What is a tontine?
A tontine refers to a system for raising capital by which individuals contribute to a pool of money and receive dividends from their share as the pooled money is invested.
Traditionally, as investors passed away, they weren’t replaced, and surviving investors received more significant profits and gains as a result of the group shrinking. The final survivor typically enjoyed the whole income in its entirety. Tontines were popular in the U.S. in the 1700s and 1800s.
Insurers manage tontines through life insurance policy administration systems, similar to life annuities. These tools make it easy for insurers to develop and administer new life, annuity, pension, and health insurance products to clients.
How does a tontine work?
An investor pays a lump sum upfront when investing in a tontine. The sum is never paid back to the investor, but they receive annual dividends until death. When an investor passes away, their shares are divided among the remaining surviving tontine members, increasing their annual dividends.
As more investors pass on over time, the living investors’ yearly payments continue to grow. The last investor alive collects the entire dividend until their death, at which point a tontine ends.
Are tontines legal?
Tontines were popular in the 18th and 19th centuries. They’re still common in France and are regulated by the European Parliament. Tontines acquired a negative reputation in the U.S. as life insurers engaged in questionable practices.
In 1906, the Armstrong Investigation led to restrictions on their versions of tontines. There’s an overarching debate as to whether tontines are illegal or not, but some experts suggest they should be revisited as a form of retirement savings.
Tontine example
The Tontine Coffee House in Manhattan is a real-world example of a tontine. Established in early 1793, it was built by stockbrokers. The stockbrokers needed a place to conduct business and have meetings following the signing of the May 1972 Buttonwood Agreement – the founding document of the New York Stock Exchange. The coffeehouse was funded by selling 203 shares at $200 each.
Tontine vs. lifetime annuity
Tontines are sometimes compared to lifetime annuities because of their similarities in structure. However, there are significant differences between the two.
With a tontine, investors pay a lump sum upfront and receive annual dividends from the pool. When a tontine member passes away, their payment is distributed among the remaining living participants until only one investor remains.
On the other hand, individuals can purchase lifetime annuities with a lump sum of money and receive income for the rest of their lives. Lifetime annuities guarantee payments at predetermined amounts.
Alyssa Towns
Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.
