Endowed with confidence

By THIS IS MONEY
Updated:

 

My husband & I would like to know if an endowment would be a good way to save for the future. We are not homeowners and do not intend to buy a property. We are currently paying for life insurance with no return on that. We are 39 and 46 with two dependants age 15 and 17. We do recognise that there would be some risk involved. LP, Birmingham

Ben Willis at Chartwell Investment replies: Endowments offer investors a dual purpose - they combine a life cover element and an investment element. They have been heavily criticised over the past few years but this is mainly where they have been used as a vehicle to pay off a mortgage and fallen short of doing that.

Premiums paid into endowments in the early years will be used to pay for plan set up costs, administration charges and the life cover element.

It is only after several years that your premiums will actually be used for the investment element. Therefore, an argument against endowment plans are that if you needed to cash in the policy in the early days, it is highly likely that you will receive considerably less than the money you have put into the plan.

Many people argue that investors would be better off splitting the dual purpose role of an endowment and buy a pure protection policy and a pure investment plan separately. And this is what I think you should do.

You already state that currently pay for life insurance that pays no return, so I am assuming that you have term assurance and, as long as you are satisfied with the level of your life cover, you do not require more.

Therefore, this allows you to save into a pure investment plan. As you are prepared to accept risk, I would suggest that you invest into an equity unit trust, as equities have historically provided good returns over the long term, i.e. 10 years plus.

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