Author: Mrs DDU.
Private health insurance (PHI) is a very extensive topic in Australia, with lots of things to consider when navigating the PHI pros and cons list. “Should I get private health insurance?” Is a question almost every Aussie asks themselves at some point in their life. I wrote an article here explaining the basics of our choice and mindset for our specific medical situation, taking into consideration our infertility and IVF.
This article is delving into the more complex financial side of PHI; tax, rebates and lifetime health cover loading all play into our consideration for PHI.
If you are reading this quite a bit later than when it was posted, information in this article might not be current.
We all love free money from the government right? Well luckily for us here at DDU our income falls into the ‘Base tier’ ($90k for singles, $180k for families) so we get the full rebate (for under 65 year olds). The rebate lowers every year on the 1st of April, but we can “lock in” the previous (and higher) rebate for that little bit longer if we pay yearly, which we did.
The current rebate off the PHI premium, as of April 1st 2016, is 26.791%. As a simple example, if we were quoted $1,000 (bargain!) up front for a year of PHI we would get $267.91 “off” the price. Be aware that a lot of quotes have the rebate already included in the quoted price. If you want to have a look at the current rebate tiers, age brackets and rebate percentage head on over to this Australian Tax Office page which has a nice and simple table.
For us the rebate really doesn’t have any impact on our decision to get PHI, although it is a nice bonus to make it a bit cheaper. As the rebate is gradually dropping each year we don’t feel it’s something to rely on or consider when getting PHI.
The Lifetime Health Cover Loading
Lifetime health cover loading (LHC) can get a little complicated, but the basic rule is; if you don’t have PHI ‘hospital cover’ by the 1st of July after your 31st birthday LHC will kick in at 2% and accumulates, adding 2% to your PHI premiums year on year. For people who immigrate to Australia after the age of 31 your LHC would kick in on your 1 year anniversary with Medicare (congratulations, what a lovely gift from the government).
The maximum LHC that can be applied to anyone is 70% and all LHC can be removed after 10 continuous years of PHI hospital cover. If you have any LHC applied to you, you cannot get a rebate on this percentage; if you have $1,000 PHI premium (without rebate) and 10% LHC, your total premium is $1,100 but the rebate % is only applied to the initial $1,000.
Currently being 23 & 24 LHC doesn’t impact us. I mentioned in the last PHI article that we aren’t married to the idea of holding PHI; taking it up when ‘needed’ and dropping it again is fine by us. Serving the 12 month waiting period (more than once) isn’t something we are bothered by and there is a large chance we will drop our PHI to the curb before the age of 31.
So considering our flip-flop approach to holding PHI and our deeply engrained planner mindset I wanted to put a graph together to see if getting (and holding) PHI at 31 is the route we should take. What would be a better financial outcome? and does it make any financial sense to hold off on permanent PHI until 10 years later at the age of 41 (20% LHC loading), or even taking PHI up at the age of 66, at the maximum 70% LHC loading. In each scenario I’ve assumed that we would hold PHI until 100 years old (Mr DDU has life goals to live to 100, so I might as well tag along).
For simplicity’s sake I’ve used the numbers from our current yearly premium – $3,191.05 ($2,303.30 with the 2015 rebate of 27.820%). I’ve also applied the same rebate each year for the graph, even though in the real world it would continue to reduce each year, which would actually make the perceived benefits of not having LHC loading even less.
Waiting until the age of 41 (10 years after the LHC age of 31) you have saved $16,650.90 even after factoring in 20% LHC loading for 10 years.
Waiting until the age of 66 (35 years after the LHC age of 31) you have saved $58,278.15 even after factoring in 70% LHC loading for 10 years.
Those are absolutely huge savings and I feel better about holding off on permanent PHI until we are a little older. Even just that 10 year difference to 41 is substantial, we can definitely make that $16k work much harder putting it to good use somewhere else. Of course we have to take into consideration what our income level will be at that age, and the tax implications, factoring that in would change the outcome (I’ll go over that below).
The Medicare Levy Surcharge (MLS) is a tax applied if your taxable income reaches $90,001 for singles and $180,001 for families. The MLS starts at 1% and has 3 tiers depending on your income and maxes out at 1.5% of total taxable income (at $140k for singles, $280k for families).
The Medicare levy surcharge is not to be confused with the Medicare Levy; The Medicare levy is 2% of all taxable income paid by all Australians (unless that individual has an exceptionally low income). If you want to learn more about the Medicare Levy Surcharge check out the Australian Tax Office page here.
Getting PHI once your income hits the MLS seems to be more of a moral and lifestyle choice, with that extra taxation as an incentive. There is a bit of a mentality once your income hits that level you should remove yourself from the public system because you can afford it, and free up room for those who can’t. I can see that once we hit that income level we may choose to have PHI for peace of mind, but on the other-hand I could also put PHI in the category of “lifestyle inflation” (increasing your lifestyle expenses to match your income, therefore never really getting ahead financially). I also agree that when Mr DDU and I hit a higher income level I would feel obligated to keep those public resources for people who can’t afford it, I know I would feel a bit disgruntled if someone with double our income was taking a hospital bed we needed.
Out of curiosity though, and to see how it stacks up financially, I added the MLS to the previous graph. Putting the income at $180,001 is 1% MLS (the rate of tax for incomes between $90,001-$105,000 for singles and $180,001-$210,000 for families), with the same age ranges as before:
I set the income for the MLS at $180k because it seemed logical that being right on the threshold would make us most likely to struggle with the decision, and be torn over what is the best choice for our lifestyle and finances. It’s really interesting that the choice to not get PHI at all is by far the best purely based on financial numbers, the difference between getting PHI at 31 and never getting it at all is $35,286 – assuming the income never rises from $180k and for a lot of people they stop earning any income when they retire. The difference between getting PHI (with 180k income) at 31 or waiting until 41 is only $1,349.10 (being more expensive waiting until 41). I’m surprised to see that financially It’s better to either get PHI right at 31 on a high income, or never get it at all – the two most polar opposite choices.
In all 3 categories (rebate, lifetime health cover loading and tax) it really boils down to lifestyle choice for us, because not getting PHI could be way better for our wallet, which I’m surprised and kind of relieved to see in my graphs. I’m way more comfortable knowing that we can hold off on permanently holding PHI without ruining our “value for money” long term, and if we have a lifetime health cover loading it won’t be the end of the world.
How does the Medicare levy surcharge, lifetime health cover loading and rebate play into your PHI decisions?
Thanks for reading this article about our investing journey Down Under.
Onwards and upwards!