Going up in smoke

Smoking damages your health says the warning on cigarette packets. And cigarette addicts can expect to pay more for life insurance cover - their expectancy of life is less.

But according to leading life insurance brokers, smokers who ignore advice to quit on National No Smoking Day next Wednesday will be forced to pay through the nose for their habits.They claim the extra paid bears no relationship to the additional health risks involved in smoking that all admit - including the tobacco lobby.

The one major company that did not discriminate against smokers - Equitable Life - is no longer open to new business. It featured low cost rates for both groups. Now life cover purchasers have to look at two factors - the absolute cost of insurance and the gap between smokers and non-smokers.

Tom Baigrie of phone-based brokers LifeSearch says there is no reason why one leading company - Eagle Star - reduces rates for non-smokers by 14% while Scottish Widows slashes its smoker premiums by 44%. Both quotes are for 24-year-old males looking for cover for the next 15 years.

"They cannot both be right," he says. "The big discounts which virtually halve premiums are not reflected by death rates. While smokers tend to die earlier, these premature deaths tend to happen to those in their 50s and beyond - the extra risk run by younger lives is there but it is marginal. Young male deaths are dominated by non-health issues such as accidents, violence, and drink or drug related incidents," he says.

Figures from MoneyFacts show that a 24-year-old male smoker looking to cover a £100,000 sum faces an average 27% loading. For the mid-price company in our table, this works out at £3.07 a month or £552.60 over the 15-year term.

Rival broker Direct Life & Pension agrees. "Clearly there are savings to be made by not smoking. But if you do smoke, there are significant savings to be made by shopping around," says Direct Life's Gregory Taylor.

Forest, the lobbying organisation for smokers, believes non-smokers get a good deal at the expense of those with tobacco habits.

"Recent research by Professor Richard Doll, who discovered the links between lung cancer and cigarettes, shows smoking really affects older age groups while those who start as teenagers and stop at 30 only run a 2% extra risk of cancer - those ending the habit at 50 only face an 8% additional risk. This small gap becomes huge in the hands of the insurers," says Simon Clark at Forest.

Legal & General, whose rates for 24-year-olds looking for 15 years' cover are best value, charges smokers £8.40 a month for £100,000 cover and £6.30 for non-smokers - a 25% gap.

"There is a wide discrepancy between life offices on how they view smoking," says L&G's Ronnie Martin.

"One factor is that each life office has its own opinion on health grounds - we have 40 years of statistics on lung cancer but less on other tobacco related health issues such as the impact of smoking on obesity.

"There is also the question of whether smokers tend to have a more dangerous lifestyle leading to more fatal accidents. The gap should widen as policy applicants get older," he says.

But Martin also admits that the discount is down to marketing factors as well as risk. "Actuaries and companies take views on the customers they want. Some target younger customers with low death rates and might decide to offer a big discount to non-smokers. Others may be willing to spread the risks more widely," he adds.

But whether policy purchasers smoke or not, Baigrie says it is the rate they pay that counts - and as premiums continue to fall, they should check regularly to see if there are better value deals from rival companies - a process known as rebroking.

What to do with the cash you save

Cigarettes will average £4.40 a packet following the latest budget tax rise, so there's a bigger cash incentive than ever to stop.

Smoking 20 a day will now cost £1,606 a year - and that's before additional expenses connected with factors ranging from insurance to extra dry cleaning bills.

Giving up can transform smokers' finances. The money comes from taxed income. For someone on a typical £22,000 a year salary, the extra cash effectively adds up to a 10% pay rise. It would pay for a three-star fortnight's holiday for two in Europe or a top of the range television set.

But savings from butting out cigarettes can be even bigger if they are invested. Putting £1,600 a year into a tax-free Isa returning 7% - the official rate used for illustrations - with a 0.5% annual charge would build up to £21,591 after 10 years, slightly more if the cash was invested monthly.

The same £1,600 into one of the new stakeholder pensions would produce premiums worth £2,051 for a basic, lower or zero rate taxpayer . Higher rate payers collect a contribution worth £2,666 - over 20 years this latter sum would turn into £98,000 in a typical retirement plan.

Giving the money to charity via tax saving Gift Aid produces an uplift of £451 to more than £1,000 to the good cause. Yorkshire Bank calculates that stopping smoking and switching to its "Rapid Repay" combined flexible mortgage and current account would save the 20 a day person with a £50,000 mortgage around £37,500.

"It's around £130 a month extra and, at present interest rates, that would pay off a 25-year home loan more than 13 years early, saving a huge interest bill," the bank says.

Only those converting pension pots into annuities can hope to gain from smoking. A few insurers pay smokers more because they are likely to die earlier. But in most cases, the extra cash does not cover the cost of their habit.