Monday, 23 June 2014

The Lifetime Health Cover loading can really think about it before June 30

This post is written for Australians in the lead up to the end of the financial year.  If you turned 31 in the last financial year and don't have health insurance then you should really consider getting it otherwise the Lifetime Health Cover loading will bite you quite badly.

At the end of every financial year you will notice that health insurance companies start advertising quite heavily and advising their customers to get health cover before June 30 in order to avoid the Medicare Levy Surcharge.

I have written before about how you shouldn't get fooled by this.  The surcharge will apply for the percentage of the year that you don't have health insurance.  So if you get coverage on the 29th of June and earn above the threshold ($88,000 for singles and $176,000 for families) you are still going to have to pay the surcharge (1.0% - 1.5% depending on your income) for the 364 days you didn't have coverage.  You should still get the coverage to avoid the tax...but there is no real rush to it.

However the Lifetime Health Cover loading is time dependant and if you don't have health cover and you turned 31 in the last financial definitely need to get health insurance before June 30!

What is the Lifetime Health Cover loading?

The Lifetime Health Cover loading is an initiative by the Australian government to encourage people to take out health insurance when they are still young and keep this health insurance going.  It stings you if you don't have health insurance now but if and when you decide to get it at some point later in your life.

The Lifetime Health Cover loading is a huge stick to encourage you to get health insurance before you turn 31.  Read on to find out how it works.

How does the Lifetime Health Cover loading work?

If you do not have hospital cover on the 1st of July following your 31st birthday (assuming you turned 31 after 1 July 2000) you will have to pay a loading when you do decide to take out health insurance later in life.

The loading is calculated as 2% for every year you are uninsured for every year you are over 30.  For example if you decide to first take out health insurance at age 40 you will have to pay 10 years x 2% = 20% more for your health insurance than someone who was covered the whole way through. This loading lasts for 10 years from the point you first get hospital cover. 

What if I don't want health insurance?

In Australia we are lucky enough to have a pretty good public health system and a lot of people who earn less than the Medicare Levy Threshold (see above) don't really have to have health insurance to get a good level of care.

If you don't think you will ever want health insurance then these provisions are unlikely to affect you.  However if, 10 years from now, you are earning more than the Medicare Levy Threshold and it does make financial sense for you to get health cover, the loading will really start to affect you!

You can get stung if your partner didn't have health cover and you get a joint health insurance policy

Most people who live as a couple tend to get couples or family policies for health insurance as you tend to get much better value from these.  However if you decide to get one of these policies then will need to average out the LHC loading between you and your partner.

For example if you have had continuous cover, your partner only got cover at 40 (and so has to pay a 20% loading) your LHC loading becomes the average of 0% and 20% = a 10% increase in your combined health insurance policy charge.

Therefore you not only need to think about what you are doing...but also about what your partner is doing because it can affect you in the future.

There are exceptions to the rules...

There are some exceptions to the rules and it is worth reading the Australian government's website for all the rules regarding exceptions and lapses in coverage which can be found here.

However as a quick overview
  • You can have a gap in cover of up to 1094 days (3 years less one day)
    • If you have a gap in cover greater than that then you start to pay the loading from this point at a rate of 2% of year not covered
    • If you suspend your membership instead of cancelling it - it doesn't count towards the 1094 days
    • If you go overseas for more than a year this doesn't count towards the 1094 days (you can return for up to 90 days)
    • If you use your 1094 days your 10 years LHC loading starts again
  • New migrants have special rules
    • The loading starts if you don't have coverage within 1 year of your Medicare registration (or your 31st birthday...whichever is later)
I haven't covered every special circumstance here but I do encourage you to look at all of the rules...especially if you believe that you can get out of being stuck for the LHC loading.

If you are turning 31 or have turned 31 and it is coming up to June 30 you should really think about getting coverage.  Think about your own financial situation and speak to your financial advisor or planner.  I don't know your financial situation so can't give you specific advice however I do think it is worth seriously thinking about.

You May Also Be Interested In
Insurance: How does the Medicare Levy Surcharge work?
Choosing the right health insurance
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  1. Great post for the Aussie readers :).. I've considered getting private health cover and will soon have my hand forced (for good reasons i.e. earning above the threshold ha) but how much does it get indexed per year?

    Yes it is very sneaky the way it is advertised as well.. When I was working in the Tax Office, we followed up the medicare levy surcharge and the amount of confusion that rule caused was interesting (to say the least)..

    Will feature you in July's (The Career Circle as well), check it out July 27 :)

    1. I agree with you that you need to look out for the surcharge but the Health Care Loading is the one that I think will catch a lot of people out.

      People that think "I don't need health cover now because I earn less than the threshold and I can get it when I earn a bit more". They will get stung if they reach this threshold a bit later in life by the loading and it will stick with them for 10 years!

      Anyway I hope people see this or other posts about it and realise how important it is to be covered