This is a guest post by Mandy Hiew, co-author of Money Tips for Doctors
MRTA is the abbreviation of Mortgage Reducing Term Assurance. For those who don’t know what’s MRTA – it is a life insurance plan with decreasing sum assured over time, just to cover your home loan owed to bank.
Normally, this is what happen. After you buy a house, the mortgage officer will normally ask you to buy a hassle-free bank MRTA, single premium, and financed into the loan. You only pay a little bit extra per month, what a fantastic plan!
But are you aware that buying MRTA may not be able to directly protect your asset and your family?
If you purchase MRTA, the beneficiary is the bank. If any misfortune happens, the bank get the mortgage outstanding balance from insurance company (and now the bank is safe).
What happen to your house by now? Your house will be frozen under the estate, your assets will be utilized to pay for other liabilities, clearing income taxes (including outstanding and uncleared taxes for the past many years) and settle legal and accounting expenses. Your family is the LAST party to receive your assets. And in this process, your beloved family will only receive the asset if your asset value is greater than liability, otherwise your estate will be declared insolvent (bankrupt). Your family is forced to leave the house even though the insurance proceed from MRTA has already been paid out. Isn’t it unfair?
In short, bank MRTA is meant to protect the bank, you and your family are only being protected Conditionally.
Then what is the solution? Buying personal MLTA. It means Mortgage Level Term Assurance.
If you purchase personal MLTA, the beneficiary is your family. In case of any misfortune happens, your family will get insurance proceed equal to the value of the house. And the most important thing is that this insurance proceed is creditor-proof and will not be frozen.
What about the house? The house will still be frozen and subject to the same estate execution process anyway.
If your asset is less than your liability, your family at least have already got the cash from insurance. They can buy a new house now.
If your asset is more than your liability, your family get both house and the cash.
Does this make sense to you?
And the other wonderful thing is that if you finish your mortgage installment earlier and wanted to change to a bigger house. Your personal MLTA is portable to your new loan.
What is your choice?