Definition
A Tontine is a type of investment plan historically used to raise capital, where investors buy into a fund and receive periodic interest earnings. However, with a Tontine, upon each investor’s death, their share is redistributed among the surviving investors, increasing their dividend. The scheme continues until only one investor survives, who ends up receiving the entire fund.
Phonetic
The phonetic spelling of “Tontine” is: /tɒnˈtiːn/
Key Takeaways
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- Tontine is an investment plan which allows benefits to be shared among living members. The mechanism involves investors joining the plan, and the benefits or dividends are distributed among them. As members pass away, their shares are reallocated among the surviving members.
- The primary characteristic of a Tontine scheme is that it becomes more beneficial for the surviving members over time. The scheme continues until the last survivor, who ultimately receives the remaining benefits, making the nature of Tontine somewhat akin to a lottery or a gamble.
- Tontines were quite popular in the 17th and 18th centuries, particularly in Europe. However, they started declining due to concerns over moral hazard, fraud, and the introduction of modern insurance and retirement plans. In the current time, the concept of Tontines is mainly of historical interest.
“`This might render as:1. Tontine is an investment plan which allows benefits to be shared among living members. The mechanism involves investors joining the plan, and the benefits or dividends are distributed among them. As members pass away, their shares are reallocated among the surviving members.2. The primary characteristic of a Tontine scheme is that it becomes more beneficial for the surviving members over time. The scheme continues until the last survivor, who ultimately receives the remaining benefits, making the nature of Tontine somewhat akin to a lottery or a gamble.3. Tontines were quite popular in the 17th and 18th centuries, particularly in Europe. However, they started declining due to concerns over moral hazard, fraud, and the introduction of modern insurance and retirement plans. In the current time, the concept of Tontines is mainly of historical interest.
Importance
Tontine is a crucial finance term as it represents a type of investment plan, primarily associated with raising capital. The concept originated in France and Italy in the 17th century and plays a significant historical role in public finance. Under a tontine, investors pay into a fund, which is then invested, and dividends are shared among them. The critical catch is that as members die, their shares are distributed among the remaining members, increasing the survivors’ dividends. Therefore, the last investor alive receives the entire payout. While not commonly used today due to strict regulations and ethical considerations, tontines have been fundamental in understanding various complex financing methods and life insurance principles.
Explanation
A Tontine is a financial structure originally implemented for the purpose of pooling and distributing funds. Its distinctive feature is that it harnesses aspects of finance and mortality in a way that the benefits escalate for the remaining participants as others drop out, due to circumstances such as death. It originated in the 17th century and was typically used as a type of annuity scheme designed to raise capital where a group of people would put money into a common fund and subsequently receive an annuity that grows as members pass away. The predominant usage of tontines was to fund public goods when public finances were not as developed as they are today. Throughout history, tontines have been used to finance a variety of projects, such as infrastructure, government war efforts, and even the establishment of esteemed universities. The prospective returns on one’s investment would grow over time, providing an incentive to participate. While tontines have fallen out of favor due to regulatory concerns and the development of other financial instruments, they still offer unique insights into how finance evolved and how untraditional financial structures can be mobilized for wide-scale projects.
Examples
1. The King William Tontine: One of the earliest recorded examples of a tontine comes from the late 17th century. King William III of England needed to raise funds to fight a war against France. A public subscription tontine, known as “The King William Tontine,” was created. The King promised to pay fixed dividends to the subscribers and their heirs until the last subscriber died, at which point the entire fund and its proceeds would revert back to the crown.2. The French Tontines: In the 18th and the early 19th century, the French government issued a series of tontines. These were large, state-backed investment funds to raise capital. These tontines were used as a means of raising money for public projects, like building bridges, factories or to fund wars. One of the largest was the “Tontine de l’An VII” in 1800.3. Tontine Coffee House: An interesting example is the Tontine Coffee House in New York City, founded in the late 18th century. The coffeehouse was a stock exchange founded by a group who pooled their money together in a tontine-like agreement. Also, it was the precursor to the New York Stock Exchange. The shares in the coffee house were eventually bought out, but its founding remains an interesting example of a use of tontine principles.
Frequently Asked Questions(FAQ)
What is a Tontine?
A Tontine is a type of investment plan that combines attributes of a group annuity, life insurance, and lottery. It was initially used as a way of funding public goods in the 17th to 19th centuries. In a Tontine, each subscriber pays an agreed amount into the fund, and then receives periodic payouts until they pass away, after which the payouts are redistributed among the remaining participants.
What is the origin of the term Tontine?
The term comes from Lorenzo de Tonti, a Neapolitan banker who is said to have invented the scheme in France in the 1650s.
How does a Tontine work?
A group of people agree to invest in a common fund, with the arrangement that the dividend is divided among them. As participants in the scheme pass away, their shares are distributed among the surviving members, until, at the end, the sole survivor inherits the total worth of the original fund.
Are Tontines legal?
In many countries, Tontines are not legal or are heavily regulated due to their potential for abuse. In the United States, for example, the selling of Tontines was banned in the early 20th century.
What is the risk involved with Tontines?
The risk in a Tontine is primarily longevity risk. Participants late in life may see greater returns, but early death means a loss of future payouts.
Are Tontines practically used nowadays?
While traditional Tontines aren’t commonly used today due to legal restrictions, the concept has seen some renewed interest, particularly as a form of retirement income.
Who benefits the most in a Tontine?
Theoretically, the last survivor would benefit the most from a Tontine since they would receive the entire fund.
What are the main features of a Tontine?
The main features of a Tontine are: the pooling of capital, which is then invested; the distribution of dividends among surviving members; and the redistribution of shares upon the death of a participant.
Related Finance Terms
- Annuity: This is a financial product sold by financial institutions to provide a stream of payments to the buyer at a future date or series of dates.
- Survivorship Annuity: A type of annuity that continues to make payments for as long as at least one annuitant is alive.
- Risk Sharing: The practice of distributing potential financial losses among different parties in a transaction.
- Joint Tenancy: A legal term referring to a manner of owning property together for two or more parties. Joint tenants with the right of survivorship have equal ownership and if one party dies, ownership transfers fully to the surviving party/parties.
- Life Insurance: A contract between an insurer and a policyholder, in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured.
