Tontine vs. Annuity: Which Is Better?

In recent years, there has been a renewed interest in an investment scheme that fell out of favor more than 100 years ago: the tontine. But what exactly is a tontine? The simplest way to describe it is that it’s a kind of annuity, with a twist. If you outlive the other participants, you get to claim the pot at the end. The concept of the tontine may sound morbid, but it can make sense, which we’ll explain in more detail. Tontines and annuities both have their advantages and disadvantages; which one works best depends on your situation.

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Understanding Tontine vs. Annuity

To understand the high-level differences between the two, let’s start with annuities. With an annuity, you pay an insurance company either a lump sum or you pay over time to receive regular income later. The payments you receive are often fixed but can also be variable in some cases.

A tontine works similarly. In the past, you would pay a lump-sum upfront and receive regular dividends. With a tontine, there is a small group of members who participate. When one of the members inevitably dies, their portion of the returns are distributed among the remaining members. That process repeats until there is only one remaining member, who then gets the entire dividend. When the last member dies, the tontine ends and is returned to the issuer, which in recent history was an insurance company.

Tontine vs. Annuity: Costs

One of the key differences between tontines and annuities is the costs. For their part, annuities are expensive to administer because insurers take on a lot of risk with them. They must have big cash reserves to be sure they can pay their plan participants, including scenarios where people live longer than expected. This makes their payouts low relative to how much people pay for annuities.

Tontines are different. Instead of a large-scale insurance policy, tontines are a single pooled investment between a small group of participants. This structure means tontines are much simpler to administer, which is one of the reasons they are cheaper.

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Tontine vs. Annuity: Risk Sharing

A tontine is a unique investment structure built around the concept of shared risk and reward among a group of participants. Each investor contributes money to a common pool, which is then invested to generate returns. Over time, as participants pass away, their share of the income is redistributed to the remaining members. This means the longer you live, the larger your potential payout becomes. This is a feature that effectively transfers longevity risk among participants rather than to an insurance company.

Annuities, by contrast, shift the risk from the individual to the insurer. When you buy an annuity, you pay a lump sum to an insurance company in exchange for a guaranteed stream of income, often for life. The insurer assumes the longevity and market risk, meaning you’ll continue receiving payments no matter how long you live or how the market performs. While this offers financial certainty, it comes at a cost, annuities typically include fees and may offer lower returns compared to investments that keep risk in the hands of participants.

The key difference between tontines and annuities lies in who bears the financial risk. In a tontine, participants share that risk collectively, your payout depends on how many members remain alive and how well the investment pool performs. In an annuity, the insurance company takes on that responsibility, ensuring steady payments regardless of external factors. Both models aim to provide lifetime income, but tontines offer greater potential upside for those who live longer, while annuities prioritize predictability and peace of mind.

Tontine vs. Annuity: Payout Structure

Annuities can have a few different payout structures, but the simplest one is a fixed annuity. With such an annuity, you might make a lump-sum payment of $100,000 and receive 5% (or $5,000) per year for the rest of your life. In this example, 20 years is the breakeven point; beyond that, the annuity pays you $5,000 every year beyond what you paid in. Such is the risk the insurer assumes with the annuity.

Now, imagine you pay a lump sum into a tontine instead. Let’s suppose you and nine others pay a lump sum of $10,000 for a 5% dividend; you initially receive $500 per year. However, as other participants die, their dividends are divided up between the survivors. If you are the last one alive, you end up getting a $5,000 dividend (5% of the ten $10,000 payments) each remaining year of your life.

In other words, you get 50% of your initial investment back by the end. Not only do you receive a larger payout the longer you live; the difference in payouts is also larger. The table below offers one example.

Example of How a Tontine Works

Number of Participants	Annual Payout Per Participant	Difference
10 Participants	$500	—
9 Participants	$555.56	$55.56
8 Participants	$625.00	$69.44
7 Participants	$714.29	$89.29
6 Participants	$833.33	$119.05
5 Participants	$1,000	$166.67
4 Participants	$1,250	$250
3 Participants	$1,666.67	$416.67
2 Participants	$2,500	$833.33
1 Participant	$5,000	$2,500

Keep in mind that this is just a simple example to illustrate how a tontine could work in theory. In practice, the number could be different. For instance, in one of the very first tontines, organized in 1689 in France, each participant paid 300 French livres to participate. The last participant of that tontine died at 96 and received 73,000 livres as a result.

Tontines can also be more complicated than the table above shows. For example, tontines of the past put people into age tiers; it wouldn’t make sense to have two participants in the same tontine with 30 years between them. Instead, they would often have ranges of five or 10 years at the most. Older participants would also earn a higher interest rate due to their increased risk.

Bottom Line

An annuity is an arrangement between you and an insurance company where you pay the insurer for the right to receive regular payments. With a tontine, you pool your money with other investors and receive payouts from the pool. As participants die, their payments are distributed between the remaining participants. When the last participant dies, the tontine ends and any remaining money is returned to the issuer, which could be an insurer.

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