Hi, my name is John and I’m a 30-year old real estate investor.
Recently, I had bought an investment property for RM 500,000 where I obtained a 35-year mortgage amounting to RM 450,000 that bears an interest rate of 3% per annum. I intend to hold onto this property for a period of 10 years and sell it off to realise my capital gains. As such, my questions are:
a. What’s the difference between a Mortgage Reducing Term Assurance (MRTA) and a Mortgage Level Term Assurance (MLTA)?
b. Which of the two should I opt for?
Before deciding, I’ll pen down 5 major differences between a MRTA and a MLTA and they are as follow:
1. Sum Assured
Let’s say, John opts for a 35-year MRTA where his initial coverage is RM 450,000 or 100% of his mortgage. Subsequently, as its name suggests, John’s cover shall then be reduced annually beginning from the second year of his mortgage until it hits zero at Year 35, the end of his mortgage tenure.
Whereas, if John opts for a MLTA, his coverage of RM 450,000 would be fixed as such for as long as he holds onto his policy or until the maturity of the policy.
2. Option to Renew
Let’s fast forward to 10 years later, when John has indeed sold off his property.
If John had opted for a MRTA, he would be able to recoup some portion of the premium paid for his policy for he only enjoyed 10 out of the 35 years worth of protection that he paid for originally.
Meanwhile, if John has opted for a MLTA and let’s say, his policy is a full-fledged term assurance, he can choose to either continue on with servicing his policy as a typical family protection plan or to discontinue it altogether. If he chooses not to continue it, John will not receive a single sen from it as the premiums paid to John’s insurer are solely for protection.
3. Primary Beneficiaries
If John passes on prematurely, his sum assured shall first be used to settle all of his outstanding mortgage owed to his bank, if he opted for a MRTA for the bank is the primary beneficiary of John’s MRTA policy. Subsequently, any outstanding balance from the MRTA policy after settling his mortgage would then be paid to John’s nominated secondary beneficiaries, who are most likely his loved ones.
However, if John signed up for MLTA, he can nominate his family members such as his wife or his parents to be the primary beneficiaries of his policy. Instead of paying the bank, the sum assured shall first be paid out to his beneficiaries. Out of which, his beneficiaries can decide whether or not it is better to use his sum assured to either settle the loan in full or to continue the mortgage installment of his investment property.
If John opts for a 35-year MRTA, he shall make 35-year worth of premiums one- shot in full and these premiums will be embedded within his original mortgage, especially if he chooses not to make the payment in cash. If that is the case, his MRTA premium (which could amount to about RM 15,000 for a loan amounting to RM 450,000) will be financed by his banker at a rate of 3% per annum.
Simply put, John will incur interest expense (around RM 450 per annum) on his MRTA premium.
Meanwhile, if John opts for a MLTA, he could choose to pay for his policy either on a monthly, quarterly, half-yearly, or yearly basis. He will not incur any sort of interest expense as its premium would not be added into his original mortgage. As John is 30 years old, his premium is relatively a lot more affordable.
For instance, by using Fi Life’s free quotation, I’d found that John’s premium for a term policy with a sum assured of RM 450,000 is fixed at RM 81.50 a month / RM 978 a year. Please do note that the quote is based on premiums today for a 30-year old male who is a non-smoker.
5. Options to Add Critical Illness Benefits
Typically, a MRTA policy covers death and total permanent disability (TPD).
But, if John opts for MLTA, he may add on critical illness benefits to his policy. In this case, it depends on John’s preferred choice of life insurer. Here, let’s say, he chooses Fi Life to buy his MLTA. He may choose to pay a little extra to have 25% of his life coverage, which is RM 112,500 (RM 450,000 x 25%), to be paid out to him in advance, if he is diagnosed with any one of the defined critical illnesses such as cancer, heart attack, stroke, or coronary artery bypass surgery.
This allows John to have some cash support to service his mortgage installment while he is recuperating from his illness.
Of course, if he passes on, the beneficiaries will then inherit the remaining 75% of the sum assured, which is RM 337,500 (RM 450,000 x 25%).
Here is a summary of the differences between a MRTA and a MLTA:
So, which of the two is better for John?
Personally, if I’m John, I may consider a MLTA policy if I wish to enjoy a fixed life insurance cover and have the option to choose who my beneficiaries are for my own policy. Also, I could avoid paying unnecessary interest costs year-after-year on my additional loan taken to pay for MRTA if I choose instead to go for MLTA.
But perhaps, you may ask, ‘What if the bank insists on me having a MRTA and is offering me a much lower interest rate for doing so?’
If that is the case, I would first ask the bank for their lowest priced MRTA policy to qualify for their promotional or lower mortgage rate. Then, I shop for a MLTA policy and choose the one that gives me the best bang for my buck. For a start, if you like to get a quote on a term policy in 10 minutes, you may click onto the link below: