Have you ever thought about what would happen if you were to buy a home, and midway through the loan term, you can no longer continue paying your home loans due to disability or death? How will your family pay off the home loan in your place?
Well, folks, this is precisely why home loan life insurance, like MLTA, MRTA, MRTT & MLTT, exists.
Have never heard of these terms in your life? Or are you here because you want to know more? Then read on!
WHAT IS A HOME LOAN LIFE INSURANCE FOR?
A home loan life insurance covers the remainder of home loan repayments in the event of the borrower’s death or permanent disability. This way, the borrower’s dependents can keep the home and not have to worry about the home loan repayments – with this, the outstanding loan amount is already paid for in full on your behalf.
It is not compulsory. However, in some cases, loan providers do require applicants to have it to secure a home loan with them. Some even offer better rates to entice borrowers to insure themselves.
There are a few different options available in Malaysia, with MLTA and MRTA being the most common. Let us explore the differences below!
MORTGAGE REDUCING TERM ASSURANCE (MRTA)
With MRTA, the insurance coverage will decrease over time in line with your outstanding loan amount owed to the bank/ loan provider. The payout is designed to cover the remaining mortgage amount owed at that point of time of death or total permanent disability, so the borrower’s dependents will not be left without a home to live in.
The amount will be paid directly to the home loan provider as the sole beneficiary. No one else is entitled to the payout, and any excess will still be paid to the home loan provider.
MORTGAGE REDUCING TERM TAKAFUL (MRTT)
An MRTT is very similar to MRTA – it is essentially the Takaful version of MRTA, except that Islamic banking principles are practised where interest-based transactions (“riba”) is avoided.
PROS & CONS OF MRTA/MRTT
Pros
-
- Cheaper in cost, paid in a single lump sum upfront before the start of your policy.
- Can be bundled along with the home loan.
Cons
-
- Can be transferred to another property, but the process is difficult
- There is no guarantee of insurability, as proof of health is required with every application.
- The risk of insufficient protection coverage due to the outstanding loan becoming higher than the protection you have, due to fluctuations in bank interest rates. This is especially so if you choose to insure lower than the loan amount.
- No cash value (savings/ investment feature where funds can be drawn from while alive).
- Since the loan provider is the beneficiary, your family will not have any control over the insurance payout.
- Not income tax-deductible.
- No available coverage option to cover anything else other than death or total permanent disability.
Ideal if you….
-
- Have no or few financial dependents
- Plan to own the property long term
- Have adequate medical and life insurance arrangements in place
- Are generally healthy
- Are on a budget
- Have no plans to refinance the home in the future (unless with the same bank)
MORTGAGE LEVEL TERM ASSURANCE (MLTA)
The MLTA however, will pay out a fixed sum that will not change over time, regardless of the decrease in your outstanding loan amount owed to the bank/ loan provider.
With this, should death or total permanent disability happen, the borrower’s outstanding mortgage amount will be covered in full, and there will be an extra sum left over which will go to the beneficiary of the insurance policy. The best part about this insurance is the fact that it is flexible!
Unlike MRTA, payment for MLTA will be made either monthly, quarterly, half-yearly or yearly throughout the entire loan tenure.
MORTGAGE LEVEL TERM TAKAFUL (MLTT)
Once again, MLTT is similar to MLTA in most aspects – it is the Takaful version where everything is done in line with Islamic finance principles that moves away from interest-based transactions.
PROS & CONS OF MLTA/MLTT
Pros
-
- The leftover amount after paying off the remaining mortgage will go to your chosen beneficiary, which will help tide them over during that period.
- Can expand coverage to include critical illnesses.
- Tied to a person’s life and not property, so transferring the policy to other homes is not a problem at all.
- Has cash value, which you can take out anytime or at the end of the policy.
- Freedom to purchase at any time, and not necessarily only at the same time you buy your home.
- Has an option for savings feature where you can arrange for a portion of the premium to be put into.
- Income tax-deductible.
- Protection value can be adjusted up or down whenever you want.
Cons
-
- The cost for MLTA is significantly more expensive if compared to MRTA.
- Buying at a later time may not be worth it, as it will cost more in the long run.
Ideal if you….
-
- Have many dependents and are the only income provider in the family
- Have pre-existing health condition(s)
- Can afford to pay the high premium
- Plan to keep property only for the short term
- Plan to cover a property meant for investment
- Plan to refinance the home in the future
SO, WHICH ONE SHOULD I GO WITH?
First and foremost – you should decide if you would like to go with a conventional insurance policy or a Takaful one.
Costs of MRTA/MRTT and MLTA/MRTT will vary for every individual, as it is dependent on your age, current health condition, mortgage amount terms of the mortgage, AND different policies for calculating costs that will differ for every bank/ insurance provider.
So, it is always good to shop around and compare rates and protection levels to ensure the best bang for your buck.
Here are a couple of tips to keep in mind as you consider!
- Legally, it is not compulsory BUT some banks do require you to buy mortgage insurance as a pre-requisite to applying for a bank loan. However, the insurance type would be MRTA and NOT MLTA – so do not let your broker fool you into believing otherwise.
- If you plan to pay off your mortgage within the next few years, then MRTA/ MLTA/ MRTT/ MLTT may not be necessary.
- Close to 100% of your home loan coverage is recommended if it is your primary home for the long term. However, if it is your investment property, you can opt for lower coverage that will allow your next of kin enough funds to make the necessary arrangements.
- Do you have life or medical insurance? Consider if it is sufficient to cover the needs of your dependents and whether mortgage insurance is needed in this case.
|
MRTA/ MRTT |
MLTT/ MLTT |
|
|
Purpose |
Protection |
Protection & cash value |
|
Premium |
Low |
High |
|
Payment |
One-off upfront |
Monthly instalments |
|
Sum Covered |
Decreases over insurance term |
Remains the same over insurance term |
|
Transferability |
Yes, but with much difficulty. |
Yes |
|
Claim |
Loan balance goes to Bank/ Financial Institution |
Loan balance to Bank/ Financial Institution Remaining balance to beneficiary |
|
Ideal for |
|
|
The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.
