The OTHER reason that smokers pay more for life insurance

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Smoking is an expensive habit. The amount of money a smoker spends on cigarettes over their lifetime can amount to a small fortune. In addition to the cost of cigarettes, smokers also pay more for life insurance.

Today the impact of smoking on your health is well understood. Smoking decreases your life expectancy, as well as increasing the chance that you are disabled or diagnosed with a critical illness. It therefore makes sense that smokers are charged more for life insurance to allow for their increased chance of claiming.

However, there is a second reason that some insurers factor in that makes a smoker’s premium more expensive. It has to do with how long smokers keep their insurance policy before cancelling it. A significant assumption we make when pricing life insurance is around how long we expect to receive premiums on that policy. We incur a significant amount of expenses when a policy commences. This means that the longer we expect a policy to remain active before being cancelled, the cheaper the premium becomes. Some insurers have seen that their smoking policyholders keep their policies for a shorter period than non-smokers. When an insurer factors this into their pricing, it makes the gap between smoker and non-smoker premiums even wider.

You may ask if this is a self-fulfilling prophecy, given that most people cancel their insurance because it is too expensive. If you charge more for smokers because they claim more, should you not expect them to be more likely to cancel their policy because, all things being equal, it is more expensive for them already? We thought so too, but when we compared smokers and non-smokers who paid the same premium as a percentage of their income, we found that smokers still kept their policies for a shorter period on average.

So, why do smokers keep their insurance policies for shorter periods than non-smokers?

There isn’t an agreed answer for this, but some people believe that smokers have an inherently different attitude to risk than non-smokers. Most people who have started smoking in the last few decades started smoking aware of the risks. And yet they still chose to smoke. If smokers are, in general, the kind of people who take more risks, it would mean that they also would place a lower value on insurance – a product designed to reduce risk.

If this was true, it would also suggest that smokers don’t just claim more for insurance because of the impact of smoking on their health. If smokers engage in riskier behaviour in general, this would lead to them being more likely of suffering an injury or illness that would cause an insurance claim, which insurers than price for.

My last point – you may be a smoker and you may feel that you fully value your insurance and that you don’t engage in riskier behaviour than a non-smoker. That’s quite possible. The view above is just a theory, and even if it was true it means that the average smoker has a higher tolerance to risk than the average non-smoker. Unfortunately insurance products are still priced by assigning people into different groups and then treating everyone in the same group in the same way. If an insurer was able to work out how to better predict how long individuals were to keep their insurance policy, it would have a massive impact on how insurance products are priced.

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