What are the differences between Mortgage Reducing Term Assurance (MRTA), Overdraft Term Level Assurance (ODLTA) and Mortgage Level Term Assurance (MLTA) insurance? Which is better for my needs? Does it make a difference if the property is for my own stay or for investment purposes?
Updated: May 29, 2017
As part of property ownership, you need to consider asset risks planning if you buy your property with financing should anything unfortunate happen.
We discuss a few options for protecting your property assets, and provide guidelines on pros, cons, tips, costs, and how much coverage is needed.
Why the need for property asset risk planning?
Being a wise property owner, you will want to manage asset risk planning to make sure unfortunate events i.e. becomes incapacitated or passing away have minimal impact on you and your loved ones.
Property Asset Risks
- Losing the home you and your family live in.
- Losing your property to the bank or forced to auction off your property.
- Forced to sell your property at a loss.
MRTA: Mortgage Reducing Term Assurance
Protection: MRTA gives you protection which reduces over time until it reaches zero. In the past MRTA was often compulsory. Today, you have more flexibility (although some banks are resorting to offer better rates if you take a MRTA and loan with the bank).
Duration: 5 years – 35 years (up to maximum home loan duration)
Cash Value: No (If you make an upfront lump sum payment, you made get back a refund for future premiums if you cancel your MRTA early)
Costs: Approximately RM3,500 for every RM100,000 of protection required (one time)
- E.g. RM500,000 protection: 17,500 (lump sum)
- MRTA is lower cost in terms of total premium, especially if you short cover instead of your full duration of your home loan.
- MRTA can be bundled together with your home loan reducing cash outlay.
- Protection coverage may be insufficient as your protection either ends earlier OR your owing amount is higher than the protection you have, especially loan rates increases.
- No cash value. Even if you cancel the MRTA policy early, you may get back only a certain % of the premium paid (or zero when nearing the last years of the MRTA policy).
- Expensive cost for the MRTA if factored into your home loan would approximately double.
- E.g. RM500,000 protection: 35,000 (factored into home loan) / Additional RM175 per month for home loan payments.
- MRTA can be moved to another property when you sell and buy a new property, with some difficulty and paper-work and only for convention non-Takaful MRTA policies.
- Insurability is not guaranteed. You need to prove you are healthy every time you want to purchase a new MRTA.
- Consider other options besides MRTA, focusing on value and not just the total premium costs. Other options such as a MLTA often prove to be better alternative.
- If possible, pay off the MRTA separately (not bundled into home laon) as otherwise you will be charged a high amount of interest.
- If you are “forced” to take a MRTA by the bank, take the minimal coverage for the minimum period of years (typically 5 years). Then follow up with your own property asset risk planning.
MLTA: Mortgage Level Term Assurance
Protection: MLTA offers level (or slightly increasing) protection.
Duration: As long as you need the coverage. (At the minimum, coverage for 30 years available).
Cash Value: Yes (increasing over time but may dip in old age as protection costs increase).
Costs: Approximately RM400 for every RM100,000 of protection required (per year). Min RM1,200 per year.
- E.g. RM500,000 protection: 2,000 per year (166 per month)
- MLTA gives you the same or increasing protection over time.
- Upon claim, payout goes to you/nominee(s) which you can use at your own choosing including paying part/all of your home loan.
- Cash value accumulation which you can withdraw at any time (or upon ending your MLTA).
- MLTA is on your life and not tied to a particular property. If you decide to sell your property and purchase a new property you can use your same existing MLTA as risk protection for your new property.
- Flexibility with protection value which can be adjusted up or down at any time you desire.
- Option to add on a premium waiver whereby if Total Permanent Disability (TPD) or Critical Illness (CI) occurs, all future premiums are waived.
- MLTA is more expensive than MRTA in terms of total premium costs.
- Work with a good advisor familiar with MLTA products to structure your asset protection to give you the best combination of value, protection, and cash value.
- Inform your nominees (or trustee) on the insurance and instructions on dealing with the property and funds in case of passing/TPD.
ODLTA (aka ODLA): Overdraft Level Term Assurance
Protection: ODLTA provides level protection which remains the same throughout. It is more often used among short term investors to cover a short period (e.g. 5 – 10 years)
Duration: 5 years – 35 years (up to maximum home loan duration)
Cash Value: No (If you make an upfront lump sum payment, you made get back a refund for future premiums if you cancel your ODLTA early)
Costs: Approximately RM6,500 for every RM100,000 of protection required
- E.g. RM500,000 protection: 32,500 (lump sum)
- Coverage remains constant throughout the period.
- Any additional coverage after paying off for the property would go to your next of kin.
- Can be financed into your home loan.
- More expensive than MRTA by 20-30%.
- Other cons similar to above MRTA.
MRTA or MLTA?
A MLTA is a better option in terms of value and flexibility. However, your cashflow needs to be sufficient to handle the higher ongoing premiums.
A MRTA is a lower cost option, and you can bundle it with your home loan if necessary. You may also need to take up a MRTA in order to enjoy better home loan rates from your bank/financial institution.
Share and discuss on MRTA and MLTA
- Q: How much protection do I need… ?
How much home risk protection you require would depend on each individual’s needs and personal finances circumstances. However, the following guidelines may help you in your decision making process with the following questions.
- Q: … for own stay (primary residence) for medium-long term?
For your primary residence, you will want to cover close to 100% of your entire home loan amount. This will ensure that if anything untoward happens to you, that the entire home loan will be paid off and your family has a place to stay in (with extra if it’s a MLTA).
E.g. Property purchase price RM500k with 90% financing. Home loan at RM450k.
Cover sum assured RM400k – 450k.
- Q: … for rental/investment purposes?
For investment properties, you would need a lesser amount of coverage. The coverage is important to ensure that if anything unexpected happens, you (or your family/investment partners) have enough time to handle necessary arrangements without having to worry about monthly loan repayments, inability to find tenants, or negative yield. For example, your family/partners may need to sell the property but need to await for the property market to recover.
- Reselling (flip): suggest to cover 3 to 5 years equivalent home loan repayments.
- Rental: suggest to cover minimum 1 year equivalent home loan repayments, even if you are confident of good occupancy.
- Q: I have cash savings/investments and life insurance. Do I still need MRTA/MLTA?
No, if you are ok with using the cash savings/selling investments to cover your outstanding loan if anything untoward happens. Most of us do take loans when buying properties as it is an appreciating asset. Leverage allows you to improve your property investment returns and provides better cash flow. It is a relatively small expense for protecting your property assets adequately.
For life insurance, you will want to ensure that you are adequately protected. You should not have too much life insurance coverage unless you were overprotected and buying too much insurance previously before you purchased a property. Talk to an advisor to review and improve your risk management (and likely save money).
- Q: Should I take a premium waiver rider?
It is optional. You can compare the cost difference with/without a waiver upon occurrence of disability and/or critical illness and decide.