A home is most likely than not, the most important and biggest investment in your life. You will put a lot of thoughts into identifying the location, selecting the perfect house, viewing and ultimately purchasing the dream home, obtaining financing and then it’s on with the big move-in and making it the place where your life revolves around.

However, for something so crucial and important, do we really have any idea on the importance and how we are protecting our biggest investment in our life?

Protection Plans Available

When it comes to property, the perfect protection plan can be separated into two distinct areas, both of which are equally important – the first being on the coverage on the person serving the loan (borrower) and second, on the property itself.

Insurance for the Borrower

Insurance for the borrower is the insurance plan that provides financial insulation in the event of death or permanent disablement of the person taking the loan. Let’s face it; if we fail to service the loan, we will no longer have a house. Therefore, it is crucial to have a plan in place to prepare for the unwanted possibility of no longer being able to pay our installments due to the circumstances life may throw our way.

Having insurance for the borrower provides assurance to the bank and the borrower that if the borrower is unable to continue paying installments on the loan due to death or permanent disablement, the insurance company will pay the remaining outstanding loan amount, and we may be able to continue on with life without having to worry about the financial burden that comes with having a mortgage.

MRTA – Burns upon Maturity

Most banks would actually insist that the mortgagor take up some sort of protection plan to ensure the bank’s interest in the property. The most popular insurance product for this purpose is MRTA or Mortgage Reducing Term Assurance. It is quite common for banks to offer preferential interest rates if their clients take up MRTA for the loan from their panel insurers.

So, what is MRTA? It is a term insurance with the sole purpose of providing financial insulation against death or permanent disablement of the life assured (or in this case, the borrower) during the loan tenure. Term insurance like MRTA does not yield any bonus or interest or any sort of payout after it matures. In layman’s term, the premium is “burnt” after it matures.  

The Sum Insured (the amount paid out in case of death or permanent disablement) in MRTA is the same as the loan amount and reduces progressively in accordance with the reduction in the loan amount over the loan tenure. Premium is calculated based on the age of the insured and the Sum Insured, and is on a one-time, lump sum payment basis. Most banks can include the MRTA premium into the loan amount, and the borrower serves the final calculated installments inclusive of MRTA.

Most borrowers are not aware that they have other options besides taking up MRTA to protect their loans.

Life Assurance – On Your Terms

Most banks will also accept a normal life insurance, provided the Sum Insured is adequate to cover the loan amount (i.e. equals or is more than the loan amount). Charging a life insurance against your loan instead of taking MRTA provides you with more flexibility in terms of payment, as you can pay the premiums to the insurance company on a monthly/quarterly/half-yearly/annually basis at your own choice - not to mention the savings in interest as you do not include this premium into your loan like you would in a MRTA.

Moreover, with a life insurance, the Sum Insured does not reduce like it does in MRTA, but stays the same throughout the period of cover. The best thing about opting for a life insurance is that it yields returns and even bonuses upon maturity, depending on the type of insurance chosen upon, so you can choose to have an investment link or an endowment policy, which will also serve as an investment, and at same time using it to provide a collateral to protect your mortgage with the bank.

However, life insurance does cost more than MRTA, and it is definitely not for homeowners who do not wish to worry about paying premiums for their insurance. You will also need to charge this policy to the bank by doing an assignment of your policy to your bank.

With an assignment, the bank will have absolute rights to your policy, and you will not be able to do any changes to the policy without prior approval of the bank while your mortgage is still ongoing. However, the bank will discharge all claims to this policy once the loan is fully redeemed and you will be able to have full rights on your policy and all its benefits thereafter.

Insurance for the Property

Your MRTA or Life Insurance will only cover the life of the borrower. But what happens in the unfortunate event where your home was burnt down by fire, or is damaged by flood or is crushed in a landslide?

In these instances, homeowners are still liable to serve their mortgage installments AND at the same time, will still need to incur the necessary expenses for repairs and to make the damaged property a home again.

Protecting one’s home is more than installing the most sophisticated alarm system or having the most durable perimeter fencing. To protect your home, you will also need to have a good insurance plan that will insulate you against financial loss in the event of damage to your home. For this purpose, homeowners can choose from two types of insurance available in the market:

Fire Insurance

A basic fire insurance provides coverage against damage to your property resulting from fire, lightning and domestic gas explosion. Fire insurance is regulated in Malaysia, which means that the charges are tariff-based and standard regardless of where you choose to purchase your fire insurance. You have the option to include additional coverage such as flood, riot, strike and malicious damage (RSMD) or landslide into your fire insurance for extra protection for additional premium.

Houseowner Insurance

A more hassle-free way to protect your property is a Houseowner Insurance.

Houseowner Insurance is a packaged property insurance plan that provides a more comprehensive and wider coverage for residential properties and saves the owner the hassle of customizing the Fire Insurance. Houseowner Insurance, like Fire Insurance, is also regulated and tariff-based, so a home owner does not need to worry too much on the charges as it is standard throughout the country, wherever you choose to buy it from.

If you are an investor or you are renting your property out, you will be pleased to know that a Houseowner Insurance also provides a loss-of-rent coverage in the event of damage to your property and you can’t rent your property out while repairs are carried out.

Ensure Adequate Coverage

Whether you choose to go for Fire Insurance or Houseowner Insurance, the most important thing you need to remember when getting these insurance policies is to determine an adequate Sum Insured to be covered for.

Unlike MRTA or insurance for the borrower, your Sum Insured for a Fire or Houseowner Insurance should be on a “reconstruction cost” and not based purely on your loan amount. Note that when you purchase a property, you are paying for the land and the actual building. But in the event of a claim, the insurer will only compensate you for the cost of rebuilding your building, so you will need to factor OUT the cost of the land from your Sum Insured to avoid paying higher and unnecessary premiums.

At the same time, your Sum Insured has to be adequate for reconstruction of your house, as under most Fire Insurance and Houseowner policy contract; there is an Average Value clause, whereby the Insurer can and probably will charge the home owner a co-insurance penalty if the property is under-insured. So, how do you find out the reconstruction cost?

For a new or under construction property, it will be stated in the sales slip or the Sales & Purchase agreement. If you are purchasing these policies for refinancing purposes, the reconstruction cost is usually stated in the valuation report. Alternatively, you may contact one of the many valuers out there to get an indicative amount.

Of course, if you own a non-landed property, you do not need to worry purchasing a fire or houseowner insurance, as your building management office purchases fire insurance on your behalf, and is charged to you through maintenance fees. But, you may want to consider the optional protection plans for a more complete coverage.

Other Optional Protection Plans

What’s a home but a building of bricks and cement? Arguably, the most important aspect in any home is what is actually in it. Therefore, it make sense for home owners to take up a Home Contents Insurance to protect their belongings, especially if they are renting - your landlord will only take up insurance to protect the building, but not your belongings.

For this purpose, you can choose to purchase a HOUSEHOLDER insurance, which can be purchased together as one policy with a HOUSEOWNER insurance, or you can talk to your general insurers of choice on the home contents insurance plans that they may have.

How Do You Purchase the Protection Plan?

Most banks would offer you the option to purchase all these protection plans as valued added services when you take up a loan with them, so this may be the most straight-forward way you can get this done.

Of course, as a consumer, you have all the rights to purchase your own insurance plans, and the banks should also accept your own arranged policies, as long as it is up to their specifications and requirements, and more importantly, you take the necessary measure to charge these policies to the bank. Talk to your insurance agents for assistance and advice.

It is also good to know that if you have the time, purchasing your own fire or houseowner and/or householder insurance or a home contents insurance directly through any general insurance company will entitle you to discounts on your policies and this discount could be between 10% - 15% of the gross premium chargeable as accorded by Bank Negara Malaysia.

However, you will need to be there in person when purchasing your protection plan, and you will also need to handle any future claims (if it arises) directly with the insurers as the bank will not be able to assist you too much, and you do not have an agent to get it done for you.

Chan Ai Cheng
General Manager, S. K. Brothers Realty (M) Sdn Bhd
Member, Institution of Surveyors Malaysia (ISM)
Member, Malaysian Institution of Estate Agents (MIEA)
Registered Financial Consultant, International Association of Registered Financial Consultant
For comments and feedback on this article, please emailaicheng@skbrothers.com