Do you really need health insurance?

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With health insurance premiums always on the rise, the argument of whether to have health insurance or not has been waged for many years. 

Do I take out health insurance or do I invest the same amount each year and use this if I get sick?

And what about the tax or rebate incentives, are they worthwhile?

As with any type of insurance the decision is a personal one. Some people go without insurance, thinking that the money is better spent or invested elsewhere and are willing to take that risk. But how many of us have actually sat down and weighed up the differences between taking out health insurance or not, particularly with the government penalties on those not covered by a private health fund?

Is this you?

Michael is a 30-year-old family man who pays $2,000 per year for basic health cover. By age 70 he would have contributed over $150,000 (adjusted for inflation). For this amount, he and his family are covered for hospital (with elective surgery) and ancillary medical costs, although still subject to his insurer’s hospital excess.

If Michael and his wife decided to cancel their health fund insurance and invest the $2,000 per year (adjusted for inflation), by age 70 their investment would be worth around $340,000, assuming investment returns of 7% pa. They would have to pay all of the costs of having a doctor of their own choice, in a hospital of their choice plus any other associated specialist costs. Michael will also pay the Medicare Levy Surcharge on his taxable income, which can be thousands of dollars (see below).

While $340,000 may sound much better in your pocket than giving away $150,000 for something that you may not use that much, how many of us are prepared to put away that amount of money and never touch it? That's the tough question.

To consider if there are any tax benefits in obtaining health insurance, we must consider the Medicare Levy Surcharge, the Rebate on Private Health Insurance and the The Lifetime Health Cover Loading.  Let me explain these below.

The Medicare Levy Surcharge

If you earn less than $84,000 pa as an individual or $168,000 pa as a family and don't have private health insurance, you will not be charged the Medicare Levy Surcharge. However, if you earn over this and don't have private health insurance, you will be charged the Medicare Levy Surcharge as outlined in the following table. 

  No change Tier 1 Tier 2 Tier 3
Singles 84,000 or less 84,001 – 97,000 97,001 – 130,000 130,001 +
Families 168,000 or less 168,001 – 194,000 194,001 – 260,000 260,001 +
All ages 0.0% 1.0% 1.25% 1.5%

So if you're a high-income earner this could amount to a hefty sum.  For example, if you’re single and earning $95,000 per year, you will pay $950 (1%) extra in tax if you don’t have private hospital cover. For that amount, you could have some basic Hospital Cover and get the benefits of being insured instead of just paying the tax.

Rebate on private health insurance

The rebate on private health insurance can be thought of like a discount on your premiums. The level of rebate you receive is based on your age and income as calculated for Medicare Levy Surcharge purposes.

There are three tiers of Australian Government rebates as shown below.  For example if you are earning less than $168,000 as a family and are under the age of 65, you will receive a rebate of 30% which is like a discount on your premiums of 30%. 

Private health insurance rebate for the 2012-13 financial year

   No change  Tier 1  Tier 2  Tier 3
Singles $84,000 or less $84,001 – 97,000 $97,001 – 130,000 $130,001 +
Families $168,000 or less $168,001 – 194,000 $194,001 – 260,000 $260,001 +
Under 65 30% 20% 10% 0%
65 – 69 35% 25% 15% 0%
70+ 40% 30% 20% 0%

The Lifetime Health Cover Loading

Lifetime Health Cover is a Federal Government initiative designed to encourage you to take out private hospital cover earlier in life and maintain your cover.

Essentially, if you don’t take out private hospital cover by 1 July following your 31st birthday, you’ll have to pay more when you do join. This loading is a surcharge on health insurance for those who take out cover after age 31. It amounts to a loading on the premium of 2% for every year you are over 30.

For example, if you wait until you’re 40 to join, you will pay 20% more than someone who joined when they were 30. This is calculated at 2% for every year you’re over 30. 

So if your family income is below $168,000 pa, you won’t be penalised for Medicare Levy Surcharge, but you will be penalised if you choose to take out cover after your 31st birthday for every year that you delay doing this.  Remember that if you are under this income threshold you also get a 30% rebate on your premiums.  Keep in mind that your income levels may increase in the future and Medicare Levy Surcharge may then come into play.

Insurance should be seen as just that – Insurance. We always hope we won't need it but it's there in case we experience unforeseen emergencies.

There are always alternatives and their associated upsides and downsides that you can discuss with your financial adviser. In the end, the decision is a personal one and can be influenced by your current health and family health history.

Olivia Maragna is the co-founder of Aspire Retire Financial Services and has been recently named the Australian Adviser of the Year. Olivia's advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Send your finance questions to Olivia at scoop@brisbanetimes.com.au

Olivia Maragna

Olivia Maragna

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