If you want to own a property (or you already have one), you need to consider asset risk planning. We’ll discuss the most common options for protecting your property assets, and provide some guidelines on the pros, cons, tips, costs, and how much coverage is needed.
Do I need property asset risk planning?
You will want to come up with a proper asset risk plan to make sure unfortunate events (i.e. incapacitated or pass away) have little impact on you and your loved ones.
Property Asset Risks
- Losing your property to the bank or forced to auction off your property.
- Losing the home you and your family live in.
- Forced to sell your property at a loss.
MRTA (Mortgage Reducing Term Assurance)
Protection: MRTA provides protection which reduces over time until it reaches zero at the end of its’ term. Some banks may offer better rates if you take a MRTA along with the loan.
Duration: 5 years – 35 years (up to maximum home loan duration)
Cash Value: None
Note: If you make an upfront lump sum payment, you might get back a refund for future premiums (if you cancel your MRTA early)
Cost: Roughly RM3,000 for every RM100,000 of protection required (differs from insurer to insurer.
E.g. RM500,000 protection: RM15,000 (lump sum)
Pros
- Low cost, especially if your coverage term is less than the full duration of your home loan.
- No need to pay an upfront lump sum (can be paid monthly) if bundled together with your home loan.
Cons
- Coverage may be insufficient if your remaining loan amount is higher than the protection you have, especially if your loan rate increases.
- No cash value
MLTA: Mortgage Level Term Assurance
Protection: MLTA has a level (or slightly increasing) protection.
Note: “level” protection means the coverage amount is fixed. (E.g. Loan is 500k, so coverage amount is 500k throughout the whole 30 years)
Duration: As long as you need the coverage.
Cash Value: Yes, the cash value increases over time (but may decrease in old age as protection costs increase).
Costs: Roughly RM400 for every RM100,000 of protection required (per year). Min RM1,200 per year. (differs from insurer to insurer)
E.g. RM500,000 protection: RM2,000 per year (166 per month)
Pros
- Offers level or increasing protection over time.
- Upon claim, payout goes to you/nominee(s), not the bank.
- Cash value.
- MLTA is covered on your life, not on your property. If you sell your existing property and purchase a new property, you can use your existing MLTA to cover your new property. (This only makes sense if your new property is roughly the same price as the old one)
Cons
- MLTA is more expensive than MRTA.
- Opportunity cost.
Tips
- Work with a good advisor to structure your asset protection according to your needs and goals.
- Inform your nominees (or trustee) about your protection and instructions on dealing with the property and funds in case of death/permanent disability.
- In some cases, taking up MLTA is an opportunity cost.
The amount of cash you save by taking MRTA instead of MLTA can be placed in a good investment which could generate you great returns over time (if you know where to put it) - If you plan to buy a house for investment or “flipping”, taking up a short-term MRTA can save you a lot of cost.
- If you already have plenty of life insurance coverage, you may not require extra protection.
MRTA or MLTA?
MLTA has more flexibility. However, your cash flow must be sufficient to handle the higher premiums.
MRTA is a lower cost option, and you can bundle it with your home loan if you prefer not to pay an upfront lump sum. In some cases, you might take up a MRTA to enjoy better home loan rates from your bank. If you are an investor with good investment strategies, a MRTA might be best for you.
FAQ
Note: The amount of home risk protection required depends on each individual’s needs and personal financial circumstances.
How much protection do I need for my primary residence (for medium to long term)?
For your own and family’s primary residence, cover as close to 100% of your entire home loan amount. Thus, if anything untoward happens to you, the entire home loan will be paid off and your family has a place to stay in.
(E.g. Property price RM500k with 90% financing. Home loan at RM450k. Cover at least RM400k – 450k)
How much protection do I need for rental/investment purposes?
For investment properties, some coverage is important to ensure that if anything unexpected happens, you (or your family/investment partners) have enough time to make arrangements without having to worry about monthly loan repayments or being unable to find tenants.
Your family/partners may need to sell the property but need to wait for the property market to recover.
- For Reselling (flip): recommended to cover 3 to 5 years equivalent home loan repayments.
- For Rental: recommended to cover minimum 1 year equivalent home loan repayments.
I have cash savings/investments and life insurance. Do I still need MRTA/MLTA?
You do not need MRTA/MLTA if you are fine with using your cash savings/investments to cover your outstanding loan if anything unexpected happens.
For life insurance, ensure that you are adequately protected.
However, please consider it carefully. MRTA/MLTA is a small expense for adequate protection of your property assets.
Should I take a premium waiver rider?
It is optional. You can compare the cost difference for “coverage with waiver” and “coverage without waiver”, then decide.
