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 🙂

 

Understanding Private Health Insurance

Private health insurance is one of the valuable tools that you can use as part of your lifestyle safety net.

One of the big benefits is access to a private hospital and avoidance of lengthy public waiting lists if you ever need surgery. (Of course deep pockets also gives you such access.)

The private health system in Australia takes pressure off the public health system so the Government provides incentives and penalties to encourage you to participate.

Thirty Percent Rebate

The Australian Government currently subsidises private health insurance with a 30% rebate. In one sense that is equivalent to making the insurance ‘tax deductible’ to the vast majority of Australians.

Medicare Levy Surcharge

I’ll let the Government explain this penalty:

The Medicare Levy Surcharge is levied on Australian taxpayers who do not have private hospital cover and who earn above a certain income. The surcharge aims to encourage individuals to take out private hospital cover, and where possible, to use the private system to reduce the demand on the public system.

The surcharge is calculated at the rate of 1% of taxable income. It is in addition to the Medicare Levy of 1.5%, which is paid by most Australian taxpayers. The Medicare Levy Surcharge is imposed on individuals earning over the threshold who do not have an appropriate level of hospital insurance. The threshold is $73,000 for individuals and $146,000 for families.

You do not have to pay the surcharge if your taxable income is below the income threshold.

A key thing to understand is that for many higher income earners the cost of the surcharge is higher than the cost of the private hospital cover insurance that would enable them to avoid the surcharge. So once you earn above the threshold it is a no brainer decision to purchase hospital cover. Remember there is no obligation to choose the more expensive ancillary cover.

Learn More

To learn more about private health insurance I recommend the following websites:

  • PrivateHealth.gov.au is an Australian Government website which includes a database of all policies offered by Australian health funds.
  • PrivateHealth.com.au is an initiative of the Heath Insurance Association and includes some statistics and discussion of the benefits of private health insurance.