A tontine is an investment where participants pay into a fund and receive equal dividends, with payouts increasing as members die. The last surviving member receives the entire fund. Originally used to raise funds for the state, it was banned due to the incentive to cheat. Modern versions are used for health insurance.
A tontine is a type of investment where participants pay into a pool of funds and receive equal dividends from the fund. As members die, the dividends are divided among fewer and fewer people, resulting in larger payouts. When only one person remains, that person receives all the money from the fund, which is a windfall payment in old age. This concept is named after Lorenzo de Tonti, a banker who lived in the 17th century and seems to have pioneered the idea.
Originally, the Tontine setup held the money for the state when all the shareholders died, and was developed as a method of raising funds by encouraging citizens to play, much like modern state lotteries. Members of a goofy group bet that they will outlive other members, reaping larger and larger dividends over time. Unfortunately, this setup also created an incentive to cheat by murdering other party members to access larger dividends, and in many regions, governments have banned tontines to address this issue.
Beyond the issue of group members encouraging others to leave through unsavory means, a major drawback to the tontine was that payments stopped the moment a member died. Investors would receive dividends during their lives, but surviving family members would get nothing after death. If the tontine were the only investment, this could leave families at a disadvantage, unless the investor also saved and invested the dividends to support the survivors.
A modern version of the tontine can be seen in some regions where it is used as a form of health insurance. Members shop in a pool and receive annual dividends to pay for health care expenses. As they start to age, which requires more attention, they pay big dividends, because party members are dying. This tontine arrangement can create an incentive to save money on healthcare as much as possible so members don’t have to spend their dividends to pay for healthcare.
Some workplaces use this option to provide health insurance services to employees. The creators structure the legalities carefully to avoid running afoul of the laws that prohibit traditional goofballs. Employees may also choose to start on their own, and in some cases an employer may agree to sponsor the fund with matching payments and other benefits. Employees may want to discuss options with a human resources department to determine what they can legally do and how much support the employer would provide.
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