Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Personal Finance: The Other Retirement Account

Whole Life Insurance. An argument has raged on for hundreds if not thousands of years regarding the value of permanent life insurance (or the lack thereof). One camp believes in the idea of forced savings with consistent returns, along with the added bonus of a death benefit, while the other side says buy term (insurance) and invest the difference, with the hopes of getting a better return on your investment and still retaining the necessary death benefit.
These days, most people who are familiar with the argument (maybe with the exception of insurance agents) agree that generally speaking, term life insurance makes the most sense for insuring against an unexpected loss. And just as so, if a person wants to start or increase their savings, there are much better routes to go than whole life insurance. Of course there are times when whole life makes sense for insurance purposes as well, ranging from estate planning for tax management, to leaving a financial legacy for your family or a favorite charity.

With all that said, there are certain cases where a whole life insurance policy actually makes a lot of sense as a long term investment vehicle, but you absolutely must consider several key factors in order for such an approach to be beneficial to you. The cash value of a permanent life insurance policy grows tax deferred, just the same as a 401k or IRA. Disbursements from the cash value are taxable as ordinary income to the extent that they are more than the amount you've paid in premiums, but loans can be taken free of tax, even if you have no plans to repay. With a traditional whole life insurance policy, the policy holder does not have the ability to choose investments, rather the insurance company manages a general account for all of its policy owners which normally consists of mostly fixed income securities, and ultimately generates dividends for the policy holders.

When determining if life insurance as a retirement account is right for you, the most important aspect of your situation to consider is your time line and investment horizon. It is imperative that you have the ability to allow your policy contributions to grow untouched for at least 20 years. Any time frame shorter than that and your policy will not have enough time to fully recover from initial fees that are incurred and will not completely flourish. If you have 25 to 30 years until retirement, or of course even more, you're in even better shape, and one step closer to having another retirement savings option at your disposal.

I say another retirement savings option because the second key factor you need to consider before utilizing life insurance as an investment are the other tax deferred retirement accounts that may be available to you. 401k's and IRA's are specifically designed for retirement savings, offering the same tax deferred grow as an insurance policy, but with nearly endless investment choices and extremely low fees, if any at all. Because of these benefits, you should always ensure that you are making the maximum contributions possible to your retirement accounts before considering investing in a whole life insurance policy. If you meet these two requirements then whole life insurance as an investment vehicle for retirement is certainly a feasible option for you, but you're not done yet.

Now that you've potentially added another type of account to your retirement arsenal, you're going to need to do a little research. As I mentioned earlier, insurance companies manage their policy holder's cash value in a general account, and as you can imagine, some insurers are better at this than others. Because of this, you should not run out and buy the first whole life policy that you can find just so you can begin to throw money into it. Instead you should look for industry leaders in terms of dividends, longevity and something called Comdex ratings.

Some of my favorites are Mass Mutual, Guardian, Northwestern Mutual, New York Life and Met Life who all paid dividends in 2012 ranging from 5.5% to 7% and have each been in business for well over 100 years. These companies also have impeccable Comdex ratings, which are actually composite scores based on ratings from the four major rating agencies (Moody's, Fitch, Standard & Poor and AM Best). Both New York Life and Northwestern Mutual maintain scores of 100 (highest possible) while Guardian has a score of 99, Mass Mutual 98 and Met life 96. Any score over 96 is considered extremely safe.

Lastly, most major life insurers now have hybrid policies that are commonly referred to as adjustable or combination policies. These policies are permanent, offering level premiums and cash value, but are comprised partially of whole and partially of term insurance. The major benefit of such a policy is that you can secure a higher amount of death benefit with lower level premiums relative to a 100% whole life policy, by increasing the amount of term insurance in your policy. In addition to this feature, your ability to secure a higher death benefit will allow you to contribute a higher amount of additional premiums to your policy, which are ultimately your investment contributions, without your policy being classified as a modified endowment contract.

If you meet the above criteria and would like to save more for retirement, I encourage you to consider using a whole life insurance policy as an investment vehicle. If interested, an insurance professional can offer you projections on cash value returns and can help you structure your policy to best meet your current and future saving goals.