Safety Nets
Insuring A Person Who Is Not Paid For Their Work
Unpaid household work has a replacement cost, and protection arrangements built only around salaries leave that cost entirely uncovered.
Household protection is usually sized against income. Work performed inside the household produces no income and still has to be replaced if the person doing it cannot.
The output has a market price
Childcare, care for an older relative, transport, household management and domestic work are all services that can be bought. When performed within the household, they are simply not paid for.
If the person doing them cannot continue, the work does not disappear. It is either bought at market rates or absorbed by someone who was previously earning.
Either route has a financial consequence, which is why the absence of a salary does not mean the absence of an insurable loss.
The cost concentrates at particular life stages
The replacement cost is highest when children are young, when a relative needs regular care, or when a household is running on one income by design.
These are the same periods in which the household has the least capacity to absorb an additional cost, because the earning adult is already supporting everyone.
The exposure therefore peaks and falls with the household's composition rather than with anything about the individuals concerned.
The second effect is on the earner
Where unpaid work stops, the earning partner often reduces hours or leaves work to cover it. That produces a loss of income alongside the new cost.
A household can therefore lose earnings without the earner having anything happen to them, which is not how protection is usually modelled.
This double effect is the reason the exposure is larger than a simple estimate of childcare costs suggests.
Cover exists but is sized differently
Life cover and critical illness cover can generally be arranged on a person with no earned income, since they pay a defined amount rather than replacing a salary.
Income protection is different, because it is designed to replace earnings and typically requires them, which limits its availability where there are none.
Sizing therefore starts from the replacement cost of the work rather than from a multiple of pay, which is a different calculation with different inputs.
The gap persists because nothing prompts it
Employer schemes cover employees, and protection conversations usually begin at a workplace or at a mortgage application. Neither prompts a review of the unearning partner.
The result is households where one adult is well covered through work and the other, whose absence would cost more, is not covered at all.
Availability of cover for non-earning individuals and its treatment vary by jurisdiction and insurer and change over time.
Questions readers ask
How much should an emergency fund hold?
It depends on how long an income gap would realistically last for your occupation and household. A single income, specialised work or self-employment generally justifies substantially more.
Why does my emergency fund keep getting used up?
Usually because predictable irregular costs are being paid from it. Car servicing and insurance renewals are not emergencies, and funding them separately is what stops the reserve being raided.
