It’s Tontine Time Again!
Although this concept may seem alien today, tontines have a long creditable history that reaches back half a millennium. The name “Tontine” comes from a 17th-century Italian financier, Lorenzo de Tonti. In those days, Tonti pitched for a tontine scheme to the French government in the 17th century as a way for King Louis XIV to raise money.
A Tontine is organization of individuals who enters into an agreement to pool sums of money permitting the last survivor of the group to take everything. It can also be said that Tontine is a rare agreement among several persons, who agree that each will invest in an annuity and the last to die will receive the remaining assets and profits.
The holders of tontine life insurance contracts pay premiums for a certain amount of time before they gain the right to acquire dividends. In the event that a policyholder dies during the tontine policy, his or her beneficiary will be entitled to benefits, but no dividends. The earnings that ordinarily would be used to pay dividends are accumulated during the tontine period and subsequently given only to policyholders who are still alive at the end of the term. This type of policy is known as a dividend-deferred policy.
During late Middle Ages tontines became very popular in Europe as a financing tool. The European monarchs borrowed, via tontines, to fund their wars.
At the height of its popularity in the 1900s, tontines represented two-thirds of the insurance market in the United States and accounted for more than 7.5% of the nation’s wealth. By 1905, there were an estimated nine million active tontine policies in the U.S., with only 18 million households! In 19th century tontines were a popular vehicle for increasing life insurance sales in America. History credits tontines for the insurance industry’s ascendance in America.
The modern culture served to amplify the fashionability and the dark side of tontines. Popular writers like Agatha Christie, Robert Louis Stevenson, and P.G. Wodehouse wrote stories about tontine participants conspiring to kill one another to claim the big payoff!
Today growing number of financial advisors, academics, and Fintech firms think that it is the right time to take a serious look at these financial instruments. They would like to see tontines make a comeback. Tontines are attractive because they provide regular income of an annuity – more income for living members – and because of tontines’ structure and relatively low costs, they produce higher yield than annuities.
Tontines also offer a solution to longevity risk—the danger of outliving money. With automation and developments like blockchain technology, today’s tontines could boast of something that was missing earlier: transparency. With transparency there is less possibility of fraud. The market for tontines is as large as for life insurance, especially with the Baby Boomers, Gen X and Millennials began looking for an alternative to low yielding pensions.
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