Health insurance is different to life insurance or any of the related disability and trauma type benefits as this type of insurance doesn't pay money to you, it pays medical professionals and hospitals.

If you want to attend a private hospital it costs a lot of money. You can pay for it yourself, or you could take out health insurance (waiting periods often apply).

There are a variety of reasons why people would want to go to a private hospital, perhaps because you want your own doctor, or your own room, because specialist treatment you require is available through the public system only at the end of long waiting lists, or perhaps just because you've watched too much television and all those horror stories the opposition and the nursing union harp on about are starting to get to you.

Private Health Insurance is designed to take some of the pressure of the Medicare system. Just like the whole greying population thing frightening the government into creating compulsory superannuation, the omnipresent threat of the bankruptcy of the public health system has forced the Government to come up with measures to promote health insurance.

Like all Government initiatives, they do this with a combination of carrots and sticks, though in this case at least one carrot really is just another stick painted orange.

There are two big incentives to take out private health insurance. First of all, they apply a surcharge to high income earners. The Medicare Levy Surcharge is an extra 1% stuck on top of your existing tax bill if you are on a high income and don't have private health insurance.

You pay the Medicare Levy Surcharge if your income, which in this case includes reportable fringe benefits exceeds $50,000 for a single person, or $100,000 for a couple or family. For couples and families this threshold increases by $1,500 for each dependent child after the first one.

You don't usually pay the Medicare Levy Surcharge if you take out private medical insurance, but from 1 July 2000 the laws were changed a bit and it isn't sufficient to merely take out the cheapest form of insurance purely to get you off the hook. You will still pay the surcharge if your health insurance has an annual excess greater than $500 for a single person, or $1,000 for a couple or family. It is no longer sufficient just to take out some token el-cheapo plan in order to save tax. People were getting around the Medicare Levy Surcharge by finding the cheapest policy they could find and never using it, still just using the public system. That annoyed the Government of course so they changed things. Check your policy!

The other big incentive, or punishment (depending on how optimistic your world view) is cheaper rates for people who take out policies when young. If you take out a policy when you are 30 or less, you pay the premium of a 30 year old for the rest of your life. You can look at that as a great reward for those that take out a policy when young, or look at it the other way and see that for anyone not taking out a policy when young will have their premium jacked up by 2% a year for every year they procrastinate, and be forever burdened with a higher price to pay. If you stop your cover and start it again later you'll pay the higher rate applicable for someone joining for the first time at your age. The rate rises by 2% for every year you are older than 30, so a 40 year old will pay 20% more than a 30 year old. The maximum age loading is 70%, which applies from age 65.

From 1 January 1999 there has been another incentive scheme, the Government pays a 30% rebate on premiums to make cover more affordable. There is also a relatively new incentive which you've probably heard about on TV by now, the Government is putting in place measures to reduce the "gap", the amount that normally is not covered by health insurance. Ask about this from your fund.

There are various policies that cover different amounts. You can take out premium policies that pay for practically everything, including ancillaries such as optical and dental bills and ambulance transport with little or no gap, through to budget policies with huge excess payments when you make a claim. The latter are really cheap, and get you off the hook for the age based loading thing so you can take out comprehensive cover later on when you are old and sick, but watch out for the Medicare Levy Surcharge if you are a high income earner.