Got Lots of Money to Burn? Take Up Smoking
Forget the health risks. If you’re thinking about smoking, consider the cost.
Congress is weighing a massive increase in cigarette taxes that could easily push the cost of a pack of cigarettes to $3 or more, compared to between $1.60 and $2.25 today.
Add that higher tax to the already substantial out-of-pocket expense of smoking, and it’s enough to give pause to anyone thinking about taking up the habit.
Consider Liam, a hypothetical consumer who smokes one pack a day. Liam is 15. (A recent study from the U.S. Surgeon General’s office showed many youngsters start the habit in sixth grade. They think smoking will make them appear “slim, sexy, sociable, sophisticated and successful,” according to Surgeon Gen. Joycelyn Elders.)
Assuming that he pays $3 a pack--a reasonable estimate, if a new cigarette tax goes through--he’ll puff away the down payment for his first car--$1,095--in his first year of smoking.
By the time Liam is 25, he will have spent $10,950 on cigarettes.
If, instead, he had saved the cigarette money and put it in a mutual fund with an 8% annual investment return, he would have socked away $16,694 in cigarette savings alone. That’s enough to make a down payment on a house.
By age 65, Liam will have spent at least $54,750 on cigarettes. But pure spending figures understate the case. If he had invested that $3 a day instead of spending the money on cigarettes, he would have accumulated a nest egg of $723,770. (That, again, assumes a fairly conservative 8% annual average investment return.)
But the price of cigarettes is just one of the extra costs Liam started paying when he began smoking. He’s also probably paying more than nonsmokers for many types of insurance--life, medical, homewners and automobile.
The difference in the cost of life insurance is the easiest to quantify. Smokers generally pay between 20% and 100% more for life insurance than nonsmokers, says Steven Stark, vice president of marketing at SelectQuote Insurance Services in San Francisco. The difference in rates depends on the buyer’s sex, the insurer and whether you’re buying a whole life or term life policy.
For example’s sake, we assumed that Liam would buy term insurance--the least expensive type of life insurance--for 20 years, starting on his 30th birthday. That’s presumably an age when he would have dependents relying on him for support.
*
Liam would pay an average of $702.50 a year for a $250,000 policy, Stark says. If Liam did not smoke, he would pay an average of $297.50 a year, he adds. Over 20 years, that $405 annual difference amounts to $8,100. If you account for the time value of money--the amount Liam would have if he could invest the annual difference, instead of paying it to a life insurer--Liam is behind by $19,879.
If Liam buys health coverage through a group plan, he generally wouldn’t pay more than a nonsmoker. However, should he have to buy an individual policy, he would pay substantially more than a nonsmoker, insurance experts say. For example’s sake, we’ll assume Liam can buy health insurance through a group policy and pay the same premium as a nonsmoker.
When it comes to homeowners and auto insurance, the amount Liam would pay would vary widely based on the insure, as well as Liam’s age, his driving experience, the car he drives, the value of his home and where he lives. Farmers Insurance Group ran a sample comparison based on a 38-year-old man living in Canoga Park, driving a fairly standard car and living in a modest house. This man, if he smoked, would pay about $19 more than a nonsmoker in identical circumstances for homeowner’s insurance and about $108 more for auto insurance, a Farmers spokeswoman says.
Assuming the $127 annual price differential holds, and that he needs to insure both a house and a car for 40 years, Liam would pay a total of $5,080 more than a nonsmoker with similar needs. If Liam had invested that $127 each year, he would have accumulated $36,946 at the end of the 40-year period.
Some studies indicate that smokers also pay substantially more for a plethora of health-related items, such as hospital stays, doctor’s services and long-term care. A recent congressional study estimated that a smoker pays roughly $229 a year more than a nonsmoker in hospital bills, $43 more than nonsmokers to doctors, $37 more for nursing homes and $19 more for medication.
The additional costs, including $2 in the “other professional” category, amount to $329 a year. Over Liam’s 50 years of smoking, that amounts to $16,450--or $217,461 when adjusted for an 8% annual opportunity cost.
Adding it all up, Liam is about $998,155 poorer at age 65 than he would have been if he had not taken up smoking. In other words, that “sophisticated” habit has cost him what he could have spent to to buy an oceanfront mansion and a Porsche.
