A Personal Finance Blog for Malaysian: What are the benefits of MLTA?

Wednesday, November 3, 2010

What are the benefits of MLTA?

Benefits of MLTA

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 MLTA?

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

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

3. 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.

4. 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.

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

6. 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.

7. 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.


Illustration:
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 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]

However, MLTA are not for everyone because:-
  • Cash flow - Additional payment from month to month is required as compared to MRTA, which you can financed into the loan and your installment amount only increase marginally.
  • Timing - Time frame for holding the property may be too short.
  • Existing life insurance policy - Those who have bought "extra" life insurance earlier.