Life insurance may play a vital role in an estate plan because insurance proceeds can be counted on to provide liquidity when it’s needed. With proper planning, insurance money can pay expenses such as estate tax and keep other assets intact.

Suppose, for example, Bill dies and leaves a large estate to his daughter Julia. Substantial estate tax is due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia might not want to rush into a forced sale of the real estate. However, if she taps the inherited IRA to raise cash, she will have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

Anticipating such an outcome, Bill could buy insurance on his own life. The proceeds can be used to pay the estate tax bill. Then Julia can hold onto the real estate while taking only minimum required distributions from the inherited IRA. If the insurance policy is owned by Julia or by a trust, the proceeds probably will not be included in Bill’s estate and will not increase the estate tax obligation.

However, some common life insurance errors can wreck your estate plan:

* Naming your estate as beneficiary. This places the policy proceeds in your estate, where the money will be exposed to estate tax and your creditors. Also, your executor will have to deal with more paperwork if your estate is the beneficiary. So you should make sure to name the appropriate people or charities.

* Naming only one beneficiary. You should name at least two “backup” beneficiaries, to reduce confusion in the event the primary beneficiary should predecease you.

* Putting your life insurance in the “file and forget” drawer. You should check your policies at least once every three years. If the beneficiary is an ex-spouse or someone who has died, you should make the appropriate change and get a confirmation, in writing, from the insurance company.

* Carrying inadequate insurance. If you have a young child, it probably will take hundreds of thousands of dollars to pay all his or her expenses, including college bills, in case of your untimely death. Stinting on insurance may penalize your survivors and such economies probably aren’t necessary today, with term insurance costs so low.