Mortgage Insurance – MRTA at the surface
You decided that you want to have your own house, your own rules – and because like the majority of people you aren’t born with silver spoons, you realise you have to pay with your own money. You apply for a loan and because you are uninsured, or underinsured, the banker suggests you to adopt an insurance plan to protect their interests. The banker told you that you need only pay once, and you will be protected throughout the entire period. One-time payment of RM9000 for a RM300,000 sum assured, compared to a traditional life insurance policy of yearly payment RM7000 for the same amount. ‘Who on earth wouldn’t take this offer?’, you thought.
1.0 So what is MRTA?
Mortgage insurance is an insurance policy assigned to protect your mortgage if you lose your ability to generate income due to Death and Disability (sometimes even Diseases). MRTAs are one such insurance, and it stands for Mortgage Reducing Term Assurance. This insurance policy allows you to pay a one-time premium and will assure your mortgage throughout your loan tenure. Such policies are often offered by banks to ensure they receive the loan settlement regardless of whatever is happening to the debtor. If you die before your mortgage is fully paid off, the bank would receive your house and your family members would not have been burdened by the mortgage repayments. A Mortgage Level Term Assurance (MLTA), on the other hand, is an insurance policy that has either fixed or increasing sum assured. The common life insurance policies which you normally adopt from insurance agents can be used to be assigned as your MLTA. We’ll talk more about MLTA some other time.
2.0 MRTA – A deeper look
The key word in Mortgage Reducing Sum Assured is the ‘Reducing’. As your loan term reduces, so does your protection. What is a RM300,000 sum assured in the beginning decreases eventually to zero at the end of the payment term. Why? Because for such policies, only the bank truly benefits. You are not allowed to nominate your family as your beneficiaries. Of course, the one-time payment seems to be worthwhile, not if you consider the compounding interests on it – as MRTA’s premium payments are often financed into your loan. What that means is, instead of choosing to pay the upfront RM9000 premium mentioned earlier, you can choose to pay it over the period of your mortgage. Assuming a typical loan interest rate of 4.7% per annum, and a typical loan term of 30 years, you end up paying ~RM36,000 for an insurance policy that yields you nothing in the end. Of course, you can choose to pay the premium in one lump sum. In that case, why not use the money to reduce your mortgage sum instead? In other words, if you have a spare RM9000 lying around, it could be more beneficial to reduce your mortgage from RM300000 to RM 291000.
3.0 An alternative
The emergence of investment-linked insurance policies has definitely offered much flexibility in financial planning. For the same sum assured of RM300,000, it is possible to pay a yearly premium 3 times lower than the one-time payment of MRTA’s. Not only you spend an extra RM6000 in the first year reducing your biggest liability to avoid the dreaded compounding effect, you spend RM3000 per year into an asset that may accumulate over time. The sum assured of RM300,000 not only remains, but increases over time, often at 1% per year. Towards the middle or later period of your loan payments, the cash value can then be partially withdrawn to shorten your loan tenure. It is also worth noting that should something happen to you, the money paid out goes to whichever family member you nominate first. And unlike MRTAs, your personal insurance policy is transferable as a new mortgage insurance should you choose to purchase another property in the future. If you have existing life insurance policy, remember that you can cite it as your mortgage insurance. Remember that MRTA is not compulsory.
4.0 Why MRTA may cause you to lose your home?
This is particularly worth noting for those who are underinsured or uninsured. If you have an MRTA, after a person dies, his estate and assets will now be frozen under the estate law to pay off debts and liabilities. This includes income taxes, other debts and loans, accounting and legal expenses etc. and his family will be the last in line to receive your asset. So what happens if his liability is bigger than his asset? In severe cases, the house will be declared insolvent in order to meet outstanding debts, and his loved ones are either forced to move out. Otherwise, maybe selling a car or two or forging out some life savings will do the job. Anyhow, it’s not a condition that I want to be in.
5.0 Then when should I choose MRTA?
Of course, there can also be situations where MRTA is more suitable. MRTA’s can be taken up only if your sole interest is to insure your property, you do not have outstanding liabilities and you are well-insured. Generally, to be well-insured is to be able to protect yourself against all major financial catastrophes, especially medical costs, and to protect your dependents long enough for them to live comfortably if you left too soon. However, considering how on average each Malaysian holds only half an insurance policy – we have a long way to go in becoming a well-insured community. Perhaps, choosing the right insurance to protect your mortgage and you are a right place to start.
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What is mortgage insurance and how does it work? (no date) Available at: http://www.consumerfinance.gov/askcfpb/1953/what-is-mortgage-insurance-and-how-does-it-work.html KCLau (2006) Why you may lose your house if you simply opt for bank MRTA? — KCLau.Com. Available at: https://kclau.com/insurance/mlta-vs-mrta/ Lee, I. (2015) MRTA vs MLTA: Which do you need? Available at: https://www.imoney.my/articles/mrta-vs-mlta-need Life insurance industry records RM1.17 trillion coverage – business news | the Star Online (2015) Available at: http://www.thestar.com.my/business/business-news/2015/02/13/life-insurance-industry-records-trillion-ringgit-coverage/ Prepared by Will Tan
What is mortgage insurance and how does it work? (no date) Available at: http://www.consumerfinance.gov/askcfpb/1953/what-is-mortgage-insurance-and-how-does-it-work.html
KCLau (2006) Why you may lose your house if you simply opt for bank MRTA? — KCLau.Com. Available at: https://kclau.com/insurance/mlta-vs-mrta/
Lee, I. (2015) MRTA vs MLTA: Which do you need? Available at: https://www.imoney.my/articles/mrta-vs-mlta-need
Life insurance industry records RM1.17 trillion coverage – business news | the Star Online (2015) Available at: http://www.thestar.com.my/business/business-news/2015/02/13/life-insurance-industry-records-trillion-ringgit-coverage/
Prepared by Will Tan