What if something fatal happens to you before you finish paying off that 30-year home loan? What will happen to your property? What will happen to your family? Every day, there are a lot of people buying properties out there, but are those new property owners aware of the importance of mortgage assurance?
Mortgage assurance plays its role in the event of a mortgage owner’s death or Total and Permanent Disablement (TPD), a fail-safe plan to protect the loved ones so that they are not saddled with the heavy debt of a mortgage to the point of defaulting on the loan and losing their home. However, mortgage assurance policies can be very precarious. They can be complex and jargon-filled, leaving homebuyers wondering whether it’s worth taking out the insurance at all.
There are two mortgage assurances in Malaysia: Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA).
MRTA
Mortgage Reducing Term Assurance is usually very popular among property owners due to the lower premium, making it more affordable. It is an insurance policy that frees the borrower’s dependents from any debt as it is designed to pay off the remaining debt on repayment mortgages upon the property owner’s death or TPD.
MRTA uses the one-off premium system, rather than a recurring premium that is paid monthly, quarterly or annually to the insurer. The “reducing term” of MRTA sometimes cause confusion among property owners, however it basically means that the coverage gradually reduces in accordance with the outstanding balance of one’s mortgage until it reaches nil at the end of the mortgage loan.
MLTA
In contrast, MLTA offers more than just repayment of your outstanding mortgage balance. MLTA will ensure that your loved ones also receive some cash payout in the event of death or TPD. It is often seen as an alternative to life insurance as it offers both protection as well as cash benefit.
Hence, MLTA is more expensive than MRTA. However, the premium doesn’t need to be paid up front and one-off like MRTA—it can be spread over the lifetime of the mortgage.
The key difference is MRTA’s sum assured reduces over time while MLTA’s sum assured remains constant throughout the term of the policy.
Why MRTA and MLTA are important?
These mortgage assurances are essentially a protection mechanism for everyone with a mortgage, especially for a household with a sole breadwinner. If you are a sole income-earner in the family, you surely do not want to see them struggling to survive or pay off the outstanding loan in the event of your untimely death or permanent disability.
Why people are neglecting the mortgage assurance?
1. Might as well buy life insurance of the same value
The high premium payment will make property owners think twice whether to get mortgage assurance or life insurance since life insurance also pay out cash upon the occurrence of death or disability. The argument is that property owners can instead buy term life insurance for the amount of the mortgage insurance offered by the bank. If you change lenders or sell and buy a new home, you’ll have to apply for a new mortgage insurance policy; term life insurance, however, stays with you. Either way, your mortgage is paid off if you pass away.
2. Bank is the beneficiary
With mortgage assurance, the beneficiary is the bank. With personal life insurance, however, you get to name your beneficiary. The beneficiary will have the flexibility and freedom to spend the money that they may even not want to pay off the mortgage, which could mean better financial security for your loved ones whether for your property or for personal spending. The fact that mortgage assurance is not compulsory makes no obligation to property owners to purchase themselves one.
3. Keeping the property for a while to sell it away in the near future
Property owners who are planning to move to another property after some time may not consider getting mortgage assurance simply because it is not worth the long tenure since they are going to leave the property anyway.
4. Declining benefits
The value of the bank's mortgage assurance benefit declines as you pay down your mortgage. Traditional term policies, on the other hand, keep their value and usually do so with lower premiums. With bank insurance, the amount of coverage and subsequent payout if you die decreases with your mortgage balance. But the amount of term life insurance stays the same throughout its term.
Buy mortgage assurance or not?
Mortgage assurance is for the peace of mind of your family. So, rest assured that if something happens to you, the mortgage is paid and your family won’t be out on the street. Buying a new home can be a daunting experience but please don’t gamble with your family’s life.
What do you think of mortgage assurance? Share your thoughts with us.
(By: Elmia Kayok)
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MRTA and MLTA: Don’t Let Your Need to Protect Your Home Be Used Against You
