Mortgage and Life Insurance - How They Impact Property Purchase
Chan Ai Cheng compares Mortgage and Life Insurance for property buyers
In most instances, the purchase of a home is funded through borrowings from financial institutions, depending on a person’s financial capability and thereafter monthly repayments for such loans will be made by the borrower to the financial institutions. The question we now ask is what happens to the property should something untoward were to befall the borrower? This is where Insurance on the Mortgage comes in. The consideration should be to insure the borrower against liability from loans taken from financial institutions.
There are broadly 3 ways of insuring you on your mortgage:
Mortgage Reducing Term Assurance (MRTA) is also frequently referred to as Mortgage Insurance. MRTA helps you settle your loan in the event something happens to you. MRTA will cover the unpaid portion of your loan should an untoward incident happen.
See Figure 1: Illustration of MRTA. Many people do not like to talk about this, but disability, illness or death can occur at any time and always at the moment least expected. MRTA is designed to give peace of mind and protects the family from losing a home. The premium is reasonable, and it can even be financed by the bank.
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The coverage amount progressively gets reduced commensurate with the reduction of the outstanding loan amount |
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Payout from MRTA: RM250,000 |
Figure 1: Illustration MRTA
Mortgage Level Term Assurance (MLTA) works in the same way as MRTA. The only difference is the settlement amount is equal to the Sum Assured and not just the unpaid portion of the loan.
See Figure 2 : Illustration of MLTA.
Figure 2 : Illustration MLTA
Life Insurance works in the same manner as MLTA. The main difference between MLTA and Life Insurance is that MLTA is a single premium whereas Life is a yearly renewable premium. The design of Life Insurance is to maintain the lifestyle of the insured or their next of kin and not just to pay off liabilities to the bank.
See Figure 3 for comparison between MRTA, MLTA and Basic Life Insurance
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MRTA |
MLTA |
Basic LIFE |
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Pays the amount equal to the outstanding balance of the mortgage loan. |
Pays in full an amount equal to the Insured’s Sum Assured |
Pay in full an amount equal to the Insured’s Sum Assured |
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Objective is for the settlement of loan |
Objective is to preserve the way of life to ensure continuation of income |
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Single Premium (one-time) for the entire loan tenure |
Monthly or Yearly Premium (Policy is renewed every year) |
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Provides basic protection at much lower rate compared to life insurance |
Costly. Premium rates are calculated on an individual basis. |
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Flexibility in premium payment - Insured can pay via cash or finance into the principal loan and amortized over the loan tenure period. |
Premium payment either via cash or auto debit on a monthly basis. |
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Availability of cash surrender value or transfer of policy holder from the bank to individual in the event of early settlement of loan. |
Returns available depending on type of life plan (e.g. investment link) |
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Availability of joint-life - more than 1 applicant but subject to a maximum of 3 applicants can apply to be insured under both MRTA and MLTA be it full coverage for all applicants or apportionment depending on individual applicant’s needs. |
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Figure 3 : Comparison of MRTA/MLTA and Basic Life
For investors, you can decide on your coverage amount and tenure of your MRTA/MLTA – this is important when the property is meant for investment. You can opt for MRTA/MLTA for a shorter duration than your loan tenure, giving you protection during your investment period at a lesser premium.
For example, Alice invested in a condominium in Petaling Jaya currently under construction and due for completion in 3 years. She intends to sell the unit upon completion. She can choose for a coverage of 5 years therefore protecting her investment during that period only. However this practice is not recommended when protecting your dwelling home. All banks and insurance companies will assist in calculating the premium for you based on your age, loan tenure and loan amount.
Insurance’ primary objective has always been meant for protection. Should you decide otherwise, the choice is yours. It is good practice to have one. Let’s not pass our liabilities to our loved ones. Do get in touch with your local insurance agents for a better understanding of the various options and guidance as to which one will suit you better in your given situation.
Your home, your property, your family is worth protecting.
Chan Ai Cheng
General Manager, S. K. Brothers Realty (M) Sdn Bhd
Registered Estate Agent, Board of Valuers, Appraisers & Estate Agents Malaysia (LPPEH)
Certified Residential Specialist, NAR USA
Registered Financial Consultant, International Association of Registered Financial Consultant (IARFC)
Member, Malaysian Institute of Estate Agents (MIEA)
Member, Institution of Surveyors Malaysia (ISM
For comments and feedback on this article, please emailaicheng@skbrothers.com
