Know Your Stuff: Do you need home loan insurance?

This article first appeared in City & Country, The Edge Malaysia Weekly, on August 9, 2021 - August 15, 2021.

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Several years ago, Leah’s husband passed away from a cardiac arrest, leaving behind his wife and two young children aged below four. His sudden, unexpected death left the family emotionally devastated. It also raised concerns among Leah’s friends about her financial ability to support the family, with commitments ranging from the monthly home loan repayment and the children’s education to household expenses.

It was later revealed that the home loan had been fully settled with the home loan insurance that her husband bought when he purchased the home.

Even though such insurance is not legally compulsory in Malaysia, many home loan providers have made it a mandatory condition.

When it comes to home loan insurance, many would be familiar with terms such as “MRTA” and “MLTA”. Two additional terms have been included in recent years, namely “MRTT” and “MLTT”. What are they?

Home loan insurance is a type of protection plan that pays the lending bank the mortgage loan’s outstanding balance in the event of the borrower’s death or total and permanent disability. 

According to the Life Insurance Association of Malaysia (LIAM), the protection amount for MRTA, or Mortgage Reducing Term Assurance, reduces according to (and matches) the remaining outstanding loan balance.

For MLTA, or Mortgage Level Term Assurance, the protection amount remains constant throughout the loan tenure, resulting in the likelihood of the borrower’s next of kin receiving a sum of money after the outstanding loan amount is paid.

There are other variations of these home loan insurance schemes as offered by different banks under different names. Two of the popular ones currently are MRTT (Mortgage Reducing Term Takaful) and MLTT (Mortgage Level Term Takaful).

The Malaysian Takaful Association (MTA) summarises the description, benefits and terms and conditions for MRTA, MLTA, MRTT and MLTT but it notes that they are not exhaustive. Potential insurance buyers will still need to refer to the insurance policy and takaful certificate of the respective insurance companies and takaful operators for detailed explanations of the benefits, terms and conditions and exclusions (see table).

Some homebuyers may feel that a home loan insurance is not necessary as they have sufficient protection from their life insurance policies. Nevertheless, both LIAM and MTA note that different insurance policies cater for different needs and purposes, hence homebuyers are advised to subscribe to the relevant insurance plans accordingly.

When a home loan involves a huge amount, most life insurance policies will not provide sufficient protection. Moreover, a home loan insurance is more affordable in terms of premium.

MTA advises homebuyers to consider the purpose of getting such protection. For example, homebuyers purchasing a house for long-term stay may opt for MRTT or MRTA. Meanwhile, MLTT or MLTA may be more suitable for investors who regularly buy and sell properties, as the coverage can be reassigned to cover the financing for  some other new property when the current financing is settled.

“It is worth noting that the cost, available duration of protection and even the ability to be granted protection can vary, depending on your own circumstances,” it says.

Buyers, MTA adds, must be aware of the choices that the bank can offer via its panel of takaful operators when choosing a home loan insurance. It is important to ensure that the coverage term and the profit rate of the financing facility match the benefits illustrated by the home loan insurance so that the sum covered reduces at the same rate as the outstanding financing amount.

“It will also ensure that borrowers are adequately protected throughout the mortgage financing term. Please go through the certificate terms and conditions of the mortgage takaful plan to ensure that this is the right plan that [you] have participated in,” it explains.

Apart from the coverage term, LIAM says the protection amount should at least match, or be sufficient, to cover the mortgage loan amount. In the case of MLTA, borrowers may even have excess claim benefits as the mortgage loan tenure progresses.

“It is important to understand the scope of coverage. Most borrowers are not aware that protection starts only upon the loan’s first disbursement unless the protection plan chosen has the option of immediate protection,” it says.

“They also need to understand how the payment for the protection plan cost is made and ensure that it is made or else there will be no coverage. Check if there is any applicable rebate with the subscription of a protection plan, such as a lower mortgage loan financing rate. They may have to go for a medical examination, depending on the amount of protection applied for.”