Buying a home is a huge commitment and will take the average homeowner up to 35 years to fully repay. Hence, you should be protecting this investment even when you are no longer around to finish paying for it due to unforeseen circumstances.
Providing a home for your family or dependents is a good thing, but if the home loan is not settled in full, it can turn into a burden for your loved ones in the event of death or total permanent disability (TPD) if you don’t have mortgage insurance.
A mortgage insurance policy frees the borrower’s dependents from any debt as it is designed to pay off the remaining debt on repayment mortgages in the event of death or TPD.
In practice, customers who borrow money from financial institutions in Malaysia will find that their loan approvals are tied to their signing up for a mortgage insurance policy.
Just like any other life insurance policy, you need to pay a set amount of premium for a mortgage life insurance policy. If you pass away while the policy is in effect, the insurance company pays off your mortgage. Your spouse or beneficiaries can then live in the house debt-free without having to worry about making any mortgage payments.
Which mortgage life insurance do I need?
In Malaysia, there are two types of mortgage life insurance available – Mortgage Reducing Term Assurance (MRTA) or Mortgage Decreasing Term Assurance (MDTA) and Mortgage Level Term Assurance (MLTA).
However, MRTA and MLTA are often misunderstood. Which do you need as a homeowner?
MRTA is a life insurance plan with decreasing sum assured over time, and it used just to cover your home loan owed to bank. This plan is usually offered by the bank you are getting the mortgage from, as it is used as protection for the bank in case of misfortunes that stop you from servicing the loan.
On the other hand, MLTA is a slight variation from MRTA and offers an alternative for a borrower who is looking for a life insurance which offers protection plus savings and in some policies returns on the premium. This is a personal plan that you purchase separately through an insurance broker or agency, where you and your dependents are financially protected when you are no longer around, or have lost the ability to generate income.
Here are the major differences between MRTA and MLTA:
| MRTA | MLTA | |
| Purpose | Protection | Protection, saving & cash value |
| Protection | Sum insured reduces according to loan tenure. | Sum insured remains the same on a fixed level sum assured basis. |
| Transferable | No | Yes |
| Nomination | Beneficiary is bank. | Beneficiary can be anyone. |
| Financing | Usually financed into home loan. | Usually self-financed. |
| Payment | Lump sum | Periodic (monthly, quarterly, semi-annually or annually) |
| Premium | Low | High |
| Cash value | None. It has a reducing cash value, which drops to RM0 at the end of the loan tenure. | Yes. It has a fixed cash value (guaranteed) throughout the loan tenure. |
| Claim | Insurance company will pay the loan balance to the bank & the beneficiary will receive the home. | Insurance company will pay the loan balance to the bank & beneficiary will receive the home plus cash. |
The MRTA is most suitable for those who have adequate standalone life and medical insurance, and do not have many financial dependents. This type of insurance will only take care of your home loan, if it is not fully repaid in the event of TPD or death. The sole beneficiary of the policy is the bank, not your family members. However, your family get to inherit the property without having any bank loan attached.
MLTA is best for those who need an extra financial protection in the worst case scenario, as it also has a cash value at the end of the policy. This is best for those who have many financial dependents, for example young children and a stay-at-home spouse.
However, MLTA is a normal life insurance policy that is not part of your housing loan and customers must ensure they understand the terms and conditions fully otherwise they may find themselves in a tight spot if the insurance company does not approve the claim and the bank loan remains unpaid while the dependents are left without any cash payout either.
Is it worth having?
Most mortgage officers recommend mortgage life insurance (either MRTA or MLTA) when buying a new home. However, before committing to an insurance policy, it helps to do as much research as you can on the product.
Mortgage life insurance is aimed at providing security to your loved ones from being burdened by home loan repayments if you pass away or are afflicted by permanent disability. However, if you do not have anyone to leave your property to and money is tight, getting a mortgage life insurance may not be your highest priority. For those with dependents however, it’s worth considering.
What do you stand to lose if you do not have a MRTA or MLTA? If you are planning to pay off your mortgage within a few years, then an MRTA or MLTA may not be on the top of your list. However, if you are planning to service it for the next 30 to 35 years, and especially if you are co-buying with someone else, it will be best if you are protected.
For example, if you are purchasing a property with your spouse, and each will be paying 50% of the repayment every month, a death or permanent loss of income may be a huge blow on the couple’s finances. Having a mortgage life insurance will provide you the peace of mind that you will not lose your property even if the other person is unable to pay for the mortgage.
How much do I need to pay?
How much premium you need to pay for your MRTA or MLTA 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.
Just like purchasing life or health insurance, if a person is diagnosed with a certain illness, the insurance company has the right to reject the policy or there will be extra loading in the premium. It depends on how severe the illness is and will only be determined after a medical examination by their panel doctors.
Here’s how much you need to pay in premiums for MRTA compared to MLTA based on insurance cover for a mortgage loan amount of RM540,000 at 4% interest over 30 years for a 25-year-old homeowner.
| Age | ||
| Time period | ||
| Financing/coverage | ||
| Sample interest rate* | ||
| Premium | RM1,302.65 (half yearly) RM657.70 (quarterly) RM223.50 (monthly) |
|
| Total premium paid (30 years, not incl. interest) | ||
| Cashback (upon completion of loan tenure) |
Source: e-Lelong
* These figures are used as reference only as the interest rate will differ from different providers; refer to your original policy for the actual terms.
With skyrocketing property prices, most homebuyers today have no choice but to pick the longest loan tenure possible to reduce their monthly loan repayments so they will likely be paying for their property for over 3 decades.
Understanding what you are purchasing is crucial in managing your money. If you are unable to pay the premium of MRTA, you can opt to finance the premium into the loan and thus the loan instalment will increase. You will also be paying extra interest as the bank is advancing the money to you to pay the premium.
