This Failed Savings Tool is Making a Comeback
It’s not often that you see a new beat from a dead heart. But when it comes to a specific type of monetary arrangement, it appears that we may just have such a case on our hands.
We’re talking about tontines — which, at it their core, are simple agreements between a set number of people to go in together on a bond — a very long-dated bond. As Investopedia defines it, a tontine is “A system for raising capital in which individuals pay into a common pool of money and then receive a dividend based on their share and the performance of investments made with the pooled money. The principal invested in the tontine is never paid back to the investor; rather the investor receives dividends until his or her death.”
And here’s the final piece to the puzzle: “If a ‘shareholder’ dies, his or her shares are divided up among the surviving investors.” So, essentially a tontine is a type of annuity — one that pays you more and more in dividends the longer you survive. You’re putting your money in a pool, and in a way, gambling that you’ll outlive the others who have bought in with you.
Now, tontines are a relic of the past. Their origin can actually be traced back all the way to the 1650s when an Italian living in France, under King Louis XIV’s rule, floated the tontine as a way to raise money for the crown. Throughout the centuries, they gained popularity as an alternative to annuities or bonds that citizens could purchase from a monarchy. According to a 2010 article from the Fordham Journal of Corporate & Financial Law, the tontine fell out of favor with the public sometime during the middle of the 20th century, mostly because people were uncomfortable with the idea of profiting or benefiting from another’s death.
So, why are we talking about this seemingly dead financial concept from 1600s France? Because the tontine is making a comeback.
There have been a few articles lately that discuss a renewed interest in tontines, including one from The Washington Post which goes into detail regarding the modern form of tontines — which we typically just call annuities or longevity insurance. Still, that doesn’t mean that author Jeff Guo is supportive of the traditional tontine returning to prominence, calling them “sleazy” and “totally illegal”.
“Tontines are a bit like the dinosaurs of the retirement world. They perished in a dramatic extinction event, but their DNA lives on in many of the financial products we see today,” Guo writes. “Tontines were some of the first popular ways to save for retirement, and historians say their demise left the door open for corporate pensions, and Social Security, which continued the tontine promise of a guaranteed retirement.”
Marketwatch also recently spoke with Moshe Milevsky, a retirement expert and professor at the Schulich School of Business at York University in Toronto, about the resurgence in interest in tontines. Milevsky is supportive of the idea of tontines returning to the financial fray, and says they should allow investors to generate more from a retirement portfolio, and help direct spending rates.
“In my mind the tontine is the extreme longevity insurance product which walked down the runway 350 years ago… and should be invited back for an encore,” Milevsky told Marketwatch.
So, there are competing schools of thought when it comes to tontines, but the real question is whether or not there is room or demand in the world of modern finance for their resurrection. There really isn’t a clear answer, but we can bet on the fact that there will probably be a good number of people who investigate the tontine as an alternative to other modern services.
Kent McKeever, author of the aforementioned article “A Short History of Tontines” published in the Fordham Journal of Corporate & Financial Law, seems to think the tontine could see a modern day reincarnation. “Only Louisiana and South Carolina have actual statutes specifically outlawing tontines,” McKeever writes.
“Contemporary demographics make reviving the tontine as an annuity-like instrument a realistic possibility. The gradual increase in income to participants as they grow older is an attractive proposition, especially among a graying population for whom standard forms of life insurance are not particularly useful.”
Will we see tontines make a triumphant return? We’ll have to wait to find out. But you should at least do your homework and know what tontines are all about before you let yourself, or an older loved one, get talked into participating.
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