In only a few days, thousands of hard-working Australians will face costly penalties for not taking out private health insurance.
As many as 380,000 Australians aged 31 are about to be stung by Lifetime Health Cover Loading (LHCL) – an additional private health insurance charge making coverage 2 per cent more expensive.
The LHCL was designed to motivate Australians to take out private health insurance while they are still young by increasing premiums by 2 per cent for each year an Australian over 31 does not take out a policy.
Those incremental lifts add up rapidly, and would mean someone taking out private health insurance for the first time at age 35 would have to pay 10 per cent on top of the premiums charged by their insurer.
By age 55, that figure grows to 50 per cent – adding thousands to the price of insurance.
The increments don’t stop until the age of 65, at which point the LHCL will have grown to a massive 70 per cent – the point at which government has capped it.
“At 30, while many of us might be fit and well, you may need that cover as you get older and may not be working,” Finder personal finance expert Kate Browne said.
Research from Finder suggests 61 per cent of Generation Y – about 3.4 million Australians – don’t understand how the LHCL affects the price they pay for insurance.
“More education is needed,” Ms Browne said.
“The government sends out a yearly reminder, but that’s not enough and unfortunately many Australians are still unaware.”
As much as 8 per cent of Australians aged 31 to 65 are already paying the extra money, Ms Browne said, many of whom may not even know they’re doing so.
Do I need private health cover?
The LHCL only kicks in when someone takes out private health insurance later in life.
For many, Australians, that could mean never taking out health cover is actually the cheapest option.
Grattan Institute health program director Dr Stephen Duckett even noted that for many older Australians, the LHCL even leads to a reversal of the program’s intended outcome.
“In some ways it acts as a disincentive, so if you’ve not taken out private health insurance before your 31st birthday, and decide to get it when you’re 45, then you’ll realise private health insurance has become quite expensive,” he told The New Daily.
“It increases the cost of private health insurance quite significantly, so it actually acts as a disincentive for people joining private health insurance in their middle ages.”
But there is another government policy at work which makes even a more expensive premium a more economical option than not taking out cover – the Medicare Levy Surcharge.
This surcharge means Australians earning over $90,000 a year are taxed an additional 1, 1.25, or 1.5 per cent of their income annually, depending on which tax bracket they fall into.
A Finder survey of more than 14,000 people estimates that 16 per cent of Australians earn over the $90,000-a-year threshold – roughly equivalent to three million people.
For this cohort, private health coverage is likely to be cheaper than the additional income taxes they would face under the surcharge.
But Dr Duckett cautioned these are not the only people who should think about getting health insurance.
“The critical thing people need to ask is what is their current income, and what is their likely future income in the next decade,” he said.
“Because if that is above the Medicare Levy Surcharge threshold, then it’s cheaper by and large to take out private health insurance than to not.”