To be sure, tontines are illegal in America and have been since the early 1900s. There have been many articles of late, however, arguing for their return and putting the product back onto the menu of options that retirees may want to purchase. The idea of the tontine is rather simple. You get a group of people who all buy into the tontine, with their money going into the collective pool of cash. At certain intervals, you get paid money back. When people in the pool pass away, the money they invested does not go back to the investor’s family or estate. Instead it stays in the pool, allowing the payment to the remaining members to increase. The offensive part comes from the financial gain garnered by another’s death. Some people may view it as gambling on the lives of another.
REGULATORY SCHEME OUTLAWING TONTINES
In 1905 the New York based Equitable Life insurance company internal fight went public with accusations of self serving deals and political payoffs. In response New York launched a far reaching investigation that helped to shape insurance law for the next century. The Armstrong Committee started the career of future United States Chief Justice Charles Evans Hughes, who was a rabid opponent of gambling and helped to create the picture in the public that tontines are gambling. He further helped to draft the 400 plus pages of recommendations and reforms. At the time, New York had jurisdiction over 95 percent of the insurance industry in America. Moreover, within ten years most states enacted similar legislation. As such, the impact was national in scope. Among the reforms enacted was a prohibition on rebates by insurance companies and a ban on deferred dividend insurance.
ANALOGOUS FINANCIAL PRODUCTS AND DIVERSE MARKETPLACE
If one accepts that the tontine is an unsavory form of gambling that should be outlawed, then credit default swaps may also be analogous. While gambling on the death of an individual or a group of individuals may not be as bad as gambling on a mortgage loan defaulting, it is unsavory just the same. Therefore, the idea of gambling is contained within professional, modern and regulated financial products. Many people currently invest in annuities, which is quite analogous to the tontine. In fact, some investment outfits are proposing financial products that have elements of a tontine contained within them. Indeed, the idea of varying payouts on based on the mortality of the payees is already imbedded in some pension products and some TIAA-CREF plans. Some influential authorities are also creating proposals to allow for tontines to exist in the market place, albeit with regulations in effect to insure appropriate management. It is possible that the market place will start to incorporate some hybrid financial products that contain for elements of a tontine investment product. No doubt with the aging of such a large and growing percentage of society, the marketplace would benefit from diversification. There are some, in fact maybe many, individuals who would favor buying into a tontine investment product, as it may feel more fair. It is not a far leap to imagine a future with tontines or tontine hybrids in it.