With smokers paying 50% more for life insurance coverage than non-smokers, your client may be tempted to lie about his or her smoking habit.

Your experience in dealing with people will tell you intuitively when a client isn’t being truthful. However, accusing that client of lying is not the best way to further a working relationship.

Instead, you have to make sure the client understands the risks of stretching the truth. If the insurer can prove your client lied at the time he or she applied for insurance, the policy will be voided.

“There’s a very significant risk to lying,” says Don Shaughnessy, an insurance advisor with Protectors Group Ltd. in Peterborough, Ont. “The insurer will deny payment — period.”

If an insurer is asked to pay out a $2-million policy when the insured has died of lung cancer within 10 years of the date the policy was issued, Shaughnessy says, it is likely the insurer will conduct an investigation.

The insurer could ask for the client’s medical records and talk to his or her doctor. On a large policy, the insurer might hire an investigator to talk to the client’s spouse, co-workers and friends. The insurer has a fiduciary duty to its shareholders and other policyholders not to pay claims that shouldn’t be paid, Shaughnessy adds.

Twenty years ago, insurers had to prove intentional fraudulent misrepresentation if a dispute over nonpayment went to court. But insurers now protect themselves against lying about smoking, says Jim Bullock, registrar of the Peel Institute of Applied Finance in Toronto, by including a provision in their policies that states a non-smoking policy will be void if it was issued to someone who was a smoker at the time of application.

Insurers have good reasons for taking a hard line, Bullock says. First, the reinsurers who back up insurers don’t want to pay for smokers, he says. Second, the connection between smoking and a variety of cancers, heart and lung diseases, and sleep disturbances is well documented. (For more about this connection, see “facts about smoking” on the Canadian Lung Association’s Web site: www.lung.ca.)

Bullock says heavy smokers are usually heavy drinkers, are twice as likely as non-smokers to get divorced and are three times as likely have an auto accident.

If a policy that exceeds $500,000, part of the underwriting process is a medical checkup. Blood and urine tests for a variety of health —or ill health — indicators will pick up cotinine, which indicates the presence of nicotine in the body. Saliva testing also can establish the presence of cotinine.

According to the Foundation for Blood Research in Scarborough, Me., a smoker’s level of cotinine can be detected within a week to 10 days of smoking. (See www.fbr.org.)

An insurer might also request a test for cotinine as part of an autopsy, Bullock says. If cotinine is found, the insurer might deny payment of the death benefit — even if your client’s death was not smoking-related, such as death as a result of a car accident.

One of the grey areas in this whole discussion is cigar smoking.

Cigar smokers’ habits differ significantly from those of most cigarette smokers. For many cigar lovers, smoking is related to celebrations — New Year’s, summer vacation, weddings or closing that big business deal.

About six years ago, Shaughnessy says, most insurance companies tightened the rules on cigar smoking. But many will allow one large cigar a month and still give a client a non-smoker rate.

However, this is not widely publicized. Insurers don’t want a flood of applicants attempting to come in just under the radar, he says.

Group insurance, however, generally differs from individual policies. Employee plans usually have zero tolerance for use of tobacco products within a year of applying.

The onus is on advisors to understand the policies they recommend. “They need to know how close the client is to the flame,” Bullock says.

Relying on not getting caught is a poor way to approach buying life insurance. “Smokers are just asking to be victims,” Shaughnessy adds. An advisor can provide a policy that will suit a client’s needs, as well as lay out the risk.

However, it would be easier to reduce the risk to clients if insurance companies provided a clear definition of “smoker” in their policies, Bullock says.

@page_break@For example, “tobacco products” covers everything from the nicotine patch to marijuana. But most clients are unlikely to know that. And cigar smokers are less likely to view themselves as smokers, equal to their once-an-hour cigarette-smoking colleagues at work.

“Is 12 cigars a year the same as one a month?” Shaughnessy asks. “What is a large cigar?”

Shaughnessy and Bullock say insurance regulators have been deaf to advisor requests to include a definition of “smoker” on insurance policies. IE