There are definitely plenty of insurance plans out there. You can insure anything from your car to your pancreas and lately even your pet cat. But more commonly, you can also opt to insure your mortgage or as it’s widely known; home loan.
What is the point of insuring your home loan? Well, typically it’s to pay off your loan in the unfortunate event that you can’t. Usually, death and permanent disability are the events that these insurance policies cater to so you can’t use it if you’re simply down on your luck and out of work. Or just lazy.
But we digress. If you’d like to insure your mortgage and protect your family from losing their home to credit collectors when you pass on; this is the product for you. But as with any kind of insurance; mortgage insurance also come in different types. At present, there are two: the Mortgage Reducing Term Assurance (MRTA) and the other one is the Mortgage Level Term Assurance (MLTA).
Here’s the lowdown on the two.
MRTA vs MLTA
To start you off; we made a super simple chart to show you the differences between the two insurance types. Though the purpose is the same; you’ll notice they are creatures quite different.
|Protection||Protection, Savings and/or cash value|
||Covers the outstanding housing loan on a decreasing sum assured basis||Covers the outstanding housing loan on a fixed level sum assured basis|
|Payment||Lump sum payment by cash or financed into housing loan||Paid periodically on a monthly, quarterly, semi-annually or annual basis|
|Nomination||Bank is the beneficiary||Anyone can be the beneficiary|
|Suitable for*||Where buyer aims to own the house in a longer term||Where buyer is expected to sell the house in short-term|
*The line on suitability is just a suggestion. As always, you’re welcome to choose whichever makes you comfortable. After all, insurance is supposed to make you feel comfortable in the event of a calamity.
Do I even need mortgage insurance?
This is a tricky question for sure. Do you need life insurance? Do you need personal accident insurance? For the many of us viewing the glass half-full; these events are either very remote (permanent disability) or really far off (death) so there is truly no need for mortgage insurance. When we have passed on; loved ones can either continue paying the loan or sell the house to repay if necessary. In the best of situations; we would have paid the house loan in full by the time we meet our maker.
But as the realists know; life hardly ever works according to plan. Who knows what tomorrow holds? The very premise of insurance depends on us not knowing when disaster will strike and if you are the kind to feel antsy – you could definitely do with such a policy.
Property agents will of course encourage you to take it. It’s a great policy for them too as it ensures they will get paid no matter what happens to you. But even during a hard sell on the benefits of the policy and the guilt trip about leaving your loved ones peace of mind: always remember that the sole decision rests with you.
Do I have to decide when I buy my house?
The simple answer is no. Insurance agents and banks will always be happy to sell you a policy later in your mortgage if you didn’t buy one on the outset. Why would they turn away a paying customer? But there are of course things to remember when putting off purchasing a mortgage insurance policy:
1) If paying for MRTA which requires lump sum payment – can you afford this? Many who take MRTA upon application of their home loan will add the additional premium lump sum into their loan amount to help pay for it. Since you can’t do that later on – you must have the full amount on-hand.
2) Does not having mortgage insurance make you squeamish? Some people just like having insurance and not having a policy even for a short time makes them nervous. If you’re such a person – can you stand having a mortgage but not a mortgage insurance policy?
Once you’ve made a decision; it’s on to the next question – which one should you choose?
Which one is better?
There are two salient differences to note between the MRTA and the MLTA. The first being that the MRTA will pay out based on the amount still owed to the bank and the MLTA will pay the exact amount agreed in the policy no matter how much you owe (this is usually more than the amount owed and based on the value or purchase price of the property). The second difference is that the MRTA requires only a single lump sum premium payment whilst the MLTA will be recurring yearly.
There are two ways of looking at this selection: MLTA is great because not only will you receive the amount you need to repay the bank but a little extra which works as a cash value. But because MLTA premiums are repetitive; you’ll definitely be paying more in the long run than you would for an MRTA. Think about your loan tenure: is the extra you will pay for an MLTA justified in the event of a pay out? MRTA on the other hand is great if all you want to do is to secure your mortgage. It’s the bare minimum in mortgage insurance and it’ll definitely do the job but it’ll give you little else. Still, it’s a single premium payment and is easier if you don’t expect to have a good enough cash flow to keep paying premiums every year.
Also remember that MRTA is non-transferable – meaning it is tied to this house during this financing period. Should you choose to sell; you cannot take your policy with you to the next property you purchase. The opposite is true for the MLTA which is a policy that follows you (if you so want it to!).
When it comes down to it, which is better will depend on you. If you want a bare minimum policy just to secure your house this time around – the MRTA is the choice for you but if you want something a little extra; the MLTA will be a better option.
In truth, the policies have so many important distinctions that it’s not really possible to say either one is better than the other. As always, after informing you of the distinction; the best thing you can do is make the decision based on your needs.