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The question of whether to take out private health insurance or invest the money elsewhere has been debated for years. On the surface, it seems like a straightforward financial decision, but when you factor in the government-imposed penalties for not having health insurance, such as the Medicare Levy Surcharge (MLS), the equation becomes more complex. Let’s dive deeper into the considerations and see if the math supports the decision to self-insure.
Could This Be You? The Investment vs. Insurance Dilemma
Imagine Paul, a 30-year-old family man paying $2,000 annually for basic private health insurance. Over 40 years, adjusted for inflation, Paul will spend approximately $200,000 on premiums. In return, his policy provides hospital coverage (including elective surgery) and some ancillary medical costs, albeit with limitations like hospital excess fees.
Now, what if Paul opted to self-insure? By investing that $2,000 annually, indexed at 4% per year and earning a return of 7% per year, Paul and his wife could amass approximately $786,000 by the time they turn 70. That’s nearly four times the cost of paying insurance premiums! This sum could cover their medical expenses and more, assuming disciplined saving and no catastrophic health costs.
However, it’s not as simple as pocketing the difference. Without private health insurance, Paul would face additional out-of-pocket costs for hospital stays, elective surgeries, and specialist visits. Moreover, he’d be subject to the Medicare Levy Surcharge if his income exceeds the government’s thresholds.
The Medicare Levy Surcharge
The Medicare Levy Surcharge is a tax imposed on individuals and families earning above certain thresholds who choose not to take out private health insurance. For the 2024 financial year, the surcharge rates are as follows:
| No change | Tier 1 | Tier 2 | Tier 3 | |
| Single threshold | $93,000 or less | $93,001 – $108,000 | $108,001 – $140,000 | $144,001 or more |
| Family threshold | $186,000 or less | $186,001 – $216,000 | $216,001 – $288,000 | $288,001 or more |
| All ages | 0.0% | 1.0% | 1.25% | 1.5% |
For high-income earners, the surcharge can be a significant amount—potentially eroding any savings gained by not purchasing health insurance. For example, someone earning $150,000 annually without private health insurance would face an additional tax bill of $2,250 under Tier 3. For a family with combined earnings above $300,000, the surcharge could amount to even more.
Strategies to Consider: Striking a Balance
If self-insuring appeals to you, there are strategies to mitigate some risks:
- Take Out Basic Hospital Cover
Opting for a minimal hospital policy can exempt you from the Medicare Levy Surcharge while providing essential coverage. For instance, basic plans often cover emergencies and some elective procedures, giving you peace of mind without significant costs. - Invest the Difference
Use the money saved by not purchasing comprehensive health insurance to build a personal health fund. For example, if full coverage would cost $3,000 annually and basic coverage costs $1,000, invest the $2,000 difference in a diversified portfolio. Add your tax refund (boosted by avoiding the surcharge) to this fund to accelerate its growth. - Maintain a Contingency Plan
Even with self-insurance, ensure you have a financial buffer for unexpected, high-cost medical emergencies. The goal is to minimize the risk of depleting your savings.
The True Value of Insurance: Peace of Mind
Insurance, at its core, is about protection. While you may never experience a health crisis that justifies the premiums paid, the peace of mind it provides can be invaluable. Health insurance guarantees access to timely treatment, specialist care, and private hospital facilities, which could be critical in a medical emergency.
Conversely, self-insurance requires discipline, careful planning, and a willingness to assume significant financial risks. While it offers the potential for greater financial rewards, it may not suit everyone, particularly those who are risk-averse or struggle with long-term saving.
Ultimately, the decision to take out private health insurance or self-insure depends on your financial situation, risk tolerance, and discipline. Here are some key questions to ask yourself:
- Can you commit to saving the equivalent of your premiums consistently over decades?
- Are you comfortable bearing the financial risks of medical emergencies?
- Does your income level make the Medicare Levy Surcharge a significant consideration?
If you’re uncertain, consult a financial advisor to analyze your circumstances and create a tailored strategy. Remember, the right decision is one that aligns with both your financial goals and your peace of mind.
To compare health insurance options head over to Canstar.
