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What is a Tontine? - Definition & Legality

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will define the concept of the investment product known as a tontine and discuss the changing nature of its legality in the United States.

Tontine

Before Social Security and other retirement programs, tontines offered an opportunity for financial security. Their disuse in recent years has further propelled their mystique. They've been the subject of sitcoms and murder mysteries. Jeff got the idea from an old TV show to start one since he's distrustful of Social Security. But what exactly is a tontine, and are they even legal in today's world? Let's help Jeff understand exactly what he's potentially getting into.

Definition

A tontine is a financial scheme where a group of people invests a sum of money, with the principal, or invested amount being returned to the last surviving investor. This investment is irrevocable; the money cannot be taken out again. An individual investor will receive interest or dividends from the tontine based on the investment's performance. As each investor dies, their shares or proportional ownership of the tontine are redistributed to the survivors. Thus, the remaining shareholders receive larger dividends as more of the tontine members die.

Although the concept of life insurance can be morbid in itself, with traditional life insurance the payout on Jeff's policy is entirely dependent on whether or not he dies while covered. With a tontine, he benefits financially from the deaths of others. It's this element that has influenced the plotlines of many murders in fiction since tontine shareholders realize the death of other members. Another factor that offers unease to some while at the same time explaining the popularity of the tontine is the element of gambling. After all, Jeff figures he might put in a few thousand dollars but maybe one day hit a multi-million dollar jackpot if he outlives the other participants.

Legality

Unfortunately for Jeff, tontines are illegal in the United States. It wasn't always so, but changing cultural attitudes toward the concept led to this current legal status. When family structures started to shift away from the idea of multigenerational households living in agricultural areas, fewer families could count on their children to provide for financial security in old age. The tontine was highly popular as an insurance product that helped provide that security as retirees could expect to receive payments plus future increases for the rest of their lives.

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