A 30-year-old buys an investment property for RM500,000 with a 35-year mortgage of RM450,000, at an interest rate of 3% per annum. The individual plans to hold onto the property for 10 years and then sell it to realise the capital gains.
For insurance, the individual must now decide between a mortgage-reducing term assurance (MRTA) and a mortgage-level term assurance (MLTA). Which would be the best choice?
First, a look at the five major differences between an MRTA and an MLTA.
1. Sum assured
Say the investor opts for a 35-year MRTA with initial coverage of RM450,000. Subsequently, as the name suggests, the cover will be reduced annually beginning from the second year of the mortgage until it hits zero at Year 35, the end of the mortgage tenure.
If the investor opts for MLTA coverage of RM450,000, the coverage remains fixed as long as they hold onto the policy or until it matures.
2. Option to renew
Fast forward to 10 years later, when the investor has sold off the property. If they had opted for a MRTA, they would be able to recoup some portion of the premium paid for they only enjoyed 10 out of the 35 years’ worth of protection that was paid for originally.
If they had opted for an MLTA, and it is a full-fledged term assurance, they can choose to either continue to service the policy as a family protection plan or to discontinue it altogether. If they choose not to continue the policy, they will not receive a single sen from it as the premiums paid to the insurer are solely for protection.
3. Primary beneficiaries
If the investor dies prematurely, the sum assured will first be used to settle the outstanding mortgage owed to the bank.
If they opted for an MRTA, the bank is the primary beneficiary of the policy. Any outstanding balance after settling the mortgage would subsequently be paid to the investor’s nominated secondary beneficiaries.
However, if they signed up for an MLTA, they can nominate family members, a spouse or parents, as the primary beneficiaries of the policy.
Instead of paying the bank, the sum assured is paid out to the beneficiaries, who can then decide if it is better to settle the loan in full or to continue to pay the mortgage on the investment property.
4. Premiums
If the investor opts for a 35-year MRTA, 35 years’ worth of premiums must be paid one-shot in full, and the premiums are embedded within the original mortgage, especially if they choose not to make the payment in cash.
If that is the case, the MRTA premium (which could amount to about RM15,000 for a loan of RM450,000) is financed by the banker at a rate of 3% per annum.
Simply put, the investor will incur interest expense (about RM450 per annum) on the MRTA premium.
With an MLTA, the policy can be paid for on a monthly, quarterly, half-yearly or yearly basis.
There will be no interest expense as the premium would not be added into the original mortgage. As the investor is 30 years old, the premium is relatively a lot more affordable.
For instance, using Fi Life’s free quotation, the investor’s premium for a term policy with a sum assured of RM450,000 is fixed at RM81.50 per month, or RM978 a year. This quote is based on a 30-year-old male who does not smoke.
5. Options to add critical illness benefits
Typically, a MRTA policy covers death and total permanent disability. But, if the investor opts for an MLTA, they can add on critical illness benefits to the policy.
In this case, it depends on the preferred choice of life insurer. Say they choose Fi Life to buy the MLTA.
They can choose to pay a little extra to have 25% of the life coverage, or RM112,500 (RM 450,000 x 25%), paid out in advance if they are diagnosed with any one of the defined critical illnesses such as cancer, heart attack, stroke, or coronary artery bypass surgery. This gives the investor some cash support to service the mortgage while recuperating from the illness.
Of course, if they die, the beneficiaries will inherit the remaining 75% of the sum assured, which is RM337,500 (RM450,000 x 25%).
Conclusion
Here is a summary of the differences between an MRTA and an MLTA.
So, which is better, an MRTA or and MLTA?
The investor should consider an MLTA policy to enjoy a fixed life insurance cover and have the option to choose their beneficiaries for their own policy.
They would avoid paying unnecessary interest costs on the additional loan taken to pay for an MRTA.
But what if the bank insists on having an MRTA and is offering a much lower interest rate for doing so?
If that is the case, the investor should first ask the bank for the lowest priced MRTA policy to qualify for the promotional or lower mortgage rate.
Then, shop for an MLTA policy and choose the one that gives the best bang for the buck.
