Let’s take a quick look at the two types of Takaful insurance products – MRTT and MLTT, that cover you when the unfortunate happens.
It is a big financial commitment when it comes to purchasing a property, especially if you are a first-time homebuyer. Often, you will be opting for a home loan offered by a financial institution and this also means that you will be committing yourself to a loan tenure for as long as 35 years in a normal circumstance. But did you know that such mortgage loans often come with a mortgage life insurance application as well?
What is mortgage insurance and do you need one?
In a nutshell, mortgage insurance is a type of insurance, such as Takaful insurance products like MRTT or MLTT. It provides coverage for your outstanding mortgage loan in the event of death or total permanent disability (TPD). Having a policy that covers your long-term loan will give peace of mind for you and your dependents – at the very least that they will still have a roof over their heads!
Without insurance coverage, the mortgage loan lender or usually a financial institution in this case (for example, a bank) will have the right to repossess your property and auction it off if there is a failure in servicing the remaining balance on the loan.
However, with one, you or your dependent or beneficiary will be able to continue to stay in the property as the insurance will cover the amount of the loan, either by way of direct payment to the financial institution or giving out a total sum to the beneficiary – depending on which life insurance product you have purchased.
What are MRTT and MLTT?
They are both Takaful insurance products and work to cover you and your loved ones during the needy times such as death or serious disability. The Takaful insurance products are Islamic based and offer a halal foundation for the insurance policy.
What is MRTT?
Mortgage Reducing Term Takaful or in short, MRTT, is a Takaful insurance product that gets you covered on a property if you as a borrower or a homebuyer suffer from total permanent disability (TPD) or face death.
In other words, it is a safety mechanism that is designed to provide financial support when you are not able to work to pay for the home loan. In such an event, the financial institutions such as a bank will be paid in full for the loan settlement by the insurance company. MRTT insurance will then provide financial stability for your loved ones without giving any extra financial burden at such a difficult time.
How does MRTT work?
As the term suggests, MRTT is a reducing term life insurance product that adheres to the Takaful principles of Islamic finance where the sum assured is designed to reduce as the total value of your outstanding loan reduces. This means the amount you owed to the financial institution will decrease as you pay your home loan. Thus, it is essential that you ensure the term and sum assured are properly established before and when the MRTT insurance policy commences.
How much does it cost to buy MRTT insurance?
As the Takaful insurance policy is based on the total amount of a home loan offered by the financial institution, there is no set cost for a MRTT insurance policy.
The cost will variably depend on the risk insured for the home loan such as coverage amount, duration of the cover and the age of the homebuyer upon applying for the loan from a financial institution. All of these factors will be taken into consideration.
However, a lump sum payment is required at the start of the MRTT policy and this type of policy is said to be a relatively cheaper option compared to a level term policy such as MLTT. This is due to the fact that the pay-out amount for MRTT will reduce accordingly based on the period of the home loan.
The pay-out, however, will be channelled directly to the financial institution that finances the home loan and no additional amount will be paid to the homebuyer’s beneficiary or dependent in this case.
What is MLTT?
Mortgage Level Term Takaful, or aptly known as MLTT, is also an Islamic finance product that works to provide financial support to homebuyer if death or TPD occurs. It is a life insurance cover and the total amount assured will remain level throughout the duration of the policy. Like its counterpart, MRTT, it is not a compulsory affair but highly required by financial institutions to cover the home loan offered to the homebuyer.
How much does it cost to buy MLTT?
A common scenario is that MLTT could be more expensive because the financial risk covered by the financial institution is usually greater as it requires the same amount of pay-out at any time of the policy. In contrast, the total sum for a reducing term policy will reduce over time.
In addition, the cost of a MLTT insurance policy will variably depend on factors such as age, the duration of the cover and the total amount insured.
In other words, the costs will generally be higher when you are older or you are opting for a longer coverage term. The cost will also increase when you request for a higher insured value for the property you are buying.
What’s the difference between MRTT and MLTT?
In terms of MRTT vs MLTT, an apparent difference is the pay-out method. Unlike MRTT, the MLTT insurance will directly pay out the assured sum to the policy owner or beneficiary if death or TPD occurs. In such an event, it becomes the responsibility of the beneficiary to pay for the mortgage loan settlement with the financial institution and this can be done via instalments or lump sum payment, as per the arrangement agreed by both parties. If there is a surplus or additional amount left after the mortgage loan settlement, the beneficiary will be entitled to receive the money and it is the beneficiary’s right to access the funds.
Additionally, an MRTT insurance policy will be cancelled if a homebuyer decides to refinance the property before the end of the coverage term while this will be entirely a different scenario for an MLTT policy. The latter will not be affected by the property refinancing or if the property buyer decides to sell the property.
Hence, MRTT generally works best for homebuyers who are looking for a long-term residential property, age over 35 or for those who are highly unlikely to refinance the property. MLTT, on the other hand, will work well for properties that are meant for short-term investment or for property buyers who are below 35 years old or likely to refinance the property.
Is it compulsory to buy MRTT or MLTT?
Legally, it is not compelled by the law, but this has often become a necessary item to tick to obtain a property loan such as a home or mortgage loan. In a way, many financial institutions such as banks made it mandatory to have such mortgage life insurance to provide assurance for the loan offered to the property buyer.
As discussed above, MRTT and MLTT are both Islamic financial products and they are simply the Takaful version of both Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA). Like MRTT, a MRTA insurance policy is the conventional product of MRTT, covering a reducing home loan over a period of the agreed term.
The same goes for MLTA. It is the conventional version of its Takaful version – MLTT. Equally, all these are mortgage life insurance products, and they offer coverage in the case of death or TPD. They are not mandatory by the law – at least not by Bank Negara – but mostly required by financial institutions when you are applying for a property loan or a home loan.
Read more about MRTA vs MLTA here.
How to pick the right mortgage insurance?
Obviously, there is no clear rightful winner when it comes to choosing the right insurance product for your own or loved ones.
Always remember that both MRTT and MLTT are offered by many financial institutions – banks or insurance companies – and they vary accordingly in their terms and conditions, including spelling out the basic definition of TPD!
Consider carefully the offer made to you including the cost, the duration of the coverage and other factors, depending on your current circumstances.
Perhaps the quick steps below could help you:
Step 1: What is your purpose of buying a property?
Find out the main purpose for buying the property. Consider if it is for own use or for short-term investment. This will serve as a guide to determine how long you will be owning the property.
Step 2: Budgeting
Have a monthly or yearly budget for the insurance policy, that works well for your overall household income. This is essential to ensure there will be no deferred or late payment in the future once the insurance policy commences. Make careful consideration on a committed amount that you are comfortable to pay for a long term.
Step 3: Make a comparison
Once you have the budgeted amount in mind (and agreed by your partner, if any), do make comparisons and calculations on the policy. Seek for opinions and ask for financial advice. Always ensure you have understood the terms and conditions set out by the policy and resolve any queries you have with the financial institution you are opting for. This will help in choosing the right insurance product that you need.
Nevertheless, it is always vital for property buyers, be it for short-term investment or for own use to seek financial advice from professionals before deciding which mortgage life insurance suits and works best.
What is most important is that the insurance product that you choose fits your needs and provides the most adequate coverage to you or your loved ones at the neediest time.