A tempting pitch is making the rounds: tap home equity, invest the borrowed cash in life insurance, and supposedly come out ahead.

The promise sounds tidy—more “liquidity,” plus potential tax advantages that depend on structure and costs—yet the moving parts are anything but simple. When leverage meets high-fee products, small missteps can become expensive quickly, and regrets arrive fast.

The Proposal

The setup usually looks like this: take an interest-only mortgage or home-equity loan, pull out around $200,000, and put the proceeds into a cash-value life insurance policy. Advisors may frame it as a sophisticated swap—turning “idle” equity into a growing financial asset—while keeping monthly payments low at the start for years.

Sales Incentives

A key question is whether the idea is designed to improve household finances—or to move a policy. Cash-value insurance can generate large commissions and ongoing charges, so it’s common for enthusiastic sales presentations to highlight best-case projections. If the conversation leans heavily on charts and lightly on risks, that imbalance matters.

Debt First

Borrowing changes the baseline immediately. Before any investing happens, there is a new obligation attached to the home, along with required payments. Even if the payment is initially interest-only, it still drains cash flow. Miss enough payments and the consequences can be severe, because the home is part of the collateral.

Interest-Only

Interest-only loans can feel painless early on because principal repayment is delayed. The danger is psychological as much as financial: low initial payments make the arrangement seem safer than it is. When the loan later requires principal payments—or a refinance—the monthly cost can jump right when budgets least expect it.

Rate Risk

If the loan has a variable rate, the math can shift fast. A rising rate increases interest costs, and higher payments can arrive even if the insurance policy’s investments deliver mediocre results. That mismatch creates pressure: the loan bill is due on schedule, but investment returns do not follow a timetable.

Return Hurdle

For the strategy to work, the policy’s net growth must exceed the loan’s interest rate by a comfortable margin, year after year. That is a tall order because the policy doesn’t invest “cleanly” like a simple portfolio; it has internal costs and insurance charges that reduce the amount actually compounding.

Benjamin Graham, investing author, writes, “The essence of investment management is the management of risks, not the management of returns.”

Fee Drag

Policies marketed as investment-like often carry layers of expenses: sales charges, administrative fees, cost of insurance, and other deductions that can be hard to track. Early years can be especially punishing, with a chunk of premiums diverted to cover upfront costs. Those headwinds can delay break-even for a long time.

Liquidity Claim

The pitch often says the move “preserves liquidity.” In reality, equity is already a form of backup funding: it can be tapped if truly needed, without forcing money into a complex contract. After the switch, liquidity depends on what the policy’s cash value is—and on what penalties apply if funds are pulled out.

Locked Funds

Cash value is not the same as a free-and-clear savings account. Many policies impose surrender charges or restrictions for years, which can make withdrawals costly. Even when access is allowed, removing money can reduce the policy’s long-term performance or shrink the death benefit. Flexibility is usually narrower than advertised overall.

Borrowing Again

Some plans suggest taking policy loans later to access cash. That can create a circular problem: borrowing against the policy that was funded with borrowed money. Policy loans can accrue interest and, if unmanaged, can erode the account value. The structure may look clever on paper but can be inefficient in practice.

Stress Test

Any presentation deserves a tougher set of questions. What happens if rates rise, returns lag, or job income dips? What is the worst-case payment schedule? How much of the first-year contribution disappears into charges? Ask for a detailed policy illustration and loan schedule, then check whether the plan still works.

Cleaner Options

For households seeking long-term growth, simpler routes usually carry fewer surprises: build savings, invest with transparent costs, and insure with insurance—not as an investment substitute. If life coverage is needed, choose a policy sized to the family’s real protection gap. For many families, a strong emergency fund beats complexity. Debt should serve a clear purpose, not create fragile leverage.

Conclusion

Using home equity to buy expensive life insurance can stack risks: higher debt, uncertain returns, and limited access to cash during the years it matters most. A healthier approach is separating goals—protecting loved ones with appropriate coverage and building wealth with straightforward tools. Does the pitch still sound attractive after the downside is fully priced in?