As a property investor you might have came across both mortgage reducing term assurance (MRTA) and its brother mortgage level term assurance (MLTA). Both have its pros and cons. Depending on who you ask you will get a certain preference for one or the latter. In fact if you really want a summary of the comparisons just do a quick Google search, you’ll find many tables like these:-
I wanted to know more about the truth behind such tables so I went on to check with major bank officers and insurers.
The first thing I noticed is that bankers will promote MRTA and life insurers will advocate MLTA. No prize for guessing who gets the commission for which product. Contrasting the information I got from both parties here is what I found:-
Fallacy #1:- MRTA is compulsory! It is not, Bank Negara does not state this. However a form of protection is strongly encouraged for financial planning. Most banks will also give a better loan package if an MRTA is purchased from them. If a person is adequately insured he can use his personal life insurance in place of an MRTA or MLTA subject to review and agreement from the bank.
Fallacy #2:- All MLTA is term assurance. There are cases where customers have been sold whole life plans or investment link insurance plans as a level term assurance. Protection wise it still fulfills the purpose of covering for the loan in the event of death and disability but premium wise it’s higher. It’s best to understand the protection duration we need and plan accordingly.
Fallacy #3:- The coverage is insufficient. Basic MRTA and MLTA do not cover critical illness. Most MLTA have the option of including a medical rider for dreaded diseases, MRTA do not. Purchasing a home could be a 30 year commitment. A medical rider should be seriously considered. Statistically most people go through a critical disease at one point in their life. A counter argument to this is that if a person is struck with a dread disease he would eventually lose ability to do meaningful work and be classified as totally and permanently disabled – making him eligible for claim. Such cases are subject to debate and best avoided with critical illness protection.
Fallacy #4:- About the cash value. MLTA proponents’ promises guaranteed cash value back at the end of the tenure and hence free protection. This is partially true depending on the policy type of the MLTA. MLTA policies with guaranteed cash back are generally more expansive and might have an investment portion to it. Again the guaranteed portion will differ from policy to policy. On the other hand it’s also true that at the end of the tenure the cash value for MRTA is burned. However if the housing loan is settled early the MRTA can be surrendered for cash value.
Fallacy #5:- Can MRTA be transferred? The quick short answer is NO! One of the main disadvantages of MRTA often highlighted is that an MRTA is tied to the property, and a new one must be purchased each time a new property is purchased. This makes MLTA a more compelling choice for investors. Fact is this is only partially true, some banks offer the option to transfer the balance sum assured for MRTA to another property. In some situations however it might just be more beneficial to purchase a new policy rather than doing a top up. Transferring MRTA from banks to banks is also complicated. Check with your local bankers for more information that best meets your situation.
Fallacy #6:- MRTA is easily impacted by BLR fluctuation. Partially true especially if the sum insured and the duration is a small fraction of the loan amount and tenure. If the full amount and tenure is bought it is fairly robust. This is because the interest rate used to calculate the MRTA is usually higher than the BLR. Most banks use approximately 7% vs BLR 6.6% (effective being around 4.4% assuming the banks give -2.2%). Furthermore the BLR only impacts the outstanding amount. If the applicant is unable to serve the loan the he is given approx 3-4 months before the house is auction off. If a claim is made on the MRTA within that time frame it should be able to cover for the difference due to BLR increase (unless it’s a very very drastic change).
Which 1 to buy then? Well the decision is once again in your hands. The purpose of this article was to provide additional information for contemplation. Cliché answer would be if the budget is within range get an MLTA else get an MRTA. Either way its best to get 1 or the other as a safeguard !
Article contributed by a good friend, Jerry Low. For more information, feel free to mail him at: firstname.lastname@example.org
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