TONTINE. A tontine exists whenever sev eral persons are united in a group on such terms that on the death of any member of the group certain specified advantages previously enjoyed by him are distributed among the surviving mem bers. The principle has been employed in many kinds of transactions. of which the most impor tant are Government loans and life insurance. The application of the tontine principle to Gov ernment loans began in the later Middle Ages. The idea was introduced into France about the middle of the seventeenth century by an Italian named Lorenzo Tonti, but it had already long been known in Italy and Germany. It was one of numerous devices adopted by various States to induce the public to subscribe to Government loans. The first French loan on this principle was made in 16S9. and the last one in 1759. Ex isting tontines were wound up in 1770 and life annuities substituted for their privileges. The English Government made less use of tontines than the French. The earliest one was organized in 1692, and the third and last in 1789. There were a few Irish tontines in the eighteenth cen tury. •The idea was unattractive to the English people, and none of the loans was fully sub scribed, although offered on very favorable terms.
A subscriber to a tontine loan was the buyer of a life annuity. which increased in amount with the death of any member of the class to which the subscriber belonged. On the death of the last survivor the obligation of the Government termi nated. In most eases the subscribers were di vided into classes according to age, the right of survivorship prevailing only among the memberi of the same age class. Sometimes the amount of the annuity at the beginning varied for the different classes. Thus in the first English loan the an nuity increased from class to class, being slightly over 4 per cent. for those under twenty years of age, and more than per cent. for those over sixty. Occasionally there were other limitations. For example, the Qrst English loan. which did not classify subscribers according to age, provided that when the number of survivors was reduced to seven the right of survivorship should cease. On the third loan it was stipulated that no sin gle annuity should exceed £1000. Nearly always the subscriber to a loan had the privilege of nam ing any other person as the recipient of the life annuity, with the natural result that a large pro portion of the annuitants were young. The fea ture of a tontine loan which was relied on to at tract subscribers was the great return secured by those investors who lived longest.
It is obvious that a tontine loan is a very un wise fiscal measure. In the case of ordinary life annuities it is fairly safe for the Government to assume that premature deaths will largely offset exceptionally long lives, but in the case of a ton tine there is no such balancing of extra short and extra long lives. It is not the average dura tion of life of the group which determines the amount of interest which the Government will have to pay, but a much more uncertain thing, the duration of the longest life.
The application of the tontine principle to life insurance has taken two forms. Under the old
or full tontine plan, which was in use before the days of surrender values, an insured person who allowed his policy to lapse recovered nothing from the company. The gain which the company had made on his policy was put to the credit of the other insured of the same class. At the end of the tontine period all such profits were dis tributed among the members of the group whose policies were still in force. After the in troduction of surrender values, partly under legal compulsion and partly by the voluntary action of the insurance companies. the so-called semi-ton tine plan was adopted. Under this plan there is a similar division of surplus among those mem bers of the group whose policies are in force at the end of the tontine period, but the surplus to be divided is comparatively small. It arises chiefly from two sources, from an expense rate so low that some part of the loading of 'the pre mium is saved, and from an interest rate on in vestments higher than that assumed in calculat ing reserve values. A person taking out a semi tontine policy enters into an agreement with the company that the profit thus arising on his policy shall be put into a pool along with the corresponding profit on other policies of the same class, and that at the end of the tontine period, which is usually ten, fifteen, or twenty years, the pool shall be divided among those members of the class whose policies are still in force.
The question of the desirability of applying the tontine principle to life insurance has been the occasion of much discussion. That the full tontine plan was a bad one cannot be questioned, hut the evils arose more from the absence of surrender values than from the method of distributing the surplus. For the semi-ton tine plan the purely financial argument would seem, on the whole, favorable. In all forms of life insurance the indemnities paid on the poli cies of those dying early are partly at the ex pense of those whose policies run a longer time. The distribution of the surplus on the tontine principle is at least a partial reparation. It ought always to he clearly understood, however, that the larger return to those whose polieieg are kept in force to the end of the tontine period necessarily means a smaller return to those who die or whose policies terminate before that time. The weightiest objection to tontine insurance is a moral one. It is introducing additional un certainty into the transaction of life insurance, where the speculative element is already large and might to he kept at a minimum.
Private tontines were by no means uncommon down to the end of the eighteenth century. They were frequently resorted to for the purpose of raising money for purposes requiring large in vestments of capital. Large buildings in many cities of the United States were erected by means of capital raised in that way. At the present time they are almost unknown, partly because the abundance of capital has made it unnecessary to resort to them, partly because the large ele ment of uncertainty involved in them is incon sistent with the spirit of modern business.