One of the most common questions I get as a budget coach is, “Is private health insurance really worth it?”

Burdened with big mortgages, rising child care costs and low wage growth, it is only natural that young Australians question if the growing cost of health insurance is really worth it.

The problem is there are so many variables, not to mention misinformation, to consider that it is almost impossible to make an objective decision.

So in this article I will walk you through the key factors to consider when considering if private health insurance is worthwhile for you.

 

We have a good public health care system

Let me just start by stating that despite the fact we all whinge about waiting times in hospitals – whether that be sitting in A&E in the middle of the night with a sick child or waiting 2 years for a hip replacement – our Public Health system is world class.

The long waiting lists are typically for conditions like hip and knee replacements or cataract surgery.

If you turn up at a public hospital with a serious injury or illness you will get the treatment and care you need in a timely fashion. This is what your taxes pay for.

But let’s take a look at the ‘incentives’ (big sticks) in place to take up private health insurance.

 

Medicare Levy Surcharge

This is possibly the most important thing to consider when looking at the whether private health insurance is worth it to you.

The surcharge is simply an extra tax charged on higher income earners, who don’t have private health insurance to help cover the cost of health care. It kicks in at $90,000 for individuals and $180,000 for families. The levy starts at 1% and rises to 1.5% for higher income earners.

So if you are single and earn $90,000 you can expect to be slugged an extra $900 in tax. If you are a family with a combined household income in excess of $180,000 you will pay an extra $1,800 in tax.

To avoid paying the Medicare Levy Surcharge you need to have  Hospital Cover.

It makes sense that the more you earn the more having health insurance makes sense. Between what you are saving in tax and what you are getting back on health insurance you can actually come out in front.

The Australian tax office has a useful little ‘Income Tax estimator’ that will help you work out what your Medicare surcharge liability is likely to be.

 

The Private Health Insurance Rebate

Another incentive offered by the Government is the Private Health Insurance Rebate.

The rebate is simply money you receive from the Government to help you cover the cost of your insurance premiums. You can receive this rebate in two ways:

• As a discounted premium with your insurance provider, or
• Through your tax return with the ATO

You can see from the table below that the rebate is means tested and that the rebate increases with age. This table is from PrivateHealth.gov.au

So singles earning $90,000 or less and families earning  $180,000 or less under the age of 65 will receive a 25.934% rebate on their health insurance premiums.

 

I am about to turn 30 – what about the Lifetime Health Cover initiative?

The third ‘incentive’ to get younger people into Private Health Insurance is the Government’s Lifetime Health Cover Initiative. This one really is a big stick rather than an incentive.

Put simply if you don’t take out private health insurance by the 1^st of July after your 31^st birthday, any future private health insurance policy you take out will cost more.

So if you decide to get health insurance later, your premiums will increase by 2% for every year you did not have cover over the age of 30. So if you get insurance at aged 40 you can expect your premiums to be 20% more each year than if you taken out the policy at 30.

 

3 reasons the Governments wants, no needs, people to take up private health insurance

If the Lifetime Health Cover initiative sounds scary it’s meant to. The government needs young Australians particularly to take up health insurance; here is why:

• The more people who have private health insurance, the less reliance there is on the government-funded Medicare system.
• The more people who use private health insurance, the cheaper it gets for everyone.
• Most importantly the younger members help subsidise the cost of the older members. Unlike other forms of insurance, health insurance premiums are not allowed to increase based on age. This means younger members pay the same premiums as older member despite the fact that older members are more likely to use it. Now before you scream “unfair” just remember that in 30 years’ time you may find yourself hoping that there are young people around to subsidise your knee replacements and cataract surgery.

In 2016 Choice put together this awesome infographic using APRA: Private Health Membership and Benefits stats showing who gets the most benefit from health insurance.

All good reasons for the Government to try and encourage, cajole, scare you into taking on private health insurance but ‘scare tactics’ aside, is it really worth it to you?

 

What are the key benefits of private health insurance?

Benefit #1  – You can typically get access to specialist of your choosing when you want to see them.

Benefit #2 – You can typically jump public waiting lists and get elective surgery when you need it.

Benefit #3 – You have more choice about where you are treated.

Benefit #4 – If you are a poor saver then it also acts a forced savings to partially offset health costs.

That’s really about it; of course depending on your own life situation these benefits may be very worthwhile for you.

 

So when does private health insurance make sense?

• If you are a high-income earner and you are taking a substantial hit with the Medicare Levy, a quality level of Hospital Cover may make sense.
• If you are very active and require regular maintenance, are injury prone like me or have significant health issues that are covered by the particular policy you are taking out.
• If you are over 55 and starting to feel your age, whether that’s creaky joints or more sinister health issues.
• If having the ability to choose your specialist, having elective surgery when you want to have it and getting treatment where you want treatment are important to you.
• If you are a Nervous Nelly or Paranoid Pete who simply can’t sleep at night unless you have every known insurance in place.

But if you are young, healthy and an average earner it is very hard to justify private health insurance.

 

For us health insurance has been worthwhile

Over the years I would have to say that private health insurance has been well worthwhile for Lianne and me. Three unexpected caesareans, multiple surgeries related to my marathon running, orthotics, two sets of braces and regular trips to sports physicians, physios, osteopaths and massage therapists have all added up. Not to mention the fact we have avoided paying the Medicare levy for many years.

The ability to select our specialists and have surgery when it was needed has been a Godsend but for most people in their 20’s, 30’s and 40’s this simply isn’t a concern.

And with premiums increasing at double the rate of CPI and wage growth it is becoming very difficult to justify in the household budgets of young individuals, couples and families.

 

The smart alternative to private health insurance

Take the money you would be putting into private health insurance premiums and:

• Put it into a high interest savings account until you have a $2,000 to $3,000 buffer to cover and unexpected health issues.
• Better still if you have a mortgage, put it into an offset account (not a redraw facility) and save yourself 4-5% interest on your mortgage.
• Once you have the buffer in place, channel any additional premiums into knocking down any high interest lifestyle debt such as car loans, personal loans and credit cards, saving you 10-20% interest each year.
• Once the lifestyle debt is cleared, channel the premiums, plus the repayments you no longer have to make on your lifestyle debt, into your high interest savings or offset account so that when the medical expenses do arrive you have the financial capacity to cover them.
• The last thing you must do is budget for your known health care costs on a monthly basis. All of my budget coaching clients have a virtual ‘health jar’ that they allocate a certain amount of money to every month to cover the health costs they can anticipate, ie doctors’ visits, medications, optical, dentist, physio, chiro and so on. The buffer is then used to cover the unexpected, or unexpectedly large costs you just can’t anticipate or budget for.

So in summary – don’t get scared into taking on private health insurance. Private health insurers and the Government have a vested interest in getting as many young people into private health insurance as possible, but the reality is if you are young, healthy and on an average household income you are probably better off self-insuring ie saving the premiums, building a rainy-day fund and paying off lifestyle debt.