My parents want to get a million dollars of life insurance and put it in a trust as a way to avoid taxes for the inheritance. They think that taxes will be raised by significant amounts in the future. I said that it's not a good idea and life insurance is not a good investment. I told them that the money they put in won't even keep up with inflation and showed them a compound interest calculator where if they just put it into mutual funds it would grow more.

Is there anything I can say to convince them? Is there anything about the taxes I could tell them about?

edit: thanks for the response, i saw the thing about the 11 mil gift which I knew about but didn't know for couples its double. They said the one mil life insurance thing is only for diversification cuz they have some other assets and money elsewhere thats more than that around 5 million so that should still be under the limit. thanks again

  • You know, there's two types of life insurance "term" life insurance and "whole" life insurance. They're quite different. If you're talking "term" life insurance, it is INCREDIBLY expensive if you buy a contract where it lasts so long that you will very likely be dead (say, 95 or 100 years) when it expires. If you "outlive" term life insurance - you do not get one cent.
    – Fattie
    Apr 3, 2021 at 18:16
  • if your parents believe the taxes thing, they won't care about rate of return. Would you rather leave your kids all of a million, or half of a-million-plus-a-hundred-thousand-interest-earned? Problem is, they're wrong about the taxes (see the answer.) Focus on that. Apr 3, 2021 at 18:19

2 Answers 2


If we're talking about an estate of only a million dollars, there will be no estate tax due so there is no point in trying to avoid estate taxes. Very, very few people in the US actually have to pay the estate tax.

As of 2021, the current estate tax exemption is $11.7 million for a single person ($23.4 million for a couple). So long as your parents are hoping to pass along less than that (and assuming they haven't used up this credit already with taxable gifts), there will be no estate tax due. Thus, there should be no need to do something economically inefficient like investing in life insurance in order to reduce the estate tax.

Of course, the estate tax exemption could decrease in the future. It is scheduled to be cut in half in 2026. There doesn't appear to be a movement to reduce the exemption to the point that it would catch your parents' estate.

  • That's only true for the federal estate tax. For example Massachusetts estate tax exemption is only 1 million and the estate tax rate if fairly steep. This might very well warrant a trust or some other means of mitigation .
    – Hilmar
    Apr 4, 2021 at 1:59
  • Note that the exemption is between one-person and one-person - if there are two parents and even only one kid that is married, you have four combinations who gives to whom, resulting in four times the exemption.
    – Aganju
    Apr 4, 2021 at 18:03

Life insurance is supposed to secure the beneficiary in case of early death.
For covering that risk, the insurance company takes a significant chunk out of the contributions. Using a life insurance as 'savings' is a very poor investment, and easy to beat. Any advisor (that doesn't get a bonus based on life insurance sales) will confirm that.

However, a lot of people make poor investment decisions every day, and often times they don't want to hear about arguments and facts, because they already have made their decision. Try to explain the details to them, but don't be frustrated if it is like talking to the wall.

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