I recently saw that there is an annuity that has tontine-like aspects:
– You put your money in and never get it out – even your heirs receieve no principal
– It pays off an amount every month
– It invests this money from subscribers in a mixture of stocks and bonds and the return each month is partly determined by the performance of the portfolio
– When you are old enough you receive what the annuity calls “longevity payments” which I assume are paid off by the unpaid principal of those who have died.
However, the reason I do not consider this a “real” tontine is that these “longevity payments” don’t start until your mid-80s and seem pretty nebulous. I’d prefer getting my death cash immediately and in a documented fashion!
Now, fixed annuities will perform better than Treasuries if you live long enough, and also in effect do not return principal (although they do for tax purposes). However, the cash is not directly invested – you are giving it to the insurance company which will take on the risk themselves leaving no market upside for you. And also, for this reason, their returns are pretty crappy so I’m wondering if you could do better if you were willing to shoulder the risk yourself.
Is there any combination of derivatives or annuities which will combine market investment with immediately increasing payments the longer one lives based on actuarial tables, with no principal left over at the end?
There’s the Variable Annuity, which is actually just an ordinary mutual fund that’s disguised as an annuity. That’s probably the closest thing to what you want. You might be able to find one that has riders to do that sort of thing.
I don’t know too much about them, though–I won’t touch them with a 1,000-foot pole. I think that at least 90% of “advisors” who sell them are extremely unethical.
Well, a British consol (consolidated bond) fits the first two of your criteria: regular payments in perpetuity but no return of principal. As government bonds, their return is not linked to investments, though. Wiki cite That seems to indicate the British gov’t bought them back in 2015 so there aren’t anymore out there.
Well, your classic basic annuity has some tontine-like characteristics. The longer you live, the greater the payout, so the payout to the annuitants who live to a ripe old age is being cross-subsided from funds provided by the annuitants who lived fast and died young.
And you could magnify this effect by providing, not a level annual payment, but one which increased each year at a guaranteed rate. The higher that rate, the greater the cross-subsidy to the long-lived. But they probably wouldn’t see it as a cross-subsidy; they’d see is as something they had paid for by accepting much lower initial annual payouts. The insurance company, of course, is taking a bigger risk on investment return here, so they’d up their margin to compensate themselves for that, so the product overall would be more expensive and would provide a lower return. But, techinically, it wouldn’t be a difficult product to price.
And you could make it even more tontine-like by providing that there would be no payout at all for the first (say) five years, followed by annual payouts which would start out modest but increased at a generous rate for each year they continued.
But the more tontine-like it becomes, the less the likely demand. If no insurance company is writing contracts on these terms, the likely reason is that nobody is clamouring to buy it.
If you can propose a conditional payment stream, an insurance company will be able to give you a price on it assuming the conditions are tractable. If you want to do something with existing off-the-shelf contracts that are available on publicly traded exchanges, you might not have any luck, mainly because exchange-traded contracts generally don’t care about when someone dies - the estate and then heirs merely succeed to the interest in the contract. Having death as a condition for contract termination pretty much means you have to go through an insurance company.
I agree with the sentiment that if anyone is offering you to subscribe to such a contract, you should ignore them. If you’re seeking out such an arrangement with an insurance company, you probably won’t get as good of a price as you would if you were buying a product that’s already been developed, but if you go to a reputable large firm you presumably won’t get completely hosed and get something that, according to their actuaries, is reasonably but not overly profitable (on the balance of probabilities) to the insurance company.
You can sort of simulate something like it by actively buying an annuity every year using funds from some investment pool, but obviously there’s no way you’re going to be able to match exhausting the principal of that investment pool exactly the same year as your death. You can maybe look at actuarial tables and see what your expected time to live is at each age, and invest the appropriate portion of the pool each year. This will lead you to buying smaller and smaller annuities and the payments in the long-term will not be relatively as large compared to the short-term payments as you may want and you won’t ever exhaust the investment pool principal, but it at least would be the best shot at getting close while maintaining ever-increasing payments even if the last few years of a long life they won’t go up by much.