There is 2 common mortgage life insurance available in Malaysia which is Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA). These both insurances are basically help the applicants to settle the outstanding mortgage loan in the event of death or total permanent disability (TPD). In the same time, it can protect your loved one from being burdened by home loan repayments if you no longer able to pay for it. In simple word, it is insurance for your mortgage.
There are a few differences between MRTA and MLTA.
MRTA is a product of most of the bank in Malaysia. It is a more convenient option as it is packaged as an option along with your home loan when you applying loan with the bank. On the other hand, MLTA is similar with the traditional life insurance policies and must be taken up separately with third party insurer. Its premiums are higher than MRTAs, and you can opt to paid by monthly, quarterly or yearly basis. (Click here to read more about The Differences Between MRTA And MLTA)
Besides that, there are a number of misconceptions surrounding these 2 types of insurances. In today, we will solved all of these misconceptions to you and let you understand more about the real intention of MRTA and MLTA. Let’s get started!
Misconception #①: MLTA offers guaranteed cash value
The real conception that MLTA offers free protection is derived from the MLTA loyal customers that offers a guaranteed cash value back at the end of the tenure. But do note that the guaranteed portion will differ from policy to policy and insurer to insurer.
Additionally, before you decide to buy a MLTA, do think over and over again as its cost roughly 10x higher than a MRTA. Also look at the factors like inflation, which could eat into your cash value over the long term. To prevent this issues, some of the MLTA plans incorporate an investment portion to it.
In the meantime, with MRTA, the cash value typically drop to zero at the end of the loan tenure. But, if you pay-off the mortgage loan early, it can be surrendered for cash value.
Misconception #②: MLTA is term assurance
Not ALL MLTA is term assurance. But there is MOST MLTA is term assurance if the MLTA come with the investment-linked insurance plans or whole life plans.
Whether is is term assurance, it still fulfills the main purpose of covering your mortgage loan if something bad does happen to you and caused your unable to settle the mortgage in full. But if you pay a higher premium for it, the longer protection period you have.
It is advisable to consider whether you can afford which type of insurance according to your financial status as well as which protection plans that you most prefer. For example, if you plan to pay-off your mortgage loan within a few years, says 3 years, then you may not put either one to your priority list. While, if your loan tenure is up to 30 or 35 years, then you should consider to buy a mortgage life insurance for protection.
Misconception #③: MRTA is compulsory
Although the bank officers try to convince you over and over again and even tend to offer a better loan package if you buy a MRTA with them, well we telling you the truth that MRTA is not compulsory.
In facts, at the end of the day, a MRTA is simply bough as a coverage so that if there is anything unforeseen bad happens on you, you and your loved ones will not be burdened with mortgage repayments and the house if still yours.
Misconception #④: MRTA is non-transferable
Can a MRTA be transferred? Believe most of the homebuyers have asked the same question with the bank officers. Well, the answer is actually YES. You can transfer your MRTA to the next property that you purchase. But this can be kinda tricky.
Here we explain to you more clearly.
For instance, you buy a MRTA for Property ABC worth RM 500k. You pay a one-time premium at RM 11,500 for the MRTA. 5 years later, your coverage reduces to RM 400k, it is because a MRTA coverage reduces over ttime, hene the term “reducing term”.
Afterwards, you plan to move into other property called Property XYZ and it valued at RM 350k. If you choose to sell Property ABC, you have the option of transferring your existing MRTA to Property XYZ, since the remaining MRTA coverage is about RM 400k, and it sufficient to cover Property XYZ
However, if you plan to move into a higher valued Property DEF worth RM 600k and your existing MRTA coverage is not sufficient to cover for the risks. At such case, you have the option of topping up for the remaining RM 200k coverage (unless you like to live dangerously).
At such cases, it might make more financial sense to buy a new policy rather than topping up an existing one. The process of transferring MRTA from one bank to another is very complicated. Terms and conditions also differ from bank to bank. Do check with your local bank officers to figure out which option is best for your current situation.
Misconception #⑤: MRTA is not affected by the changes of Base Rate (BR)
This is true if your MRTA covers the full home loan amount and full loan tenure.
When home loans were still based on the Base Lending Rate (BLR), MRTA was not affected as historically the BLR did not changing much. But, the new base rate (BR) was designed to allow individual banks to regulate their rates, hence more changes are expected.
Usually, changes in base rate (BR) will only affect your MRTA if its coverage is below your loan amount. If you purchase a property that can coverage for the full loan amount, your MRTA is not likely to be affected as the interest rate used to calculate MRTA is usually higher than your home loan interest rate.
But, if you are a property investor, you’re already sufficiently protected by life insurance, you will most likely opt for a shorter or lower coverage amount for MRTA, if you decide to buy any. In such case, your MRTA will most likely be affected by changes in the base rate.
Misconception #⑥: MRTA and MLTA coverage are insufficient
In fact, the basic MRTA and MLTA plans do not cover critical illness. However, most of the MLTA do come with the option of including a medical rider for critical illnesses. MRTA does not.
In a gist, MRTA will be more suitable for those homebuyers who already have sufficient medical insurance, and do not have many (or any) financial dependents. This type of insurance will protect merely of your home loan if it is not fully repaid in the event of death or TPD. Additionally, in an MRTA plan, the beneficiary will be the bank itself and not your family members. Hence, your family will not get any single cent should the worst situation happen, but they will receive the property.
On the other hand, if you have more than one financial dependents and require extra protection, then you should consider to take MLTA, as it also has a cash value at the end of the policy.
So, should you get a MRTA or MLTA to protect your mortgage loan and your property? Well, this is depends on a number of factors that including your financial status, number of financial dependents, and overall insurance protection.
Whatever you choose, at least you have get some form of coverage to safeguard your mortgage loan and your property as you never know when you might just need it.