Definition
A Tontine is a type of investment plan that originated in the 17th century, where the participants contribute towards a common fund and receive income shares from it. As each participant dies, their share is redistributed among the surviving investors, meaning the benefits grow for the remaining participants. The scheme goes on until there’s only one survivor, who ends up receiving the entire income.
Key Takeaways
- Tontine is a type of investment plan that originated in France in the 17th century, where a group of individuals collectively invest their money into a common fund and receive dividends based on their invested share.
- When a member of the tontine passes away, their share of the dividends is redistributed among the surviving members. This process continues until the last member alive, who receives all remaining dividends.
- Tontines were popular in the 19th and early 20th centuries, but most countries have now banned them due to their similarity to a form of gambling. However, they are being reconsidered as a mechanism for annuities due to their simplicity and self-regulating nature.
Importance
Tontine is a significant term in finance because it represents a unique kind of investment plan which merges features of a group annuity, a lottery, a mortality table, and a kind of longevity insurance.
In a tontine, a group of investors pool their money together to invest in a common fund, with the profits shared among them as per agreed terms.
The distinguishing feature of a tontine is that as each participant in the investment scheme dies, their share gets distributed among the surviving participants.
This continues until only one investor survives and is entitled to the entire income or endowment.
This system encourages long-term investment and provides a measure of risk sharing, and is therefore a significant concept in understanding complex financial investment structures.
Explanation
Tontine, a type of investment plan, primarily serves the purpose of providing a combination of life annuity and a form of life insurance. An investor in a tontine scheme secures an income stream for life while also receiving an increasing income potential as other members pass away.
The scheme’s purpose is to pool together resources and provide benefits to the surviving subscribers, thus creating a self-sustaining fund that delivers financial protection and assurance to subscribers throughout their lifespan. Tontines are mainly used to finance public goods or governmental projects.
In earlier times, governments would use tontines to raise capital for public projects like wars or infrastructure development, without having to repay the capital; they would only ensure a lifelong income stream to subscribers. Tontines can also be used as pension systems, offering retirees a lifetime income that increases as other members die off.
This combination of features makes tontines a unique, albeit somewhat morbid, financial mechanism.
Examples of Tontine
The New York Life Insurance Company: In the mid-19th century, New York Life Insurance Company was actually originally named Nautilus Insurance. They wrote tontine policies, which were extremely popular and become a major pillar of their business model.
The King’s Tontine: In 1789, the French King Louis XVI needed funds to finance the cost of preparing for war. The King’s advisor came up with the idea of a royal tontine. The plan raised an enormous amount of money quickly, but unfortunately, many of the investors lost their money during the French Revolution.
Tontines in Popular Culture: The scheme achieved probably its greatest level of public awareness through its portrayal in the stage and film versions of the 1956 American musical play “The Little Shepherd of Kingdom Come”. In addition, numerous stories and TV episodes use the device as a plot motivator, including “The Wrong Box”, “The Simpsons”, and “Archer”, though these tend to portray it as a death pool, which is a common but inaccurate portrayal of the scheme.
Tontine FAQs
What is a Tontine?
Tontine is a type of financial arrangement that is similar to an annuity. It’s a combination of a group annuity and a kind of mortality lottery where each participant pays into a fund that is invested and grows over time. As each participant dies, their share is divided among the remaining participants, and the last survivor ends up with the remaining funds.
How are Tontines different from common Annuities?
The main difference between tontines and common annuities rests in the distribution of mortality credits. In annuities, when one member dies, the mortality credits are given back to the insurance company. In tontines, these credits are distributed among the surviving members of the pool.
Are Tontines legal?
Tontines were once common, especially in the 18th and 19th centuries. However, due to fraudulent activities and lack of regulatory oversight, they were banned in many countries. In the U.S., the legal status of tontines is a grey area, but efforts are being made to bring them back in a modernized and regulated form.
What is the origin of Tontines?
The concept of tontine originates from the 17th century by Lorenzo de Tonti, a Neapolitan banker. The first tontine was started in France by King Louis XIV in 1653 to raise money. The idea quickly caught the interest of the public due to its lottery-like payoff system.
Can Tontines provide an income for life?
Yes, like annuities, tontines are designed to provide a lifetime income. However, the payout increases as other members die, potentially leading to substantial income for the longest-living members.
Related Entrepreneurship Terms
- Survivorship Benefit
- Annuities
- Dividend Distribution
- Shared Investment
- Mortality Risk
Sources for More Information
- Investopedia: This website offers detailed insights about all finance and investment related terms including Tontine.
- Encyclopedia Britannica: This source provides comprehensive information on a broad range of topics, including financial instruments like Tontines.
- United States Senate Committee on Finance: This can be a helpful resource for understanding the legal and regulatory aspects of Tontines in the United States.
- The Economist: This major international publication often discusses financial instruments and their impacts, potentially including Tontines.
