Insurance companies can be strict about smoking, but we show you how this can increase your income by £500 per year.
Sainsbury's Finance believes that three million people who have the occasional cigarette claim to be non-smokers.
I have lost count how many of my friends and acquaintances are non-smokers who smoke. It might be they are social smokers or they have a few cigarettes on stressful days, but they classify themselves as non-smokers nevertheless.
Most people who smoke are old enough to define for themselves how many cigarettes with their alcohol makes them smokers, and I am not interested in contradicting them. But sometimes we don't get to decide this on our own: insurers get the last word.
One puff and you're punished
Since smokers are more likely to die young, their beneficiaries are more likely to receive a life insurance payout, so insurers set higher premiums for nicotine users.
Most life insurers will call you a smoker if you take a single puff, or use a nicotine patch, even just once in the 12 months before taking out the policy, often charging you the same as a social smoker or even a regular smoker. Most insurers only wants to know one thing: “Have you used nicotine in the past 12 months?”
Someone who has a single cigar to celebrate Christmas has probably no greater risk of cancer or other health problems as someone who smokes nothing but walks through a smoke cloud when leaving the office every day.
A 30-year-old non-smoker who wants £100,000 of life insurance for 25 years could pay just £5.63 a month at today's prices for new customers. Yet a smoker, by the insurers' broad definition, could expect to pay £9.23.
Use the strict rules to your advantage
I've heard of tests that can be done that show you're a smoker (or were a smoker, if you're dead), but I don't know how effective they are, and it doesn't matter to me either. Fraud makes insurance more expensive for everyone else, so lying is not something I would contemplate or condone.
Yet there are ways to cheat the system while playing within these strict rules the insurers set.
To start with, you could try to stop smoking now for 12 months. Even if you fully intend to start again later, if you don't use nicotine for a year, you could potentially then cut your premiums by a third by switching to a new policy.
You might think that's cheating, but the insurers can't have it both ways: if they count you a smoker for having one puff in 12 months just to see what it tastes like – or for any other reason – then if you stop smoking for 12 months – for whatever reason – they must accept that too when incepting your new policy.
Make £500 extra per year
That's just the first way you can use their strict definition of 12 months to your advantage. When my retirement is less than a year away, I plan to have a puff on a cigarette – my first and last dose of nicotine and tobacco in my life. It'll be interesting to finally see what all the fuss is about, but more importantly it will increase my income.
When you cash in your pension pot to a life insurer, they will pay you an annuity – a guaranteed monthly income for the rest of your life. If you are a smoker – by the insurer's definition – you are likely to die younger, which means your pension pot doesn't have to stretch for as many years. Hence, the insurer offers you a higher monthly annuity, because your pot of money doesn't have to last as long.
If you then go on to live longer than the insurer expects, it still has to keep paying you every month until you die.
For £100,000 of pension savings, being a smoker as defined by life insurers could lead to an extra £500 per year in income compared to a non-smoker. That's a lot of money, especially for pensioners.
Risks to these strategies
I can't deny that you're potentially looking for trouble with the above strategies, although I think the risks are quite small.
[SPOTLIGHT]Insurers may try to avoid paying these claims, perhaps by saying that you had a duty to tell them everything, including the reason you quit for 12 months before taking out insurance, or the reason you smoked just before buying an annuity.
However, current industry guidelines and practice are very clear in that insurers should explicitly state questions they consider to be important on their forms, and shouldn't expect customers to know what extra information might be relevant to their decisions. That's why, if they ask you “Have you used nicotine in the past 12 months” and don't ask you specific questions for more details as to why you have or haven't smoked, you are not lying by following my above strategy and answering simply and correctly “Yes” or “No”.
Make sure you read the small print and questions carefully though, always answering truthfully. Some insurers may already ask more specific questions, and others may come up with terms and conditions that protect their blanket rules on nicotine ant tobacco usage, while preventing you from using the same rules to your advantage.
If your insurer refuses your claim and you think it's unfair because it didn't ask the right questions, complain to the Financial Ombudsman Service, which can force the insurer to pay out.
Having a relapse
If you start smoking again after taking out life insurance, or stop smoking after getting an annuity, you shouldn't expect problems. Usually, it is just the situation at the time you take out the policy that counts.
There are the occasional scare stories where insurers have tried to avoid their responsibilities on the basis that the customer's lifestyle changed and they weren't informed. Read the small print carefully before signing to ensure there is no ongoing duty of disclosure. Your benefactors can complain to the financial ombudsman if they believe a payout has been rejected unfairly.
More: compare life insurance through lovemoney.com, which won't be beaten on price. If you find a cheaper quote afterwards, we'll match it down to the penny.