Sam is unhappy with the returns from his endowment policy and wants alternatives to save for his child's education.

I have been investing on a monthly basis in an endowment policy with Liberty Life for the past five years. It turns out that the current investment value is less than my cumulative contribution by about R660. I perceive this to be unsatisfactory returns [losses] and am contemplating cashing in the policy and buying into an index-tracking fund like Satrix with that money. The investment is meant for my childs education 10 years from now when she starts university. Please let me know what you think, writes Sam .

Maya replies:

It is difficult to comment on the endowment policy without all the information, but generally speaking endowment policies only benefit income earners whose tax rates are higher than 28% as the policy is taxed at the corporate rate rather than the individual rate.

However, the policy may also include other benefits such as minimum performance guarantees and premium waivers that pay your premiums in the event of disability or retrenchment.

The question is whether you needed those benefits and what they ultimately cost you. Given your long-term investment horizon, a guarantee was probably not necessary, and you also need to weigh up the need for premium waivers based on other risk cover you may have.

Endowment products can be used effectively, but I am always concerned that they are oversold due to the relatively high commission structure on the product.

As a rule, interrogate your adviser when they recommend an endowment to make sure you are benefiting from the product offering, and not just the adviser. It is the costs of the product that often result in its underperformance. You have the right to understand the commission paid on the product compared with a pure investment product.

Cashing in

Before cashing in the product you need to understand if there would be any penalties. According to Liberty, the level of early termination charges would depend on the exact product type and how long it has been in force. However, after a contract has been in force for five years no early termination charges will be levied. This is in terms of the revised early termination charges. So if the case has been running for five years as stated, there will be no early termination charges.

Getting advice

Liberty makes the point that financial advice is a key component of a client taking out a Liberty product. A financial adviser is able to look at the overall portfolio of the client and assist the client with their decisions. Satrix is, in fact, not one product; it currently offers seven different products. When the client buys Satrix there is no one assisting the reader to make the choice, or help them monitor their portfolio.

Liberty has reminded us that you have paid for financial advice so it may be worth speaking to the broker about the performance and why he or she sold you the policy. It is a frustration of mine that advisers take the commission but are not there when you need the advice.

University education

In terms of where to invest for your daughters varsity education, Fundisa could be an excellent option.

This is a joint initiative between the government and the unit trust industry. The government tops up your annual savings by 25% up to a maximum of R600 per year. This means if you are saving R200 a month you are guaranteed a 25% return before even the returns in the underlying investment, which is in fixed interest (cash and bonds).

There is no other product in the market that can guarantee these returns. Because the bonus is capped at R600, the optimal monthly investment is up to R200 per month, and the minimum is R40 per month. However, she will only be able to use the funds for her tertiary education and not her gap year. For further information you can go to the website www.asisa.co.za/fundisa . Note that the website fundisa.co.za is NOT related to this product.

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