Should you get private health insurance?
May 29, 2017
With cost of private health insurance increasing every year, many people are asking themselves “is it worth it?” The answer to that is “it depends”. Ultimately, this decision is both an emotional and financial one.
There are several factors to consider from a financial perspective when deciding to take out private health insurance – the ‘Medicare Levy Surcharge’, ‘Private Health Insurance Rebate’, the cost of the hospital insurance policy and ‘Lifetime Health Cover Loading’.
Depending upon your situation - it may not cost much more to have private health cover – making the decision easier to take out private health insurance a little easier.
The Medicare Levy Surcharge
Most Australian tax payers are required to pay a basic Medicare Levy (whether or not you have private health insurance). The Medicare Levy Surcharge is an additional levy, which applies to Australian taxpayers who do not have an appropriate level of private hospital insurance and who earn above a certain income. It is designed to encourage individuals to take out private hospital cover, and where possible, to use the private hospital system to reduce demand on the public Medicare system.
How much is the Medicare Levy Surcharge?
For the purpose of calculating the Medicare Levy Surcharge, “income” includes items in addition to normal income, such as rental losses, reportable fringe benefits and reportable super contributions.
Private Health Insurance Rebate
The private health insurance rebate is an amount the government contributes towards the cost of your private hospital health insurance premiums.
This rebate is income tested, which means your eligibility to receive it depends on your income. If you have a higher income, your rebate entitlement may be reduced, or you may not be entitled to any rebate at all.
The taxable income thresholds for 2015-16, 2016 -17 and 2017-18  are:
It’s also worth noting that the government has placed some limitations on what constitutes adequate cover, so make sure that your health fund policy complies to take advantage of the Private Health Insurance Rebate and avoid the Medicare Levy Surcharge.
Outlined below is a basic scenario where it makes sense (financially) to take out private health insurance, when taking into account the Medicare Levy Surcharge, the Private Health Insurance Rebate and the cost of a particular hospital insurance package.
Let’s take a single individual, named Sally, whose annual taxable income is $95,000.
Sally, like most Australia tax payers, is required to pay the Medicare Levy Surcharge. Sally’s income level puts her at Tier One, calculated at 1% of her income, which amounts to $950, to be paid at tax time.
We found a basic hospital cover policy for $1233.00 per year. Assuming Sally takes out this policy, then he/she would be exempted from paying the Medicare Levy Surcharge (saving $950) and be eligible to claim the government Private Health Insurance Rebate (calculated at the Tier One level) of 17.289% of the cost of the policy. This means Sally would receive a rebate of $213.17 towards to the policy, bring the cost of the policy to only $1019.83 for the year.
If Sally did not take out Private health insurance, she would have to pay $950 Medicare Levy Surcharge, and if Sally takes out private health insurance, she would have to pay $1019.83.
In effect, this means that Sally is only paying $69.83 to have private hospital cover.
Lifetime Health Cover Loading
If your annual income places you in the Base Tier for the Medicare Levy Surcharge (0%), but are expecting to move up Tier’s in the near future, you may still consider taking out private health insurance now to avoid any Lifetime Health Cover loading, which is designed to discourage people from waiting until later in life to take out private health insurance.
A Lifetime Health Cover Loading of 2% is applied for each year you spent without private health insurance over the age of 30. You can calculate your lifetime health cover loading here.
For example, if Sally took out health insurance (at $1233.00) for the first time at the age of 39, she will be required to pay 18% loading (9 years at 2% loading) extra on top of the health insurance premium being an extra $221.94 in loading per year. Sally would still receive the Private Health Insurance rebate of $213.17 which is calculated on the cost of her premium excluding the loading).
This brings the total cost of her health insurance $1241.77 for the year. So even with loading, Sally is only paying an extra $291.77 per year for private health insurance compared to having no insurance at all.
If you would like help working out your position in relation to private health insurance, simply enter your details below or call 03 9781 4533 and we will gladly assist.
The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should consider your own financial position, objectives and requirements and seek personalised advice before making any financial decisions.