The cigarette ban imposed during the Covid-19 lockdown has been highly controversial. Many people, already cash-strapped from the economic effects of the coronavirus, have been forced to either purchase their cigarettes illegally at exorbitant prices or quit smoking altogether.
While the withdrawal symptoms, anxiety and stress that come hand-in-hand with kicking the habit – especially unwillingly – can be severe, there are significant financial benefits to quitting. Over and above the cost-saving achieved by not buying cigarettes, most insurers will review your life premiums if you have stopped smoking for more than 12 months. In addition, improved health can mean fewer illnesses and lower medical costs going forward.
According to 2019 research by Marsh & McLennan (Insurer perspectives on smoking risk), there are more than a billion smokers in the world today, and a billion people could die of tobacco-related causes this century. Their report, based on a global survey and interviews with insurers, reinsurers and other relevant stakeholders, reviews current insurer practices relating to smoking risks in respect of underwriting, pricing and product development. Life insurers around the world are exposed to the mortality and morbidity effects of smoking, with the general practice being to load life insurance premiums.
That said, tobacco risks are becoming more complex as products evolve to include vaping, e-cigarettes and nicotine replacement therapies. While smoking trends may be changing, it remains a major public health challenge. Marsh & McLennan’s research revealed that one in five people over the age of 15 use tobacco in some form, with smoked tobacco being the most common, and that one in 10 deaths worldwide is attributed to tobacco use. Tobacco kills up to half of its users and harms most organs in the human body at any age through exposure to thousands of toxic chemicals, and smoking is the leading risk factor for cancers and chronic respiratory diseases, and among the top 10 risk factors for cardiovascular disease. According to Professor Richard van Zyl-Smit, head of the Lung Clinical Research Unit at UCT Lung Institute, 50% of smokers will die prematurely (that is, lose about 14 years of their life) from a smoking-related illness.
From a life insurance perspective, research reveals that smokers are disproportionately less likely to be insured, although it is believed that the statistics are somewhat inaccurate because many smokers fail to disclose their smoking status correctly when taking out insurance. Most insurers define smoking status based on industry standards using the definitions non-smoker, current smoker and former smoker, being those who have smoked in the past but have not used tobacco products for between six and 12 months, when underwriting an individual for life insurance.
Underwriting is a process used by life insurers to assess the overall risk a person presents when applying for life cover, and this includes a person’s smoker status. An applicant’s premiums are calculated based on the findings of the risk assessment, although each insurer has its own underwriting process and risk model. In general, however, smokers’ life insurance premiums are higher than those of non-smokers. During the underwriting process, the insurer assesses your health status, medical history, family medical history, and lifestyle habits, and can request a variety of medical tests be conducted. During the underwriting process, insurers generally rely on the disclosure made by the applicant regarding their history and frequency of tobacco use.
Full disclosure when completing your life insurance application is essential, and any form of non-disclosure can result in your claim being rejected at a later stage. Life insurers are fully within their rights to not pay a claim and declare a policy void should it come to light that the applicant was dishonest or failed to disclose important information when they took out the policy. As such, an applicant is obliged to disclose all information that is likely to influence the judgement of the insurer when determining the terms of the policy, including exclusions and premium loadings. Detailed information allows the underwriters to assess the exact risk that the applicant presents and to charge a fair premium. If you are not sure whether the information is important or not, rather disclose it and let the insurer decide if it is material or not.
If you applied and were granted life cover as a smoker and have subsequently quit smoking for a period of 12 months or more, it is definitely worthwhile approaching your insurer to have your premiums reviewed. Your new status as a ‘non-smoker’ could result in a more favourable insurance premium, and this saving can be put to good use. Bear in mind that many insurers will request that you undergo a cotinine urine test as proof that you have stopped smoking, although these tests are not always accurate.
To demonstrate the long-term financial effects of kicking the habit, we have developed the following case study. David is 40 years old and earns R20 000 per month, with his after-tax income being R17 420 per month. He has life cover through a major South African insurer of R1 million for which he pays a smoker rate of R447.39 per month. His benefit plan is age-rated and increases with CPI.
David smokes 10 cigarettes per day or 300 cigarettes per month. At a cost of R38 per box (R1.88 per cigarette), this means that his smoking habit costs him R570 per month. As a result of the tobacco ban during the Covid-19 lockdown, David decided it was time to give up smoking. With an extra R570 per month available, he decides to use this money to boost his retirement funding. As such, he sets up a unit trust retirement annuity and, because his contributions to the RA are tax-deductible, he is able to contribute R718 per month (R570 plus R148 tax saving), or R8 616 per year. David plans to retire at age 65 and commits to contributing to his RA at this level, with his premiums increasing annually in line with inflation. He invests in a strategy that targets annual returns of 10% net of all fees. Taking these assumptions into account, David will have an amount of R1 550 251 saved in his RA when he retires at age 65.
After 12 months of non-smoking, David informs his life insurer of his non-smoking status. After conducting a cotinine test to verify that David has indeed stopped smoking, the insurer agrees to reduce his life insurance premiums to R269.54 per month, thereby saving himself R177.85 per month. David decides to channel this cost-saving towards his unit trust RA. David is now able to invest an amount of R942.27 towards his retirement annuity (R570 + R177.85 + R194.42 [tax saving]), with this contribution increasing annually at a rate of 6% until he retires at age 65. Because David stopped smoking at age 40, he will now retire with an amount of R1 897 102 in his RA at age 65. This equates to around R500 000 in real terms today, which is a significant sum of money.