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3 life insurance mistakes you can easily avoid

Senior woman paperwork
Dan Tardif | LWA | Getty Images

It may be time to give your life insurance coverage a checkup.

Mistakes that financial advisors see clients make with life insurance was a common theme at the FPA Be conference in Baltimore this week.

"Insurance planning really shouldn't get started until there's been some financial planning," certified financial planner John Ryan told attendees at a Thursday seminar on insurance mistakes.

Here are three missteps that can be easily avoided or fixed:

1. Not having enough insurance

Among parents with young kids, 37 percent don't have life insurance, according to a 2015 Bankrate report. Of those who do have insurance, half have less than $100,000 in coverage.

Not having enough insurance is a common misstep, said Ryan, who is an independent insurance broker and the founder of Ryan Insurance Strategy Consultants in Greenwood Village, Colorado. But it's an easy one to fix, and can be inexpensive thanks to low term policy rates.

Conduct a thorough analysis of your life insurance needs to make sure you have enough to cover funeral expenses and replace your income for the family, as well as cover debts like the mortgage.

"With the [term] rates today, there's really no reason not to round up," he said.

2. Not reviewing your medical records

It's smart for consumers to request a copy of their medical record from their primary care physician before applying for life insurance, certified financial planner Carolyn McClanahan told attendees during a Thursday session on health planning. McClanahan, a physician, is also the director of financial planning for Life Planning Partners in Jacksonville, Florida.

Insurers will get those records, too, and use your medical history to gauge risk and determine rates, she said. There may be potentially costly mistakes in the record that should be fixed. (McClanahan said she recently found such an error on her records, ahead of applying for a new policy.)

3. Focusing on avoiding estate taxes

Having someone else (say, a spouse) own the life insurance policy on you can be smart estate planning. Because you don't own the policy, it won't be included in your estate when you die.

But so-called "three-corner life insurance" where the owner, insured and beneficiary are all different (say, one spouse owns the policy on the other and names the kids as beneficiaries) should be avoided, attorney Lawrence Brody told attendees during a Thursday session on insurance planning mistakes. Brody is a partner at Bryan Cave in St. Louis, Mo., specializing in estate planning.

That three-corner configuration has the effect of turning the policy proceeds into a gift from the policy owner to the beneficiary, he said. Any amount over the annual $14,000 annual gift tax exclusion would be considered a taxable gift to the owner, reducing his or her annual lifetime exclusion.