Below are two types of mortgage insurance offered in Malaysia to pay for the outstanding housing loan in the event of death or total permanent disability (TPD) of the borrower:
- Mortgage Reducing Term Assurance (MRTA): It is a term insurance policy with a decreasing sum assured that corresponds with the outstanding amount during the tenure of the loan agreement.
- Mortgage Level Term Assurance (MLTA): It is also a term insurance policy but unlike MRTA, it has a constant sum assured over time during the entire period of the insurance. In addition, the pay-outs are not limited to settlement of the outstanding home loan, but any balance upon settlement of the outstanding loan, can be distributed to nominee(s) named in the policy.
See below for their features:
Having a MRTA or MLTA is important especially for residential properties as it will not burden the family with a huge debt to be paid and potentially not having a roof over their heads. Whilst mortgage assurances may seem useful, many are unaware of their disadvantages:
Disadvantages of MRTA
- Insufficient Sum Assured. MRTA is dependent on the loan amount and interest rates at the time of purchase, there would be a risk that the MRTA’s value declines at a faster rate than the remaining loan value. In addition, should interest rates for the loan repayment goes up, the sum assured may be insufficient to pay for the remaining loan balance.
- Sole Beneficiary is the Bank. The pay-outs go directly to the bank as this policy is designed to be used as protection for the bank in case of misfortunes. Client’s family will have no control over the sum assured and have no benefits whatsoever over it.
- Solely for housing loan payment purposes. This type of insurance will only take care of the housing loan, no other purposes. Moreover, it does not cover events other than TPD and death. If borrower suffers critically ill for instance, then the burden to repay the loan (and other expenses like medical bills etc) will fall on his/her family.
- The sum assured declines each year and will reach zero at the end of the loan tenure Moreover, if there are no untoward incidents that happen and borrower pays off the loan within the loan tenure, he/she will get nothing from the MRTA policy. How About MLTA?
Disadvantages of MLTA
- Extra facilities come with a higher premium similarly to life insurance, age plays a role in the MLTA cost. Client will have to bear a higher premium if the age is older. He may not even able to subscribe for this plan if ailments are discovered during the medical check out.
- Not all MLTAs provide the option of including an extra medical rider Even if they do, what if the unforeseen circumstance falls outside the medical conditions?
- No control over the remaining sum assured Just like a normal insurance policy, the remaining sum assured will be paid to the beneficiary in the form of a cash pay-out in one lump sum. Client will not be able to ensure that the remaining sum assured will be used for the right purpose. Without any control mechanism, it is up to them how they spend off the money. Your client has no control over it!
How Insurance Trust Helps? Undoubtedly, both MRTA and MLTA come with their own protection and are extremely useful in settling the outstanding loan. To cover for the disadvantages, Insurance Trust helps settlement of any outstanding loan not paid for by MRTA or MLTA.
In addition, it can also be used for:
- Settlement of any debts such as outstanding income taxes, hire purchase, credit cards and personal loan
- Maintaining the lifestyle of the family
- Paying for any medical expenses of the family
- Paying for the education costs of the children
- Paying the costs of applying for probate, legal fees etc
Benefits of Insurance Trust
- Freedom to appoint any Beneficiary. Client can be the only beneficiary during lifetime and enjoy the benefits of the insurance policy. He can also appoint substitute beneficiaries in the event of his demise!
- Retaining control over the sum assured. Client will have peace of mind! Any outstanding housing loan will be paid as instructed and the remaining can be used on his family for the right purposes! Just like a Will, he can make any change as well!
- Ensuring sufficient funding. Client has the flexibility to assign multiple policies to the Insurance Trust. Whenever there are changes in his financial position, he can also add on additional policies to ensure that the funding is sufficient to fulfill all his needs and objectives!
CONCLUSION Having a mortgage insurance is extremely important as it frees Client’s family from being burdened by housing loan repayments in the event of his death or TPD. It comes with its own protection but does not overcome the disadvantages. To complement such cover, by having an Insurance Trust coupled with either MRTA or MLTA, it will give Client and his/her family complete protection and peace of mind!