Paying a small regular amount so that someone else covers a large loss if it happens to you.
Example
Two hundred students each pay $10 a term into a shared pot. Three of them break a laptop that year, costing $600 each. The pot covers all three, and none of those three had to find $600 alone.
How it fits in
Over a lifetime most people pay in more than they take out, and that is how the arrangement works rather than a flaw in it. You are not buying a good average return, you are removing an outcome you could not survive. The test for any offer is whether you could absorb the loss yourself. If you could, an emergency fund does the same job for free, which is why cover sold on small items is usually poor value.
Where this is taught
Related terms
When the money you earn from saving starts earning its own money on top.
Interest paid only on the original amount, never on the interest you have already earned.
Needs are the things that keep you safe and well. Wants make life nicer. Mixing them up is what empties most budgets.