The distortions of job‐search incentives caused by unemployment benefits and their financing are well known. However, a benefit‐tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non‐monotone relation between efficiency (incentives) and equity (insurance). An increase in benefits (and thus tax rate) may up to some point increase average income and reduce inequality. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade‐off, otherwise policies would not be optimal.