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Private health insurance at a lifetime milestone

Jonathan December 12th, 2014 0 comments

Entering your thirtieth year can mark a major milestone in the progress of a lifetime. In Australia, reaching that mark often includes making key decisions about private health insurance (PHI) for singles, couples and young families.

The interwoven threads of financial incentives and disincentives to taking out private health insurance (PHI) in Australia are often confusing to many young people. The segment of the population under 35 is the least likely to require health care and therefore most likely to ignore PHI and rely on Medicare as their insurance of choice. Young people may still be hospitalized. Check out this chart of hospitalizations by age.

Hospitalizations by age.

Nonetheless, young Australians who are about to or have just turned 30, whether single, married or starting a family, who have not taken out private health cover will need to confront three major issues going forward – see Table 1. We’ll look at each in turn

Financial incentives for young Australian adults to join the PHI system

Incentive Penalty/Reward Group affected
LHC Loading 2%/year acc. fee 2%/year acc. fee
Medicare Levy Surcharge 1.5-2.5%/year fee Incomes $90,000+

Lifetime Health Cover (LHC) Loading

The most important financial incentive to joining the PHI system by the time you reach the age of 31 is to avoid paying the LHC Loading. This tax kicks in when the taxpayer reaches age 31 and grows steadily thereafter, reaching a maximum of 70% after 35 years (age 65).

LHC Loading is an extra tax of 2% on top of your basic hospital-coverage premium for every year over the age of 31, beginning on June 31 the year after your birthday, that you do not have that coverage. In other words, if you do not start paying for hospital coverage until you are 36, you must pay an additional 10% above your premium for the 5 years above 31, multiplied by an accumulating 2% per year

Key facts:

  • Full name: Lifetime Health Coverage Loading (LHC Loading)
  • Kind of PHI affected: Hospital coverage
  • Effective at: Year beginning June 30 after your 31st birthday
  • Tax rate: 2% of premium for each year over 31 not covered, added together

The point of LHC Loading is to encourage Australians to buy into the PHI pool when they are younger rather than free-ride in their youth and then buy in when they are older and more likely to use the system. It is a powerful incentive for Australians to take out PHI at a younger age, especially when added to other incentives.

However, the demand from younger Australians for lower-cost policies has led to a growth in so-called basic coverage PHI policies. These bare-bones plans typically offer the minimum amount of coverage prescribed by law and exclude certain types of medical services, including some commonly used by younger people – see Table 2.

Table 2 – Typically excluded treatments in basic PHI coverage

  • Assisted reproduction and IVF
  • Obstetrics and birth-related care
  • Non-cosmetic plastic surgery
  • Gastric banding and obesity surgery
  • Psychiatric care
  • Rehabilitation

Couples in their early thirties thinking about starting a family, for example, should bear in mind that bare-bones basic-coverage policies typically exclude all reproductive and obstetric care, as indicated in the table.

Medicare Levy Surcharge and Private Health Insurance Rebate

A further incentive for younger taxpayers at higher income levels to buy PHI is to avoid paying the Medicare Levy Surcharge (MLS) while receiving the Private Health Insurance rebate. Each begins to impact the taxpayer at income levels around $90,000 per person.

1) Medicare Levy Surcharge

Acronym: MLS
Kind of PHI affected: hospital coverage
Effective at: $90,000 annual income if no PHI
Tax rate: 1%-2%

2) Private Health Insurance Rebate

Acronym: PHIR
Kind of PHI affected: full coverage
Effective at: From start of coverage
Subsidy rate 29-38%

Taxpayers must pay the MLS beginning at incomes of $90,000 annually if they do not have PHI and thus rely solely on Medicare. This acts as an incentive on taxpayers to take out private hospital cover and thus avoid paying the levy.


Medicare Levy Surcharge Calculator

The Medicare Levy surcharge is an additional fee paid on top of the 2% Medicare Levy Surcharge that most Australian taxpayers pay. You can avoid the surcharge if you have Private Health Insurance (Hospital Cover).

The exact surcharge level you'll need to pay depends on your income level and relationship/family status. Use the slider and dropdown menu below to determine what surcharge you're liable for if you don't have private hospital cover.

Please select status

Your Medicare Levy Surcharge is 1% of your income, or $2050
Singles
Families
$90,000
$180,000
$90,001-105,000
$180,001-210,000
$105,001-140,000
$210,001-280,000
$140,001
$280,001
Medicare Levy Surcharge
Standard Tier 1 Tier 2 Tier 3
All ages 0.0% 1.0% 1.25% 1.5%

Extras Insurance

This refers to areas of PHI that are not typically included under the basic hospital coverage demanded of the incentives programs. Consumer-information outlets like Choice  typically recommend that consumers buying PHI for tax purposes only should not include extras policies, since these are not considered for tax purposes. In addition, extras insurance typically only covers part of the cost of services like dentistry and optometry.

Nonetheless, for couples in their early thirties who may be considering starting a family, avoiding extras insurance might not be a wise choice. Extras insurance will, for example, cover portions of some pregnancy and birth expenses not covered by most hospital plans.

Even better, once children are born they are automatically covered by their parents’ extras insurance and some insurance policies offer no-gap (no-copayment) coverage for children. Any parent with growing children these days knows the strain that children’s dental expenses, in particular, can place on a family’s budget.

Action plan

Avoiding the LHC loading of 2% per year accumulated is as good a reason as any for Australians who have entered their 30th year to buy private health insurance especially for anyone earning (or likely to earn) more than $90,000 per year. This is because it will remove the Medicare Levy Surcharge of 1% applied at this income level. It is important to remember that PHI Premium costs are also subsidized by the government.

For couples of this age at this income level ($180,000 combined) who have or are considering having children, there are further incentives not only to buy insurance, but to buy so-called Extras coverage as well. Although the cost of such insurance is not subsidized, it (partially) covers reproductive, pregnancy and obstetrics services that are not covered by basic hospital plans. It also includes free coverage for children in potentially-expensive areas like eyesight and dental services.

Bottom line: Unless you plan to live on schoolteacher salaries all your life (or lives), you will definitely need to buy PHI. And if you plan on having children, best make that a comprehensive policy that includes both hospital coverage and extras insurance.

Disclaimer: The above information is correct and current at the time of publication.

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