Owning property is a dream come true, yet the process to achieve this dream is filled with challenges and tough obstacles. Borrowing from a bank can result in a debt cumulation of near 20-40 years. What if something occurs to the owner of the house? What would happen? Is there a preventive coverage to protect the owner’s loved ones? Mortgage insurance is an important aspect when dealing with an unprecedented turn of events. It helps to protect your home and your loved ones in the face of unfortunate circumstances. However, this is not to be confused with home insurance. As mortgage insurance protects the benefactor and family, home insurance deals with the protection of the home itself. These two are completely separate terms and meanings. This two-part article will explain the contents of mortgage insurance and home insurance.
In layman terms, mortgage insurance ensures that in the event the individual is unavailable to repay the debts, the insurance company will help the individual to repay the debts. Like conventional insurance, the individual must buy an insurance policy and pay a monthly premium. In the timely event the individual passes away while the policy is in effect, the insurance company pays the mortgage. Beneficiaries or closest to kin can live in debt-free without much worry. It can also occur in the event of a tragic accident that makes one disabled, or total permanent disability (TPD). In Malaysia, there are two types of common mortgage insurance available, which are the Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA).
MORTGAGE REDUCING TERM ASSURANCE (MRTA)
Mortgage Reducing Term Assurance (MRTA) is a life insurance plan that serves purely to pay off the outstanding mortgage balance to the financial institution in the event of death or TPD. It functions also as a form of protection for the bank in cases where the individual is unable to further service the loan. Individuals have to pay a huge lump sum premium for an MRTA plan, which is usually offered by property agents. The sum insured decreases over time according to the loan tenure, meaning that coverage slowly reduces in line with the total loan until the end of your mortgage. The amount paid usually covers the home loan borrowed from the bank.
For example, Sami Valloh purchases a property of RM300,000 and the bank loans a total of RM270,000 over a tenure of 30 years. Sami takes an MRTA policy for 30 years, which is paid a one-off for RM12,000. Sammi repays RM20,280 annually (monthly RM1,690) as agreed to pay off the loan with 6% of the bank’s interest rate. After 15 years, there is RM100,00 outstanding balance. Sammi suddenly dies/gets paralysed and is unable to pay. The MRTA covers whatever amount is outstanding on the mortgage balance at the point the insured is unable to pay the mortgage or part of it.
Hence, the bank is the beneficiary of the MRTA policies, whereas, family members do not get any amount. MRTA will also get affected by base rate (BR). Since banks can adjust their BR rates, MRTA coverage will be affected if below the loan amount. If the property purchase has full loan amount and coverage, MRTA is not likely to be affected. Another fun fact about MRTA is that it is actually transferable in some cases (with complicated time-consuming paperwork), but if the property bought is worth far more than the current property, it is more advisable to buy a new policy. MRTA is most suitable for individuals with sufficient standalone life and medical insurance, and also not financially dependent on anyone.
MORTGAGE LEVEL TERM ASSURANCE (MLTA)
Although similar concept to MRTA, Mortgage Level Term Assurance (MLTA) functions differently, where not only does it pay off the outstanding mortgage balance, but also entitles the individual’s family get some financial payout in the event of the individual’s death or TPD. Anyone can be the beneficiary for the MLTA, making it transferable. This works as a life insurance as well, offering both protection and cash benefits. In fact, one can even pay more premium to expand it to cover Critical Illnesses (CI) as their insurance policy. This flexibility with protection allows adjustable value at anytime you desire. The premium can be spread throughout the mortgage term, allowing periodic payment instead of a one-off payment. Unlike the MRTA, the protection for MLTA does not diminish over time, as it ensures constant sum assured basis. MLTA is most suitable for individuals with families and those that are financially dependent on the individual as the source of income. The downside for an MLTA is that it is highly expensive, costing 10x more than an MRTA for basic coverages.
As both MRTA and MLTA have their own respective qualities, there have both their pros and cons. It is up to the individual on whether they are able to afford it, the necessity, and also the benefits that entail it. Many banks offer amazing policies, however, do more research and consult your financial planner for a better recommendation.