




Harsh Roongta

27 Aug 2010

Now all of us know that Smoking is injurious to health (thanks to the government regulations that require a prominent skull and bones and a written warning to be printed on all cigarette packets). A somewhat less prominent written warning is also printed on all gutka pouches and packets. Apart from the direct money spent on purchasing these tobacco products (which anyway ranges from Rs. 1000 to Rs. 2500 per month for most tobacco slaves) the indirect costs in terms of health care and loss of productivity costs due to the various illnesses caused by tobacco usage is quite substantial. To that long list of expenses caused by use of tobacco please add the extra costs of insurance. In fact the extent of such extra costs on insurance came home to me when we received a query from a reader.

Here is that query: I am 38 years old and am thinking of buying a 30 year Unit Linked insurance Plan where I will pay a premium of Rs. 39,000 per annum for a sum assured of Rs. 75 lacs. After deducting all the charges including mortality, the indicative fund value at the end of 30 years comes to be around Rs. 4.50 lakhs at a gross return of 6% p.a. and Rs. 9 lakhs at a gross return of 10% p.a. If I invest the premium amount in a PPF for the same tenure the fund value would total to around Rs. 44 lakhs @ 8% p.a. Since I am getting such a poor return should I investing in PPF rather than buy this policy.

For advising him we needed to work out the cost of a 30-year term policy for Rs. 75,00,000.

The below mentioned table is as per the above illustration for a male aged 38 years with a 30 year tenure for a sum assured of Rs. 75,00,000

On that basis at that time the cheapest premium worked out to Rs. 22,000. Assuming he invested the difference of Rs. 17,000 (Rs. 39,000 less Rs. 22,000) in PPF @ 8% p.a. it would accumulate to around Rs. 19 lakhs. So we advised him to take a term policy and invest the remaining amount in to various investment instruments depending upon his risk appetite to get better returns. Also his tenure for investment was quite long so we suggested him to go for a more aggressive portfolio that includes equity. But there was a sting in the tale. The customer came back and told us that in spite of excellent medical reports he was getting the term policy at a premium of Rs. 36,000 p.a. and not Rs. 22, 000 as we had told him. On further enquiry we realized that the additional premium was not because of any health issues but because he was a smoker and the premiums indicated were for non-tobacco users only. Now of course the equations changed completely. The money left from the premium payable on the ULIP plan was only Rs. 3,000 and the gross amount accumulated on that would be much lower than the fund value even at the lower return of 6%. This was happening because the ULIP plan did not differentiate between a healthy non-smoker and a healthy smoker. We asked him to take the ULIP policy immediately if it was still available.

But this episode bought home to me the financial costs of using tobacco. Here is an example to put the figures in perspective. Assume that the direct and indirect cost of smoking/gutka is around Rs. 3,000 p.m. on a very conservative basis. If the same money were put in a diversified equity plan for 20 years (and return is 15% p.a.) the funds would be enough to pay for a course that costs Rs. 14,00,000 in today's money (assuming inflation at 6% p.a.). So the next time you light up that cigarette or reach for the gutka pouch please remember that the money for that is directly coming at the cost of your's child's higher education.

Our readers who are in their 30s and 40s and looking for sum assured of Rs. 75,00, 000 for a tenure of 30 years can refer the table below which compares the premiums for tobacco and non tobacco users.

Name of the policy


Age - 30, Term 30

Age - 40, Term 30

ICICI Pru Life iProtect Plan

Non-Tobacco User




Tobacco User








Difference (%age)



Kotak Life - Preferred Term Plan

Non-Tobacco User




Tobacco User








Difference (%age)



But wait the story does not end here. I was using the same illustration with a young cousin of mine to convince him to give up smoking. Instead he sought my advise on an ingenious plan. What if he does not tell the insurance company that he is a smoker and uses the resultant savings in premium to build up the nest egg? I told him that plan would not work because firstly the insurance company would not pay on the policy in case he died but also they would anyway discover the fact that he smoked in the medical tests. But he refused to give up. He said he would give up smoking for a while before he applied for the insurance so that the medical tests will not reveal that he smoked. I pointed out that it will still not work as the premium he was paying would be completely wasted as the insurance company was not going to pay the claim on the policy if anything happened to him. It would be extremely irresponsible of him to take such a risk with his family's future. Not one to give up easily he asked what would the insurance company do if a policy holder who was a non smoker at the time he took the policy started smoking later. Well I was stumped at that one. The Insurance Company would probably have to pay if a non-smoker (at the time the policy was taken) turns into a smoker later on. But I pointed out that this did not apply to him in any case since he was already a smoker. Stop postponing the inevitable, Vaibhav and quit smoking now I advised him.

Hopefully he has taken the advice. What about you?

(Smoking and tobacco usage have been used interchangeably in this article lower premiums are available only where the policyholder does not use tobacco in any form smoking, chewing, snuff, etc.)