“There’s No Chance You Guys Do This”

Summary

Podcast Summary: “There’s No Chance You Guys Do This”

Episode Details:

• Title: There’s No Chance You Guys Do This
• Podcast: The Ramsey Show Highlights
• Host: Ramsey Network
• Release Date: January 13, 2025

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Introduction

In this episode of The Ramsey Show Highlights, a listener reaches out to seek advice regarding the management of whole life insurance policies that were leveraged to fund a family-run dog daycare business. The discussion delves into the complexities of handling insurance-backed loans, debt repayment strategies, and the implications of maintaining or dissolving these financial instruments.

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Caller’s Financial Situation

Caller (B) explains the background of their family’s financial arrangement:

• Business Funding: Five to six years ago, the caller and their family initiated a small business—a dog daycare, boarding, and grooming facility—by borrowing against their parents' whole life insurance policies.

• Loan Details: There are six total policies with a combined face value of $1.4 million. Over time, approximately $600,000 has been borrowed against these policies. The remaining net cash value stands at about $200,000, while the current death benefit totals approximately $1.06 million.

• Business Performance: The business has been profitable and growing steadily. Initially, no loan repayments were made for the first two years, allowing interest to capitalize. Subsequently, monthly payments commenced from the business’s profits.

• Additional Financial Activities: The caller also mentions involvement in trading IPOs, which was seeded with funds borrowed from their parents, with a percentage of earnings returned to them.

Notable Quote:

“...we borrowed money against my parents’ whole life insurance policies to help fund the real estate purchase and construction.” (00:10)

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Options for Managing the Loans

The caller poses critical questions regarding the best approach to repay the $600,000 loan:

1. Debt Repayment Strategy: Should they employ the snowball method—paying off the smallest loans first—or address all loans evenly since they share the same interest rate?

2. Benefit Analysis: Is there any advantage to using the snowball method given the minimum payment requirements and the flexibility to manage payments as desired?

Notable Quote:

“So am I even benefiting from the snowball considering there's minimum payments on these things?” (01:28)

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Host’s Analysis and Recommendations

Ramsey Network (A) provides a candid assessment of the situation:

1. Emotional Investment and Feasibility: The host expresses skepticism about the caller’s likelihood to implement the snowball method effectively due to the family's deep emotional ties to the business and financial arrangements.

   Notable Quote:

   “I don't think there's a snowballs chance that you guys are actually going to do this.” (04:03)

2. Primary Recommendation – Cancel the Policies:

   • Rationale: Eliminating the whole life insurance policies would remove ongoing expenses and halt the accrual of interest on the loans.
   • Financial Impact: Canceling the policies would yield a net cash value of $190,000 and require repayment of the $600,000 loan, effectively balancing the financial obligations.

   Notable Quote:

   “I would cancel the whole life policies completely, cash them out, and end it.” (04:37)

3. Considerations Before Cancellation:

   • Death Benefit Implications: The host clarifies that canceling the policies would reduce the death benefit available to the surviving parent.
   • Financial Stability: Assurance is given that the remaining finances would keep the surviving parent financially secure without the policies.

   Notable Quote:

   “Are you going to have their finances set up in such a way that their mom's going to be okay if dad does financially without these policies?” (06:22)

4. Terminal Illness Scenario: The host advises against keeping the policies under the assumption that the parents are not terminally ill, emphasizing the improbability of capitalizing on a potential death benefit.

   Notable Quote:

   “I personally, unless someone is... in hospice or something, I'm not going to fool with that.” (06:55)

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Conclusion

The host concludes that the most financially prudent action is to cancel the whole life insurance policies. This decision would eliminate unnecessary expenses, cease interest payments on the loans, and simplify the family’s financial obligations. The recommendation hinges on the parents’ continued financial stability without the insurance policies and the improbability of needing to rely on the death benefits imminently.

Final Notable Quote:

“But you do whatever you want to do. That's a different situation.” (07:23)

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Key Takeaways:

• Evaluate Necessity of Financial Instruments: Regularly assess whether financial instruments like whole life insurance are serving their intended purpose, especially when leveraged for business funding.

• Debt Repayment Strategies: While methods like the snowball can be effective, their applicability depends on the specific financial and emotional context.

• Simplify Financial Obligations: Removing complex financial arrangements can enhance clarity and reduce long-term obligations, especially when they no longer align with current financial goals or circumstances.

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Notable Resources Mentioned:

• Y Refi Refinance: A sponsor mentioned for refinancing defaulted private student loans. (00:02, 07:23)

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This episode offers valuable insights into managing borrowed funds against life insurance policies, emphasizing the importance of aligning financial strategies with current business performance and familial financial security.

Transcript

[A]

Brought to you by Y Refi Refinance your defaulted private student loans [e-mail] Ramsey.

[B]

So I'm calling to talk about your favorite financial instrument, the whole life insurance policies. I have a question about policies that my parents bought years and years ago and hopefully you can help me figure out what to do with these things. So long story short, me and my family, me, my parents and my brother opened a small business about five or six years ago. When we did, we borrowed money against my parents whole life insurance policies to help fund the real estate purchase and construction. It's a dog daycare, boarding and grooming facility. Been open five years. Doing well, Profitable, Growing. It's in good shape. The first two years we didn't make any payments on those loans. So the amount grew as they capitalized the interest. Then I started making monthly payments on those loans for money that we were making in the business once we became fairly profitable. So here's my question. These loans, they. There's six total loans, excuse me, six total policies that my parents took out. So $1.4 million in face value insurance plus the additional insurance they purchased over the years as they were. I think they made some overpayments in the past, things like that. I have borrowed about $600,000 against the policy. So here's my question.

[A]

What's the remaining cash?

[B]

Do I borrow the remaining. The net cash value as of today is about 200,000 and the death benefit as of today and all of them combined is about 1.06 million. Okay, my question is do I bother paying these loans down? And if I do, do I use your snowball effect and go for the lowest balance loans first or do I pay them off all evenly because technically they all have the same interest rate. It's basically like one large basket, right? So am I even benefiting from the snowball considering there's minimum payments on these things? Right. I can pay them at any time, any way I want. I could make the payment. I could not let the interest capitalize. You know, you can manage them any way you like. So what do I do with them? Should I pay them? Should I not?

[A]

Apparently your parents don't need the actual life insurance.

[B]

Well, I mean, look, they took these out thinking, hey, what I'm asking is.

[A]

Is that if your dad died today, your mom's not going to get much money because the loans, the loans are repaid from the death benefit.

[B]

Yeah, well when you take. Yeah, correct. When you. So when you. The total value.

[A]

So if you have a face value of 1.4 and you have loans of 600. They currently have $800,000 in actual proceeds would come to your mom if your dad died.

[B]

Well, there's also an extra 200,000. They also over the years purchase an extra 200,000 of insurance by overpayments. So. So it's paid.

[A]

Paid up additions.

[B]

Yeah, paid up additions. Yeah. So they actually have a million dollar in death benefit. But yet. You are right though by the way. My parents. So they have an interest in our small business. They have income through that. That's actually my second job. I have another job where I, I'm a trader. I flip the syndicate market. You know, I trade IPOs. I borrowed money from my parents to seed that as well and gave them a percentage of what I make off of that. So basically my parents had to have other wealth. Yeah.

[A]

How much?

[B]

How much? So I, I'm going to be honest and I don't have total transparency, but I'm going to say all in. They probably have assets about a million.

[A]

And a half dollars in addition to all this. Okay.

[B]

Yeah.

[A]

So yeah.

[B]

And, and income, even though they are retired, they have income from two businesses that I run that they have interest in. So they, they. You're right. Without this life insurance, they would still be financially safe.

[A]

Yeah. Okay. Well, I don't think you guys are going to do what I would do because you're so far afield and your parents are so heavily emotionally invested in this process that I don't think there's a snowballs chance that you guys are actually going to do the this. But you asked, so I'll tell you, I owe you that. What would I do? I would cancel the whole life policies completely cash them out and end it.

[B]

I had a funny feeling you'd say that.

[A]

Yeah, I would just end it because your mom is going to be fine. And if they want you to execute a note for 600,000 back to them, then you would owe them that money because you've reduced the amount they're going to get from the cancellation of the policies by the loan you've taken out. So you know, they either need to get equity in the business and. Or more equity.

[B]

They do have equity. They have.

[A]

I know, but does that offset the loan? No, you're still paying on the loan.

[B]

Gotcha.

[A]

Right.

[B]

No, you're right, you're right. Well, let me ask you this just because you, you definitely understand these instruments better than I do. Right. So say I was to cancel these policies today. Um, they're not yours.

[A]

You can't your parents can cancel them today.

[B]

Well, you're right. They will put it this way. They, they, they basically I, I've been managing their finances for them other than some just assets that they own that somebody else hasn't helped them out with because they're both kind of, frankly, you know, they're, they're, they're a little older and both a little bit unwell. Say. So they basically asked me what to do with these things and do, you know, they, they take my advice and trust me and I, I don't want to put them in the wrong direction here, you know.

[A]

O.

[B]

But let's say, say that I advise them say you should close these things down today. Right. So they do that. They get out of it what, the net cash value that's Left at that $190,000 check for that 190 and then they have the 600 that is owed to them from the start of our business.

[A]

Correct.

[B]

And, and that's it.

[A]

That's it.

[B]

Right, right. Okay.

[A]

And they got rid of all the expenses and you're not paying interest on your own money.

[B]

Yeah, exactly. Yeah. Okay, that all makes sense. The only, the only counter I'd have that if you help convince me here, Dave, is. So there is say that they were to pass away soon, unfortunately. Right. I mean my parents, to be frank, they're, you know, they're elderly. There's just over a million dollars of death benefit left over after accounting for the loans. Right? No. How come?

[A]

Because you got a million four in death benefit minus 600 now.

[B]

Well, it's a million. Don't forget it's million four plus the other 200 and what do they call paid up additions?

[A]

Okay, 1.6 minus eight. Yeah. All right.

[B]

Yeah, well, minus six. Yeah. So it's a million. I mean I looked at the statements and the death benefit amount for each one of these things added together is just over a million. So why walk away from that payout for taking.

[A]

I mean, if they're terminally ill and got a year to live. If you want to play that gamble on your parents death game, you can. I'm personally not doing that and I don't think they are. I don't think they're one year from grave. I may be one year from grave. I don't know. But, but, but the, you know, you guys are paying so much in such extreme costs and have for so long on these ridiculous things that the last thing I'm going to do is keep giving these people money. I just couldn't do it. And so, but again, if someone's terminally ill, that's on one of these policies and you think they're, you know, you think they got a one year, as my grandpa said. He said, I'm not buying green bananas, you know, you know, you think we're running on the end of this thing, then if you want to play that gamble game against their death, that's called an actuarial table. It's the statistical probability of death versus the game you're playing. And I personally, unless someone is, you know, in hospice or something, I'm not going to fool with that. The other, the other question is, are they okay? Are you going to. Have you got their finances set up in such a way that their mom's going to be okay if dad does financially without these policies? I think she is. And then the same question the other way. But I mean, you do whatever you want to do. That. That's a different situation. And then the loan you've got back to them for the doggy, whatever it was, hotel or whatever it was, the. If you've got siblings and so forth, you may have some issues of dividing that up. You may end up on them, depending on how this will is set up. I'd want to know how the will's done for your sake, but wow, zero chance he does it. Agreed. Why refi Refinances delinquent private student loans for struggling borrowers. Learn more at Y r e f y.com Ramsey.