A tontine is an investment where participants pay into a pool and receive equal dividends, with payouts increasing as members die. Originally used to raise money for the state, tontines were banned due to the incentive to cheat by killing other members. The major drawback is that payments cease when a member dies, leaving surviving family members with nothing. Modern versions include using tontines as a form of health insurance, with employers sponsoring the fund.
A tontine is a type of investment in which participants pay into a pool of funds and receive equal dividends from the fund. As members die, the dividends are split among fewer and fewer people, resulting in bigger payouts. When only one person is left, that person gets all of the money from the fund, paying out a fortune in later life. This concept is named after Lorenzo de Tonti, a banker who lived in the 17th century and appears to have pioneered the idea.
Originally, the tontine setup had the money go to the state when all the shareholders died, and it was developed as a method of raising money by encouraging citizens to play, much like modern state lotteries. Members of a tontino pool made bets that they would outlive the other members, resulting in bigger and bigger dividends over time. Unfortunately, this setup has also created an incentive to cheat by killing other pool members to access bigger dividends, and in many regions governments have banned tontines to address this problem.
Beyond the issue of pool members encouraging others out through unpalatable means, one of the major drawbacks of the tontine was that payments ceased the moment a member died. Investors would receive dividends during their lifetime, but surviving family members would get nothing after death. If the tontine were the only investment, this could leave households at a disadvantage, unless the investor saves and also invests the dividends to provide for 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 buy into a pool and receive annual dividends to pay for healthcare bills. As they start to age, requiring more care, they get bigger dividends, because the members of the pool are dying. This tontine arrangement can create an incentive to save as much as possible on health care so that members don’t have to use dividends to pay for health care.
Some workplaces use this option to provide health insurance services to employees. The creators carefully structure the legal aspects to avoid conflicting with the laws that prohibit traditional tontines. Employees may also choose to start their own businesses, and in some cases, an employer may agree to sponsor the fund with matching payments and other benefits. Employees may wish to discuss options with an HR department to determine what they can legally do and how much support the employer would provide.
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