Mortgage Reducing Term Assurance (MRTA): Fundamentals

Assurance which provides financial protection in the event of premature death or total permanent disability on a reducing term life basis. Most of the time, medical examination is not require if sum assured is not significant and age below 45. If require, such expenditure will be paid by the company.

Coverage
. Death
. Total permanent disability
. Critical illness (optional / depends on individual assurance's coverage)

Premium payment option:
. Single premium
. Premium could be amortized / financed into a mortgage ( will increase the cost by 50% ~ 100% depending on the tenure of mortgage)

Basic mechanism
. Sum assured of MRTA is projected based on amortization method which is the same calculation method for mortgages and exhibit a pattern of reducing sum assured throughout the protection period.
. To hedge against the risk of interest rate fluctuation, the rate which used for the projection of protection is ranging around 7% - 9% (or a rate which higher than the effective market rate by 3% - 5%)
. A simple chart below shown the MRTA's coverage (In blue) and mortgage outstanding (in pink) throughout the tenure
Mortgage: -Tenure: 30 years, Effective interest rate: 4.3%, Loan amount: 300k
MRTA: Protection period: 30 years, Effective rate: 9.0%, Beginning Sum Assured: 300k

Estimation of premium payable
Age: 25, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 7,990
Age: 35, Tenure: 30 years, Sum assured: 300k, Rate: 9%, Single premium RM 16,570
Age: 45, Tenure: 25 years, Sum assured: 300k, Rate: 9%, Single premium RM 32,200




Risks & Important Notes
. Throughout the whole tenure, the sum assured is projected to fully cover the estimated outstanding with sufficient buffer (the gap between the pink and blue lines). However, it should be noted that the buffer is much smaller during the beginning and ending period, implying a risk:
If the fluctuation of interest rate is volatile during these period of time which resulted the effective interest rate of the mortgages breach the protection's coverage for substantial time, it will cause the outstanding to be more than the projected sum assured. So, if any unfortunate event hit the insured during these times, the sum assured might not be able to fully cover the liability. 


. MRTA is not a life time plan and only can cover up to age 65 ~ 75, depends on individual companies' coverage.

. Initial beneficiary of the policy is the institutions if MRTA is bought with the panel insurance companies of the banks and the policy will be kept by the institution instead of borrowers. (Unless you purchase the policy with other insurance companies, then, you would have your flexibility to assign your own beneficiary and safe keep)

. Quite a number of agents claims that MRTA is not transferable to a new mortgage. The fact is, assuming the mortgage is settled earlier than expected while the MRTA's coverage is still active. There are several options which available to the insurers:
1. convert it to term life. Some paperwork to be done over the counter.
2. surrender the policy and cash out the remaining value.
3. remain as it is. Assign it to new mortgage if it is acceptable in the future.
However, assigning an old MRTA to a new mortgage will not be able to provide full coverage for the latter, the shortfall will be even obvious if the old MRTA just have a few remaining years to go.

The chart below show the scenario which an old MRTA (pink line) used to insure against new mortgage (dark blue line). Grey area is the effective coverage which provided by the said MRTA while the light blue area indicates the unprotected outstanding.