A tontine is a financial arrangement in which members mutually and irrevocably agree to receive payouts while living and share the proceeds of their accounts upon death. Specifically, a member’s account is forfeited at death, with the proceeds apportioned among the surviving members. Payouts naturally vary depending on investment performance and the mortality experience of the membership pool. Tontines offer investors a way to pool mortality and longevity risks collectively among themselves, without intervention by an insurance company.
Risk pooling is powerful because although the lifespan of any individual member is highly uncertain, the lifespan of the group is much less uncertain. Tontines can allow members to diversify away substantially all idiosyncratic longevity risk – the uncertainty associated with how long they will live and how much they can withdraw/spend without outliving their savings. Members that elect lifetime payouts are virtually assured of receiving them.
Individual Tontine Accounts could be implemented as either managed accounts offered through registered investment advisory services or as individually-owned investment brokerage accounts. Either way, they could be offered through a common tontine pool and provide significant flexibility for tailoring to individual needs.
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