What Is a Tontine?

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 an increasingly smaller number of people, resulting in larger payouts. When only one person is left, that person receives all the money from the fund, making for a windfall payment in old age. This concept is named for 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 going to the state when all the shareholders died, and it was developed as a method for raising funds by encouraging citizens to gamble, much like modern state-run lotteries. Members of a tontine pool bet that they would outlive other members, getting larger and larger dividends over time. Unfortunately, this setup also created an incentive to cheat by murdering other members of the pool to access larger dividends, and in many regions, governments have banned tontines to address this issue.

Beyond the issue of members of the pool encouraging others to exit it via unsavory means, one major drawback of the tontine was that payouts ceased the minute a member died. Investors would receive dividends during their lifetimes, but surviving family members would get nothing after death. If the tontine was the sole investment, this could leave families at a disadvantage, unless the investor also saved and invested the dividends to provide for 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 yearly dividends to pay for health care expenses. As they start to age, requiring more care, they get larger dividends, because members of the pool are dying off. This tontine arrangement can create an incentive to save money on health care as much as possible, so that members don't have to use up their dividends paying for health care.

Some workplaces use this option to provide health insurance services to employees. Creators structure the legalities carefully to avoid running afoul of laws banning traditional tontines. Employees can also choose to start 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.