So you recently purchased a house and can’t seem to decide between MRTA & MLTA? We share with you a detailed analysis of each protection option.
A house is probably the greatest investment made by most individuals and many Malaysians aspire to make their home ownership dreams come true. As a homeowner, you must think about the potential risks too; namely, what happens to your home and family should something unfortunate were to happen to you?
Who will then take up the financial obligation of paying off your mortgage instalments? Enter mortgage insurance plans – here we detail 2 most common options available for Malaysian homeowners plus a third alternative unknown to many:
1. Mortgage Reducing Term Assurance (MRTA)
How it works
MRTA is the most popular and economical option for property loan borrowers and is usually packaged as an option when applying for a home loan at a bank. It is a single premium group term life insurance that pays your outstanding home loan in event of your death or total permanent disability (TPD).
Its ‘reducing term’ element means your coverage will gradually reduce in line with your outstanding loan until it reaches zero at the end of the tenure. In event of your death/TPD, the benefits derived from this mortgage insurance will go directly to the bank to settle your outstanding loan and your family members will not receive any cash benefit from it. This is because the bank serves as the beneficiary of a MRTA policy.
You have the option to select the coverage amount and tenure of your policy while the premium charged will depend on your age, gender, etc. The premium is paid up-front as a lump-sum. Most homebuyers top up this amount to their mortgage value as most banks offer a goodie of a lower interest rate on your home loan should you do so.
Of course, you can also opt to buy it later but in that case, you need to have sufficient money to pay off the lump sum premium on your own.
It is a common misconception that a MRTA is non-transferable from one property to another. This is a myth – all you have to do is to ‘top up’ the premium based on the new property’s value.
However, the process is a bit complicated and may consume a considerable amount of time if you intend to transfer the policy from one bank to another. You also have the option to surrender this mortgage insurance at any point of time and get back the surrender value as per your written policy terms.
What are the cons?
1) The MRTA’s biggest downside is that the loan settlement directly goes to the bank. Your family will have no control whatsoever over it. Even if the loan is settled, your house can remain frozen under the state. This is until all your income tax, legal and accounting expenses are paid. You have to remember that since your family will receive no cash value from the policy, they will not be completely protected from the financial burden in your absence.
2) Those opting for a MRTA coverage below the home loan amount should take note that their MRTA will be affected by fluctuations in interest rates.
3) There have also been a few incidents where some banks calculated too low of an interest rate when selling the MRTA policy to their clients – rightfully, the interest rate used to calculate MRTA should be higher than your home loan interest rate. Consequently, the increase in bank interest rates over the years has made the actual outstanding loan higher than the projected outstanding loan. Hence, giving policyholders no choice but to pay the balance.
This unnecessary debt may come as a shocker for the deceased’s family and add to their already tough situation.
Is it for you?
- If you plan to keep the house for the long term and have no financial dependents, then MRTA is ideal for you.
- It is most suitable for young adults on a budget leash and those who already have their own medical insurance.
Where can you purchase MRTA?
Banks are allies of MRTA as the beneficiary of the policy are banks. So, most banks will highly recommend you to opt for an MRTA. Do note however that this mortgage insurance is not compulsory, so do not feel pressured to purchase the MRTA should your lender make it a requirement in order for you to qualify for a home loan. Make sure to check out other options available in the market.
2. Mortgage Level Term Assurance (MLTA)
MLTA offers repayment of your outstanding home loan as well as a guaranteed cash value back at the end of the scheme. This cash benefit will help keep your family afloat in the event of your death or total permanent disability (TPD). Unlike the MRTA, anyone can be a beneficiary for a MLTA, the policy-holder can nominate any family member to receive the pay-out should something happen to him or her.
An MLTA’s sum assured remains constant or level throughout the policy’s tenure period. The most important thing about this mortgage insurance is that the insurance proceeds are credit-proof and will not be frozen. It is a complete protection with additional saving, optional riders and in some cases, even policy returns on premium to fulfil your family’s financial necessity.
Upon paying off the bank for the outstanding mortgage amount, the insurance company will pay whatever money leftover (plus returns on investment if the policy is investment-linked) in the form of a cash payout to the policy’s beneficiary. Most MLTAs provide the option of including a medical rider for critical illnesses too, providing further protection.
MLTA is prized for its flexibility. You can co-own the insurance if you have jointly purchased a property with someone else, in which case the scheme will cover only 50% of your loan. It is also super easy to transfer the policy from one property to another, hence it is most sought after by property investors.
Moreover, you can surrender this mortgage insurance’s policy at any time with a guaranteed surrendered value mentioned in your policy paper.
What are the cons?
1) The extra facilities of MLTA come at a price of higher premium which can be paid periodically over the tenure of the mortgage, on a monthly, quarterly or yearly basis.
2) You don’t need to buy an MLTA upon the purchase of your house, but if you were to buy it later, you will be paying more in the long run since its premium payments are repetitive. Age plays a role in MLTA much like life insurance, the higher the age, the higher your premium will be.
Is it for you?
- It is highly recommended if you are the sole breadwinner of your family and have several dependents.
- If you intend to keep the property for the short term or use it for investment, then it is the best policy as it is easily transferable
Where can you purchase MLTA?
Mostly, insurance companies offer MLTA as it is a hybrid of life mortgage insurance offering you both protection and savings.
Tips & tricks
- Don’t fall prey to agents who try to throw in MRTA in your housing loan package without justifying why you need it and is shady about interest rates.
- Find out whether legal loan fees and valuation fees are financed in your loan package.
- If you plan to sell the property within a few years, do not purchase a mortgage insurance but if you intend to keep it for a long time or are co-purchasing it with someone else, then it is better to get the insurance.
- There is no need to purchase either insurance should you already have a life insurance that covers the total amount of your loan and have no other pressing financial liability.
3. What is the third alternative? It’s Term Life insurance
If you would like to get a fusion of both options at a lower premium rate, then Term Life insurance is the answer. It is the oldest and most common life insurance which offers your family (beneficiary) a lump sum payment (sum assured) in event of your death or TDP during your policy tenure (similar to MLTA).
Meanwhile, the premium structure is akin to the MRTA but is more flexible as you and your loved ones will be protected as long as long as you pay the premium and it can be terminated at any point of time. Policy-holders can also extend the coverage by adding critical illness into the condition in return of a slightly higher premium.
This video briefly explains the difference between Mortgage Insurance and Term Life insurance:
There are 2 ways to incorporate Term Life insurance to meet your home loan dues. The cheaper plan is in the event of your death, where the lump sum money received by your family can be invested in return of regular interest income which can, in turn, be used to pay the loan instalments.
However, if you would like your family to have some extra cash after settling the outstanding loan, then your term life insurance coverage should be equal to your total living expenditure till your estimated retirement age (say 20 years) so that your family can pay the bills along with the mortgage in case something happens to you.
Is it for you?
If you are looking for an affordable and more flexible option, with a transparent premium and coverage value, then the Term Life insurance is for you.
Written by Fahri Ahmed | Edited by Reena Kaur Bhatt.