Estate planning is about leaving a positive legacy. It also requires careful consideration of the needs of dependent family members. Testators drafting or updating their estate plans may need to designate people to hold positions of authority, clarify who inherits specific assets and provide guidance for those settling their affairs.
In some cases, life insurance can play an important role in an estate plan. Testators can easily make mistakes related to life insurance when creating or updating their estate plans. The three mistakes below can have long-term consequences for those left behind after a testator passes.
1. Choosing not to carry coverage
Some people think of life insurance as a windfall provided to those who survive after someone dies. However, life insurance often helps to cover key expenses and prevent financial hardship.
It doesn’t leave people wealthy but rather protects them from predictable financial challenges. Carrying enough life insurance to replace lost income, pay off personal debts and provide temporary support from loved ones can be a wise investment.
2. Naming a beneficiary in a will
The life insurance policyholder gets to choose who receives the funds from their policy. Sometimes, testators make the mistake of discussing life insurance coverage in a will or in trust documents.
However, they may fail to provide updated instructions to the insurance company when their plans for their policy change. Typically, the beneficiary designations filed with the insurance company determine who receives the funds after the policyholder passes.
Instructions in a will do not supersede the documents filed with the insurance company. If a policyholder fails to update their documents when they divorce, have more children or lose a loved one, the wrong party may ultimately benefit from their insurance coverage.
3. Naming minors as beneficiaries
Carrying life insurance to support dependent children is a common practice among parents. Naming the children as the policy beneficiaries may seem like the best solution. Minors technically do not have total control over their assets.
A surviving parent or guardian may take control of their resources until they become adults. Unfortunately, that means that the funds intended to provide support for the children may end up squandered by someone else.
Parents may want to consider establishing a trust and naming the trust as the beneficiary of the life insurance proceeds. The trustee can then maintain those resources for the children and make necessary distributions to a surviving parent or guardian while the children are still young.
Discussing estate planning goals can help people avoid common mistakes with their assets, insurance coverage and documents that could negatively affect their loved ones. A discussion about life insurance can help policyholders ensure that their coverage has the intended impact on their loved ones.
