HEALTH INSURANCE

Private health insurance: Lots of changes for 2012

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Private health insurance is a heavily regulated industry. On balance, that's a good thing, because issues around health, and in particular health costs, are pretty important. But one of the downsides is that regulations change frequently and health insurance has lots of regulations that affect both the premiums you pay and your tax bill.

This year has seen a lot of changes, and it's important that you understand these changes. For people who are close to certain ages, or certain income levels, the cost consequences of not understanding can be quite significant.

There are three basic regulations that affect how much health insurance costs you: the private health insurance rebate, the Medicare levy surcharge and lifetime health cover.

Private health insurance rebate
The private health insurance rebate is a system that effectively reduces the premium you pay for private health insurance by paying a rebate (which can either be used to reduce the premium upfront, or paid to you later). It was introduced in 1999, and up until this year, it didn't matter what your income was, you got the rebate if you took out private health insurance. It's now means-tested, so that as your income rises, the percentage of the rebate you receive reduces.

There are four income "bands" that decide what percentage you receive as a rebate on your premium. There are different rules for people over the age of 65, so these bullet points apply to people under the age of 65. For a full description of the rules for people over the age of 65, and a calculator to help figure out what income bracket you fit into, the federal government has a very useful website you can visit.

First, for singles, the income bands and the percentage rebate that apply are:

Income less than $84,000: 30 percent
Income between $84,001 and $97,000: 20 percent
Income between $97,001 and $130,000: 10 percent
Income over $130,001: 0 percent rebate

For families, the income bands are different:

Income less than $168,000: 30 percent
Income between $168,001 and $194,000: 20 percent
Income between $194,001 and $260,000: 10 percent
Income over $260,001: 0 percent rebate

Medicare levy surcharge
The Medicare levy surcharge increases the amount you pay for your Medicare levy, depending on whether you have private health insurance. In simple terms, if you don't have private health insurance, and your income is over a particular level, you pay a higher levy. Again, the private health website operated by the government has the specific details on income thresholds and the increased levy.

Lifetime health cover
Finally, lifetime health cover (LHC) is effectively a "penalty" on top of your health insurance premium if you don't take out a hospital cover private health policy. If you don't have hospital cover on July 1 following your 31st birthday, you will pay a 2 percent "penalty" on top of your premium when you then take out hospital cover. This penalty increases every year. In fact, your premium will be 2 percent higher for every year you are aged over 30.

If you waited until you were 40 years of age to take out hospital cover, you will be paying 20 percent more than someone who took out cover at the age of 30 (2 percent per year multiplied by 10 years). This penalty keeps growing until it reaches 70 percent. The good news is that once you have paid this LHC loading or penalty for 10 continuous years, the loading is then removed (as long as you retain hospital cover). There's more information on the private health website operated by the government.

Health insurance seems a lot more complicated than it actually is, perhaps because of all these regulations. But just like every financial product, you should compare products from different providers, and not just renew automatically every year. You can compare health insurance health insurance at RateCity. It doesn't take long, and could help save you plenty of money once you understand your tax and financial position.