Legal Definitions - tontine policy

A tontine policy is a historical financial arrangement, somewhat similar to an insurance policy or an investment fund, where a group of individuals contribute money to a common pool. The key characteristic of a tontine is that participants receive regular payments (an annuity) from this pool, and as participants die, their share of the payments is redistributed among the *surviving* members. This means that the payments to the remaining survivors increase over time, with the last surviving member eventually receiving all the remaining benefits until their death, at which point the fund is typically dissolved.

Tontine policies were popular in previous centuries but are largely rare or prohibited today due to their speculative nature and the potential for moral hazard (where participants might have an incentive for others to die). However, understanding them helps illuminate historical financial practices.

• Example 1: Historical Investment Group

  In 18th-century France, a group of wealthy aristocrats might have formed a tontine. Each aristocrat contributed a significant sum to a common fund. In return, they all received an annual income from the fund. As members of the group passed away, their portion of the annual income was divided among the remaining survivors. This meant that the longer an aristocrat lived, the larger their annual payment became, with the final survivor eventually receiving the entire annual payout from the fund.

  This example illustrates a tontine policy as a private investment scheme where the benefits to surviving members increase as others die, highlighting the core principle of survivorship.

• Example 2: Government-Issued Annuities

  During the late 17th and 18th centuries, some European governments, needing to raise money for public projects or wars, would issue "tontine annuities." Citizens could purchase these annuities, essentially lending money to the government. In return, they received annual interest payments. The unique tontine feature was that as the original purchasers of these annuities died, their share of the interest payments was reallocated to the surviving annuitants, leading to progressively higher annual returns for those who lived longer. This made them an attractive, albeit speculative, investment for longevity.

  Here, the tontine policy is shown as a government-backed financial instrument used for public finance, demonstrating how the survivorship principle was applied to generate increasing returns for long-lived investors.

• Example 3: Fictional Legacy Arrangement

  Consider a fictional scenario from a historical novel where an eccentric millionaire establishes a trust for his five grandchildren, stipulating that the annual income from the trust will be divided equally among them each year. However, the will specifies a tontine-like clause: upon the death of any grandchild, their share of the annual income is to be redistributed among the remaining living grandchildren. The last surviving grandchild would then receive the entire annual income from the trust until their own death, at which point the trust's principal would be donated to charity.

  This example, though a trust rather than a formal insurance product, clearly demonstrates the fundamental mechanism of a tontine policy: pooled benefits that increase for survivors as other participants pass away, illustrating the concept in a relatable, albeit fictional, context.