MythBusters : Must Buy MRTA When Buying A House?

Posted by Kris | Saturday, March 05, 2011 | , | 13 comments »



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.


Just google and you will find that alot of people are confused about this main requirement.



Myth 2: MRTA is non-transferable 
Truth 2: You can transfer your MRTA to the next property that you buy. 
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)


Myth 5: MRTA Insurability is not Guaranteed as compared to MLTA. 
Truth 5: MLTA (Mortgage Level Term Assurance)  is something like a life insurance policy coupled to your housing loan. It is alternative to MRTA but the premium is higher and is paid annually to the insurer. Because the premium is higher, you get higher surrender value when you cash it out. However, i am this myth is there because i am seeing forums explaining that MLTA insurability is guranteed as compared to MLTA. Insurability means that whether the insurer wants to sell you their policy or not. 

This myth  says that MLTA insurability is guaranteed meaning you don't need to prove your health conditions when you buy it. This is totally wrong. ALL insurance typically need you to verify your health conditions when you attempt to buy a policy. There is even a disclaimer put into every insurance policy type (life, critical illness and medical) that the insurer has a right to reject claims if something happens to you within 2-3 months of buying a new policy.

Hence, it is to my shock and disbelief that this myth is circulating in the internet. It is true however depending on your age (20-30 years old) and the total coverage you are able to get a policy without any medical checkup. However, try buying A ONE Million policy at 20 years old (you are likely very fit at that age) , you should expected to undergo a through medical checkout regardless of your age and risk profile.

Hence both MRTA & MLTA needs to take into account your age and risk profiles. Thus, higher premium for both when you get it at an older age.

In my sincere hope, I hope this longest post so far in my KnowThyMoney blog will give you some idea on the subject matter so we can utilize our money wisely in our daily life. 

P.S Disclaimer: I am not an expert nor a financial genius. I am gained all this knowledge by experience and GOOGLING and truly believe that by sharing knowledge we can avoid previous mistakes by other people and grow wiser faster.  It is a better & cheaper way to gain knowledge other than attending expensive seminars out there if you don't have any $$$ to spare. (Unless you want to pay me to give seminars :D )

Let's learn together and CARPE DIEM!! As such I encourage comments from readers.

FREE advice may not be necessarily an expensive advice provided you do your own research to confirm the validity of the free advice.

Thank you GOOGLE!! 


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13 comments

  1. ChampDog // 9:46 PM  

    Wow! Nice write up on MRTA. :) Btw, I wonder which bank doesn't require the MRTA requirement?

  2. Kris // 10:08 PM  

    Thanks ChampDog. I just would like to share my thoughts and idea. "Ignorance is not bliss" if you plan to be financially free.

    There are certain banks that allow you take up loan without MRTA. You just need to ask around. I am not sure whether i can post this in my blog..haha

    Most banks have now their own sister general assurance arm firm. (insurance is lucrative cash generating business) Thus, buying MRTA is considered good side business for them.

  3. Kesh // 10:55 PM  

    nice article~

  4. Kris // 9:42 AM  

    Thanks Kesh. Your name is wonderful..sound like CASH $$$$ :P

  5. Anonymous // 5:05 PM  

    hey Kris i hope u would see this. i wanted to understand mre bt MRTA even tho i know now it's too late. the house which my family and i are stayin now is haunted by housing loan agents ova nd ova again.i thought once the person died (my late dad), the house is fully insured by MRTA.the house was previously in my mom and dad's names.so i supposed the amount insured is only half?if not, the bank won't be botherin us to pay evry mth (now they are askin for a lump sum). thx, have a nice day!

  6. Kris // 6:32 AM  

    Anonymous,

    That is pretty weird scenario. They should not ask for lump sum as the MRTA should kick in. Nevertheless, the MRTA payback is usually not enough to cover the entire remaining loans.

    For example, lets say a house is RM100K. The MRTA protection maybe around 90K only and will be reducing year by year as your total loan also reduces (since you do loan repayment every month).

    You might need to check your MRTA policy whether you will get half of the money. If so, it cannot cover the entire remaining loan. I guess that is the reason they are chasing you.

    I think you might to apply another loan since one of the principal owners of the loan has passed away, to cover the "remaining existing loan - 1/2MRTA".

    Above is just my guess, you need to talk to the bank management.

    Rgds,
    Kris

  7. Anonymous // 7:01 AM  

    Kris, there is always a danger to take advices by googling and reading forum. I also read some misleading articles by bloggers who may not be trained in the field or "see" things from one side only, i.e. Either the supply side or demand side. Both may have their points but if taken alone, it becomes bias.

    What you mentioned here are not entirely accurate. Risk management involve not only the product itself but should take a holistic view. Without understanding each individual home owner situation, we should not rule out the suitability of a financial instrument. That is my 2cent. An MRTA may be suitable for home owners who are looking for short to medium term protection with one time commitment, or home buyers who have limited budget and would like to finance the premium into the loan. There is also an important part that is missing in your article. The TERM of an MRTA is very important too. It is a term policy, hence the protection will last as long as the term only. Regardless of the initial coverage, transferability among properties, etc, one will be under insured if he uses a shorter term MRTA to cover a loan that has longer loan term. That may explain why banks do not usually accept other remaining housing loan MRTA policies as a substitute to fulfill the MRTA requirement by a loan package. Another reason will be costing which I shall reply Champdog as below.

  8. Anonymous // 7:03 AM  

    Champdog, there are a lot of banks offer no-MRTA packages. What Kris did not mention is the costing are different. When you choose a non-MRTA packages, usually you will get an average-market interest rate, I.e. BLR-2.0%. However, the same bank may offer a better rate package, i.e. BLR-2.4% but with the condition of compulsory MRTA being purchased from the bank's own banker assurance business unit. Why? Because keeping everything constant, these two packages should produce similar profit margin to the bank, if not the same level of profit. It is all about profit margin. When a financial product is being designed, a loan package in this case, they need to include a profit margin that provide sufficient income to have a profitable business. Hence the inclusion of MRTA is one way to "balance" out the lost of margin with lower interest rate package. Do you expect a bank to remove this requirement but still give you a special rate package? Of course not! But as a home owner, you can still enjoy the lower interest rate package by fulfilling the minimum requirement by getting the minimum term MRTA, i.e. a 5-year term MRTA. Having said that, this so call "saving" in interest may cost you or your family more if anything unfortunate were to happen to you (the borrower). Your loan will be under insured. You are saving only in one aspect, but exposing yourself with "self-insured" the remaining loan that is under insured. If you know what you are doing and what the negative impact and ready to accept the risk yourself, by all mean go ahead and enjoy the lower interest package. That is a calculated risk that you can take if you understand well the implication of it. There is no "right" or "wrong" decision when taking up an MRTA. It is only whether MRTA can serve your needs at one particular point in time. There are some shortfalls of MRTA which I will explain using another question from another anonymous reader.

  9. Anonymous // 7:05 AM  

    To answer the question by another reader about why a bank is after the family of a decease loan owner, we have to look at it from the legal point. Legally, the property ownership has become the estate of the decease owner. The estate is legally liable to settle the outstanding debts that were owed by the decease. The estate beneficiaries, usually the family members, are liable to pay back all the out standing debts before they can distribute the estate to the beneficiaries. That is why the bank is coming after the family members to settle the outstanding loan of the property. You may wonder why the MRTA doesn't offset the outstanding loan. There are a few possibilities.

    I) Under insured, in a few possible ways.
    a) Joint ownership, with each owner took an amount of sum assured equivalent to half the initial loan amount. Most joint home owner usually do that to save MRTA premium.
    b) MRTA coverage term is shorter than the loan term. Hence the latest sum assured had reduced faster than the outstanding loan amount. Home owners may do that to save premium too, at the expense of under insured if the home owner does not pay up the loan in less than the MRTA term.
    c) BLR has increase a lot more than the rate of MRTA reducing rate (this rate is defined when purchasing an MRTA policy, but usually the banker default to a fixed value that the bank think will be higher than the average BLR).
    d) A combination of both (a), (b) and (c).

    II) Home owner might have refinanced the house without increasing the MRTA sum assured and extending the MRTA term. (Pratically, this is not possible for MRTA as the policy is a single premium policy which does not have the flexibility).

    III) A combination of (I) and (II).

    Hence, all these reasons show that how important it is to review the insurance coverage regularly. We may think that our original MRTA should settle everything but if we did not follow the original installment payments or refinance or market condition had change, we may have surprises like one of the reader here.

    The reasons mentioned above also shows that why we cannot rule out MLTA or normal life insurance as a complement or substitute of MRTA. Each product is designed with product features that are unique, and serve different needs. We must be careful not to generalize knowledge that we obtain from the web forum, including my comments here, without looking into individual situation. This is what I meant in the beginning when I said Kris is giving his views only from his perspective but may not be necessary applicable to others. One size doesn't fit all. That is why there are so many financial products being designed.

  10. Anonymous // 7:06 AM  

    Last but not least, I must say that it is important to understand one important fact. All business entities are there to make profits. Only with sustainable profits, a good business entity can continue to serve its customers' needs now and into the future. We also do not want to see a business entity that does not make a sustainable profit, because no matter how good the product offerings was, if the business entity no longer exist due to unsustainable low profit margin, then it will be a lose-lose situation for consumers, employees and business stock holders. So next time before we hit on any business entity, let us remember that we need them to survive to continue serving our needs. If we are employees for a business entity, dont't we also hope that our own company are making good profit so that our company can continue to hire us to provide our services to our company customers?

    I hope my sharing does provide some insight to your readers.

  11. Anonymous // 7:11 AM  

    If the original house owner has passed away, you can't apply another loan until you settle the estate issues. The joint name property had to be transfered to surviving party. In order to do that, you must settle the outstanding loan in one lump sum.

  12. Adrian // 7:12 PM  

    I was forced to buy an MRTA and MLTA when my intention is to sell my property within 5 years. It doesn't make sense at all to pay that lumpsum MRTA premium or to buy a very high premium MLTA via an Investment Linked policy. The banks that refused my loan currently are Maybank, Public Bank and Ambank due to my refusal to buy MRTA. Still negotiating with them now today as I'm writing this.

  13. Kris // 8:45 PM  

    Thanks for sharing Adrian. I hope your negotiation turn out in your favor.

    Cheers,
    Kris