Smoke gets in insurers' eyes: Non-smoker discounts are not all they seem, reports Christine Stopp

----------------------------------------------------------------- Life insurance rates ----------------------------------------------------------------- Life insurance for smokers and non-smokers ----------------------------------------------------------------- AGE 30 ----------------------------------------------------------------- Smoker Rate pounds Non-smoker Rate pounds Equitable Life (r) 155.00 Albany Life (r) 151.20 Liberty Life 216.19 Equitable Life (r) 155.00 Albany Life (r) 232.70 Liberty Life 160.85 Prosperity Life (r) 241.00 Prosperity Life (r) 171.00 Standard Life 247.00 Confederation Life (r) 182.00 ----------------------------------------------------------------- AGE 45 ----------------------------------------------------------------- Equitable Life (r) 595.00 PPP Lifetime (gr) 543.73 Ecclesiastical 755.60 Zurich Life 553.38 Permanent Insurance 830.00 Permanent Insurance 559.00 Liberty Life 860.66 London Life 572.00 Sun Alliance 874.64 Liberty Life 575.13 ----------------------------------------------------------------- Annual premiums for a sum assured of pounds 100,000 over 20 years. Best available rates for man aged 30/45 next birthday. (r) premiums reviewable (gr) - guaranteed for terms up to and including 15 years. Terms over 15 years are reviewable ----------------------------------------------------------------- Source: Finstat Rate Update -----------------------------------------------------------------

AS THE giant tobacco conglomerate BAT was announcing a pounds 1.3bn record profit last Wednesday Eagle Star, its insurance subsidiary, was encouraging non- smokers by giving them discounts of almost 30 per cent on life insurance.

Discounts on premiums for non-smokers have become widely accepted in the life industry over the past 10 years, though they are still not available from all companies. The table shows the lowest available rates for simple life cover (term insurance) of pounds 100,000 over 20 years for a 30-year-old and a 45-year-old man.

Insurance companies offer non- smoker discounts because they believe they will generate fewer claims. This belief is borne out by the mortality figures according to Liberty Life actuary Lloyd Zokay. In most of the population - and especially the over-35s - the probability of dying within the next year is only two thirds as high for non-smokers as it is for smokers.

The declaration that has to be signed on an insurance application form is not particularly onerous. Applicants just have to say they have not smoked a cigarette for 12 months. Pipe and cigar users are not counted as smokers.

Are people honest when they fill in the form? 'A good question,' says Mr Zokay. He points out that if the application form was filled in dishonestly, and the fact came to light when the person died, the insurance company would not pay out. He has not, however, seen a case where a claim was reduced or refused for this reason.

It is known that in the general population non-smokers outnumber smokers by two to one. An insurance company might begin to look closely at applications if its ratio of smoker to non-smoker applicants was very different.

A non-smoker discount is given or withheld on the basis of information on the application form. If the policyholder goes back to smoking later on there will be no reduction in rates. If a smoker gives up there is no eligibility for a discount on a policy that is already in existence, though it might be worth trying to negotiate a drop in rates with your insurer.

Non-smoker rates are available mostly on protection policies such as term insurance where there is no investment element. Oddly, they are not yet widely offered on medical insurance, though Liberty Life is now revamping its income replacement policies to include them and Mr Zokay believes the distinction 'should be reflected in more and more products'.

Non-smoker discounts are not usually expressed as a percentage of the premium. Instead, the applicant is given a rate that would apply to someone a year or so younger. In practice, the discounts amount to anything from 26 to 35 per cent.

However, the size of the discount is not what counts. The general level of premiums fixed by the company plays a much more important part.

The TSB was crowing about the smoke-free policy at its head offices and its non-smoker discounts this week. Its term insurance annual premiums for 30-year-old and 45-year-old policyholders on the same terms as in the table work out at about pounds 432 and pounds 1,164 for smokers and pounds 288 and pounds 780 for non-smokers. These are mostly double the best buy rates we show.

You should also be wary of paying for extras when what you really need is life cover. The TSB's Maximum Protection plan costs, for pounds 100,000 of cover for the ages shown in our table, pounds 516 or pounds 2,010 for smokers and pounds 376 or pounds 1,352 for non-smokers. This is 'whole of life' cover which pays out on your death whenever it occurs, though after the first 15-year term you will have to accept an increased premium or lower cover.

For a 45-year-old man the rates are almost twice the same company's term rates quoted above. The additional benefit is 'serious illness and disability cover', which means the pounds 100,000 lump sum is paid out in the event of any of a list of illnesses such as heart attack, kidney failure or MS.

Equitable Life is one of a number of companies that ignores non-smoker discounts. Its reasoning is that smoking is similar to many other risks the life insurance company accepts, and does not merit separate treatment, though someone smoking more than 40 cigarettes a day would be charged higher premiums on health grounds, as would someone who drank a lot of alcohol.

How come Equitable's rates are still so low, even though they pool risks that other insurers keep in separate boxes? Many premiums were inflated, says Chris Matthews of Equitable's actuarial department, due to Aids. Since the potential liability was unknown, a lot of companies multiplied their premiums just in case. Equitable quotes a 'maximum premium' that is much higher than that actually paid, and reserves the right to raise contributions if Aids-related claims prove very expensive for the company.

A non-smoking discount is an attractive selling point, especially in the week of National No Smoking Day. Consumers should not be dazzled by the idea of '30 per cent off', but should look at overall premium levels and make some comparisons with other companies' rates.

Eagle Star's rates on pounds 100,000 over 20 years are similar to those offered by the TSB: pounds 418 and pounds 1,260 for smokers and pounds 345 and pounds 896 for non-smokers. The BAT subsidiary wants you to give up . . . but not a lot.

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