Banks sometimes require borrowers to purchase a mortgage reducing term assurance (MRTA) policy as part of a loan arrangement because it provides some form of security that the loan will be paid whether the client passes or becomes incapacitated. On the other hand, for the policyholder, it offers some peace of mind that their debt will not burden their heirs. Therefore, it may seem like a sensible policy purchase, but that is not always the case.
Do MRTAs Benefit the Policyholder?
Critics consider it a bad investment as it does not provide the conventional form of security associated with life, chattel, and other similar forms of insurance. In fact, the bank who issues the loan is the beneficiary of the MRTA. However, in doing so, it still does protect the immediate family and other heirs of the policyholder. Because the debt would pass to the borrower's estate upon their death, the policy helps offset any remaining balance.
Do MRTAs Provide Enough Coverage?
Despite the benefit previously discussed, MRTA insurance has its limitations. One major drawback is that it often only offers a fixed benefit. In case the total loan amount incurs any extra charges due to interest, delinquent payments, or penalties for violating terms of the loans, the MRTA policy cannot hold the insurer responsible. In this way, it is possible that it would cover any outstanding sums on the loan. Careful contingency planning can help prevent any further liability.
Do You Need an MRTA?
Whether you need an MRTA or not depends on your specific circumstances. For instance, someone who is the sole breadwinner of their family may want to consider buying a policy. The risk of passing debt onto the family could outweigh overall the cost of an MRTA policy. Conversely, a young professional who is unmarried and in a good state of health has less of a need for an MRTA.
One other important factor to consider is your health. Insurers assess the likelihood of a borrower dying during the period of loan repayment and subsequently consider it to set premiums. Therefore, borrowers who have health risks, live an unhealthy lifestyle or work in dangerous environments, such as construction sites, often have to pay a much higher premium than the conventional office worker. In these cases, assess whether the money to be allocated for the premiums will be put to better use in an investment that can earn enough to pay for the loan later.
An MRTA may not represent the best investment, but it could be a viable option for certain borrowers. It's up to you to assess your situation and consult a professional, if needed, to determine whether you need this form of mortgage insurance.