How to stop your money going up in smoke

Today (Tuesday, 1 July 2008) marks the first anniversary of the ban on smoking in public places in England and Wales - and smokers who quit this time last year can now cash in by re-broking their life insurance policies.

Life insurance is a type of insurance that pays out a lump sum when the policyholder dies. Its aim is to prevent the dead person's partner or family from struggling financially. Smoking is a major factor for this type of insurance because of the proven health risks it causes and so insurers charge smokers higher premiums - sometimes up to 50% more than non-smokers.

Term assurance can provide substantial life cover when you are most likely to need it at a surprisingly affordable cost.

Reformed smokers are re-classed as non-smokers when they have given up for a year and so can start benefitting from cheaper premiums when they have been nicotine-free for 12 months.

How your life insurance gets cheaper

Some companies will re-evaluate the original policy and charge the reduced non-smoker rate once the qualifying period has passed. However, some may insist on a new policy. If this is the case, make sure that the increased premium for your higher age does not wipe out any saving you would gain for now being a non-smoker.

For example, Norwich Union would charge a 35-year-old male smoker buying £100,000 worth of life cover over 25 years £16.10 a month but a non-smoker could get the same cover for just £10.70 a month. Similarly Royal Liver would charge a 35-year-old female smoker £13.39 a month for £100,000 worth of cover but a non-smoker would pay just £7.50 a month.

Although insurers won't actively check whether you have given up, they will ask you whether you smoke on the application form and expect you to be truthful. If you come to claim and itis discovered that you lied, the claim will be declined and the premiums you have paid will be wasted.

NHS figures suggest the smoking ban is having a positive effect on the number of people trying to quit. It says that nearly 165,000 people gave up smoking with NHS help in 2007, compared with around 129,000 in 2006.

Other protection policies such as critical illness which pays out a tax-free lump sum on diagnosis of certain specified illnesses, and income protection which insures a proportion of your income in the event that you cannot work due to accident, sickness or unemployment, will also be cheaper for non-smokers.

Statistically you have a greater chance of suffering a serious illness before retirement than dying. Protect yourself and your loved ones with critical illness insurance.

For example, Royal Liver would charge a 35-year-old male smoker £67.74 a month for £100,000 worth of critical illness cover but would charge a non-smoker £41.86, saving them £7,764 over a 25-year term. Likewise private medical insurance (PMI) policies are cheaper for people who don't smoke and live a healthy lifestyle in general.

Health is a prerequisite for wealth and happiness. Find out more about Private Medical Insurance now.

What you can do with all that money...

Reformed smokers might also wonder what they can do with the money they used to spend on cigarettes.

"The average smoker is predicted to smoke 30 cigarettes per day. Based on a cost of £5.50 per packet for 20 cigarettes, if a smoker kicked their habit, they could save £250 per month," says Michelle Slade, analyst at Moneyfacts, "This time last year the top paying variable rate regular saver was offering a rate of 7.00%. If they invested £250 per month into this account they would now have accumulated £3,108."

Anyone looking to start giving up now will find some competitive rates on offer on regular savings accounts at the moment with Halifax paying 10% and Principality Building Society, Abbey and Barclays all offering 7% or more.

01 July 2008 © Moneyextra.com

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Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.