I noticed that this subject is not well mentioned in property investment related books. Hence I want to share what I know about MRTA to dispel some myth and misconception about it.
MRTA or "Mati Rumah Tetap Ada" (You Die Your House Remains) is an insurance that allows home buyers to protect themselves financially against possible death or permanent disability. Under the plan, anyone who dies or becomes permanently disabled before his mortgage is paid off will be relieved of his mortgage debt so long as he has made his MRTA payments.
Here are some of the myth that I heard about MRTA.(Mortgage Reducing Term Assurance) where your coverage decreases every year until ZERO typically at the end of your housing loan.
Myth 1: MRTA is compulsory when you purchase a house through bank financing.
Truth 1: There is no law that requires the home buyer to buy MRTA when financing a property. Hence, it the loan agent kept on pushing this idea to you, please be reminded that there is a conflict of interest here as he earns a good commission when you buy MRTA. However, there is a caveat to this if you refuse to buy MRTA.
A. Some banks make it a requirement for you to buy MRTA before extending their loans to you. It might be to lessen their financing risk or just to earn some extra income. So the best idea is to shop around for banks that does not have this requirement , if you are dead set not to buy MRTA.
B. MRTA is a "cheap" INDIRECT way to insure yourself against death and permanent disability. I will cover this more when I am in the mood to explain it. I gave it some deep thought on how MRTA will work in your favor in wealth planning. This is a contrarian view, as i know a lot of people even in the insurance industry (aka my agent) discourages me from buying MRTA.
Example: You buy a MRTA for RM200,000 property A for RM4000 premium, and after some years, assume your outstanding home loan is $100,000 while your MRTA coverage value will be likely <~100K. Your coverage will be reduced as the years gone by hence the term "Reducing Term".
Later the years you decided to downgrade your house to a property B valued at RM100,000. Selling property A will not just terminate your existing MRTA, you can just transfered it over to property B. Since the remaining coverage for the MRTA is around RM100K it is sufficient to cover for property B. Just write in to the bank/insurance agency to notified the change of property.(you can save a lot of money here) Remember the MRTA is insuring your life not the well-being of your property. Hence for the banks/insurance ,they are still insuring the same risks aka the "your life" regardless of whether it is the same property or not.
Let's say you aim for a higher valued property C which is RM500K. Hence, the existing MRTA coverage is not sufficient to cover for the risks if you croak while owning a RM500K property. Then, the simple thing to do is to top up the remaining RM400K coverage with another new MRTA policy unless you want to go naked/uncovered for the remaining RM400K.
Myth 3: Pledge your life insurance policy as replacement for MRTA
Truth 3: This method is much touted by insurance personnels as an "GOOD" alternative of buying MRTA. However, this is not easy to convince the banks to accept this unless perhaps you have a million dollar life policy and planning to take a million dollar loan which is too lucrative for the bank NOT to accept your proposal. For the average joes, this just will not work at all!!
Here is the common logic if you looked from the bank perspective:
If this allowed, what do you think the banks need to do before they accept your life policy. There is alot of low ROI risks by accepting people whom pledge their life policy. Banks make money by selling MRTA and also as a way of insuring that they can recover their profit by loaning out their money. They don't like non-performing loans even though if you cannot pay, they can take over/away your house. Bank earn more from the interest they get if you continue to pay the loans by staying alive. (Auctioning the house etc takes alot of low ROI for the banks to recoup their profit) Here are my thoughts: I am thinking from a bank perspective.
1. The banks need to check whether the life policy is genuine hence there is a lot of paper work especially if the life policy is bought from various life insurance company available in Malaysia.
2. Pledging something like a life policy that will only give them money when you croak from other life insurance company surely will incur a lot legal technicalities that will be time consuming. Remember getting money from other people is ALWAYS very very hard regardless whether you are a big corporation or an individual. Try loaning some money to your friends or relative and you will get what i mean. The banks will need to check also if you pledge the same life policy to multiple financiers if you have multiple properties. In the end where does the money go to???
Summary: Banks make more money if you are alive to service the housing loan + interest compared to auctioning the house if you croak.
Myth 4: MRTA has very low surrender value hence not worth to buy it.
Truth 4: This myth is true. MRTA like other insurance instruments has a surrender value but because MRTA premium is like ~1-2% of your loan amount hence you should not expect much from it compared to your traditional life policy. But from the financial perspective, what you buy is what you get. There is not point paying higher premium yearly for life policy just that you can get a hefty premium when you surrender it when you reach your golden age.
Remember the key thing to insurance policy is that it is NOT a SAVING/INVESTING instrument, it should be only used to protect your live-hood during your youthful and productive years. Hence you SHOULD NOT be taken in into the advice to subscribe to paying high premiums for savings-type insurance policy that can "give" you high surrender value. This will be just enriching the agent. Remember there is always a conflict of interest between those that earn commissions by selling something to you. It might not be in your best of interest to you. NO ONE can take better care of yourself other that YOU!! (so think think think and ask ask ask questions to your agent before decide to commit. I believe there are genuine helpful souls out there to help you in insuring yourself)