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: wenghigh@gmail.com
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0 Responses
can we cancel mlta halfway during the loan tenure?
If the MLTA you took from bank, then you need refer back with banker whether could cancel in half way. If you took from your insurance agent, it can be cancel in halfway.
I have client took MLTA with me. After few years, due to financial issue, he insufficient money paid the premium. He began with reduce the sum assured which mean reduce on protection coverage on the policy. After some time, he began on premium holidays which mean no payment to the policy but still have protection by using cash value to sustain the insurance charges. Finally, he decided to cancel the MLTA policy by take back some cash value. Last year when his financial back to stable, he took a new MLTA with me to cover again for that house.
Yup Crystal is right..
Just to add if you took the MLTA from an insurance agent, there should be some cash value when you cancel it so double check on that before taking any measures.
Generally its not advisable to cancel the policy halfway as there will be no safety net to cover for the loan.
Charles, you explanation very clear among MRTA and MLTA. Haha, almost is the all points i explain to my clients 😛
Another benefit of personal MLTA is flexible 🙂 It could increase and decrease the sum assured any time. In other word, premium amount could be adjust by increasing or decreasing.
Another advantage is, personal MLTA depend to the person and not the property. For example, MLTA coverage 500K for property A with loan 500K. After sell the property A, then buy property B 800K. Just increase another 300K on the personal MLTA policy. In other word, if after sell property A, then buy property in 300K, could reduce the coverage to 300k and at the same time, premium amount could be adjust lowest.
For those looking for capital gain back personal MLTA, which mean that total insurance payment paid, after certain year, want get back all capital, personal MLTA could make it. The different is need paid much premium. For example, person A spend yearly RM3,600 get 500k coverage MLTA which include critical illness, disability and death coverage. The return after certain years could get back about 70% on capital paid. While another person B spend yearly RM5,400 get exactly same benefits, the return after certain years could get back 100%++. ++ which mean earn some money.
You prefer MRTA or MLTA? 🙂
Crystal the article was written by my friend jerry.
🙂
i have a question from my friend, what If the loan of bank for a property is fully paid prior to full tenure of loan (30 years), is it recommend to withdraw the MRTA for balance refund OR continue to retain the MRTA account active?
Hi Ang,
Personally I feel this question will depend on a few factors ie does he plan to purchase any additional property, how many years of the term protection is left, the age of your friend etc.
But on a general note, I would say its safe to drop the MRTA if the property is fully paid for. This is because the main objective of the MRTA is to serve as a debt cancellation mechanism in the event of TPD or death. In this case there is no longer any debt to cancel.
Do drop me an email if you wish to study your friend’s situation in depth.
Hi Jerry,
Sorry for reiterating this, the tenure for the loan has 24 years left. let me share to you how banker had shared to me with this MRTA, i was told that by the banker the compensation is still resume even though the loan is fully paid off.
The compensation workflow is, insurance company will pay the compensation $ to bank, if bank verified no more outstanding balance, the $ will go to owner who bought this MRTA, is the process correct? besides, the MRTA is tied to property, what if i sell off the property, am i still eligible for it?
Please advise, thanks
Hi Jerry,
My sister in law and i had a conversation with bank, we were told to keep the existing MRTA as it can be used for compensation in the event of… even though the loan is fully paid off.
Morever, the amount to be refunded of the withdraw is very minimal based on the its calculation, therefore, the recommendation is to retain. please correct me if i am wrong,
Thank you.
I would like to add 1 point here….MLTA is transferable. It means when we buy new house after settle the old house loan, we able to bring the protection over to new house…imagine after 20 years, you can bring the protection over with SAME monthly installment…however, after 20 years, if you plan to buy new MRTA, it will cost really high as you grow older already….
Vic lee u hav a valid point as well
LIKE!!!
Having said that, the earlier one subscribe into MLTA, the cheaper the premium
Hi Jerry and all,
Thanks for your advice and comment. good day.
Hi
Sorry for reiterating this, the tenure for the loan has 24 years left. let me share to you how banker had shared to me with this MRTA, i was told that by a banker the coverage is still eligible even though the loan is fully paid off.
The compensation workflow is, insurance company will pay the compensation $ to bank, if bank verified no more outstanding balance, the $ will go to owner who bought this MRTA, is the process correct? besides, the MRTA is tied to property, what if i sell off the property, am i still eligible for it?
Please advise, thanks
Hi Crystal Teh, May I have you contact as I need advise on MLTA on my property. Thank you.