Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?

by Julio J. Rotemberg


  • The essence of the MIF is that people within a pool are bequeathing benefits to each other.
  • The commonality of purpose among the members of the pool, inherent in the MIF, fits with the "mutual insurance" idea with which a great deal of insurance was started.
  • The MIF might be more successful when the members of a pool have some reason to feel altruism toward each other (perhaps because they worked for the same organization). This altruism may be able to counteract an aspect of annuities that potential contributors customers dislike, namely, that they "get nothing" after they die.
  • The MIF suggests an implicit concern for direct descendants. While annuities are sometimes seen as robbing children of their inheritance, the strong tilt of the MIF toward old age leads to a lottery-like component where heirs have a good chance to inherit some of the tontine's proceeds if a contributor policyholder survives until old age.

Author Abstract

A new instrument (the Mutual Inheritance Fund or MIF) is proposed whose purpose is to help people carry their savings forward from the moment they retire into their old age. Like annuities, this instrument requires an up-front payment before people receive any benefits while also protecting people from the risk that they will live a long time. The funds that individuals contribute to a MIF are invested in a mutual fund. The proceeds from the fund's underlying assets are reinvested until the contributor dies or he turns an age specified in advance. If a contributor dies before this pre-specified age, his shares are liquidated and the proceeds are distributed to the other contributors to the MIF. Contributors who are alive at the pre-specified age are also paid the value of their accumulated shares. Like tontines, of which MIF is a variant, this instrument has returns that are more tilted towards old age than annuities. Several advantages of this are discussed, including some that may explain why tontines have proven popular with consumers in the past. JEL classification: D14. 9 pages.

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