Should you buy health insurance before 30 June?

You can beat the Lifetime Health Cover loading

Healthy and single

Kim (born 1965)

From 2000, age 35: saves $8559 over 21 years.

Age 56: income goes up so takes out cheap Basic cover to avoid paying the Medicare Levy Surcharge. Pays a 50% loading for 10 years.

Age 66: Lifetime Health Cover has cost Kim $5231, leaving them $3328 better off than if they had bought insurance when Lifetime Health Cover was introduced.

New parents

Jemima & Sasha (born 1980 and 1985)

From ages 31 & 26: save $11,536 over 10 years. Sasha saves for 5 years when she turns 31.

Ages 41 & 36: take out couples Gold cover with $750 excess for IVF treatment and pregnancy cover. They pay a 15% loading for 10 years.

Ages 46 & 41: drop down to Basic cover to save on premiums.

Ages 51 & 46: Lifetime Health Cover has cost Jemima and Sasha $6087, leaving them $5449 better off than if they had bought insurance at 31.

Who gets the most from private health insurance?

Average benefit received from health funds by 30 to 39 year olds: $172

Average benefit received by 70 to 79 year olds: $872 Younger people are much cheaper to insure, making them valuable customers for health funds.

Average hospital benefits paid per age group

Ages 0 to 9, female patients: $47, male patients: $60

Ages 10 to 19, female patients: $66, male patients: $47

Ages 20 to 29, female patients: $198, male patients: $90

Ages 30 to 39, female patients: $259, male patients: $83

Ages 40 to 49, female patients: $216, male patients: $132

Ages 50 to 59, female patients: $291, male patients: $261

Ages 60 to 69, female patients: $470, male patients: $538

Ages 70 to 79, female patients: $824, male patients: $934

Ages 80 to 89, female patients: $1122, male patients: $1344

Ages 90+, female patients: $1068, male patients: $1373

We wanted to find out whether it made better sense, financially, to buy health insurance at 31, or to delay it and pay the LHC loading for 10 years.

CHOICE has been reviewing health insurance for decades, and we used historical pricing data to find the cheapest hospital policy in each state for every year since 2001.

We developed thousands of scenarios like the one above – we didn’t give them all names like Jemima and Sasha, but they do reflect realistic patterns of saving and insurance purchases. Each scenario had two parts: saving and spending.

Saving

For each saving scenario we calculated how much could be saved from age 31 until the year 2021.

The variables we used for each saving scenario were: 

• the age of the participants (we looked at singles and couples born between 1970 and 1989)
• the amount of years they saved for after turning 31
• their state (the cheapest policy in one state isn’t necessarily the cheapest in another).

1970 was chosen as the starting point because people born before then were over 31 when the LHC was introduced, and began at a higher loading rate.

We used the RBA’s July average interest rates on a $10,000 one-year term deposit to calculate earnings. We did not account for any bank fees, and the $10,000 you would need to exactly follow our method isn’t included in any savings calculations. 

A savings account with the same interest rate would have returned similar results but would have involved a more complicated interest calculation. In the end however, interest was not a significant factor in whether savings outweighed the LHC loading.

We calculated tax at the marginal rate for someone earning just under the MLS threshold.

Spending

For each purchasing scenario we calculated how much the LHC loading might cost over 10 years.

The variables we used for each LHC loading cost projection were: the LHC rate of the participants, the pattern of cover (looking at if and when they dropped or increased cover over 10 years), and the state.

We assumed an annual premium increase of 3%.

Comparing

Then all we had to do was compare the two sets of scenarios and see which figure was greater: the savings or the spendings. We ended up with about 85,000 comparisons, and in most cases the savings figure was higher.

Every year in June health funds and comparison websites trot out their marketing campaigns trying to convince 31 year olds to buy health insurance before the 30 June “deadline”.

So what’s so important about 30 June? And why age 31?

This isn’t just about 31 year olds – it’s for anyone over 30 who is thinking about one day having private health insurance. In short, for every year over age 31 you put off getting hospital cover, you’ll have to pay a penalty if and when you do buy insurance.

It’s called the Lifetime Health Cover loading, or LHC. But don’t worry, it’s not as big a deal as it seems.

How does Lifetime Health Cover work?

LHC is a government policy that aims to get younger people into health insurance by punishing them for not buying it sooner. It does this by charging you an extra 2% for every year that passes after turning 31 where you don’t have hospital cover. If the private health insurance rebate is a carrot, LHC is the stick.

The year isn’t counted from your birthday. It gets counted from 1 July  for everyone – that’s why insurers go on about the June “deadline”. Every year in July, everyone aged 31 and over who doesn’t already have hospital cover will have their LHC loading increased by another 2%.

For example, if you take out insurance at 41, your premium will be 20% higher than a 31-year-old on the same policy. We call that extra charge the LHC loading.

The private health insurance industry needs a constant supply of healthy young bodies

The LHC loading for couples is the average of each partner’s rate. If one of you has to pay a 20% loading and the other is on 10%, you’ll pay a 15% loading on a couples or family policy.

The good news is it isn’t forever: you only pay the loading for 10 years, then your premiums drop back to normal.

The loading also only applies to hospital cover. Extras policies – for things like dental and optical – are a completely separate thing, even though health funds will try to sell you both of them. Having only an extras policy won’t get you out of paying the LHC loading if you decide you want hospital cover later.

There are other complicated rules which might affect you if you lived overseas, for example.

Why are people punished for buying health insurance later in life?

The LHC loading – or the threat of it – works. There are nearly 300,000 more people in their early 30s with hospital cover than people in their late 20s.

Insurers say the goal of the LHC is to get more people into the private system, to relieve the strain on our public hospitals. But that’s not the end of the story.

The private health insurance industry needs a constant supply of healthy young bodies to pay for the increasingly costly medical care of older people.

Younger people tend not to come with chronic illnesses, and spend less time in hospital than older people, making them cheaper to insure. Health funds pay about $170 on average in benefits for every insured person in their thirties – well below the $466 population average.

But as you would expect, this pales in comparison to healthcare costs for older age cohorts. Health funds aren’t allowed to set premiums according to a person’s age or health. Before discounts and loadings come into play, everyone pays the same base premium for the same policy. 

Younger health fund members are subsidising the private hospital care of older Australians. If this wasn’t the case then the private health insurance industry might spiral into collapse.

Is LHC that bad?

The LHC loading is the health insurance marketer’s best friend. The message is one of the oldest tricks in the book: you’d better buy now, because it’ll be more expensive tomorrow. 

There are two sure-fire ways to avoid paying the LHC loading. The first is to buy hospital cover before the next 30 June after you turn 31, and to hold it for basically the rest of your life. The second is to never buy health insurance at all.

But is the loading really that great a penalty, compared to buying insurance you might not actually want or need?

We crunched the numbers and found there’s an easy way to put off buying health insurance for years, and not be squeezed when it comes to paying the LHC loading. Here’s how you can do it:

1. Find the cheapest Basic tier hospital policy in your state.
2. Don’t buy it.
3. Repeat from step one the next year.
4. Take out health insurance when you’re ready.

We went back through 20 years of historical pricing data and found the cheapest hospital policies in every state for every year from 2001. We calculated how much these policies would cost, factoring in the government rebate. 

We then worked out how much people would save if they started saving their premiums at age 31, looking at thousands of scenarios, from singles and couples, older and younger people. 

How much could they have saved, and would it end up being more than the cost of the LHC loading when they eventually bought health cover?

How to avoid the LHC loading without buying insurance you don’t need

Meet Jemima and Sasha. Jemima was born in early 1980, and their wife Sasha was born five years after. They live in Geelong.

Jemima turned 31 in 2011. Instead of taking out health insurance before 1 July to avoid the LHC loading, they added the annual cost of a cheap budget hospital policy – $504 – to a one-year term deposit account at 6% interest. (This was the average rate for that sort of account at the time.) When the account matured next July, that deposit was worth $525.

For the sake of simplicity we’ve used a term deposit and calculated interest annually, but you could also use any savings vehicle of your choice.

Jemima did this for 10 years, reinvesting their savings and adding each new year’s premiums to the overall amount. Sasha started saving too, once she turned 31. 

In 2021 the couple takes out health insurance to cover IVF treatment and birth in a private hospital. By this point our calculations show their savings would be worth $11,536, accounting for interest and income tax.

Will that be enough to cover the couple’s 15% LHC loading for the next 10 years?

Looking forward

We’re making predictions now, so let’s say premiums will increase by 3% each year – that’s been the average increase for the past three years.

Jemima and Sasha plan to take out the cheapest couples Gold tier policy for five years (for Victoria in 2021, that’s $4854). They will then change to a cheaper Basic policy ($2408 in 2021) for the remainder of their LHC period.

Over the next 10 years, our model predicts the added LHC loading will be about $6087. With their savings, Jemima and Sasha are not only able to cover the cost of the loading, but still have nearly $5500 left over, which will cover them in case premiums increase more than we assumed. 

If they stayed with their expensive Gold policy for the full decade they would still come out more than $3000 ahead than if they had bought insurance when the health funds wanted them to, instead of when they did.

Spend your money on the things you want

We tested about 85,000 different scenarios with our model. We looked at how much would be saved if you waited anywhere between 1 or 20 years after turning 31 to take up hospital cover. We also looked at how much you might pay in LHC if you bought the highest cover for 10 years, or took out a low-cover Basic policy, or something in between.

In 99.8% of scenarios, the amount you save in premiums plus the interest you earn on it will more than cover the extra cost of the LHC loading.*

In most cases it was the amount we put away which got us over the line, not the interest. This tells us LHC isn’t that frightening a stick as the insurance industry makes out. If you put off buying health insurance until you really need it, and be smart about the policies you buy, the LHC loading will be less than what you would have spent to avoid it.

Use the money you saved to pay the LHC loading. Or put it towards something you might actually want in your 30s, like that elusive first home deposit.

* We used July average interest rates on a $10,000 one-year term deposit (source: RBA). We did not account for any bank fees, and the $10,000 you would need to exactly follow our method isn’t included in any savings calculations. A savings account with the same interest rate would have returned similar results but would have involved a more complicated interest calculation. In the end, however, interest was not a significant factor in whether savings outweighed the LHC loading. 

What if I have to pay the Medicare Levy Surcharge?

The Medicare Levy Surcharge (MLS) is a tax paid by people on high incomes who don’t have private health insurance. It’s tied to your income, and costs upwards of $930 per year.

If you have to pay the MLS, you’re unlikely to come out ahead financially by putting off getting health insurance. If you did delay, you’d double up on costs, by paying the MLS now and the LHC loading later.

There are policies out there for less than $930, most of which cover next to nothing and will see your money going into the coffers of health insurers rather than Medicare. On the plus side you can save a few dollars a year.