Smoking is injurious to wealth

Everyone knows smoking is a bad habit, but it’s important to realise that puffing away doesn’t make financial sense either. Health really equals wealth in this case.

Take the example of S Padmanabhan, 36, a chronic cigarette addict until he finally tossed away the butt forever a few weeks ago. Padmanabhan reckons that his habit of smoking at least two packs a day in his youth cost him ₹100 a day on an average. That adds up to nearly ₹36,500 going up in smoke in a year's time.

If he had instead invested that yearly expense on cigarettes over a 10-year period, which earned a 10 per cent post-tax return, it would have built up a solid sum of ₹6,39,888.

Padmanabhan recollects how smoking affected his finances significantly. When he purchased a term-life insurance premium after he started working, he dutifully disclosed to his agent that he was a smoker. “I thought about neglecting to mention it,” says Padmanabhan, “But I wanted to ensure that my family was secure since the insurer could refuse to settle a claim in case of a tragedy.”

With the health risks associated with chronic smoking, premiums rocket for smokers. A smoking individual usually pays between 15 per cent and 25 per cent more premium for a pure term cover. But the loading for policies can even be as high as 55 per cent, according to Bajaj Allianz Life.

Today, if you are a 30-year-old smoker and want to purchase a policy online, the premium for a simple term plan of ₹50 lakh from Bharti AXA (eProtect) or ICICI Prudential (iCare) will be ₹7,640 a year. But if you are not a tobacco user, the eProtect plan would only cost you ₹4,494. ICICI Prudential does not differentiate between term plans for smokers and non-smokers and the premium remains the same.

According to Delhi-based insurance broker Trilok Chand Sharma, “The final premium can only be calculated after a medical examination, which determines risk category. In the case of low risk (Category I), the additional premium for smokers is approximately 50 paise per ₹1,000 of policy amount per annum.

“In Category 2, it is double of this and in Category 3 (highest risk), it is four times.”

What explains the big difference in prices offered by insurers? Insurers use mortality tables — data estimating the longevity of the population — to arrive at life insurance premiums for different categories of investors.

Private sector players have been betting you will outlive your policy tenure according to the mortality tables, even if you are a smoker. LIC, on the other hand, has been more cautious in that respect.

Also, , factor in a ‘premium’ for the insurer’s good record on claim settlements while assessing plans. The latest data shows that LIC settled 97.4 per cent of total claims received in 2011-12. The private sector’s claims settlement ratio was lower.

Having a near and dear one check into a hospital can be a harrowing experience. It could ruin your finances as well since quality medical treatment is often our primary consideration.

Padmanabhan thanks his stars for not having had a heart attack, but he recalls how he would often experience breathlessness and occasionally mild pain in his chest. “I’d sometimes think about what I would do in case of a medical emergency brought on by my smoking,” he says. “I even set aside a specific fund for medical emergencies in my budgeting exercises.”

He also invested in a medical policy; there was no differentiation between smokers and non-smokers by health insurance companies. This is because information correlating smoking and higher medical insurance claims is still being gathered.

But things could change in future, as regulations have now stipulated that health insurance policies should come with life-long renewals, as opposed to being one-year contracts.

This might motivate the health insurance companies to safeguard themselves against costly claims by charging higher premiums from smokers.

He might have been lucky to avoid costly trips to the doctor, but Padmanabhan acknowledges his tale could have been different.

“I’ve seen many of my close friends experience complications due to their smoking habit. Frequent visits to the physician and having to watch what you eat and drink is no way to live life. I’ve quit and I’m better for it,” he declares.

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