Tontines: the latest craze for retirement planning

A tontine is a mutualized investment device based on mortality. You may already be familiar with another more popular mortality mutual investment: annuities. In an annuity, an investor hands a check to an insurance company and the insurance company pays a monthly or quarterly dividend to the investor. The insurance company is essentially betting that the investor will pass on before having to pay them too many dividends. A tontine works in a similar way.

The main difference is that with a tontine, it is a pool of investors. Here, a group of investors contribute lump sums and pool their money. Like an annuity, they receive lifetime dividend payments. The kicker with tontines is that each member of the pool dies, the person’s dividend is divided among the living members. When the last investor dies, the tontine ends and the mass of money goes to the issuer/insurance company. Another variant of tontine involves no dividend payments and the last survivor receives all the money less expenses.

Tontines were originally created by the English government in 1693. King William needed a cheap and easy source of finance to finance his war against France. Here in America, tontines were a popular way to fund retirement in the late 1800s during the Great Depression. At one point, more than 7.5% of the national wealth was linked to investments in tontines. However, since the Roaring Twenties of the 1920s were filled with corporations, Ponzi schemes and no regulations, many Americans in these vehicles were exploited and lost their life savings. As such, the vehicle fell out of favor and, in some cases, became illegal.

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