Which Mortgage Insurance Suits Your Needs Best?
Buying a home is a huge commitment and the average homeowner will take up to 35 years to pay off in full. Therefore, you should protect this investment even when you are no longer around to finish paying it off due to unforeseen circumstances.
However, almost half of the Malaysian population does not see the need to protect themselves. According to statistics from the Malaysian Life Insurance Association (LIAM), the penetration rate of life insurance has remained at around 54% over the past five years. Meanwhile, only 4% of households in the low-income group have life insurance or takaful coverage.
This indicates the lack of awareness on the role of insurance in our daily life and this includes mortgage life insurance. Providing housing for your family or dependents is a good thing, but if the home loan is not fully settled, it can become a burden on your loved ones in the event of death or permanent total disability (PDT). if you don’t. t have mortgage insurance.
A mortgage insurance policy frees the borrower’s dependents from any debt because it is designed to pay off the remaining debt on mortgage repayment in the event of death or DPT.
In practice, clients who borrow money from financial institutions in Malaysia will find that their loan approvals are tied to their taking out a mortgage insurance policy.
Like any other life insurance policy, you have to pay a fixed amount of premium for a mortgage life insurance policy. If you die while the policy is in force, the insurance company will pay off your mortgage. Your spouse or beneficiaries can then live in the home debt free without having to worry about making mortgage payments.
What mortgage life insurance do i need?
In Malaysia, there are two types of mortgage life insurance: Mortgage Reduction Term Insurance (MRTA) or Mortgage Reduction Term Insurance (MDTA) and loan-level term insurance. mortgage (MLTA).
However, MRTA and MLTA are often misunderstood. What do you need as an owner?
MRTA is a life insurance plan with decreasing sum insured over time, and it is only used to cover your mortgage owed to the bank. This plan is usually offered by the bank from which you get the mortgage, as it acts as protection for the bank in the event of misfortunes that prevent you from repaying the loan.
On the other hand, MLTA is a slight variation of MRTA and offers an alternative for a borrower looking for life insurance that offers protection plus savings and, in some policies, premium returns. This is a personal plan that you purchase separately from an insurance broker or agency, in which you and your dependents are financially protected when you are no longer there or when you are have lost the ability to generate income.
Here are the main differences between MRTA and MLTA:
|Goal||protection||Protection, economy and monetary value|
|protection||The sum insured decreases depending on the duration of the loan.||The sum insured remains the same on the basis of a fixed sum insured.|
|Nomination||The beneficiary is the bank.||The beneficiary can be anyone.|
|Funding||Usually financed by mortgage.||Usually self-funded.|
|Payment||Lump sum||Periodic (monthly, quarterly, semi-annually or annually)|
|Cash value||No. It has a decreasing cash value, which drops to RM0 at the end of the loan term.||Yes. It has a fixed (guaranteed) cash value over the life of the loan.|
|Claim||The insurance company will pay the loan balance to the bank and the beneficiary will receive the house.||The insurance company will pay the loan balance to the bank and the beneficiary will receive the house plus cash.|
The MRTA is most suitable for those who have adequate life and medical insurance and who do not have many dependents. This type of insurance will only cover your mortgage if it is not fully reimbursed in the event of PDT or death. The only beneficiary of the policy is the bank, not your family members. However, your family can inherit the property without having any bank loans attached.
MLTA is best for those who need extra financial protection in the worst case, as it also has cash value at the end of the policy. This is best for those with many financial dependents, such as young children and a stay-at-home spouse. However, MLTA is a normal life insurance policy that is not part of your home loan and customers should make sure they understand the terms and conditions or they could find themselves in a tough spot if the company does. insurance does not approve the claim and the bank loan. remains unpaid while dependents are left without any cash payment.
Is it worth having?
Most mortgage agents recommend mortgage life insurance (MRTA or MLTA) when buying a new home. However, before purchasing an insurance policy, it pays to do as much research as possible on the product.
Mortgage life insurance is designed to ensure your loved ones are burdened with mortgage payments if you die or become permanently disabled. However, if you have no one to leave your property to and money is limited, purchasing mortgage life insurance may not be your top priority. However, for those with dependents, it is worth considering.
What do you have to lose if you don’t have an MRTA or MLTA? If you plan to pay off your mortgage within a few years, an MRTA or MLTA may not be at the top of your list. However, if you plan to fix it for the next 30-35 years, and especially if you coach with someone else, it will be best if you are protected.
For example, if you buy a property with your spouse and each will pay 50% of the repayment each month, a death or permanent loss of income can be a big blow to the couple’s finances. Having mortgage life insurance will give you the peace of mind that you won’t lose your property even if the other person is unable to pay the mortgage.
How much should I pay?
The amount of premium you need to pay for your MRTA or MLTA depends on your age, the loan amount, and the length of your loan. The older you are and the larger the loan amount, the higher the premium you will have to pay.
Much like purchasing life or health insurance, if a person is diagnosed with a certain illness, the insurance company has the right to deny the policy or there will be an additional charge in the premium. It depends on the severity of the disease and will only be determined after a medical examination by their medical specialists.
Here is how much you have to pay in premiums for MRTA compared to MLTA based on insurance coverage for a mortgage amount of RM 540,000 at 4% interest over 30 years for a 25 year old homeowner.
|Period of time|
|Funding / coverage|
|Example of interest rate *|
RM1 302.65 (semi-annual)
|Total premium paid (30 years, interest free)|
|Cashback (at the end of the loan term)|
* These figures are used for reference only as the interest rate will differ between providers; refer to your original policy for actual conditions.
With house prices soaring, most home buyers today have no choice but to choose the longest possible loan term to reduce their monthly loan payments so that they will likely pay off their property for over 3 decades.
Understanding what you are buying is essential for managing your money. If you are not able to pay the MRTA premium, you can choose to fund the premium in the loan and thus the loan tranche will increase. You will also pay additional interest as the bank advances the money to you to pay the premium.
Tip for saving money
If your home is refinanced or sold before the end of the loan term, you can surrender your MRTA policy and claim repayment of the cash value, provided proof of the sale is presented.
This article first appeared on December 9, 2013.
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