Life insurance can be an excellent tool in estate planning. For instance, life insurance can be used to ensure one’s estate has cash on hand to pay creditors, tax obligations, and other post-death expenses. One can also use life insurance proceeds to provide for specific beneficiaries either directly or in trust, with various tax benefits.

As useful as life insurance can be in estate planning, though, there are a variety of issues to keep in mind with any insurance policy. Principal among these is that the beneficiary of a life insurance policy may not be able to manage that money at the time they receive it. If the beneficiary is a minor, that beneficiary does not have the legal capacity to handle or administer property and therefore the insurance company will only pay the proceeds to a court appointed guardian of the property for that minor. That guardian would be a court supervised fiduciary to who would manage the money, requiring court approval each and every time funds are required to be used for the minor, or otherwise incapacitated person. However, designating a trust as the beneficiary of the insurance policy can avoid this possibility and allow one to specify the terms of distribution more specifically.

Failing to update beneficiary designations is another common mistake with life insurance policies. This is particularly important when a designated beneficiary dies before the insured and there is no contingent beneficiary designated. Without a contingent beneficiary, the proceeds will be paid to the estate of the insured and require a probate administration to distribute to the estate beneficiaries, creating added expense and extending the time before beneficiaries receive any distribution. Additionally, this will cause the insurance proceeds to be subject to claims of creditors of the deceased and other potential third parties.

These are only some of the potential issues with life insurance. To cover all possible contingencies, it is important to work with an experienced estate planning attorney to come up with a comprehensive plan.