Choosing suitable life insurance is important. It protects your family and can be used to cover your mortgage and personal loans. In other words, it lets you leave a non-taxable amount to the family at the time of your death.
While I do advocate individuals like yourself to have minimum financial protection against crisis, I personally do not encourage friends and clients to take any form of life insurance provided by the bank that is tied specifically to your housing loan.
This is because insurance provided by the banks for your housing loan, be it MLTA, MRTA or the Islamic alternatives will have the bank as the main beneficiary. In the unfortunate event of the family needing to make claims, the money will first be transferred to the banks and the excess claims (if any at all) will then be distributed to the nominated beneficiaries.
In other words, the bank has the first right to the insurance payout while the family is on the losing end of the deal.
So if you ask me, “should I take up an MLTA or MRTA for my housing loan?”, my answer is as follows.
In reality, mortgage insurance is not compulsory for housing loan borrowers. While local banks may mandate that insurance is required if the borrower wishes to benefit from a lower interest rate, the borrower may take the lowest insurance coverage to benefit both the lower interest rate and savings.
Having said that, I would recommend doing your own calculation if the lower interest rate is enough to justify having the lowest insurance coverage. In some cases, the difference in interest rate can be 0.05% difference where the savings on interest does not justify paying for the insurance premium.
So what exactly is MLTA and MRTA, how do I choose between the 2 main types of insurance provided by banks?
What is a Mortgage Reducing Term Assurance (MRTA)?
The Mortgage Reducing Term Assurance (MRTA) is a life insurance plan where the sum assured decreases over time. This form of life insurance is often designed over the term of a housing loan and is not transferrable. It is important to note the reduction in sum and outstanding debt may not be the same.
Hence, it is important to include the correct terms and value of your home loan when making a claim from the MRTA.
If the sum assured is less than the outstanding loan at the time of making claims, there will be a gap between the cash payout and the outstanding loan. Your family will be required to pay off the difference in value to resolve the outstanding loan.
Sum Assured by MRTA < Outstanding loan
Family will need to pay more money to bank.
In contrast, if the sum assured is more than the outstanding loan, only the amount owed will be paid out to the bank. No excess money will be paid out to the family.
Sum Assured by MRTA > Outstanding loan
Family do not receive money – Only bank receive money.
Personally, I find the MRTA to be a ruthless insurance plan that favours only the loan provider.
However, in reality, the reduction in sum assured is faster than the rate of paying off the housing loan. Hence, it is not likely that there will be additional money from the MRTA after paying off the outstanding loan.
In some cases, families are required to make additional payments to banks to resolve outstanding loans because the payout from MRTA is not enough to clear off the amount owed.
Is MRTA compulsory for your housing loan?
No, MRTA is not compulsory in your housing loan application. However, there are banks that mandate having an insurance policy as part of their mortgage application requirements. Not taking up an insurance policy may result in you having a higher interest rate for the approved housing loan.
Can I transfer the MRTA upon early settlement?
No, MRTA is not transferable and is tied to the specified property throughout the financing period. Upon early settlement, a small sum of the premium may be returned to you and is pre-determined by the bank. In most MRTA offerings, a breakdown table is provided to help you understand the premium reduction over time.
What happens to the MRTA policy if anything happens to me?
In the most unfortunate event when the MRTA policy needs to be exercised, the bank will be the sole beneficiary.
When an MRTA policy is exercised, the sole beneficiary of the policy is the bank and there will be no payout to any third parties. The sum assured from the MRTA policy is paid to the bank to cover the total value of the home loan.
How should I pay for the MRTA?
The MRTA policy is paid as a lump sum payment at the start of the policy. The cost of the MRTA is typically decided based on the borrower’s age, amount of the housing loan and the loan tenure. If the borrower is afflicted with diseases at the time of application, the cost can be much higher.
When it comes to the payment option, you can choose to either,
- Have the cost of MRTA add on top of the borrowed capital for the housing loan.
- Pay for the cost of MRTA upfront.
In my opinion, it is better to pay for the cost of MRTA upfront by cash to save on the interest cost. If the cost of MRTA is built into the housing loan, the final cost can be 1.8 times higher due to the interest rate and tenure.
However, if you cannot afford to pay for the cost of MRTA by cash, then it is a worthwhile consideration to have it built into the housing loan.
Is there a takaful alternative for MRTA?
For my Muslim friends, there is the takaful alternative for MRTA known as Mortgage Reducing Term Takaful (MRTT).
The Mortgage Reducing Term Takaful (MRTT) provides takaful coverage for borrowers with Islamic bank home financing. The insurance mechanism for the MRTT is similar to the MRTA where the sum assured decreases over time and in the event of a payout, the bank will be the sole beneficiary.
What is a Mortgage Level Term Assurance (MLTA)?
The Mortgage Level Term Assurance (MLTA) is a life insurance plan where the sum assured remains the same throughout the protection period. Unlike the Mortgage Level Term Assurance (MRTA), any additional amount from the cash payout is paid to the nominated beneficiary.
If you decided to take up an MLTA with the sum assured for RM600,000 for the next 25 years. You can rest assured knowing that you are protected for RM600,000 for 25 years (from the start of policy) and the amount will not reduce over time.
In the case where your family needs to exercise this insurance policy, the RM600,000 will be used to pay for the outstanding amount on your home loan.
For example, it has been 15 years since you started paying for the housing loan and the outstanding amount is now RM400,000. The RM600,000 from the MLTA will be used to first resolve the outstanding amount of RM400,000 and the remaining RM200,000 will be paid out to the nominated beneficiary of the policy, typically the next-of-kin.
One thing to note, having an MLTA applied through the bank for the housing loan puts the bank as the main beneficiary of the policy. It is only after the bank is satisfied with their payment then the family gets their payout.
Personally, I would prefer a situation where the family is the main beneficiary of the policy and they have the first right in deciding what to do with the payout. They can choose to either resolve the outstanding loan in full or to continue making monthly payments while putting the excess funds to good use.
Is MLTA compulsory for your housing loan?
No, MLTA is not compulsory in your housing loan application. However, some banks might compel you in having an insurance policy as part of their mortgage application requirements. Otherwise, you stand to be offered a housing loan with a higher interest rate.
Can I transfer the MLTA upon early settlement?
Yes, MLTA is transferable from property A to property B once the housing loan for property A is paid. This feature makes MLTA attractive for property investors and is a cost-saving in the long run. By transferring MLTA, property investors do not incur insurance costs for the subsequent properties.
What happens to the MLTA policy if anything happens to me?
When the MLTA policy is exercised, the bank will be the main beneficiary and any additional money will be paid to the nominated beneficiary, your family or individual(s) of your choosing.
When an MLTA policy is exercised, the bank will have the first right on the cash payout and use it to resolve any outstanding amount on the housing loan. Any additional money after the loan is resolved will be paid to the nominated beneficiary. This puts the nominated beneficiary at a disadvantageous position.
How should I pay for the MLTA?
The MLTA policy is paid as a lump sum payment at the start of the policy. The cost of the MRTA is typically decided based on the borrower’s age, sum assured and policy tenure. If the borrower is afflicted with diseases at the time of application, the cost can be much higher.
When it comes to the payment option, you can choose to either,
- Have the cost of MLTA built into the borrowed capital for the housing loan.
- Pay for the cost of MLTA upfront if you can afford it.
In my opinion, it is better to pay for the cost of MLTA upfront by cash to save on the interest cost. Similar to the MRTA payment, if the cost of MLTA is built into the housing loan, the final cost can be 1.8 times higher due to the interest rate and tenure.
However, if you cannot afford to pay for the cost of MLTA by cash, then it is a worthwhile consideration to have it built into the housing loan. The premium is gradually paid for with each monthly instalment.
Is there a takaful alternative for MLTA?
For my Muslim friends, there is the takaful alternative for MRTA known as Mortgage Level Term Takaful (MLTT).
The Mortgage Level Term Takaful (MRTT) provides takaful coverage for borrowers with Islamic bank home financing. The insurance mechanism for the MLTT is similar to the MLTA where the sum assured is consistent over the policy tenure with the bank as the main beneficiary.
Is MLTA better than MRTA?
Mortgage Level Term Assurance (MLTA) is better than Mortgage Reduce Term Assurance (MRTA) due to the insurance features. The sum assured covered by the MLTA is constant through the policy tenure and is transferrable. Despite the higher insurance cost, the added features help investors save money in the long run.
In my opinion, you want to weigh the few advantages and disadvantages of the MLTA over the MRTA.
How is the MLTA better than the MRTA?
- The sum assured from the MLTA is the same throughout the policy tenure
Having a constant sum assured throughout the entire policy tenure puts the family at a more comfortable position when the unexpected do happen. At the same time, this reduces the probability where the sum assured is not enough to cover the outstanding loan amount.
If there is excess money from the cash payout after clearing off the outstanding loan, the nominated beneficiary will benefit from the policy. - The policy is transferrable when the housing loan is resolved
Although the MLTA policy cost more than the MRTA policy, it is transferrable from housing loan A to the subsequent housing loan. If the policy is transferred through 3 different housing loan in the span of 20 years, the property investor stands to save a significant amount on insurance.
What is the drawback of the MLTA?
- The MLTA policy cost more than the MRTA policy
For the same sum assured over the same policy tenure, the MLTA is expected to cost significantly more than the MRTA. In some cases, the cost of MLTA policy can be up to 2x the cost of MRTA policy. - The main beneficiary for the MLTA policy is the bank
To me, this is the biggest drawback of the MLTA policy. I am of the opinion that the family should be the main beneficiary and they should have the first right to decide what to do with the cash payout.
With the bank being the main beneficiary, the family is in a disadvantageous policy to decide what is best for the family.
Is there a better way around the MLTA or MRTA policy?
Sharing from what I did for my own housing loan, I opted for the cheapest MLTA policy by the bank. By doing so, I get to benefit from the lower interest rate, huge savings in the long run.
On top of that, I took up life insurance from life insurers such as Great Eastern or AIA. This life insurance is meant for my family to be the main beneficiary in case anything happens to me. This gives them the first right to decide what to do with the money, be it to continue the monthly payment or to clear off the housing loan.
I personally hope they will continue the monthly payment. The excess money is best invested wisely with the longer term in mind.
Author’s note: Darling, if you read this, the above is for you 😀
Final Words
Your circumstances and my circumstances are different. The choices I made for myself may not be suitable for you, we have different requirements and it should be accordingly.
Finding a suitable insurance policy for your financial situation is about identifying which policy will best meet the needs of your family in the worst possible event. I wish you the best as you plan ahead for your next purchase.
Until the next article, take care.
