What is the definition of Life Insurance?
Life insurance is an agreement between an insurance company and an insured person by which the insurance company, in exchange for a premium, agrees to pay a designated beneficiary, an amount of money upon the insured person’s death. This life insurance agreement may include terms that compel the insurance company to pay the agreed upon amount in the case of a terminal or critical illness diagnosis, or cover the funeral expenses incurred.
How is the cost of Life Insurance calculated?
The cost of such a policy is calculated by taking into account that the insurance company will need to have the funds to pay the agreed upon amount, cover the administrative costs, and still make a profit. Using statistical mortality tables which show the expected annual mortality rates, and probabilities, professionals that are called actuaries, determine the cost of such a policy.
The main variables of a mortality table are age, gender and the use of tobacco products in conjunction with the health and family history of the applicant for a life insurance. Through these variables, the life expectancy estimates for a specific person are derived. These estimates determine the final cost of the life insurance policy and the premium to be paid by the insured.
The Smoking Effects on Life Insurance Costs
In order to calculate the cost of an insurance policy, several factors are taken into consideration including the insured’s lifestyle. If the applicant engages in a lifestyle that entails high risk activities like auto racing, skydiving, boxing, martial arts and others, which means that their life expectancy is both shorter and with a high likelihood to end prematurely and/or unexpectedly, then higher premiums are imposed upon the insured person. Smokers are classified in the same category of high risks and hence, smoking affects life insurance rates.
As aforementioned, mortality tables takes into account the use of tobacco products. In most cases, smokers have a shorter life expectancy than non-smokers. For the insurance companies it is simple mathematics. If two people of the same age apply for insurance on the same day, and one is a smoker while the other is not, the non-smoker is expected to outlive the smoker by at least ten years. This means that the insurance company will have ten more years at its disposal to invest the premiums and use the profit from the investments to apply against the cost of the policy. This is why smoking has an effect on life insurance costs.
The table below shows the comparison between the Life Insurance Smokers Rates and Non-Smokers Rates.
An exempt from a life insurance quotation that clearly shows the difference between the rates charged for a non-smoker to those charged to a smoker. (image source: Ohio Govenment)
The above table illustrates a very basic example and assumes that both applicants are in the same condition of good health and have similar lifestyles. It is possible for a smoker to have a policy whereby the premium is less than that of a non-smoker. Each policy is formed on an individual basis. As you will see from the above table, premiums for smokers can be anywhere from 10% to 70% higher than for non-smokers, depending on other factors such as health history and much more.
Who is considered a smoker when applying for a life insurance?
Not all smokers are classified under the same category by companies offering life insurance for smokers. Some companies have very strict criteria while others are more flexible on the subject matter. All companies will nonetheless require a medical examination before issuing a life insurance contract. This is because, even if someone is a smoker, they can be in an optimum health condition in reference to other health characteristics like cholesterol levels, blood pressure and weight. And moreover, some smokers maintain an otherwise healthy lifestyle that will favor them and they may still receive a higher rating for life insurance purposes.
Fundamentally, the insurance companies offering life insurance for smokers, are looking for any form of regular or habitual nicotine usage. Those that enforce strict rules, even take into account chewing tobacco or dipping, which technically is not smoking. For them, smoking one or two cigars per year on a celebration or a special occasion, is still smoking and, therefore, a risk.
(Image source: healthhubs)
(Image source: squaredawayblog)
Companies offering life insurance for smokers will take into account only the levels of dependency to nicotine, and differentiate between an occasional, a moderate or a heavy smoker. These determinations on premiums are made on a per case basis.
Can I lie about my smoking habit to the insurance company?
Remember, insurance companies don’t just take your word on if you’re a smoker or not. In general, they will assume that your application is accurate, but they still will ask for blood, urine and sometimes saliva samples. Don’t be alarmed, if you are honest, this will simply confirm whether you are a smoker or not. In most cases, they may also make contact with your doctor and ask for information on your medical history before signing you up.
You should be as honest as possible to avoid issues later down the track, especially at payout time. Take this for example, as soon as a claim is made on any life insurance policy, and the coroner gets involved, his/her report may point the death to a smoking-related disease. If you were a smoker, but hid this from your insurer, the insurance policy could become void and your beneficiary will endure a stressful time as the insurance company may refuse to payout.
Affordable Life Insurance for Smokers
As it stands, smokers often think that they cannot buy an affordable life insurance policy for smokers as the premiums may be four times higher than those of a non-smoker. This is not true. There are some steps to be taken to buy affordable life insurance for smokers. These are:
Buy life insurance at the youngest age possible
Premiums increase as people age no matter if they are smokers or not. This is because their life expectancy is much shorter. The younger applicants in their 20s or 30s will always receive a better premium quotation than an older person. At that age, they will also be in a better health condition and the insurance company can collect life insurance premiums from them for a longer period of time.
Determine the right amount of coverage
This is a very tricky one. There is a fine balance between the premiums to be paid, the coverage amount and the necessities of the beneficiary. A very high coverage amount could be a waste of money for the applicant and a great source of additional income for the insurance company. A low coverage amount is definitely more affordable for the applicant, but it may not be enough to cover the needs of the beneficiary at the time they receive the amount. Especially if the person that will be the beneficiary is the sole bread winner of the entire family at the time of the payout.
The amount of coverage should be determined by taking into account four major categories:
Mortgages and debt
This is probably the single largest monthly expense. If your mortgage is paid off, that would greatly reduce the financial burden of the beneficiary. The applicant should add all the outstanding debts, including their interest, and include the total to the coverage amount.
Funeral and burial expenses
Allowing an amount in the vicinity of $10,000 to $20,000 should be sufficient to cover these expenses.
Cost of education for your children
It might be difficult to estimate this cost 10 or 20 years ahead. You need to incorporate an annual increase of the college tuition fees, other education expenses like relocation to another city and much more. My advice to you is to be somewhat conservative and over-estimate the cost of education for your children. Without any other financial assistance or a scholarship, a public university would cost in the vicinity of $150,000 while a private one would go up to $250,000 to obtain a degree. Of course, this all depends on the course and its duration as well.
This depends on your household income, your family’s lifestyle, the maturity of your investments and their return, and the amount of time you have had your life insurance. The major portion of the expenditures have been covered by the previous three above categories. Therefore, the beneficiary should be able to survive on 50% to 75% of your current income before taxes. A quick estimate of income replacement to be included in the coverage amount would be as follows: Take your current income and divide it into two (i.e. halve it) and then multiply it by the number of years that you are expected to live. If, for example, you earn $50,000 per year and your life expectancy is 40 years, a starting point / amount for coverage will be $25,000 x 40 = $1,000,000.
(Image source: mylifeinsurancequotes123)
Negotiate with the insurance companies
After you have contacted the company and they have given you a quote for your life insurance premium, you can discuss this further with them. You can even present an argument querying their calculations and ask that the quote be reconsidered. This argument should highlight that you are otherwise in “good health”. If there is a lack of previous family history of illness or hereditary medical conditions and you are incorrectly placed in one of those smoking categories. If they classified you as a heavy smoker, argue for the classification to be reduced to moderate for example.
Find an appropriate company
As mentioned above, there are insurance companies that are inflexible on who they classify as a smoker, while others are not. Some companies may also be specialized in providing insurance for smokers. In any case, you should always compare at least 2 quotes. You can do this through a Google search; just type-in “life insurance quotes for smokers” in the search line and you should have the results on Page 1 of Google.
Find the best “non-standard” policy
Even if the companies do their calculations on each case separately, they have “standard” contracts with standard stipulations per group of applicants. There are standard contracts for smokers where the only change to be made is the amount of money per case. Based on your lifestyle and needs you need to lower the risk factor involved and seek for a “non-standard” contract that would take all the other facts of your life into account.
If you manage to kick this bad habit, inform your insurer. However, please note that you must be off all nicotine related products including e-cigarettes, patches, etc. for at least 12 months before your insurer will re-assess your situation and then you will qualify for lower premiums. If they don’t, you are better off choosing another insurance company.
If you are a smoker, it will take some time, effort and research to find an affordable life insurance for smokers. It is an investment decision and like all others, you will need to analyze and compare a range of options beforehand. And you should not be afraid to ask questions so that you receive all the pertinent information on different policies, processes, medical examinations, or to clear any doubts in your mind. Insurance companies that offer higher rates for smokers could benefit from your reluctance to ask questions.
Therefore, don’t be embarrassed, just fire up all questions you have before signing up for a Life Insurance for Smokers policy and remember to update them on any changes in your personal circumstances!