For many, purchasing a property is a dream come true and a crucial milestone in life. However, it is also a long-term financial commitment and one must bear in mind that the servicing of monthly repayments could span over decades. It is important to factor in events such as death and total permanent disability that could impact the earning capability of a person. That is why one key aspect to consider when buying a property is choosing the right home loan insurance. This is important because it protects the interests of both the borrower and the lender:
Borrower: In the event of an unforeseen situation such as the borrower passing away, disability, or critical illness, the insurer will settle the outstanding loan amount. This will alleviate the pressure off the next of kin from having to settle the remaining debt. With home loan insurance, your next of kin can live in a debt-free house. After all, it is not a pleasant scenario to leave your next of kin or beloved family members to shoulder the debt if you are unable to do so.
Lender: Likewise, it also protects the lender in the event of the above-mentioned unforeseen circumstances and eliminates the risk of the loan turning delinquent.
So, the next question that you are probably asking is: what are the options available for home loan insurance in Malaysia and most important, which is the right one for me?
First, let us begin by taking a look at the options available in Malaysia:
Mortgage Reducing Term Assurance (MRTA)
As the name suggests, Mortgage Reducing Term Assurance (MRTA) is a life assurance plan that has a decreasing sum assured over time. For example, a home buyer purchases an MRTA coverage of RM 350,000 with a tenure of 25 years. If something untoward happens in year seven and a claim is made, the payout will be based on the actual outstanding loan amount at that point, instead of the initial sum covered of RM 350,000.
What are the factors in deciding the cost of MRTA?
Aside from your age, two other factors that come into play is the amount of your home loan and the tenure. However, in the case of a person who is already diagnosed with an illness, the overall premium could be higher. In some cases, the insurance company may even reject the policy depending on the severity of the illness. A medical examination performed by the panel doctors of an insurance company is required to determine this.
However, in choosing the MRTA premium, you also need to take into consideration the number of income earners in your household. If you are the only income earner, it is wise to opt for the maximum coverage to reduce the burden that your family has to bear in the event of an unforeseen circumstance. If the actual remaining balance of the home loan is higher than the projected balance at the time of payout, the next of kin would have no choice but to pay for this difference, and this could leave them with an additional burden to shoulder.
What are the payment options for MRTA?
There will be a lump sum payment at the start of your policy. This amount will be dependent on the bank and could vary from one person to another based on the factors detailed above. Should you opt to embed the MRTA into the loan itself, there will be interest charged which will depend on the prevailing interest rate.
Is MRTA transferrable?
Unfortunately, MRTA is not transferable, i.e; it will be tied to the particular property during the financing period. If you decide to purchase another property, transferring the MTRA policy from one bank to another bank can be a difficult process if the terms and conditions differ between the banks.
The value of the new property is also an important factor, and if it is higher than the existing MRTA coverage, it could be a better idea to purchase a new MRTA policy altogether.
Who is the beneficiary?
The sole beneficiary is the bank, and no third party will share in the payout. It also has a reducing cash value which will automatically reach RM0 at the end of the tenure of the home loan.
In short, MRTA is a form of protection should something unfortunate happen. In the event of a claim, the outstanding debt with the bank will be settled, so that the next of kin can live in a house without the anxiety of meeting the mortgage payment.
Is MRTA compulsory?
Although MRTA is not compulsory, the bank may mandate it as one of their requirements for an applicant to obtain a loan. The applicant does not have to source for an MRTA provider on their own as the bank may include this as part of the application process itself to make it easier for the applicants.
Mortgage Level Term Assurance (MLTA)
Mortgage Level Term Assurance (MLTA) provides the borrower with protection and savings. There are also some policies that provide a return on the premium. With this policy, the next of kin will not only receive the house debt-free in the event of an unfortunate circumstance, but they will also receive a cash value to tide them over with some extra liquidity. This cash surrender value is derived from part of the premium.
Do take note that one notable difference between the MLTA and the MRTA is the sum assured for MLTA remains the same, unlike the MRTA which reduces over time.
What are the factors in deciding the cost of MLTA?
The value of the insured amount, the term of policy and age are factors that determine the cost of MLTA. However, it is important to note that because the sum assured remains constant, there is a higher premium associated with MLTA as compared to MRTA.
What are the payment options for MLTA?
Payment for MLTA can be made periodically, i.e: monthly, quarterly, semi-annually, or even annually.
Is MLTA transferrable?
Yes, MLTA is transferable, and this feature makes it attractive for property investors.
Who is the beneficiary?
The bank will receive a payout for the outstanding loan amount. However, the beneficiary nominated in the policy will also stand to receive a cash payout. The policyholder may nominate any family member as a beneficiary. Investment-linked policies will also pay returns on the investment if the underlying investment performs well. The additional cash would come in handy for the family members should an unfortunate incident happen. Other than the above, a large number of MLTA policies also has the option of including a medical rider for critical illnesses.
Is MLTA compulsory?
Although MLTA is not compulsory, it could be a condition put forth by the bank. You can purchase MTLA through insurance brokers or agencies in Malaysia. It is also important to note that if you decide to purchase MLTA at a later time after the purchase of your home, you could end up paying more.
Mortgage Reducing Term Takaful (MRTT)
Mortgage Reducing Term Takaful (MRTT) provides takaful coverage for customers who have taken an Islamic bank home financing. Similar to MRTA, the sum assured decreases over time as a reflection of monthly payments made, and the payout will take place should an unforeseen circumstance such as death or total permanent disability happen.
What are the factors in deciding the cost of MRTT?
Factors such as the age, the total amount covered, and the term of coverage will determine the cost of the MRTT.
What are the payment options for MRTT?
At the start of the cover, there will be a lump sum payment due that is dependent on the bank. It is also determined by the factors as above. If you choose to bundle the MRTA as part of the home financing, it will be subjected to the profit rate of the financing.
Is MRTT transferrable?
No, MRTT policies are not transferable.
Who is the beneficiary?
In a payout, the sole beneficiary would be the bank, and similar to MRTA, no third party will share in the payout.
Is MRTT compulsory?
Although MRTT is not compulsory, however, do take note that the bank could require that you have a life insurance product as part of the requirements to obtain the home financing.
Mortgage Level Term Takaful (MLTT)
Mortgage Level Term Takaful (MLTT) provides both protection and financial support should death or total permanent disability happen. Unlike the MRTT, in MLTT, the total sum assured remains the same throughout the tenure.
What are the factors in deciding the cost of MLTT?
Similar to MRTT, factors that determine the cost of MLTT are such as age, the total amount covered, and the term of the coverage.
What are the payment options for MLTT?
Payment options are periodic, and you may choose to either make payments monthly, quarterly, semi-annually or annually.
Is MLTT transferrable?
MLTT is transferable, making it an ideal option for homebuyers who are property investors.
Who is the beneficiary?
In the event of death or total permanent disability, the bank will be paid for the outstanding loan amount. The beneficiary that was earlier named in the policy will also receive a cash value, as well as the debt-free house.
Is MRTT compulsory?
Just as in the case of the other home loan insurance, MRTT is not compulsory. However, future home buyers must be prepared as the bank could mandate this as part of the requirements to obtain financing. After all, they must be prudent to protect their interests in the event of an unforeseen circumstance!
Which is the best option for me?
After getting a deeper insight into the various home loan insurance coverage, are you now wondering: which is the best option for me? The first thing you must decide is if you prefer a conventional policy, or an Islamic one (takaful).
Prefer a conventional policy over an Islamic one? Now that you have decided to take this route, you can choose the best option for you based on the analysis below:
MRTA will be a good choice for those who have other protection such as medical and life insurance.
MLTA would be a suitable option for those who have a number of financial dependents and wish to leave them with some cash payout should an unforeseen situation happen.
It is also a great option for those who are purchasing a property for long-term occupation, as it can be tricky to transfer the MRTA from one property to another.
However, the premium for MLTA is relatively higher than MRTA.
However, if you are leaning towards an Islamic policy, here is the analysis between both options to help you choose which would be the right fit for you:
MRTT is a good option for those looking for only protection in the event of death and cases of total permanent disability and has other insurance policies such as medical and life insurance.
MLTT is a great fit for those who do not envision themselves living in a property for a long time, as well as property investors. This is because MLTT is easily transferable from one property to another.
In the event of death and total permanent disability, the next of kin can have peace of mind and live in the property without worrying about monthly repayments as the payout would have been made to the bank. Therefore, MRTT is also suitable for homebuyers who are looking to live in the property for long-term occupation.
MLTT is also a good option for those who would like to leave their next of kin with additional cash to tide them over, in the event of death or total permanent disability.
However, do note that the premium is relatively higher than MRTT.
In short, your selection of a home loan insurance is mainly dependant on these factors:
Conventional versus Islamic
Do you have other forms of protection such as medical or life insurance?
What long do you foresee living in your new home (short-term versus long-term?)
Are your dependents financially stable, or do they need additional cash support to tide them over if an unforeseen situation happens to impact the cash flow?
Once you have ascertained the answer to the above questions, choosing the right home loan insurance that is the best fit would not be so daunting anymore! This will give you peace of mind to enjoy your home-buying process. After all, the process of buying a property should be a memorable one as it marks an important milestone in one’s life and you should be able to enjoy the process without any hassle or anxiety.
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