Insuring the value of unpaid work in the home

Even if you or your partner don’t earn any income, you both support the family. If a non-working parent dies or is disabled, the family may need to increase spending on childcare and domestic tasks that were previously done out of love.

The cost of employing people to provide such services can easily add up. This needs to be taken into account when working out your family’s total insurance needs.

The insurance gap

Rice Warner Actuaries^[1] estimates that life insurance cover in Australia is 49 per cent less than it should be. Part of the reason for this gap is the underinsurance of non-working spouses.

Life insurance serves two main purposes; to pay off your debts if you die prematurely, and to leave a lump sum that can be invested to produce income for your dependents, so they can continue to enjoy their current standard of living.

You also need to think about how your family would cope if you or your partner were seriously ill or injured, factoring in the extra medical costs not covered by health insurance.

Income protection is recommended if you are in the paid workforce, but it won’t cover a non-working partner. However, total and permanent disability (TPD) insurance and trauma cover may fill that gap.

TPD policies typically pay a benefit if you are permanently unable to work in your own occupation, or any occupation. But some policies include a homemaker definition, allowing a claim if you are permanently unable to perform your regular domestic duties, leave home unaided, and require ongoing medical care.

Protection against serious illness

Trauma cover may provide an alternative to TPD for non-working spouses and pays a lump sum if you suffer a serious illness such as a heart attack, cancer or stroke. Your policy will spell out exactly which diseases and conditions are covered.

Rice Warner estimates the overall insurance needs for young parents aged 35 with two kids on average household earnings are roughly $750,000 of life insurance cover, $670,000 TPD cover and $4,500 a month of income protection.^[2]

As a rule of thumb, Rice Warner estimates the cover for a partner who works part-time or not at all should be roughly half that of the primary wage-earner, but the exact amount will depend on your income, age, number of children and lifestyle requirements.

Joe and Kate’s story Joe and Kate are in their late 30s with three young children. While Joe is employed (with comprehensive insurance coverage provided by his employer), his wife Kate has taken time out from her job to look after their children. Then, Kate was diagnosed with an aggressive form of ovarian cancer. She fought every step of the way, but didn’t win her battle and died within a year. While the couple understood the importance of insuring Joe as the primary provider, they had not considered insuring Kate’s essential role as the homemaker. Their loss was made much harder by the financial burden of paying someone to maintain the household and provide care for the children. With a combination of life and critical illness insurances, a family like Kate and Joe’s may have received a lump sum that could be invested and used to defray the increased costs over the coming years.

Discussions about illness, disability and death are often familiar territory for financial planners. So, please call us today to work out your overall insurance needs on (08) 9315 4788 or admin@explorewealth.com.au.

[1] Rice Warner Actuaries “Underinsurance in Australia” Research Report (2011)

[2] Rice Warner Actuaries, ibid.

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