Policies on healthy terms incentive

Sneaking an occasional cigarette while claiming to be a non-smoker may soon be a thing of the past for anyone considering taking out a new form of insurance.

Companies are beginning to offer a type of cover, called preferred life term assurance, which requires people to lead healthy lives, including not smoking for up to five years.

In return, policy holders are promised low-cost cover. This follows similar moves in other areas, such as car insurance, where "cherry-picking" of less risky clients often means more expensive policies for the majority.

Last week, Swiss Life launched its new Select Life policy. Applicants must have normal pulse and blood pressure, must not have smoked any tobacco for at least two years and must have a healthy family history.

David Kneeshaw, head of personal finance at Swiss Life, said: "We are rewarding those who lead healthy lives by permanently reducing their premiums. I believe this is the way the industry is going."

Term assurance is a straightforward way for people to protect their families against unexpected death. It is increasingly used for mortgage protection. Unlike other types of insurance, term assurance has no investment element. If the insured person dies,the family receives an agreed lump sum.But when the insured term ends before death, there is nothing left.

The absence of frills means cover is cheap. It also means that insurance companies are forced to compete mainly on price. One way of doing so is by offering cheaper deals for those in good health. In the United States, where this concept was pioneered, more than 50 per cent of term cover is now on a preferred life basis.

In return for meeting Swiss Life's tough requirements, a man aged 35 would pay £20.45 a month for £100,000 of cover over 20 years. Its standard rate for smokers is £38.99.

A cheaper standard rate, whereby an occasional cigar or pipe is allowed and the health requirements are less onerous, costs £24.75.

Similar health-related term assurance became available last year from Sun Alliance and Providence Capitol. Ronnie Martin, individual risk manager at Sun Alliance, said: "We operate a checklist approach, whereby a potential client is first asked whether he or she meets a number of conditions."

A 12.5 per cent discount on existing rates is given subject to conditions that include an applicant not having smoked any tobacco for five years and not drinking more than 21 units of alcohol a week.

To deter those who still enjoy a secret puff, the company also subjects applicants to a special test that detects nicotine in their saliva. But Sun Alliance admits the test is only effective up to a week or so after the last cigarette has been smoked.

Mr Martin said his company was not trying to "cherry-pick" by insuring only healthier clients: "We are still prepared to insure 99 per cent of the people who come to us, and our premiums on ordinary risks have not risen as a result of our new preferred life cover."

Robert Guy, a manager at John Charcol, a London firm of financial advisers, said: "The view we take is that our first concern is to get the best deal for our client. If we feel that there is a good offer from a reputable company, then we have to look at it."

Marlene Shalton, principal of Morgan James & Co, an adviser in Cardiff, said that preferred term policies were merely an open acknowledgement of what is already happening in the industry.

"Our experience shows that companies will give a cut-price quote, but will then enforce their medical conditions so strictly that they turn down all but the best proposals," she said.

Alan Parsonson, managing director at Providence Capitol's life insurance arm, said: "In the United States these things are now very sophisticated, and there may be up to eight or nine separate types of preferred life cover, including things such as DNA testing.

"I do not think that these things will happen over here, but I believe it will grow in importance and there will be at least three or four options available. The other effect it may have is to help people to adopt more healthy lifestyles."