Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
I didn’t only have the audio answer this week guys (ran out of time this week). Below are the questions, but you’ll need to listen to the pod for our response, sorry readers 😅
Show notes:
- Family Finance Youtube Channel/Instagram Page
- Lifetime Health Cover Loading for people 31 and over
Question (00:03:55)
Hi Aussie FIREbug, love your work!
I heard you talk about insurance on the Aussie HIFIRE podcast episode, but you didn’t mention private health insurance. I’m already 34 and earn over the threshold for the Medicare surcharge, so basic insurance would mean I would just about break even with taxes saved. If I retire early though, this driver would disappear and the benefits (choice of specialist, ambulance cover across states etc) are unlikely to be made use of in my younger years. If there are zero benefits, I’d also much rather pay additional taxes than pay to a health fund.
Thoughts?
Charlotte
Question (00:15:12)
Hello AFB,
Long time reader/listener, first-time commenter.
I really enjoy it when you write/talk about the positive impact that your parents had on you growing up, especially when it came to money management and working hard (my parents had the immigrant mentality too).
I have three children, 2, 5 and 7 and I’m trying to strike the fine balance between teaching them that money doesn’t grow on trees, but also giving them all they need to flourish into wonderful people.
What will your approach be if/when you have kids and do you think you’ll be as hard on them as your dad was on you?
Alex
Question (00:26:08)
Hi Aussie Firebug,
You’ve mentioned that you and Mrs Firebug are planning to have kids one day. How does this affect your FIRE plans and have you budgeted for an increase in expenses?
The wife and I are trying for kids and I’m not quite sure how to model for children as there seems to be such a disparity amongst parents as to how much a child ends up costing.
Cheers,
Dean
Very interesting episode, thank you! To weigh in with some thoughts on the costs of children (ours are now 19 and 17), I might add:
– the big cost categories before kids remain the biggest costs afterwards, i.e. housing, transport, food and travel/holidays, but it is easy to convince yourself that you “need” more, eg a bigger house, more/bigger cars, more meals out, more expensive holidays (Disney…)…these costs can grow a lot if allowed to.
– so you may well spend more (mindfully) in these categories (and enjoy doing so) but managing wants vs genuine needs is critical to controlling cost inflation. The $20 here or there can also add up (as mentioned on the podcast), but the bigger cost categories impact more overall, I would think. By way of example with respect to holidays, fostering in your kids an enjoyment of camping, or road trips staying at cheap motels, is a great long term money saver and will hopefully serve them well in future too when they have children of their own.
– we have always gone down the state school route (and moved to good suburbs that have good state schools). 7 years x $15k pa school fees x 2 children = $210k, higher when factoring in compound interest…that would mean working extra years for most parents…plus school tables only tell part of the story.
I’m glad you liked it Ian 🙂
Thanks for sharing your experience with us. A lot of what you’re saying confirms my suspicions. I feel like kids can be bloody expensive if you let the costs blow out. And even if you don’t, they still might end up costing you an arm and a leg 😂
Hey Firebug,
I figured I’d clarify the private health loading.
Like the caller, I’d rather not contribute to private health, and rather pay tax, but the government loads the disincentives so hard against you it’s a difficult choice.
As you said, the loading is 2% a year, starting from July 1st, after your 31st birthday. That loading can stack up to 70% maximum – e.g. waiting 35 years to get private health. So if you took it out two years after the date above, you’ll pay an extra 4% on your premium. 10 years, that’s 20%.
The loading disappears after 10 years. There’s some information here:
https://www.privatehealth.gov.au/health_insurance/surcharges_incentives/lifetime_health_cover.htm
The next consideration is the medicare levy surcharge, which comes into effect if you don’t have private cover over a certain income.
If you’re deciding whether it’s worth taking private health cover out, the maths are fairly simple. It really depends on your income and expected income over time. The brackets are here:
https://www.privatehealth.gov.au/health_insurance/surcharges_incentives/medicare_levy.htm
So, if you’re single and earn $90,001 a year, you are ahead on saving tax if your insurance costs $900.01 a year or less.
If you’re a couple and together earn 180,001 a year, you are ahead if your insurance costs $1,800.01 a year.
Keep in mind, that scales up as you earn more than those amounts, and the levy also increases to 1.25% and 1.5% as you go up in brackets (see the link above).
In the end, me and my partner hit the couple threshold right when we turned 31, so the timing was right to make a call. We managed to get some health insurance for right around the $1,800 amount. It’s pretty bad coverage, basic hospital and some extras (you only need hospital to avoid the loading and levy). But it does two things:
1. It avoids the lifetime loading, so if we decide to get better coverage later on, we can.
2. It avoids the levy surcharge, but not by much. However, if our incomes go up, we are slightly ahead.
To get more value out of it, we try our best to nail as many of the extras as we can. If you need glasses, you can get free or discounted glasses with most extras plans every year. There’s also a bunch of other stuff we don’t use much, but things like massages etc get discounted. If you’d already utilise some of those things, deep dive into what your coverage covers and try and extract that value every year.
Another consideration, is your health. When I was in my 20s I felt invincible and fit. 30s, it’s like wow, noone told me my body would start falling apart so early! Actually, I’m not so bad, but you do feel more aware of your health. I look at my parents getting knee reconstructions etc – they didn’t look after themselves, so it’s a lesson for me but also a warning I might need that kind of treatment.
The public system is generally great for most of life’s issues, but things like elective surgery can have longer waits and issues in the public system. So, if you’re big into sport or dangerous things and might need elective surgery or more sophisticated health care later on in life, that’s another factor to consider.
I think the public system would be much better without the private split, and I’d rather not contribute to private, but the government’s master plan of booting people onto the private system works unfortunately.
Cheers
Bolero
Great comment mate!
A lot to digest and mull over.
https://www.finder.com.au/life-insurance-and-the-cost-of-raising-children
According to 2018 research by the Australian Institute of Family Studies, it costs low-paid families $340 a week to raise two children, a 6-year-old girl and a 10-year-old boy, which is roughly $170 per child. That’s $8,840 every year or $159,120 for 18 years, per child.
It costs a bit more than that if you factor in lost income and super if someone wants to extend their maternity leave or work part time after their maternity leave runs out. My wife can earn $1000 per day in her job, but has decided to work four days per week to spend time with our kids while they’re young. Times that by 50 per year for (so far) 8 years, it starts to add up. I fully support her decision by the way, just saying there are hidden costs — or opportunity costs — in raising kids.
I enjoyed this podcast. My mum works in the health insurance industry and I have been exposed to this most of my life. I would like to expand on what you spoke about.
If you choose to take our private health insurance you will have a choice of plans. You can choose Hospital only, Extras Only or a policy that covers both. Extras are coverage for things like Dental, Optical and Massage. The more options the more costly it becomes.
It is generally cheaper to have a hospital only and then budget for the extras. If you compare between Hosptial only vs Hosptial with extras. You can work out how much per year the extras cost. In most cases, I have spent way less on these services making them not viable. Removing them will make the cost more affordable and you get the 30% lifetime loading, if you want to add in the future there is no penalty.
Out of pocket, Many people also wrongly assume that if you have coverage that is the end of it. When you have coverage, the health insurance company will have an agreed amount for a procedure and so will medicare. Let me give you a simplified example of how this is how it works in practice. You need an operation. The private cost will be $3500. This is made up of (The Bed in the ward $1000, Anesthetic $500, Operating Theatre Time $2000.
Medicare will say pay $150 for the bed, $50 for anaesthetic and $250 for the operating theatre.
Your health insurance will pay a higher amount (Called the gap) typically up to 80% but it can vary and they can often have deals with certain hospitals to pay a higher percentage.
They will pay $550 for the bed, $300 for anaesthetic and $1000 for the operating theatre.
When you go to the hospital on the day they will ask for your health insurance details and they will calculate all of this to tell you what you owe. In the above example, Medicare will pay $450, Health insurance will pay $1850. They will also check your excess too. This will be included in this amount. Say it is $500. Operation Cost $3500 Less Medicare $450 Less Health Insurance $1850 Plus Excess $500. You will be asked to pay $1700. This is called out of pocket. People often think that it will be free if they have coverage and get upset when they find out they still have to pay even though they have private insurance.
If you need to get surgery get the doctor to quote you with the MBS item number. This the code that is used by medicare, hospitals and private insurance. You can check how this cost compares with agreed rates on this government link
https://www.health.gov.au/resources/apps-and-tools/medical-costs-finder
I also recommend you AussieFireBug, look at the above link if you are planning to have a baby to see hospital costs and out of pocket if you choose to use public.
Also if you are looking to compare health insurance make sure you use the official government site. This has all products in the market, not just some
https://privatehealth.gov.au Choose compare policies.
Amazing resources. I’ve been leaning more towards private health lately. I think it’s going to make sense for us just to avoid the Medicare levy surcharge. But I don’t think we’ll need the extras
Hi AFB. Great content. I remember going through the Private Health Insurance dilemma some time ago. After having it for 10 years + in my younger years mainly for tax purposes, I decided to drop it. I may take it up in my late 50-ties/60ties again. The 2% levy is added for every year you start after 31. If you were to start PHI at 41 you will pay 20% extra, but that levy is removed after 10 years of maintaining the PHI cover. If you are relatively healthy it may make more sense to start cheapest cover closer to the period in your life when you are most likely to benefit from it despite the extra % premium loading for first 10 years after you join.
A dental cover can be purchased much more cheaply as Extras Only cover. To get the Tax Rebate and avoid the Lifetime Loading levy you must take out a compliant Hospital Cover though.
Both of my children were born in Public System at no extra cost. Friends of mine have experienced major financial (out of pocket) trauma with childbirth when using their PHI ($10k+). From what we were told, if there are birth complications, the mother and the baby end up treated in public system anyway. Being in the “catchment” of a good public hospital, we found PHI unnecessary.
It’s worrying the number of people that think cost (PHI premiums vs Medicare levy surcharge) is the only consideration and have the idea that the public system provides a comparitive service to PHI. The public system is excellent at preventing you from dying from immediately life threatening conditions but it will quite happily leave you in debilitating, life changing pain from conditions that aren’t directly life threatening.
I have a friend with several family members that had treatment for cancer within the public system and received world class treatment that saved their lives. However, I also had my brother in law suffer chronic, severe pain for many years because his condition wasn’t directly life threatening and his surgery kept getting cancelled and rescheduled time after time. He passed away without warning from a heart incident while on the waiting list and we suspect the stress of this severe pain with no end in sight contributed to this.
I also know a former work colleague now in his early 80s who desperately needs a hip replacement. His quality of life has steadily deteriorated over the last couple of years to the point where he can barely move around between rooms in his house let alone leave the house for the activities he used to enjoy. His GP is fighting to have him recategorised and moved up the list but this is the reality of relying on the public system for non life threatening issues.
I’ve also seen many examples posted on AFB Facebook group threads about younger people who have experienced health circumstances that prevent them from being able to work and severely impact their quality of life and wait years for public system treatment. Combined with a lack of income protection insurance this can cause utter financial ruin.
Great points Steve. It’s really one of those things where it doesn’t matter until it does. And fortunately, a lot of people have done just fine with the public health system. But yeah, if you’re not so lucky it could be terrible in certain situations.
As with everything, everyone’s personal circumstances are different.
However this is a good article showing what your money can do if you invest those health premiums at a younger age as opposed to putting it into private health insurance.
https://www.smh.com.au/money/saving/dont-be-fooled-by-the-private-health-insurance-industrys-pitch-to-30yearolds-20160719-gq8w5p.html
Another thing to consider, which certainly doesn’t apply to everyone – but, child support is a costly exercise too. Unfortunately my first marriage didn’t work out, and although we have a roughly 50/50 arrangement in place, the cost is about $1600 per month, net. I’ve no problems paying given that my kids are looked after, but this calculation amplifies when you take into account buying things for my place, I.e. clothes, soccer shoes, Xmas etc..
Not to mention the cost of a settlement. Easy $100-200k or more.
I first hit the fire movement at about age 25, and most people are similar, young, have made good choices with couples etc.. now I’m 34 and have since recovered financially but I still think it’s worth flagging how damn important it is to pick your partner right when on the fire journey! 🔥
When I was younger, I had PHI to avoid paying the MLS. Then when I started working part-time, I cancelled PHI. Now that I am older, I realise that PHI is probably valuable, but I will now cop a 2% loading for 10 years, as I have not had PHI for 4 years. This loading can become very high if you have never had PHI. I was always healthy & active in my youth, but things can go wrong (& become expensive) as you age.