During the 1600s, Europe was embroiled in a series of protracted religious wars. These conflicts depleted the national treasuries of most of the combatant countries, and their monarchs had a difficult time raising sufficient taxes. In France, King Louis XIV directed his minister of finance, Cardinal Mazarin, to come up with a fundraising scheme to supplement the revenues generated by taxes. In 1652, Mazarin consulted with an Italian banker, Lorenzo Tonti, who developed what become known as the tontine.
The CollectionTontine Documents
A tontine was a form of group lifetime annuity or lottery which participants bought into with a 300 livre payment to the French government. A participant could buy multiple shares and a beneficiary for each share, was selected (which was often a child). Each beneficiary received a payment each year for life, and as more of the other participants died, each surviving participant's payment grew larger. Upon the death of the last participant the government's debt would be considered paid in full.
England offered its first tontine in 1693, however, it failed to reach the funding goals it was designed to support, raising only one tenth of the desired amount. Despite this, numerous tontines were formed in later years and were relatively successful in raising funds for public works, such as bridges and public buildings.
Tontines were adopted to a limited extent in the early United States. In order to find his way out of the increasing national debt, Alexander Hamilton, in 1790, proposed a form of tontine that would turn debt with repayable principal into debt with no repayment obligations on the principal. Hamilton's tontine worked the same as the English tontine, except he included an extra provision stating that when only 20 percent of the original participants were still living, payouts to these surviving 20 percent would freeze at their current rate for the remaining lifetimes of the survivors. Hamilton's tontine was the last true tontine seen in the United States, although variations existed in later times.
In 1868, a reputable insurance company began to offer tontine insurance to the public. Tontine insurance worked by promising life insurance benefits in the standard sense while also creating individual investment accounts. Dividend payments were reinvested by the insurance company en masse for a given period of time, at the end of which the funds accumulated were proportionally divided among the surviving investors. Investors could choose either a lump sum payment or a life annuity. Deceased investors, although receiving standard life insurance payouts, had no claim on the pool.
While tontine insurance was a great plan, allowing young people to purchase life insurance and begin a retirement savings account in one instrument, by 1906, corruption led to its demise. Tontines as originally designed have long since been illegal in the United States and Britain. The reason: the incentive for one participant to kill other participants in order to increase his or her own share in the tontine was deemed to be too great a lure.