Insurance and Safety-Net Basics: Emergency Fund, Term Life, Avoiding Surrender Scams

Insurance and savings do the same job from two sides: protecting you from losses you cannot afford. Use them in the right order.

Step 1: An emergency fund of 3 to 6 months of living costs

Keep it somewhere you can withdraw at any time: a demand deposit, a money-market fund or similar. When you lose a job or fall ill, you won't have to borrow at around 18% a year or sell investments at a loss. Bank deposits are covered by deposit insurance up to 500,000 yuan per depositor per bank. "3 to 6 months" is common rule-of-thumb rather than an official standard; base it on your fixed monthly expenses, not your income. Our savings goal calculator can help you plan how fast to build it.

Step 2: Insure only losses you cannot absorb

Premiums do not come back in full; part pays the insurer's costs and profit. So insurance is worth buying for rare, expensive events your savings can't cover, such as serious illness, causing injury while driving, or the death of the main earner. Small losses like a cracked phone screen or a delayed flight belong to your emergency fund. Whether to buy critical-illness cover depends on whether your savings could carry you through a year or two of lost income.

Step 3: Prefer pure protection, and treat "returns" and "dividends" as non-guaranteed

Term or "consumption-type" insurance pays nothing if you make no claim, which feels like wasted money. Policies with refunds or dividends charge you extra premium for the insurer to hold your savings, and the dividend is legally described as a non-guaranteed benefit in bold print on the policy summary. There is a fair counter-argument: for someone who truly cannot save, a refundable policy forces regular saving. The advice here is aimed at people who can manage themselves.

Step 4: If people depend on your income, insure the earner first

A term life policy covers a fixed number of years and pays your family a lump sum if you die in that period. It matters when a mortgage is outstanding or children are young. Insuring a child's life is a low priority since a child's death does not remove a household income, and the law caps death payouts for minors. With limited money: term life and a one-year medical policy for the earner first, then a medical policy for the child. The author estimates the cost at several hundred to a few thousand yuan a year, with no official figure.

Step 5: If you want to cancel a policy, do it yourself

Be wary of online ads promising "full refund, no fee unless successful". These are usually illegal surrender agents who take 30% to 50% of the refund and ask for your ID, bank card and verification codes. Cancelling also ends your cover. In one case reported by the Hunan financial regulator, a woman paid an agent a "consultation fee" and was still refunded only the cash value; three months later she was diagnosed with breast cancer and no longer had her critical-illness cover. Call the insurer directly, or use the free cooling-off period for new policies (a policy of more than a year can usually be returned with nearly full premium refund). If you feel you were misled when sold, call the complaint line 12378 for free. Before cancelling, ask about reducing the sum insured or making the policy paid-up instead.

Bonus: before prepaying a mortgage, run one comparison

Prepaying is the same as earning your mortgage rate with certainty. The only question is whether the after-tax return you can reliably earn elsewhere is higher than your loan rate. If not, or if you're unsure, prepaying makes sense, and early payments save the most interest on equal-installment loans. Keep emergency cash either way and check the contract for prepayment penalties. Our mortgage calculator lets you test the numbers.

Source and license: adapted from HowToLiveBetter (高性价比人生指南) by eternity4719, Section 5 "Don't Waste Money", licensed under CC BY 4.0 (https://github.com/eternity4719/HowToLiveBetter). We condensed and translated the original entries; see the source for evidence grades and citations. Rules described here apply to mainland China and may change. This is educational content, not investment, tax or insurance advice.