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 🙂

 

Author: Matt Hern

Certified Financial Planner professional, Matt Hern has three times been awarded as one of Australia's Top 50 Financial Planners by The Australian Financial Review Smart Investor. He is passionate about guiding you on the right financial choices to achieve what you really want. Matt Hern is an Authorised Representative of Charter Financial Planning Limited AFSL 234665. All information is general advice only.

4 thoughts on “Should you prepay private health insurance?”

  1. How will this be administered on the 2013 tax return? If income exceeds various thresholds for year, but you have prepaid insurance will you have to enter the date you paid your premium? Can’t see it working any other way

  2. I too cannot see how any rebate included in a pre-payment will not have to be returned if you exceed the threshold at tax time 2013.

  3. Thanks Liam, MNS & Ben for your comments.

    Your questions highlight the challenge posed by imprecise laws and unintended consequences – a challenge to both the Government and to the tax payers. There is no certain and definitive answer to address your concerns.

    I have added a new section to the article titled “What’s the potential downside?” to bring that to the attention of future readers.

    You need to consider and make your own decision about whether the potential benefit ($ saved) is worth the risk to you. My articles are general information only – not personal advice.

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