Thinking of cancelling your health insurance? I get it.

You’ve just gone through another annual premium increase to your private health insurance cover. The annual premium review letter arrived in the mail and you’ve realised what your health insurance is costing you!

According to iSelect, the average annual premium for a family policy in 2016 was $3,835. Incidentally, we pay around $3,800 per annum so we’re right on the money it seems. Even so, I have also wondered whether the benefit justifies the expense.

Unfortunately there isn’t really an easy answer. There is no uniform set of criteria to assess against and it really depends on your personal circumstances and the reasons why you took out cover in the first place.

I’ve written about the reasons I have private health cover for my family (from a mothers perspective) here, but I can also appreciate that there are genuine reasons it may no longer be necessary for you.

Either way, before you go ahead and pull the trigger, you should take into consideration the following two things.

Lifetime Health Cover loading

Lifetime Health Cover loading is an initiative of the Federal Government designed to encourage Australians to take out their own hospital cover.

How it works is that you pay an additional 2% loading on premiums each year if you take out cover following the 1st July after your 31st birthday.

The idea is to promote you taking out private health insurance cover early in life and maintaining it to avoid the additional charge applicable if you take it up later in life.

Now don’t be fooled into thinking well 2% isn’t THAT much. You’ll actually pay an additional 2% on top of your ‘base rate’ premium for each year you’re aged over 30, up to a maximum loading of 70%.

So if you’re 35 when you take out private health cover – you will pay an additional 8% on top of your base rate (2% x 4 years). So as you can see, the older you are when you take up cover – the higher the loading that will apply.

Things to know

The loading applies only to the hospital component of your cover (or on your share of a couple or family premium) – not to any extras covers you have.

You can stop your hospital cover for a total of 1,094 permitted days during your lifetime without any change to your LHC loading status.

So if you cancel your hospital cover, so long as you apply and have cover reinstated within a 3 year timeframe from when you cancelled the cover initially, you won’t have the LHC applied to your reinstated cover.

Even if you are subjected to the LHC loading, it will be removed after you’ve held hospital cover again continuously for 10 years.

Let’s use Sally as an example

Please note that costs shown are for example purposes only and not reflective of a specific product.

Sally is 35 years old. She has held private hospital cover since she was 27 years old, but decides to cancel her insurance policy this year.

Sally is entitled to stop her private hospital cover for a period of 1,094 days before attracting a Lifetime Health Cover Loading to any future private hospital cover.

If she takes up this cover again before her 38th birthday, she will not be charged the LHC loading to her base premium.

If she decides to take up the cover again at some time after the 1,094 days has passed (let’s say 42) she will pay the base premium for her age + the LHC loading.

If her base rate premium is $1800, she will pay LHC loading of 14% (2% x 7 years) bringing the total cost of her policy to $2052.

The Medicare Levy Surcharge

If you don’t have an appropriate level of private hospital cover and earn above $90,000 for singles and $180,000 for families, you must pay a Medicare Levy Surcharge [MLS] at tax time.

The rationale is that by encouraging higher income earning families to hold private health insurance – the government aims to reduce the load on the public health system.

The MLS can be up to 1.5% of your income for those earning a combined family income of $280,000 per annum or more. That equates to an additional $4,200 per annum.

So when the average cost for private health insurance for a family is $3,835 (for 2016) and you’d be subject to $4,200 or more per annum in additional tax via the MLS for NOT having private health cover – that maths says you may as well have the cover!

Food for thought

Rebecca