Health insurance: when it makes financial sense to maintain cover

Bill shock has been a painful experience for millions of Aussies this year, but be careful where you seek savings.

The cost-of-living squeeze puts lots of common household expenses on the chopping block, but taking the knife to one particular bill could end up costing you more.

Private health insurance premiums have climbed in the past three months after many big funds delayed their traditional April 1 price rises, and research suggests more than one-third of people have considered cancelling or downgrading their cover.

However, saying goodbye to hospital cover could mean saying hello to a bigger tax bill and other penalties, so it pays to understand the rules, experts say.

The Medicare Levy Surcharge – an extra income tax of up to 1.5 per cent – is not just for higher income earners. It punishes people who earn Australia’s average annual income of $95,600, with 1 per cent extra tax kicking in from $93,001 for singles and $186,001 for families.

High-income earners are hit the hardest, with someone on $150,000 paying an extra 1.5 per cent income tax – $2250 a year – if they don’t have eligible hospital cover. Extras policies do not impact the surcharge.

CANCEL CULTURE

Compare Club head of research Kate Browne says more people than usual are cancelling health insurance, and a lot are downgrading their cover.

She says some people are moving to lower levels of hospital cover, which avoids the surcharge but their policy may have little value.

Give you health insurance a check-up, and understand the potential tax penalties.

“Often making the switch provides a bit of a short term saving, but can be a false economy if they do become sick because these policies often provide very little useful cover at all,” Browne says.

She says apart from the Medicare Levy Surcharge, other reasons to consider keeping health cover include:

• Public hospital waiting lists that ballooned during Covid and “are still extremely long”, with the median waiting time for a hip replacement sitting at 293 days.

• Lifetime Health Cover loading, which pushes up premiums for people aged over 31 who don’t have private health insurance: “so the later you take it out in life, the more expensive it will be”.

• Families can enjoy bigger savings because having children does not add significantly to overall costs.

“Some insurers now allow adult kids to stay on the family policy until the age of 31, for a small loading fee,” Browne says.

“The good news is that you only have to pay that loading fee once, no matter how many adult children are on the policy. This can save the family around $3000 if they have two children in their twenties.”

WEIGHING IT UP

University of Queensland professor of health economics Luke Connelly says if people find a policy that costs less than the Medicare Levy surcharge they would have to pay if they didn’t have insurance, they are likely to be better off keeping the insurance.

And for those who think they might need an elective procedure, such as a knee replacement, in the next few years, health insurance may be worthwhile to avoid long public hospital waiting lists, he says.

Compare Club’s Kate Browne

iSelect spokeswoman Sophie Ryan

A survey by iSelect this year found 37 per cent of Australians were eyeing cuts to private health insurance because of increased cost-of-living pressures.

Consumers already are battling higher power bills, home insurance and other costs, iSelect spokeswoman Sophie Ryan says.

“Combine this with the upcoming festive season, which is typically a time when many households will be spending extra on things like gifts for loved ones, decorations and food, and it’s understandable that some Aussies will be questioning whether they can afford to maintain their private health insurance,” she says.

“We’d encourage Aussies to explore other avenues before simply cancelling altogether.

“Firstly take the time to review your cover, as your current plan may no longer be suited to your health or financial circumstances.”

Ryan says people should review their policy at least every two years, “be strategic” about what may be on their health horizon in the future, and revisit their Extras cover to ask if it is delivering value for money.

RECENT PREMIUM RISES

• HCF up 3.33%, Sep 1

• Qantas Health 3.33% Sep 1

• NIB 2.72% Sep 1

• Bupa 3.39% Oct 1

• Defence Health 3.33% Oct 1

• GMHBA 2.33% Oct 1

Originally published as Health insurance: when it makes financial sense to maintain cover