Thursday, July 12, 2012

Mortgage Protection

Mortgage Protection = An insurance policy that will repay your mortgage in the event of your death, 
disability or some incapacitating disease. 
All of us want to protect our asset, right?

I believe many have heard of MRTA (Mortgage Reducing Term Assurance) when they get a mortgage 
for property.MLTA (Mortgage Level Term Assurance) is not quite new but gaining popularity over the 
past few years.

What are the REAL benefits of 

1. MRTA is an traditional product - Designed long long time ago with no flexibility and mainly to ensure
 the lender (i.e. the Bank) will get paid first.

MLTA provide more than one feature - Protection plus accumulation of cash value.

MLTA 's cash value is guaranteed* - therefore you will have total peace of mind knowing your family 
as well as property are in good hand when bad thing happened.

MLTA pays direct to you or your nominee - you or your nominee has control over the situation. MRTA
 pays direct to bank, not a choice for you. Your spouse or other survivors might be better off 
continuing to pay the loan -- assuming that's possible -- and putting insurance proceeds to other purposes.

5. MLTA is transferable in case you sell your house and buying another bigger one in 5 or 10 years later.

MLTA ensure your insurability (that is mean insurance company want to deal with you). Can you 
guarantee 10 years later your health condition is as good as now? You may want to buy but insurance
company may not want to sell because of health condition turns bad.

MLTA ensure you lock-in the low-rate now. If you buy MRTA and need another 10 years later, 
guaranteed it is much more expensive.

MLTA comes with flexibilities to package other benefits into a plan e.g. special benefits for maternity and women illness or Personal Accident or even Hospitalisation Benefits etc.

Scenario AMr. Dell has no 
MLTA but bought MRTA for his mortgage for his home.

He suffers TPD in year 4. Loss his ability to generate income, whole family in financial difficulty.

Since he can't serve the mortgage installment, he must claim the MRTA to cover the outstanding loan. 
Bank will gets the compensation from insurance company. Mr. Dell get his property for free, so to speak.

But, he has no other source of fund for his family (unless he bought some life insurance other than 
this MRTA).

Scenario B
Same as Scenario A, except that during the 4 years, BLR increased and therefore there is a shortfall
between the compensation from insurance company and the outstanding loan amount. Mr. Dell have to 
settle the different else the house is NEVER his. How to settle when one is already in financial difficulty?

Scenario C
Mr. Dell bought 
MLTA instead of MRTA because he believe in the new concept.
When TPD strikes, the compensation is more than outstanding loan by RM20,000

He and his family has the choice to:
1. Continue the installment with the compensation received from insurance company; or
2. Settle the whole loan and get the extra RM20,000 to cover other expenses.

Do you want to have the choices in your hand (instead of in the Bank's discretion)?
[never come across any bank puts borrower's interest in front of them, if you ever found one, let me know]

* depends the plan you sign up for.