Should you take out private health insurance?

The average Australian working full-time has an income of $98,098 (November 2023). This average is above the $97,000 threshold where you are obliged to pay a Medicare Levy Surcharge (MLS). This is how it works.

Figure: The Medicare Levy and Medicare Levy Surcharge thresholds for the 2024-2025 Financial Year. ^The Family Threshold increases by $1,500 for every dependant after the first. Families are classified as families with children, single parents and couples (including defacto). Source: ATO

All individuals, unless you are eligible for an exemption*, will pay 2% in addition to the tax payable on your taxable income.

The purpose of the Medicare Levy Surcharge is to encourage higher income individuals to take our private health insurance to assist with the demands on the public system. The system encourages this by allowing individuals to forego the Medicare Levy Surcharge if they take out a certain level of health cover.

The parameters for eligible health cover are:

Cover: The cover must include hospital cover and be with a registered insurer.
Excess: The maximum excess for the policy is $750 for singles and $1,500 for families.
Claims: If you claim more than once in the same year, the excess paid must be under $750 for singles and $1,500 for families.

Is it worth getting?

As with most questions to do with your finances, the answer is, it depends. For the purposes of this analysis, we will focus purely on the financial outcomes.

The first step is understanding how much the premiums of hospital cover will cost you.

This will depend on a variety of factors – your age, the extras you choose (if you choose to take it on) and the provider that you go through. The basic Hospital Covers advertised by Canstar range between $100 - $130 per month.

Here is a hypothetical model about when the Medicare Levy Surcharge (MLS) is costing more than the private health insurance. For this model, we have assumed a $130 premium per person.

The chart shows the Medicare Levy Surcharge (MLS) amount owing for different income levels. The red line shows an individual and their MLS obligation. The orange shows a family/de facto. We have assumed a de facto couple with one person from the couple on a static $95,000 salary. The other earns the amount reflected on the table. The grey lines show the insurance premiums and where they intersect.

There are a lot of variables with the family/de facto situation. Let’s focus in on singles to illustrate the financial benefit of taking out health insurance.

There is a point – for this individual, it is at $120,000, that they will be financially better off by taking private health insurance.

There are a few tools that you can use to find this point:

PayCalculator: PayCalculator allows you to put in your salary, as well as a spouse’s to understand your Medicare Levy Surcharge (MLS).

Health insurance calculators: Most private health insurance websites have a Medicare Levy Surcharge calculator (examples include Medibank and Bupa). They will allow you to put in your details and get a recommended level of hospital cover to avoid the MLS. They provide snapshots of what your MLS would be, and the cost of the health cover.

The value you are getting

As mentioned, this article focuses mainly on the financial costs of either option. When your MLS outweighs your private health insurance premiums, the equation is easier. However, for those that are sitting in the middle where you would pay less for the MLS than you would private health insurance, the main consideration is the value you would get from your health insurance.

Private health insurance can often be a divisive topic – especially in Australia where we have universal healthcare – including hospital care. It is not up to me to tell you whether private health insurance is worth the premiums. It is a personal decision. There are some differences between going through hospital care as a private or public patient. These include being able to choose your doctor, hospital and specialist.

Like many insurances, you do not see the value in it until the unforeseen happens. Carefully consider the costs and benefits that are relevant to your circumstances and your perspective on private health insurance.

Other factors to consider

Pro-rata calculation

When taking out a health insurance policy, it is important to note that you will still owe the MLS for the days that you were not covered in that Financial Year. For example, say that my Medicare Levy Surcharge (MLS) was calculated at $1,200 for the 2024-2025 Financial Year. I decide to take out private health insurance – a Hospital Only cover for $1,200 on March 1st 2025. I would still owe 75% of the total annual MLS.

Lifetime loading

Lifetime Healthcover Loading (LHC) is an extra cost that is added to private hospital premiums if you do not take out a policy before your 31st birthday. It encourages younger people to take out cover earlier to avoid this loading.

The loading adds an extra 2% per year for every year after 30, to a maximum loading of 70%. For example, if you are 45 and taking out private health insurance for the first time, you will have a loading on your premiums of 30%.

If you’re over 31 – you aren’t stuck with this loading for life. Once you hold cover for over 10 years, the loading will be removed.

Age-based discounts

On top of LHC, younger people can also get an aged-based discount. These discounts are for people aged between 18-29 that are on their own policy, and not covered as a dependent on a family or single parent policy.

The discount can be up to 10%, and the discount is 2% for each year that a person is aged under 30. All policy holders between 18 and 25 will receive the maximum discount.

If a policy offers age-based discounts they are available to both new and existing policy holders.

As the policies can differ between health insurers, it is important to keep this in mind if you are ever switching policy providers.

The discount can result in significant savings over the lifetime of a policy. For example, if you take out health insurance cover from BUPA at 24. 10% will be discounted from your policy until the age of 41. Then, the discount is phased out with a 2% reduction each year.

The verdict

With more Australians pushing above the MLS threshold, the opportunity cost between paying the MLS and taking out private health cover will increasingly be something to consider. Use the government and private healthcare calculators to help make an informed decision. However, understand that the calculators on private health insurance pages are embedded into marketing materials – they have an agenda to sign on as many people to private health insurance as possible. It’s sticky, and many customers remain with their private health insurance providers for life.

*You can find a list of the exemptions and reductions through the ATO.