Tontine

What is a tontine?

A tontine is a pooled-capital arrangement in which participants contribute money to a common fund and receive periodic payments derived from the fund’s investment returns. As participants die, their shares are redistributed among survivors, so individual payouts rise for those who remain alive. The arrangement ends when the last participant dies.

How a tontine works

• Participants pay a lump sum or subscription into the pool.
• The fund invests the pooled capital and pays regular dividends to surviving members.
• When a member dies, their share is divided among the remaining members, increasing each survivor’s future payments.
• The final survivor receives the largest share; when all members have died, any remaining capital typically reverts according to the plan’s rules or to the state.

Origins and historical use

• Name and origin: The term comes from Lorenzo de Tonti, a 17th‑century Italian financier who proposed a tontine-like scheme in France. The mechanism likely predates him in Italian financial practices.
• Europe: Tontines spread across Europe as a way for governments and institutions to raise capital without direct taxation. They funded public projects and royal expenditures.
• United States: Tontines were very popular in the 18th and 19th centuries and played a major role in the growth of the American life-insurance industry. By the early 1900s they represented a significant portion of the insurance market.

Fast fact: Tontine insurance policies were banned in the United States in 1906.

Decline and controversy

Tontines fell out of favor following several high-profile embezzlement and fraud scandals. Their structure—where survivors benefit from others’ deaths—fueled public suspicion and sensationalized portrayals in popular culture (crime and mystery fiction often featured tontine-related plots). These scandals and reputational problems contributed to regulatory crackdowns and bans.

Modern reconsideration

Interest in tontines has re-emerged among academics, financial advisors, and fintech innovators for several reasons:
* Longevity pooling: Tontines share longevity risk among participants, helping protect against outliving one’s assets.
* Cost efficiency: They can involve lower administrative and guarantee costs than traditional lifetime annuities, potentially yielding higher payouts.
* Behavioral features: Payments rise for survivors, aligning incentives differently than fixed annuities.
* Technology: Automation and distributed ledgers (blockchain) could increase transparency and reduce fraud risks that plagued historical tontines.
* Market need: With fewer employer pensions and limited annuity uptake, tontines are being explored as an alternative retirement-income tool.

However, challenges remain: regulatory uncertainty, ethical concerns about incentives, lack of guaranteed payouts, and the need for robust governance and consumer protections.

Advantages and risks

Advantages
* Potentially higher net payouts due to lower fees and no insurer longevity guarantees.
* Natural hedge against longevity risk via pooled survival benefits.
* Simpler investment structure that may be more efficient than some annuities.

Risks and drawbacks
* Payments are not fixed and depend on survivor counts and investment performance.
* Historically vulnerable to fraud, mismanagement, and conflicts of interest.
* Ethical and social concerns about incentives tied to others’ deaths.
* Legal and regulatory barriers vary by jurisdiction.

Notable historical examples

• Freemasons’ Tontine (London, 1775): Funded the construction of Freemasons’ Hall; detailed subscriber records survived for decades.
• Tontine Hotel (Ironbridge, England, 1780): Built to accommodate visitors to the Iron Bridge; the hotel still operates.
• Tontine Coffee House (New York City, 1793): Financed by a tontine and later became an early center for stock trading that contributed to the development of organized markets.

Conclusion

Tontines are an old but conceptually simple method of pooling capital and sharing longevity risk. Their reputation was damaged by early‑20th‑century scandals, and many forms were banned in the United States. Today, renewed interest—driven by retirement-income shortfalls, technological advances, and the search for cost-effective longevity solutions—has prompted discussion about modern, regulated tontine-style products. Any revival would require careful design, strong governance, clear regulations, and consumer protections to address the historical weaknesses of the model.

Key takeaways

• A tontine pools capital and increases payouts to survivors as members die.
• Historically important in Europe and the United States; U.S. tontine policies were banned in 1906.
• Modern advocates cite lower costs and longevity pooling as potential benefits.
• Revival proposals emphasize transparency, regulation, and technology to mitigate past abuses.