Should you choose a higher excess to reduce your premium?
You’ve chosen your policy, and it covers you for everything you need. All that’s left is to decide on the excess. Should you go with the $500 excess at $102 per month, or the $250 excess at $120 per month? If you’re stumped on this, we’re here to help!
We purchase a private health insurance policy in the hope that we’ll never use it. And the truth is (especially for hospital cover), many of us won’t use our insurance for years on end. So it’s no surprise that when we’re paying for expensive policies we rarely use, price is a key consideration. And in the war for customers, price is one of the key battlegrounds that insurers compete on.
But competing on price means that insurers will limit the features and benefits of their products. You may recognise this in the form of more exclusions, often framed as “don’t pay for what you don’t need”. But another key driver of premiums is the extra amount that you need to pay if you go to hospital. This is amount is known as an excess or co-payment.
How excesses and co-payments work
An excess is the amount you pay towards a hospital admission before you insurer pitches in. Rathern than a single amount per admission, co-payments are paid for each day you are hospitalised. Both have a similar effect, but you will find that excesses are more common with most insurers. In this article we’re going to be focusing on excesses, but you can apply the same logic to co-payments.
As important as the excess amount is how often the excess will be charged. Almost all policies will only charge the excess once per person per year. That means if you go to hospital more than once per (calendar) year, you don’t pay excess again. While this is true for the majority of policies, there are exceptions. It’s best to check with the insurer before you make what could be a costly assumption.
Work out what your insurer is giving you for accepting a higher excess
We’re going to use the example from the start of this article to demonstrate how to better understand your excess. Our options were:
- Choose a $500 excess and pay $102 per month in premiums
- Choose a $250 excess and pay $120 per month in premiums
The difference in excess between the two options is $250. The difference in premiums between the two options is $216 (($120 — $102) * 12 months).
You may have noticed that these two numbers are close together. This is typical — the difference in premium will usually be a little bit lower than the difference in excess. If it were the other way around (and the difference in premiums was higher than the difference in excess), you’d obviously be better off taking the lower premium — either you don’t go to hospital that year and you end up way ahead, or you do go to hospital but you have still saved more in premiums than you will pay for the excess.
Going back to our example though, we still have a decision to make. And to make that decision, we only have to answer one question…
How likely is it that we’ll need to go to hospital each year?
Ok, we know that this question is going to be difficult to answer with certainty. But there are a number of things to consider to help answer this question:
- Think one year at a time. Looking ahead at the next 12 months only, how likely is it that you will need to go to hospital? There’s nothing stopping you from changing your policy as often as you want. Insurers aren’t allowed to penalise you for leaving or switching policies. And you won’t need to re-serve waiting periods either. As your health needs change over time, you can modify your excess and even switch to a more suitable policy
- Are there any upcoming hospital stays that you already know about? Are you planning on starting a family? Has your doctor warned you that shoulder surgery is on the horizon?
- How often have you been in hospital in the past few years? Have you been in and out of hospital, or do you consider yourself fit and healthy?
- What are you likely to go to hospital for? Some hospital stays lend themselves perfectly to receiving private health insurance benefits (like the shoulder surgery example above). But if you think the most likely reason you’ll end up in hospital is for an accident, insurance won’t be of much value. And even if it is, many insurers waive the excess for accident-related admissions
Working your way through the points above, you should get a reasonable idea of the true value of the lower excess. In our example, there is $216 difference in premiums between the $250 and $500 excess. Remember, most policies only require us to pay one excess per person per year. So unless we think that the chances are very high that we’ll go to hospital in the next 12 months, the higher excess/lower premium combination looks like better value.
As a rough rule of thumb, if you’re generally fit and healthy you should consider paying a higher excess for the benefit of lower premiums. If you’re less healthy or have known upcoming medical needs, a lower excess may make more sense.
If your health and circumstances change in the future, you can always change your cover accordingly.
A word of caution
We take out insurance so that we are protected if things go wrong. Without insurance, we may find ourselves unable to pay for the medical treatment we need. Thankfully we live in a country with great universal healthcare, but there are good reasons why we may want or need to be treated through the private system. Even if you think it’s unlikely that you will need to go to hospital, if you expect that you may not be able to afford a higher excess you should strongly consider a policy with a lower excess.
If you want to learn more about excesses, co-payments and out of pocket costs, you can read more in our Knowledge Bank. Alternately, please reach out for a personalised recommendations from our experts, tailored to your specific needs.
Originally published at www.insurely.com.au on January 8, 2019. This information is relevant if you have a private health insurance policy in Australia