Should you prepay private health insurance?

Is your income above $84,000 as a single, or combined income above $168,000 as a couple? Do you also have private health insurance?

Then you should consider this opportunity before 30th June.

Effective 1st July this year (2012) the Federal Government is reducing the private health insurance rebate for singles earning above $84,000 and for couples earning above $168,000 (combined). The new rebate amounts are shown in the below table.

Income thresholds

Private health insurance rebate

Single

Couple

Under 65

65-69

70+

Less than $84,000

Less than $168,000

30%

35%

40%

$84,001 to $97,000

$168,001 to $194,000

20%

25%

30%

$97,001 to $130,000

$194,001 to $260,000

10%

15%

20%

$130,001 and above

$260,001 and above

0%

0%

0%

Many people pay their private health insurance premiums monthly and have the rebate automatically applied by the fund.

If you continue this way then from July 2012 your private health insurance premium will increase (when the rebate decreases).

Pre-pay your health insurance premium and save

However, if you prepay a year’s premium before 30th June then you will still be eligible for the current rebate of 30%.

Estimate your saving now with this spread sheet tool.

An example of what you could save

Let’s say your a young couple with a combined income of $200,000 per year.

You call your private health insurer and they advise your current premium is $3,000 if you pay annually. This is after the current 30% rebate is applied, meaning the Government has already tipped in $1,286. (i.e. the actual total premium is $4,286.)

From 1st July your rebate will drop from 30% to 10%, meaning the Government will now only tip in $428. That means your premium will jump from $3,000 up to $3,858 per year.

If you pre-pay one year’s premium before 30th June 2012 you will only pay the $3,000 and effectively save yourself $858.

That’s a pretty good return.

Crunch your own numbers

I’ve created a spread sheet with the calculation to help you decide if it is worth you prepaying your private health insurance based on your own situation. Download the spread sheet here.

Finer details

What’s the potential downside?

The legislation, as originally written, is imprecise in how the rebate applies when it comes to the timing of premium payment and the period of cover. So, by implementing this strategy you are taking the chance that what matters is when you made the premium payment. This is similar to the current situation with the prepayment of other deductible expenses, for example income protection insurance premiums and interest on investment loans.

Therefore, to manage this potential downside it’s probably a good idea to choose to take the rebate as an offset at the time you make your premium payment. Waiting to claim the rebate at the time you submit your tax return adds an extra level of risk.

Clearly this consequence of the legislation was not intended by the Government. So there is a risk they may decide to amend the laws and back-date the changes (which they can do). If they do that then you may owe them the difference in the rebate.

If the Government does change the law then your downside is the opportunity cost of having prepaid some of your expenses. Keep in mind here that I’ve written this article for those who have already decided they want private health insurance.

As always, remember this free article is general information only and not personal advice. You must work out what is right for you in your situation and take responsibility for the outcomes of that decision.

Is it worth borrowing money to prepay by 30th June?

I know that many people unfortunately don’t have the savings sitting around to suddenly prepay a year’s premium. So the obvious question is “should I borrow?” In this case you may be borrowing by redrawing from your mortgage.

I’ve included a calculation in the spread sheet to help you make this decision for yourself.

If you do choose to borrow then you must redirect your usual monthly insurance premium payment to repaying the borrowed amount within 12 months. Otherwise you’ll eat up savings with the loan interest.

Another benefit

One other hidden benefit of prepaying your premium for a year is that you may also beat the usual annual health insurance premium rise in April 2013.

Please share

If you found this free tip of benefit please e-mail a link to this article to your high earning friends and family who may benefit. Thanks 🙂

 

Freedom to be by their side with Children’s Trauma Insurance

Parents – please resist the natural urge to avoid this article because you don’t want to think about the topic. The tool I share below could save you considerable stress if misfortune strikes your family.

What would you do if your child suddenly and unexpectedly became seriously ill?

If something happened to Sophie or Isaac I would want my wife and I to be able to quit work immediately and be by their side, full–time.

I wouldn’t want one of us to have to work just to ensure the mortgage and bills get paid.

I wouldn’t want to be dependent upon the generosity of family, friends and the community to get by.

I would want to be able to afford top health care.

I would want to stay in our home. The comfort and familiarity will be an essential aid to recovery, for us and the ill child. Moving home is an added stress we won’t want.

But with most families dependent on their income, where will the money come from to provide the freedom to make those choices?

Introducing children’s critical illness (trauma) insurance

Children’s critical illness insurance is also known as children’s trauma insurance.

Child critical illness insurance pays you (the parent or guardian) a lump-sum on the occurrence of one of a number of conditions, similar to how your own critical illness (trauma) policy operates. You choose how to use the lump-sum.

What’s covered?

Most policies cover over 20 different illnesses including the ones you’d commonly think of such as:

  • Cancer
  • Paralysis, including paraplegia and quadriplegia
  • Loss of limbs
  • Blindness, deafness or loss of speech
  • Severe burns
  • Coma
  • Death and terminal illness

As with all insurance if the severity of the illness meets the policy criteria then you will be paid a benefit. With these policies the benefit will be paid as a lump-sum.

How do you get children’s critical illness insurance?

Child critical illness insurance is an optional add-on to the parent’s insurance policy. It can be an option to life, TPD or trauma insurance. So even if you don’t have your own trauma insurance policy you may be able to add child trauma insurance to your death or TPD policy.

Usually the child needs to be at least 2 years of age before you can add them to your policy, though I’ve seen policies with entry ages up to age 5. Even if your child is not yet that old when you buy your policy you can add the child trauma option when they are old enough (which is exactly what I did for my two children.)

Many policies are now offering maximum cover up to $200,000.

How much does it cost?

Premiums range between $200 and $300 per year per child for the sum insured of $200,000. You can choose to insure for a lower amount to fit within your budget.

At around $5 per week per child I consider that value-for-money peace of mind. Much more valuable than my car insurance.

Why you should consider children’s critical illness insurance

It doesn’t matter if you believe the likelihood of serious illness is low. The life and financial consequence to your family would be severe.

It is the severity of the consequence that makes the risk high enough to warrant managing the risk through insurance.

Get the protection then get on with enjoying your family time with peace of mind.

How to make money online

It’s very alluring – the opportunity to make loads of passive income, working from home running an online business that works for you 24 x 7.

Internationally respected business thought leader and entrepreneur, Seth Godin just published an excellent list of 21 points about How to make money online.

It is an essential read for anyone caught up in the wonder of the money made by the handful of people who did make money online.

I recommend that budding entrepreneurs also subscribe to Seth’s blog and regularly read more of his thought leading ideas.