New Retirement Research (May 8 2018)

Tontines are cool, if very slightly creepy. A tontine, according to our friends at Investopedia, is "a system for raising capital in which individuals pay into a common pool of money and then receive a dividend based on their share and the performance of investments made with the pooled money. The principal invested in the tontine is never paid back to the investor; rather the investor receives dividends until his or her death. If a 'shareholder' dies, his or her shares are divided up among the surviving investors. In this way, as an investment plan for raising capital, a tontine features characteristics of a group annuity and a lottery."

This system is attributed to Lorenzo de Tonti, a 17th-century Italian banker. Investopedia's entry on tontines continues: "Government-sponsored tontines paid dividends while investors were alive, but once all the investors died the government would absorb all the remaining capital. Tontines were used in the United States as a way of increasing the sale of life insurance in the 19th-century but have fallen out of use and are illegal in many parts of the country today."

We highlight this information about tontines because one of the research briefs featured today, from the Center for Retirement Research at Boston College, looks at whether tontines could expand the market for longevity insurance. This brief's key findings note that tontines might be a less expensive alternative to annuities.

Read more: Could Tontines Expand the Market for Longevity Insurance?

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