same risk with a $50,000 annual premium that I would with a few thousand dollars. My IULs get funded with extra cash flow, or with cash value I've borrowed from whole life. I treat an IUL as a stand-in for money I'd otherwise put in a Roth IRA. The growth isn't taxed along the way, and I can reach it later through policy loans without a tax bill, as long as the policy stays in force. It has more growth potential than whole life, with a floor that keeps a down year from crediting a loss. Some years I've been credited 10% or 11%. Other years it's 0%, and the insurance charges still come out, which amounts to a few hundred dollars on a policy my size.
Borrowing from whole life to fund an IUL puts the same dollars to work twice. The whole life cash value keeps being credited while the loan is out, though on some policies the borrowed portion is credited at a different rate. The money you moved gets the IUL's crediting. Both policies charge for the insurance no matter where the premium came from, so the source doesn't change that cost.
If you can't max-fund both policies, you shouldn't own both. A policy funded near its minimum spends most of its premium on insurance charges and grows slowly, and an IUL funded that way can eventually lapse. An IUL does let you catch up on premium you skipped in earlier years, but the most growth comes from getting money in early. One big policy or a ladder of smaller ones covers when a second policy makes sense.
The loan on the whole life side still has to be paid back. The only time I plan to leave loans outstanding is in retirement, when the policies are supplying income. Until then, I pay the interest and work the balance down. A year when the IUL credits 0% while the whole life loan charges 5% or 6% is a year you fall behind. A policy loan also reduces the cash value and death benefit until it's repaid.
My daughters each have an IUL rather than whole life. The insurance inside an IUL is priced by age, so it's very cheap for kids, and they have 30 to 60 years of compounding before that cost gets expensive. Their policies also carry an overloan protection rider, which can keep a heavily borrowed policy from lapsing late in life.
Add up what it takes to max-fund each policy you own or plan to own. If your income and borrowing room can't cover all of them, cut the number of policies before you cut the funding.