The invention relates to an aqueous environment-friendly insulation coating of anti-settling electric steel and a preparation method thereof. The insulation coating is formulated from the following components by mass percent: 20-60% of aluminium dihydrogen phosphate, 0.5-5% of silica solution, 1-10% of phosphoric acid, 0.3-2% of nitric acid, 1-5% of magnesium oxide, 0.3-5.5% of rare earth-salt blended solution, 0.5-5.5% of silane coupling agents, 3-20% of anti-settling additives, and the balance of solvent water. In the invention, conventional roller painting technology is adopted for coating and then a film can be made by proper high-temperature solidification. By multiple actions of physical covering, chemical passivation, phosphorization and the like, a surface insulation coating of a cold rolling electric steel plate without orientation has the advantages of good adhesiveness, high insulativity (namely resistance and puncture voltage between high-rises), high corrosion resistance, high temperature resistance and the like, as well as environmental protection without chrome or harmful ions. The insulation coating is widely applicable to the surface coating of the cold rolling electric steel plate without orientation, has a better anti-settling property, better dispersity and a better levelling property, leads coating operation on site to be more convenient and faster, and can effectively avoid the segregation of paint ingredients and the fluctuation of coating performances.