Private Health Insurance: Rebate, Tax & Lifetime Health Cover Loading

By | April 20, 2016

is private health insurance worth it for australians - dividends down under blogAuthor: 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.

The Rebate

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.

PHI LHC

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 Tax

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:

PHI Tax

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.

Final thoughts

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!

17 thoughts on “Private Health Insurance: Rebate, Tax & Lifetime Health Cover Loading

  1. Team CF

    Interesting analysis, you may also want to considered taking into account increases in medical costs (and thus associated coverage) over the years. We calculated that in the Netherlands the medical costs on a national level (which does impact the insurance premiums one way of the other) is a whopping 6% annually! That is the down side of people don’t really caring about their health, eating poorly, drinking too much booze, and are not exercising (or a combination thereof). Add lots of misinformation on lifestyle choices/diets/etc. and everyone pays too much for healthcare…. Sorry, end of rant.

    1. Dividends Down Under Post author

      Thanks CF,

      I did think about increased medical costs (and the fact that the rebate is dropping gradually each year) but I felt it was too hard to predict what they will be, plus money will change in value, so I felt it was easier to keep “today’s dollars, today’s prices” as hopefully the percentage of our income allocated to health expenses won’t rise, otherwise we would be a in a bit of trouble with a very unbalanced cost of living. As the costs rise, incomes rise and it all evens out in the wash 🙂 (hopefully!)

      I definitely relate to your rant, Mr DDU and I have been working on a healthier lifestyle over the last 2 years and are very happy with the changes, we feel much better for it and it feels great mentally too. Once you focus on your health and lifestyle it really makes it obvious how many people around you don’t.

      1. Team CF

        Very wise words! That being said, still would consider that your medical (coverage) expenses will increase faster than inflation. Unless we collectively start improving our health, which I can’t see happening soon unfortunately.

  2. ambertreeleaves

    Reading the above, I am just happy to pay a lot of taxes in Belgium and have a decent basic insurance via the government, completed by one from our employers.

    1. Dividends Down Under Post author

      Thanks for reading ATL 🙂

      We do have a fantastic public system in Australia, I guess that’s why it’s such a hard decision if we should get PHI. It’s also very complicated once you start to try and understand the costs of PHI, probably the most difficult thing is that there is no set “out of pocket” fee for anything, doctors can charge as much as they like and the PHI will only cover to a certain dollar amount, which means you won’t know how much it will cost until you need to be treated (or are researching treatment)

      Thankfully we have great doctors in the public system though, and they don’t charge any extra, but you may have longer wait times.

      I’d be really interested to read an analysis of your health system in Belgium, how it works and what you think about it 🙂

  3. The Personal Economist

    Really interesting analysis Mrs DDU. There are also extra costs for PHI like excess when you go into hospital and OB fees but this just confirms your conclusion. On the other hand by having PHI we get things like dental covered and benefits on optical. I only wish I’d done this analysis at your age 😉

    1. Dividends Down Under Post author

      Thank you TPE 🙂

      I did mention the out of pocket costs in the “part 1” article, but it’s just so hard to calculate the costs into the equation, way too many variables and we can’t predict what we will need treatment for later in life (I guess that is also a “point” for getting PHI, for the peace of mind for more immediate or specialized care).

      I didn’t factor in any “extras cover” with these, as the lifetime health cover loading and the medicare levy surcharge is only applied to the “hospital cover”, though I believe the rebate is on both. Because we don’t have extras cover (and don’t intend to take it up at this stage) it isn’t a factor for us. Though I will probably do a part 3 at some point explaining our decision and comparing it, I really find it interesting comparing the financial outcomes, especially when the decision for PHI is almost completely a lifestyle choice in Australia.

  4. Mr. PIE

    Always fascinating to read about health coverage in different parts of the world.

    Living in the US but originally from the UK, I have seen the value of both systems. I am not sure which one is better for mid/high salaried employees. High quality care in the US but for many at a terrible price. pretty much universal cover in the UK NHS system but incredibly long wait times for surgery. Often too late for some.

    I do wonder which country in the globe has the best overall balance and “gets it right”.

    1. Dividends Down Under Post author

      Hey Mr PIE, thanks for coming by 🙂

      I’m a little envious of how incredibly extensive the UK health cover is – from what I’ve read, the NHS would have fully paid for IVF if we were from there (in Australia it is about a 3rd paid for by Medicare).

      I’m not sure exactly the system for PHI there, but I’d assume they are basically paying for the ability to cut the queues, so having PHI in the UK sounds like the best of both worlds.

  5. The Green Swan

    I find it interesting to see how the different countries manage health care and insurance. The challenge all countries face is the improving technologies and advancements in healthcare are costly and should everyone have a right to access such costly care. The other challenge is much of the globe has aging populations, which require more expensive care. And lastly, we are just too unhealthy these days…not everyone, but the majority…like Team CF pointed out.

    Thanks for the post DDU.

    The Green Swan

    1. Dividends Down Under Post author

      Hey TGS, thanks for reading 🙂

      On the health front – I really believe the government should be investing in “real world, daily life” health education, teaching kids in school about practical health, nutrition and calories. So many people don’t even have a basic concept of what they are eating. If we instill good habits in kids, and explain to them why, they are much more likely to carry that on as adults.

      Also, I know that in Australia some medical advancements aren’t covered under Medicare completely, or you need to have a specific “diagnosis” to use it, even though some people without that particular diagnosis still need the testing. MRI tests aren’t covered for a lot of conditions. I guess it’s up to each country to decide, in Australia we are at a very uncomfortable point where the government is trying to “cut” things they currently cover for, which is hard to swallow.

  6. Investment Hunting

    Great post. Super confusing for me since I’m not Australian. I’m going to stop complaining so much about the U.S. health care system. Here, as long as you have a job, it’s just a simple co-pay that gets taken out of my check every two weeks. Having said that it’s still expensive. I pay $600 a month for insurance.

    1. Dividends Down Under Post author

      Thank you IH.

      Don’t worry, it’s super confusing even if you are Australian. $600 a month is insane, but I guess one day Australian prices will be up that high – the cost of health insurance is rising faster than inflation lately.

  7. Financial Slacker

    Great analysis. You have motivated me to look more closely at healthcare around the world. I’ll be reading some of the other posts you mentioned that go into more detail about the Australian healthcare system.

    I’ve worked in healthcare here in the US for over 20 years, but to be honest, I haven’t spent much time looking at how other countries handle it (other than the propaganda we get here depending on what side of the issue somebody is trying to promote).

    I loook forward to learning more and forming an opinion.

    Thanks.

    1. Dividends Down Under

      Hey Slacker – such a delayed reply, sorry!

      I love that you just like to learn about healthcare systems for your own knowledge and curiosity – exercising the brain by expanding it with knowledge is always such a great past-time. It is very interesting when you compare the USA system to other countries, we are a tiny bit afraid in Australia that the government is wanting to move towards a USA style system, I know our system isn’t perfect but it might be the lesser of two evils for Australia to keep our dual public and private (public health care is too much of a safety net that Aussies are used to).

  8. Life We Learn

    Thanks for this! I was actually treating the medicare levy and medicare levy surcharge as the same thing. Thanks for pointing that out to me! It presented a HUGE flaw in my calculations. So after doing a bit more research and a few more calculations, it turns out that there won’t be any savings at all for us. If my calculations are correct, we will actually be spending a few hundred more on PHI than the surcharge. I am basing these figures on last years numbers of course. However, despite this we have decided to keep our PHI for now. With a baby on the way it might come in useful and at least we don’t get penalised further with LHC.

    I like your article, it is very informative. I thought it was interesting in your graph that getting PHI after you are 66 years old shows high savings. I know you based it on your current premium, but I suspect that premiums would be much higher for someone signing up who is around that age, as they would be a higher risk. My dad signed up for PHI in his late fifties and he was paying at least $150 just for himself, and this was a few years ago. I suspect it would be higher now.

    Anyways, many thanks again!

    1. Dividends Down Under

      Hey, I’m so glad you came by and had a read 🙂

      I really don’t blame you for getting confused – it is such a confusing topic with so many variables – I think the health insurance companies like it that way so they can confuse us into more profits for them!

      There’s no shame in having PHI and not be saving any money, but at least you’re not expecting a saving and get a nasty shock down the line that you’re not saving money! We decided to get health insurance even though it costs us a lot extra to have it, sometimes the peace of mind is worth the price.

      On the premiums for older people – legally PHI companies cannot change their premium prices based on demographic of the customer. Every single person is charged the same premium regardless of their age, gender, condition of health; that’s why it still costs so much for a health 18 year old (the 18 year old’s premium is basically funding the PHI cost of a 80 yr old with many health conditions) PHI companies lose money on a lot of older people (or people with serious health conditions) but make all that money back on the young healthy people that have PHI for “just in case”. $150 per month for your dad doesn’t sound crazy at all ($1,800 a year), it depends on how high his cover level was and which company. They also tier their prices; changing from single to a family won’t double your prices, it’s not a per person price, like if you insure multiple cars you get a “multi-car discount” PHI companies kind of do “multi people discount”. Also remember you are getting a nice corporate savings deal through work!

      I hope you get to put all the PHI analyzing confusion behind you and enjoy the peace of mind being covered, hope your pregnancy is going smoothly too 🙂

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