How Often Can You Borrow From a HELOC to Fund a Policy, Then Borrow From the Policy to Pay It Back?

A viewer asked me how often he could run this loop: fund a whole life policy from a home equity line of credit, take a loan from the policy, use that loan to pay the HELOC back, and then do it all again.

You can do it every year. Each lap goes the same way. You draw on the HELOC and send the money to the policy as premium. Once the policy has cash value, you borrow against it and use that money to clear the HELOC balance. The HELOC is open again for next year's lap. I did it last year with my own line of credit.

The loop has a condition, though, and it's the one people skip. You can't borrow forever, because loan interest that nobody pays gets added to the balance, and then you're paying interest on interest. A policy loan reduces your cash value and death benefit while it's outstanding. So the plan has to include paying the loans back at some point, and while the loop runs I pay the interest cost each year so it doesn't compound. My cash value is compounding. The interest isn't.

That separation is what makes the loop work over time. In the first couple of years the policy often holds less than you've paid in, so you're carrying cost with no break-even yet. Once the cash value passes what you paid in, the policy's own growth can start covering a good share of the loan interest, so what comes out of my pocket gets smaller each year. I'm hoping the dividends cover most of it, but dividends aren't guaranteed, and I figure I'll still pay some.

At some point I'm done max funding. That's when the laps stop and I start knocking off loans. Until then I'm in what I call my growth phase. Not everyone is in a growth phase. If you're 67 and on a fixed income, the same loop can be the wrong tool, and a HELOC rate that moves up can make it more expensive than you planned. I covered one client's version of that in the plan that changed when underwriting cut the offer.

Eban's question, and the full back-and-forth about how much of a HELOC to use, is in a live-stream answer on repeating the HELOC-to-policy loop each year.

Before you start a second lap, write down three numbers: your HELOC rate today, your policy loan rate, and the interest you'll owe on both by the end of the year. If you can't pay that interest from income, don't run the lap.