1) Mortgage Reducing Term Assurance (MRTA)
The MRTA is the most popular choice, mainly due to its affordability and ease of signing up. It’s usually offered as an additional option when you’re applying for a home loan at a bank. It’s basically: a type of life insurance that’ll pay off your outstanding home loan in the event of your death or total permanent disability (TPD).
However, bear in mind that your insured amount will gradually reduce (just like your outstanding loan amount), until it reaches zero by the time your home loan tenure ends. You'll have the option to select the coverage amount and tenure of your policy, while the premium charged will depend on factors such as your age and gender. Remember, the premium is to be paid upfront as a lump sum!
There are, of course, some cons in taking up this type of insurance:
- In the event of your death/TPD, the money will go directly to the bank to settle the home loan’s outstanding amount, which means that your family will have no control over the insurance. Since your family won’t be getting any cash value from the policy, they won’t be completely protected from any sudden financial burden. Even when the home loan is fully settled, your property can still remain frozen under the bank’s control until all of your income tax, legal, and accounting expenses are paid.
- Opting for a lower insured amount than the home loan’s amount will affect your MRTA if there are fluctuations in the interest rate. The interest rate here refers to the BR, or Base Rate. You see, the home loans used to be based on the good ol' BLR (Base Lending Rate), which historically, did not fluctuate much. However, this new-ish BR was created in order to allow individual banks the freedom to adjust their rates when they see fit, thus more fluctuations.
- The interest rate used to calculate the MRTA should be HIGHER than your home loan’s interest rate. This is because the increase in bank interest rates over the years has made the actual outstanding loan higher than the projected amount. So if you die or suffer from TPD, your family members might suddenly find that they STILL have to pay the balance of the home loan because the MRTA policy doesn’t cover it fully. Double ouch!
But, is this MRTA policy the right choice for you? If you answered yes to either one of the below, then by all means, go ahead!
What to bear in mind: You can choose to put the premium amount into your mortgage value; most banks will usually offer a lower interest rate on your home loan if you do. You get protected AND a lower interest rate, sounds like a win-win situation indeed!
- Do you plan to keep the property for a long period of time and have no financial dependents?
- Are you having budget constraints and you already have your own life/medical insurance?
2) Mortgage Level Term Assurance (MLTA)
Now, this type of insurance is more similar to the traditional life insurance policies that you’re familiar with. It not only offers repayment of your outstanding home loan, it also guarantees a cash value given to your family members at the end of the scheme!
The best factor about MLTA is that you can choose to have a savings feature added to your policy, which allows you to allocate a portion of the premium paid into a cash surrender value. ALSO! The sum assured in this type of insurance policy remains constant throughout the tenure of the policy (unlike the MRTA which reduces in time).
So in the event of your death/TPD, the insurance company will pay the bank for whatever the outstanding amount is, after which your family members will receive the remaining amount.
It wouldn’t be fair to not bring up the cons of this scheme as well, so here they are!
- The extra benefits tied to the MLTA will obviously come at the price of a much higher premium, which has to be paid throughout the tenure of the home loan (whether on a monthly, quarterly, half-yearly or yearly basis).
- You can opt to sign up for a MLTA at a later date (not necessarily at the same time as the purchase of your property). But, if you choose to do so, you’ll be paying more in the long run since the premium payments are repetitive. The policyholder’s age plays a role in MLTA, much like traditional life insurance, so the higher the age, the higher the premium.
If you want to know if the MLTA path is the right one for you, check to see if you’ve answered yes to either one of the below!
What to bear in mind: The MLTA is valued because of its flexibility. You see, you can co-own the insurance if you’ve jointly purchased your property with someone else, in which case the scheme will only cover 50% of your home loan. It’s also very easy to transfer the policy from one property to another, and you can even opt to surrender this mortgage insurance’s policy at any time, with a guaranteed surrendered value mentioned in your policy paper.
- Are you the sole breadwinner of your family, and you have several financial dependents?
- Do you intend to keep the property for a short period of time or for investment purposes only?
3) Term Life insurance
We now come to the third option that not many are aware of! If you’d like a fusion of both the earlier two but with a MUCH LOWER premium, then the Term Life insurance is your answer. It offers your family members a lump sum payment in the event of a death or TPD (similar to the MLTA).
However, the premium structure is closer to the MRTA’s but with more flexibility: you and your loved ones will be protected as long as you pay the premium and it can be terminated at any point of time. You can also choose to extend your coverage by adding critical illness into the plan, all you’d have to do is just pay a higher premium.
The best part of this type? It can last up to 30 years, it comes with a fixed premium rate AND its value will never decrease over time! Think of it as a power-packed two-for-one combo: mortgage AND family protection.
There are two ways for you to sign up for this Term Life insurance plan. The cheaper option would be in the event of a death/TPD, the lump sum money received by your family will be invested to get returns in the form of regular interest income which can then be used to pay the monthly instalments.
The other option (which will obviously cost more) is if you would like for your family to still have some extra cash after settling the outstanding loan. This is where you have to make sure that your Term Life insurance coverage is EQUAL TO your total living expenditures up until your estimated retirement age. With that, your family will be financially secure for a few years, even after paying off the home loan.
So which plan should you ultimately be going for?It really would depend on your current financial situation and what you’d like to do with that property. Of course, if you’re on the lookout for something affordable and flexible along with a transparent (i.e. you know how much you’re signing up for!) premium and coverage value, then the Term Life insurance is the right one for you.
Check out the simple video below that briefly explains the difference between the conventional Mortgage Insurance and the Term Life insurance: If you're on the lookout for the right home loan but don't know whether you can actually afford one, why not check out this handy tool that'll help you calculate your eligibility in under 15 minutes!
This article was repurposed from "Which mortgage life insurance to pick – MRTA or MLTA?", first published on iProperty.com.my