Ask LH: When Should I Consider Getting Private Health Insurance?

Dear Lifehacker, When does private health insurance become worth it? With all the rules surrounding tax breaks (or penalties) for not having it, it can be difficult to decide if it’s a good use of my money. Thanks, Privatised

Hospital picture from Shutterstock

Dear Privatised,

The rules for private health insurance can be confusing, and have changed a number of times over the years. The current set of rules came into effect on 1 July 2012, so we’ll focus on those. (Slightly different considerations would apply if you already had insurance at that date.)

There are three factors you need to consider:

  1. How much your private health insurance costs;
  2. The level of rebate you will receive for that insurance;
  3. The extra Medicare levy you might have to pay if you don’t have insurance.

The cost can obviously vary depending on what you sign up for (insurance is generally cheaper when you’re younger, extras and expanded choice of specialists cost more). However, it’s actually more helpful to consider the other two factors first.

The Medicare levy kicks in for an individual if you are earning more than $84,000, at which point you’ll pay 1 per cent on your taxable income. That figure rises to 1.25 per cent if you earn more than $97,000, and 1.5 per cent if you earn more than $130,000. The rules become more complex if you’re married or have a family; the ATO has a calculator which will calculate the surcharge for your specific circumstances.

That said, we’ll assume you’re single. If you earn $84,001, the effective Medicare levy surcharge will be $840. What this means is that if you earn above that amount and can find health insurance for less than that, you’ll definitely be better off (since you’ll have to pay out that money anyway). If you earn under that amount, you might prefer to keep the money — but you will be penalised eventually if you don’t have health insurance by the term you turn 31.

If you haven’t signed up before you turn 31, your insurer can apply a loading of 2 per cent a year (up to a maximum of 70 per cent), As of this year, the loading portion of your insurance cost is not eligible for rebate relief either, so the total cost will be higher. So even if you haven’t quite reached a salary level where you have to pay the levy by that age, it will often make sense to sign up before the price penalty applies if you can see that happening to your salary at some point.

Whether you can find a policy at the right price will also depend in part on the level of rebates you can score, which takes us to the second item on that list. The government effectively subsidises private health insurance premiums by rebating part of the cost, but the level of rebate differs depending on what you earn. The rules are complex (see the full summary here), but effectively offer a higher rebate for people on lower incomes and people who are older. The threshold amounts are the same as for the Medicare Levy surcharge.

Note that in most cases health insurers will apply the rebate up-front, by quoting you lower premiums. When comparing prices, make sure you’re comparing like for like. You have to detail your insurance cover on your tax return, but you won’t see a refund from it if it has already been applied by your insurer. (You can opt to have the rebate as a refund, but this is a rare choice.)

The system as it stands is definitely designed to make private health insurance the option most people choose. If you fall above the Medicare levy surcharge threshold, it’s almost certainly going to cost you less or the same (leaving aside that you’ll also have additional cover).


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