Only buy insurance for losses your savings can’t cover; use an emergency fund for losses you can afford

39. Only buy insurance for losses your savings can’t cover; use an emergency fund for losses you can afford

Cost: No money is required. All you need to do is list the major potential losses your household might face and determine which ones exceed your savings capacity. This takes about half an hour.

In plain terms: The premiums you pay won’t all be returned to you; a portion goes toward the insurer’s operating costs and profit. Therefore, insurance is worthwhile only for rare events that would otherwise overwhelm your finances — such as serious illness, a car accident causing injury to others, or the death of a primary breadwinner. For smaller losses that your savings can handle, an emergency fund is the better choice.

Benefit: Only a fraction of the premiums collected by insurers is paid out as claims. The remainder covers sales, administration, and profit. Regulations require insurers selling short-term individual health plans to publish their “overall claims ratio” on their website every six months; this figure roughly indicates what proportion of premiums is paid out in claims. On average, buying insurance for any given loss ends up costing you a little extra over time. The upside is that it spreads a potentially catastrophic expense into a series of manageable annual payments. The smaller the loss and the easier it is for you to pay out of pocket, the less advantageous this trade-off becomes. Following this logic, several types of insurance mentioned earlier in this book are worth purchasing: one-year health insurance is covered in Section 7, Item 20; auto liability insurance for drivers is discussed in Item 26 of this section; overseas medical coverage is detailed in Section 21, Item 4; and term life insurance for households dependent on your income is explained in Item 41 of this section (nationwide, effective 2021).

Evidence grade: C

Sources: General Office of the China Banking and Insurance Regulatory Commission (2021). Notice on issues related to regulating short-term health insurance business (Chinese Banking Regulatory Commission [2021] No. 7, the comprehensive loss rate is disclosed on the company's official website on a semi-annual basis). <https://www.gov.cn/zhengce/zhengceku/2021-01/12/content_5579193.htm>

Notes: This recommendation is assigned a Grade C because no official statistics exist to determine precisely which policies offer good value. The guidance provided here is meant to help you make a reasoned choice. For low-cost risks — such as cracked phone screens or minor flight delays — you can easily cover the costs yourself, so these policies are generally unnecessary. Similarly, if your savings can sustain you for a year or two without income, you may opt out of critical illness insurance, which compensates for lost earnings during illness. Basic medical insurance is a mandatory social insurance program; it does not fall under this evaluation framework and must be purchased regardless, as explained in Section 7, Item 9. For smaller unexpected expenses, an emergency fund is the appropriate safeguard, as described in Item 27 of this section. Ultimately, the primary beneficiaries of this advice are you and your family.