Life insurance can be an important part of estate planning. It can provide important liquidity especially while other assets are going through probate or being sold. It is also an important solution for individuals who do not have sufficient other assets to provide for their children or spouses. However, lack of financial knowledge can lead consumers to make costly miscalculation, as Wealth Management discusses in "Eight Life Insurance Mistakes Clients Make."
Common errors include:
- Not buying life insurance when it is needed.
- Buying too little coverage to meet the expected needs of minor children.
- Purchasing the wrong type of coverage for what they need.
- Signing up for life insurance from employer's benefit plan, instead of shopping around and then losing coverage with leaving the job.
- Not purchasing any coverage for stay-at-home parents, since the breadwinner will need to take more time off work, should anything happen to the other spouse.
- Purchasing a policy that only offers coverage until children reach the age of 21, instead of funds for college and when getting started in their careers.
- Not creating a trust to handle any payouts, after a child reaches the age of 18, especially when the child is still too young to manage it.
- Canceling a policy as soon as possible, before making sure the child will not need it, if something happens to the parent
I would add two additional mistakes. First, not understanding the different types of life insurance and choosing wisely to fit your own needs and financial situation. Lastly, making the policy payable to the estate instead of an individual. In New jersey this could result in unnecessary tax liability.