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Budget Direct

Tax and Health Insurance

Tax and Health Insurance

When the end of the financial year is approaching, you should take a look at your private health cover to make sure you’re not spending more money than you need to.

Here are a few tips from Budget Direct to help you navigate the sometimes perplexing world of private health insurance.

Is it time to renew your health insurance?

It’s a sensible idea to review your health insurance policy at least once a year. Your needs and risks may have changed, the Government may have introduced new policies (or abandoned old ones) or there may be price increases. Switching to a new insurer could possibly save you hundreds of dollars on your annual bill.

If you’ve still got the same policy you had 10 years ago, you may be paying too much. Your personal circumstances may be different now.

Health insurance isn’t cheap, so knowing how to extract maximum value from your cover is crucial. If you’ve still got the same policy you had 10 years ago, you may be paying too much. Your personal circumstances may be different now.

For example, if you’re not planning to have more children, do you still need pregnancy cover? Don’t just ‘go into automatic mode’ and accept your health insurance notice when it arrives each year. Instead, look around to see if there might be something else on the market that better suits your needs (and costs less).

What is Lifetime Health Cover Loading and how does it affect you?

A lot of people get confused about Lifetime Health Cover loading (LHC) – what it is, why it was introduced, how it works and when it takes effect. LHC was introduced by the Federal Government to encourage Aussies to take out private hospital cover while they’re still young.

Essentially, it rewards you with lower premiums if you take out private hospital cover at a younger age (another way to look at it is that it penalises you if you don’t!).

A lot of people get confused about Lifetime Health Cover loading (LHC) – what it is, why it was introduced, how it works and when it takes effect.

For each year past the age of 30 that you don’t have private hospital cover, a 2% loading is applied to your insurance premium. This increases each year until it reaches 70%.

So let’s say you’re single and you’ve waited until you’re 37 to take out private hospital cover for the very first time. That’s 2% loading for 7 years, which means you’ll pay 14% more for your premium than if you had cover by age 31.

LHC is calculated a little differently for couples and families, with an ‘averaging’ process. For example, let’s say a couple’s ages are 36 (12% loading) and 33 (6% loading) respectively. This equals a combined loading of 18%, which would be halved to 9% – and this is the amount you’d pay under a joint policy for private health cover.

LHC only applies to private hospital cover, NOT to extras cover taken out after age 31. The bottom line is if you’ve waited until your ‘later years’ to decide to take out private hospital cover, you’re going to be paying much, much more for your insurance than someone who took out private hospital cover earlier in life.

The most important things to know about Lifetime Health Cover loading are:

  • Private health insurance is optional. However, if you do buy private hospital cover after July 1st following your 31st birthday, you’ll be paying the LHC loading on top of any private hospital cover premiums.
  • Lifetime Health Cover loading does not apply to extras cover purchased after age 31 – it only applies to private hospital cover.

Understanding the Medicare Levy Surcharge

FinancialAdvisor

The Medicare Levy Surcharge (MLS) is levied against Australian taxpayers who don’t have private hospital cover and who earn above a specified income. Its aim is to encourage individuals to take out private hospital cover, thereby reducing the strain on our overworked national Medicare system.

ATO’s Medicare Levy Surcharge page can provide more detailed information about MLS and how it applies.

It is important to understand the distinction between the Medicare Levy (which is paid as a matter of course by most Aussie taxpayers) and the Medicare Levy Surcharge, which is surcharge that is paid on top of the Medicare Levy by those who earn over a specific amount but have chosen not to take out private health insurance.

The MLS is calculated at the rate of 1% to 1.5% of your taxable income. If you’d like to know more about how the surcharge relates to your own taxable income, you can contact the Australian Tax Office or visit the Medicare Levy Surcharge Income Calculator. The surcharge income threshold is indexed annually.

Currently, you have to pay the surcharge if you are:

(Last checked 23rd May, 2017)

  • a single person with an annual taxable income for MLS purposes greater than $88,000 in the 2013-14 financial year or $90,000 in the 2014-15, 2015-16 or 2016-17 financial years; or
  • a family or couple with a combined taxable income for MLS purposes greater than $176,000 in the 2013-14 financial year or $180,000 in the 2014-15, 2015-16 or 2016-17  financial years. The family income threshold increases by $1,500 for each dependent child after the first;
  • and do not have an approved hospital cover with a registered health fund.

This graduated payment system is often referred to as the Tier system.

This same Tier system also applies to the rebate that the Australian Government offers those who have taken out private health cover. This rebate (known as the Australian Government Private Health Insurance Rebate) is income tested and designed to help cover the cost of premiums.

A table fully outlining this rebate (as it applies to different income levels and age groups) can be found on the privatehealth.gov.au website.

In order to be exempt from the Medicare Levy Surcharge, your hospital cover must be with a registered health fund and must cover all or some of the fees that apply to a stay in hospital.

Basically, the rebate uses the same income thresholds as the MLS, but with different rates depending on whether you’re under age 65, aged 65-69 or over 70. If you’re eligible for this rebate, you’ll be able to have it deducted from your insurance premiums or claim it back when you file your tax return.

One thing to keep in mind is that if you’re subject to Lifetime Health Cover loading, this rebate doesn’t apply to the LHC loading portion of your premium.

In order to be exempt from the Medicare Levy Surcharge, your hospital cover must be with a registered health fund and must cover all or some of the fees that apply to a stay in hospital. General treatment cover (without hospital cover) does not exempt you from paying the MLS.

Saving money on your private health cover

If you decide that private health cover is the way to go, you’ll want to keep your premiums as low as possible. One way is to choose a flexible insurer that will allow you to tailor the policy to your specific needs, so you’re getting the cover you need at a price you can afford, but are not paying for anything you don’t really require.

Some insurers offer 2 or 3 different levels of hospital cover to suit specific needs and budgets, so it’s worth taking a close look at each and deciding which one is right for you.

Some insurers offer 2 or 3 different levels of hospital cover to suit specific needs and budgets, so it’s worth taking a close look at each and deciding which one is right for you.

Why pay for cover for joint replacements or childbirth-related services if you need neither? Having a choice of insurance levels for hospital cover (or extras cover) means you can select what you feel is appropriate.

Taking out extras cover (also known as ancillary cover) as part of your private health insurance can help save you money if you need a dentist, optometrist, physiotherapist, massage therapist, chiropractor, podiatrist, psychologist, etc.

You may find that many of these more specialised services are minimally covered (or not covered at all) by Medicare, so without extras cover you’d be paying for them out of your own pocket.

Choosing a policy with a higher excess is another way to lower your premium. If you don’t make too many hospital claims (no more than one every couple of years or so), a higher-excess policy can work out okay, provided you’ve got the cash on hand to pay the higher excesses when you need to.*

Volunteering to pay a higher excess is only an advantage if you have minimal (or no) future claims, however. If you end up making a lot of claims, having to pay a series of higher excesses is no advantage at all.

*Your taxable income for MLS purposes is over the income threshold and you have hospital insurance for you and all of your dependents with a registered health fund, with a total yearly front-end deductible or excess no greater than $500 for singles or $1,000 for families/couples.

http://www.privatehealth.gov.au/healthinsurance/incentivessurcharges/mls.htm

https://www.ato.gov.au/Individuals/Medicare-levy/Medicare-levy-surcharge/

 

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