Sunday, March 26, 2017

Live Long and Prosper: the Tontine


A group of people invest equal amounts in a fund and in turn draw an annuity — an annual payment — until they die. The annual payments of surviving members increase as others die, and the last one standing winds up with the entire dividend. Upon that last investor’s death, the arrangement terminates.

That's a tontine. At the turn of the 20th century, nearly 50 percent of all American households were buying "tontine insurance," a product that split premiums between traditional life insurance policies and an investment pool, with deferred dividends paid out to survivors after 20 years. The pile of tontine money grew so large that crooks swarmed in and killed the golden goose.

Moshe Milevsky, a professor at York University, is a long-time fan of tontines, as we noted here and here. Now he seems to be gaining allies.

Could variations on the tontine be the longevity reward needed to counter longevity risk? Ideas range from the straightforward to the high tech (bitcoin tontines?). Major barrier: the wall of investment, insurance and gambling regulations a tontine product must climb.

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