From ash to cash

Smokers are subsidising the price war in life insurance policies, writes Michael Drewett

IF LAST Wednesday's national no-smoking day helped you to give up, along with an expected tens of thousands of other smokers, you may have improved more than your health.

The financial benefits could be just as significant, going much further than the pounds 1,000 that a 20-a-day smoker will fork out this year. Smokers pay more to insure their lives because they are likely, on average, to die sooner than non-smokers. The same principle applies to policies that pay out on critical illnesses, such as heart attacks, strokes or cancer, and some other insurance policies. Ninety per cent of lung cancer incidences, for example, are thought to be smoking-related, so smokers inevitably pay more for insurance that pays out on a diagnosis of lung cancer. Moreover, while it may seem reasonable to charge more for insurance, in the particular case of simple life assurance, smoker rates are often much higher than the risks dictate they should be.

A senior insurance industry executive explained: "Competition is very cut-throat at the moment. Nearly every major company is slashing term assurance [the basic form of life insurance] rates in order to climb up the comparison tables. In many cases the profit margins have not only narrowed but disappeared. With market forces concentrating minds on the cheaper rates for lower-risk, non-smoking customers, smokers are being hammered to balance the books."

As there are fewer smokers than non-smokers, any discounts can mean smokers are charged disproportionately more, given that the insurer is looking to keep up its overall level of premium income as much as possible. For example, the average cost of insurance might be, say, pounds 100. But if you offer a 10 per cent discount to the 75 per cent of non-smokers (paying pounds 90), the 25 per cent of smokers will have to pay pounds 130 each for the insurer to receive the same total premium income. Non-smokers may be healthier than smokers but not necessarily by as much as the difference in premium rates might imply.

Suzanne Moore, of the Association of British Insurers, said: "Companies claim that while the market is indeed fiercely competitive, they largely deny there is any price fixing against smokers. Some merely claim that others may not be charging smokers enough."

But a quick look at the figures casts doubt on these claims. A normal- risk man aged 30 next birthday and insuring his life for 20 years for pounds 100,000 with Norwich Union will pay pounds 13.20 per month if he does not smoke, and pounds 18.20 if he does (37 per cent more). But with Scottish Widows, the loading more than doubles (to 76 per cent) with the smoker paying pounds 20 against pounds 11.90.

Whatever the rights and wrongs of using one group to subsidise another, no one doubts that money can be saved if ex-smokers can become reclassified as non-smokers. But not every company will do it, and, even when they will, different rules may apply.

Ian Smart of Scottish Provident said: "The benchmark for being assessed at the lower [non-smoker] rate is 12 months without smoking. Most companies that are prepared to re-evaluate use this period, with the rest typically requiring two years."

After this period you will be required to sign a declaration that you have not smoked for this time and do not intend to, to get the discounted rate. You should also tell your insurer at the time of giving up. Some insurers may require a medical but typically they will have no way of checking up on your declaration.

There is another factor, of course - what does the term "non-smoker" actually mean? With some insurers it means no tobacco products at all for the stated period, but some companies allow cigars and pipes on the basis that lung cancer incidence is lower, though mouth cancer is about the same.

The trend to exclude all tobacco in the definition is increasing but many firms still claim the main danger is from cigarettes alone. A spokeswoman for Allied Dunbar, owned by BAT, the tobacco company, said that 80 per cent of relevant companies used the "cigarette specific" definition, and only 20 per cent "tobacco in general".

To clarify who does what, Helm Financial Services, a firm of independent advisers, has undertaken a survey on life insurers' attitudes to non- smokers who signed up while smokers in the past.

Peter Gladstone, a consultant with Helm, said: "Although half the companies are prepared to review their policyholders' rates after giving up, half are not. This does mean that stopping smoking is an important time to review your life assurance, in case it makes sense to change companies after the probation period is up."

Peter Heald, chairman of Advisory and Brokerage Services, another financial adviser, said: "In addition to the question of whether your company will reconsider you, do not forget that rates in general have fallen sharply of late after the previously hysterical rise connected with Aids. You may well be able to reduce the basic rate for cover as well as claiming the non-smoker discount." As an example of how much smoking really affects insurance, Mr Heald quoted a 60-year-old wanting 10-year term cover for pounds 100,000.

He said: "This man smokes 10 [cigarettes] a day. The cost of a cigarette is around 14p. But the insurance cost is pounds 202 per month as a smoker against pounds 110 if he were a non-smoker. Effectively this raises the unit cost of each cigarette from 14p to 47p. The message is: if you do not smoke very much, why not give up? It is costing you in other ways."

Many financial advisers will help you find a cheaper life insurance policy. Premier Investment, for one, will provide a free list of comparable rates for most insurers through its Policy Portfolio service (call 01483 306090). Premier's rates are also specially discounted by virtue of it rebating some of its commission.

But if you must smoke, it can be financially advantageous with pensions. Stalwart continues to lead the annuity market, your annual pension, by offering enhanced terms to people who smoke, on the basis of shorter life expectancy. It insists there is no obligation to continue smoking once the money starts arriving, but the pension annuity nevertheless remains fixed for life.