The Parent at Home: No Salary, Real Loss

Ask a household who needs life insurance and the answer names whoever brings home the pay. It is an old habit and it survives because it sounds like arithmetic: no income, no loss to replace. The arithmetic is wrong, and it is wrong in a way that shows up within about three weeks of a funeral. A household is a system, and the parent at home is running a large part of it: the care of the children, the hours around the school day, the illnesses that do not respect a work calendar, the driving, the meals, the appointments, the household administration nobody notices until it stops. None of it is paid and all of it has a price, because the day that person is gone the household has to buy it. This article is about how to work out what that costs, in your own city and with your own children, rather than accepting a number somebody produced from a table.

The question people ask, and the question that matters

The usual question is what the person earned, and it produces a coverage amount of nothing. The useful question is different: if this person were not here, what would the household have to pay for that it does not pay for now, and for how long.

That question has an answer, and it is a number a family can build in an evening from real local prices. It is also a number that surprises people, which is the reason the exercise is worth doing rather than discussing in the abstract.

One clarification before the arithmetic. This is not an attempt to put a value on a person, which cannot be done and should not be attempted. It is an estimate of the cost of the services a household would have to purchase in order to keep running, which is a completely different thing and the only thing insurance can address.

The first cost: care, priced properly

Start with the hours a working parent cannot cover. Care during working hours for a child not yet in school, care before and after the school day for one who is, and the entire summer, which is a different and much larger cost than the school year. Price all three separately using what care actually costs where you live, and check the waiting lists while you are at it, because availability is part of the answer.

Then add the hours nobody plans for. A sick child sent home, a professional day, a school closure, a snow day, the weeks between camps. In a two parent household these are absorbed. In a household with one parent working full time they are either paid for or taken as unpaid leave, and both are costs.

The number moves over time and that matters for the shape of the coverage. Care costs are heaviest when children are youngest and decline as they grow. The need has a shape and a term policy can be sized to it, which is one of the few places where the product choice follows from the arithmetic rather than from a preference.

The second cost: what happens to the other parent’s work

This is the cost nobody puts on the list and it is frequently the largest. The surviving parent generally cannot continue working the way they did. Hours are reduced, travel is refused, shifts become impossible, a promotion is declined or a role is left entirely, and the change lasts for years rather than months.

The effect is not only this year’s income. It is the promotions that do not happen, the pension contributions that do not get made, and a career that resumes on a lower path. Households that have lived through it describe this as the part they were least prepared for.

A reasonable way to allow for it is to estimate the reduction in the surviving parent’s earnings over the years the children still need close supervision, and to treat that as part of the need. It is an estimate and it is far closer to reality than leaving it out, which is the same as valuing it at zero.

The third cost: the months right after

There is a one time cost that has nothing to do with childcare rates. Final expenses. Time away from work for the surviving parent that is not covered by anything. Professional help for children who need it. Travel for family. Possibly a move, if the home no longer works with one adult in it.

For a period afterwards the household is not functioning and still has to be paid for, and money that has to be raised in that period is raised badly: accounts drained, debt taken on at bad terms, decisions made in the worst month of somebody’s life.

This is the least emotional argument in the article and the most practical. Coverage that arrives in weeks buys a household time, and time is what lets the remaining parent make decisions rather than react to them.

What insurers do with an application like this

Insurers underwrite parents at home routinely and there is nothing unusual about the application. The health questions are the same. The financial section is where it differs, because the insurer is assessing the loss to the household rather than a salary.

In practice the amount available is generally considered in relation to the household’s circumstances, which frequently means in relation to the coverage on the working parent. That is an argument for insuring both parents in the same conversation rather than treating one as an afterthought, and it occasionally means the amount an underwriter will offer is lower than the household’s own arithmetic produced.

Two practical notes. Coverage on a parent at home is generally inexpensive relative to the risk being covered, because these applicants are frequently young and healthy. And group coverage through the working spouse’s employer sometimes includes a small amount on the spouse, which is worth checking and is almost never enough on its own.

Putting the number together

Add the care costs, year by year, for the years the children actually need care. Add the estimated reduction in the surviving parent’s earnings over the same period. Add the one time costs of the first year. Subtract what is genuinely already in place, meaning liquid savings the household could spend without wrecking something else, and any group coverage that names this person.

What is left is the need, and it is generally a term shaped need: large while the children are young, smaller later, gone once they are independent. That points at a term policy for most households, sized to the years that matter, with the conversion privilege understood so the decision can be revisited if circumstances change.

Where there is also a permanent need in the household, an estate obligation, a family business, a dependant who will always need support, that is a separate question answered by a different design, and it belongs in the same meeting rather than a later one.

Who owns it, and who the money is actually paid to

Working out the amount is the hard part and it is not the last part. A policy on a parent at home also has to be arranged so that the money arrives where it is needed, and this is where households in a hurry make an expensive choice without noticing.

In the ordinary case the two parents own coverage on each other, or each owns coverage on themselves and names the other, and nothing turns on it. What needs thought is the second line. If both parents die in the same event, and the only named beneficiary was the other parent, the money generally falls into the estate, and an estate is slower, more public and more expensive to settle than a direct payment.

Naming the children instead solves one problem and creates another. Money payable to a minor cannot simply be handed to a minor. It has to be administered by somebody with legal authority to do it, and the ordinary way to arrange that in advance is a trust set up in a will, with a trustee named and the ages at which capital is released written down. That is drafting work and it belongs with a lawyer or, in Quebec, a notary.

The point is small and the consequence is not. A household that has done the arithmetic in this article carefully and then left the second line blank has bought the right amount of coverage and left the delivery to chance.

The risk that is not death, and the gap nobody mentions

Everything above assumes the parent at home dies. The same household faces a nearer risk that produces the same bills: that person becomes seriously ill or is injured, survives, and cannot do any of the work described here for a year or two.

The household is then paying for the care and the driving and the meals exactly as it would have, while also caring for the person who used to provide them, and while the working parent faces the same pressure on their hours. On any honest reading it is the more expensive of the two events, and it is the one nobody sizes.

Here the products behave differently and it is worth knowing why before the conversation. Disability insurance replaces earned income, so it is generally priced against earnings and is generally not available to somebody who has none. Critical illness insurance pays a lump sum on the diagnosis of a covered condition as defined in the contract, and it is generally available without reference to earnings, which makes it the coverage that fits this particular gap. What any insurer will offer in a given case is its own decision, and it is a question for a licensed insurance professional rather than a rule.

When the arrangement changes, and it will

Very few households stay in this shape permanently. A parent returns to paid work, or moves to part time, or another child arrives, or the working parent’s job changes and the group coverage with it. Each of those changes the number this article asked you to build.

A return to work does not simply cancel the need. The care still has to be bought during the hours that person is now working, and the household is now exposed to the loss of a second income as well. The need frequently moves sideways rather than downwards, and it is worth recalculating rather than assuming either direction.

The practical habit is a review at the events rather than a review on a schedule: a birth, a return to work, a move, a change of employer, a separation. And if the coverage in place is term, understand the conversion privilege in it before it expires, because that privilege is what lets a decision be revisited later without depending on health as it is then.

Frequently Asked Questions

Continue Learning

Read How much life insurance do I need for the wider method, use the needs calculator to run your own figures, and read Term or permanent for the product decision this need points at. Life insurance in your thirties and forties covers the years most of these households are in.