Avoid the pitfalls of group life insurance. Offer personally-owned policies.

Placebo: medicine or procedure prescribed to the patient more for the psychological effect than any physiological effect; a measure designed merely to calm or please someone.

“Really, if you’re looking at percentages, that’s what group life insurance is,” says Greg Zito, vice president of Life Services at Zito Insurance Agency, Inc.

“Ninety-nine percent of group life insurance policies never pay a benefit because it’s rare for employees to die during their working years. Most people make it to retirement. People leave their job and they leave those benefits behind,” Zito says.

Smart Business spoke with Zito about group life insurance’s false sense of security and what employers can do about it.

Why is group life insurance so risky?
When employers offer group life insurance, they don’t realize it’s not something of value to the overwhelming majority. Group life insurance doesn’t apply when someone retires, goes to another job or leaves work because they’re terminally ill. So, when life insurance is needed, it’s likely not in force.

People often have a $15,000 death benefit as part of their group medical benefits. Employees are told they have life insurance through work, therefore they believe their mortgage will be paid off or their family taken care of. In reality, $15,000 won’t cover a lot of funerals.

Many employers and employees don’t think through the implications of group life insurance. If you make it to retirement and try to buy life insurance, your age or health issues may make it cost prohibitive or impossible to procure.

What should companies be doing instead? Why is this option better?
It makes more sense — and may cost less — to introduce a program where employees have individually-owned permanent life insurance policies, so something that has actual value. It’s often referred to as a supplemental insurance benefit.

Your organization can start a basic plan for everyone and then offer your employees the opportunity to enhance the benefits. These plans can cost an employer the equivalent of giving employees a nickel an hour raise. And by offering this type of program, you could be supplementing or replacing a plan that will not pay 99 percent of the time, with a plan that will pay 100 percent of the time.

Employees can cover family members — significant others, children, grandchildren — at their own expense, all on a guaranteed issue basis. That’s where you can’t be declined for any reason. Employees also can take the plan with them when they leave your employment and be billed at home with no change to cost or benefits.

What should employers keep in mind when designing these plans?
Any time you’re setting up a plan, make sure you have an experienced, independent agent. Independent agents have access to multiple programs and know which insurance company best fits your situation. You also want someone with an easy-to-digest presentation who can enroll your employees smoothly and efficiently without any pressure. The agent should provide strong service for you and your team, including keeping relationships going when employees leave.

There are a few types of life insurance to choose from. Permanent insurance is level for life in benefits and cost, while term life policies might be good for 20 years. Permanent plans have other benefits, like a cash surrender for emergencies or retirement needs. There also are policies where you can withdraw half of your death benefit, tax free, if diagnosed with a grave illness or confined to a nursing home. Also, ensure the plan is inexpensive. Some programs start as low as $1.78 a week.

What else would you like to share about life insurance?
It’s all about getting a plan that can actually be used. People aren’t well versed in life insurance. They don’t understand it and they don’t want to think about it. In fact, 75 percent of Americans don’t have personally-owned life insurance. They believe their employer has taken care of it, so they fall through the cracks.

Since employers offer employee benefits to attract and retain good people, it is a win-win to avoid the placebo with personally-owned protection.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.