Soft breeze brushed against Caleb’s cheek as he stood in front of his own home, dumbfounded. He is still in disbelief that such misfortune could happen onto him. His beautifully renovated house that was purchased 5 years back is about to be taken back by the bank. He has no other way to pay for the installment when he lost his income stream due to cancer. With all the undergoing chemotherapy treatments, Caleb has no choice but to quit his job and properly rest. His wife, Cindy is only earning very little and is unable to help with the home loan installment.
At this point of time, many of us thought we could rely on the MRTA insurance that is mostly made “compulsory” by the banks upon applying our home loan. However, little did you know that MRTA can only safeguard your asset upon death or total permanent disability (If you included this benefit). It will not be of any use in the case of Caleb where he lost his source of income due to illness. Hence, in this article, we will explore all the life insurance options available in protecting and safeguarding your asset.
As we talked about “5 Types of Life Insurance in Malaysia” in our previous article, all the home insurance you hear in the market – MRTA, MLTA, MITA, MRTT, MLTT & etc are actually just marketing gimmicks. Basically, it still falls down to few of the 5 types of life insurance that is available to cater to your financial needs.
What are the types of mortgage life insurance?
In Malaysia there are currently 3 different types of plan that you may consider in protecting your asset, your family or both.
Mortgage Reducing Term Assurance (MRTA) is a Term plan which the coverage is limited to a certain term and it decreases over time. If you have a 35 years MRTA plan, you will see that your coverage will be 0 at the end of the 35 years term. Most of us usually commit into it, given the little knowledge and it seems affordable when we only need to pay a little bit extra in our house installment every month.
Mortgage Level Term Assurance (MLTA) is usually an Investment Linked plan and also currently one of the most popular plan in the market for its flexibility and affordability. As the name explains, the coverage is level whereby it remains the same for the whole coverage term. MLTA offers you the option to be insured for 30 years or 99/100 years, depending on the insurance company of your choice.
Mortgage Increasing Term Assurance (MITA) is a Whole Life plan which the coverage increases over time up to a term of 85 years old and above. The plan has a balanced portion of savings and coverage, offering you a stable return of 3% to 5%
Here are the major differences between MRTA, MLTA and MITA:
Should I buy from the bank or an insurance advisor?
If you are buying from the bank, the beneficiary of the life insurance is the bank. Therefore, the policy money will be paid out to the bank to settle off your outstanding loan. However, if you have other liabilities such as outstanding tax payments, credit card debts, car loans or personal loans, your property will be frozen and utilized to pay all the outstanding debts. Your family is the LAST party to receive your assets provided if your asset value is greater than liability. Otherwise your estate will be declared bankrupt.
On the other hand, if you are buying from an insurance advisor, your beneficiary will be your family and all insurance proceeds will be paid out straight to them protected by trust under Financial Services Act 2013. Under this act, all the policy money are creditor proof provided if your nomination is done correctly and is a trust policy. This means that although your property will still be frozen and subject to the same estate execution, your family already has got the insurance money in which the banks and creditors have no legal rights to touch the money at all. Click here to read more on how to ensure your nomination is creditor proof and protected by statutory trust.
In a nutshell, if your asset is less than your liability, your family gets the insurance money. If your asset is more than your liability, your family gets both the asset and insurance money. Therefore, we will definitely advise to always get a mortgage life insurance from an insurance advisor. Click here to read on the article “Secrets to Getting Lower Home Loan Rates” without any “compulsory” MRTA or FD requirements.
Do I need a mortgage life insurance for my investment property?
YES! You definitely should also still get one to protect and safeguard your investment property. However, many of you will question what is the point if you or your family can sell off the property at any point of time of any misfortune?
Sure you can sell it off but how long will it take to look for a buyer? Once you found a buyer, the process of changing the property ownership will take a much longer time than you expected. Therefore, during this period of time, you or your family member will still need to service the home installment or the bank will have the right to take back your property.
It is definitely wise to get a substantial amount of coverage as a “buffer” while selling off the property. You can definitely opt not to cover your full mortgage amount as it is not needed. Just a quarter or half of your mortgage amount will do.
Which one to choose?
The premium that you need to pay MRTA, MLTA and MITA is subject to your age, loan amount and your loan tenure. The older you are and the higher the loan amount, the higher the premium you will have to pay. Similar to purchasing health insurance, if a person is already diagnosed with an illness, the insurance company has the right to reject the application, impose extra loading in the premium or have exclusions on the specific existing illness.
Which of the MRTA, MLTA and MITA is more worth getting? Let’s do the math and you decide for yourself!
* Figures are used based on reference as interest rates will differ across the banks while the premium will differ across the insurance companies.
Do note that if you buy MRTA from the bank, your policy is non-transferable. If you plan to have more than 1 property in the future, you will have to buy a new policy every time you purchase a new property in the future.
What is your choice? If you are indecisive or in budget-constraint, you can always do a hybrid of 2 plans. For example, you can split 250,000 coverage with MLTA and the remaining 250,000 coverage with MITA. Do remember to consult a professional insurance advisor prior to your decision. Do read more on our article “5 Types of Life Insurance in Malaysia“ to understand and differentiate plans in more details.
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