Life Insurance for the Middle Class American

Recent studies suggest that the middle class American is now very concerned about the financial protection life insurance provides. Hurt by the recent economic downturn, middle class Americans have been purchasing life insurance policies in record numbers. According to experts, this is partly due to a decline in disposable income, but also reflects the concerns of an aging demographic. As middle class Americans age, they need to protect their families from additional financial stress.

While economists and politicians debate the actual definition and income level ranges of the American middle class, it's clear that those who consider themselves to be middle class are most likely to be affected by a lack of life insurance coverage. Without the financial cushion a life insurance policy provides, a surviving spouse and children could potentially suffer a significant drop in their standard of living.

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Income and Asset Protection

The basic premise of life insurance for the middle class American is income and asset protection. For a middle class couple with a mortgage, the death of one spouse might result in the house having to be sold. And unfortunately, in a liquidation sale, the only option may be to sell the house for less than what the couple paid for it. The death of one spouse may also mean that a child's college tuition could not be paid. He or she may have to leave school before graduation. And in the United States, a college education has always been the ticket into the middle class.

The death benefit of a life insurance policy protects additional assets as well. Stocks, bonds, CDs, Treasuries and mutual funds should not have to be sold below market value or at a loss in order to cover day-to-day living expenses. The death benefit should be large enough to cover all debt, including credit card, store charge card and car payments, so that the surviving spouse will enter the next phase of his or her life without having to manage debt.

Term Life Insurance

Term life insurance is usually the choice of most middle class Americans. It's affordable, available in terms that are suitable for long-term debt and pays a death benefit large enough to cover all outstanding debt.

Term life insurance can be purchased as a single or joint policy. If purchased as a single policy, the death benefit is paid to the beneficiary upon the death of the policyholder. If the policy is jointly owned, the death benefit is paid to the beneficiary upon the death of the second owner. Grandparents who wish to leave a grandchild money for college tuition or the down payment on a house often choose a joint policy. Some even leave enough for a child or grandchild to purchase an annuity that will guarantee income for life.

One of the biggest threats to the middle class American is inflation. Inflation is defined as a "progressive increase in prices over time". It may seem counterintuitive, but in an inflationary environment, the value of all goods, except money, increases. In other words, if the value of a loaf of bread increases from $1.00 to $1.50 over a period of five years, the value of one invested dollar must increase by 50% in those five years in order for the bread to cost the "same" five years later. If an investor's dollar does not increase by 50%, it costs him or her more money to purchase the bread in the future.

Because of inflation, a $300,000 death benefit on a 20-year term life insurance policy will not be worth the same amount if paid in year twenty as it would have been had it been paid in year one. Middle class Americans who choose life insurance with a term of 10 or more years should consider term life insurance with a cost of living adjustment (COLA) rider. The death benefit paid on a COLA policy will be adjusted each year for inflation. In essence, the COLA rider insures the value of the death benefit.

Whole Life Insurance

Over the past few years, middle class Americans have purchased an increasing number of whole life insurance policies. Recent studies indicate that many people are drawn to the investment portion of a whole life policy. By purchasing a whole life policy, middle class Americans are once again able to take advantage of investing for growth. Because whole life policies grow tax deferred, owners may be able to regain some of what has been lost from their investment portfolios over the past few years. And, many people who choose whole life insurance are relieved to no longer have to make investment decisions in what has become a very volatile stock market. However, all investors are advised to consider both their insurance and their investment needs before purchasing a whole life policy.

Because a whole life policy pays both a death benefit and has an investment component, the policy protects both current income and future assets. The investment value of the policy can often provide diversification for middle class Americans who may not have the financial resources to do so in other ways. A whole life policy can also be used as an additional retirement savings vehicle. A middle class whole life policy owner with an employer sponsored defined contribution plan such as a 401(k) may opt to diversify his or her investments through a whole life policy.

Further, insurance policies, whether purchased solely for the protection of the death benefit or for investment and retirement purposes, are often shielded from seizure if a financial judgment is issued against the policyholder in a civil court case. While it often seems outside the realm of possibility, a car crash or other accident resulting in serious injury or death, can wipe out a person's life savings. For the middle class American, who may not the resources to fight this type of battle, a whole life insurance policy is critical.

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