# Why are tontines illegal, but life insurance isn't? **URL:** \ **Category:** Factual Questions\ **Created:** [October 23, 2012, 11:42pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680 "2012-10-23T23:42:05Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [October 24, 2012, 4:47pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/21 "2012-10-24T16:47:15Z")
> [@TriPolar](#): > > My first thought was Cecil’s article, but I didn’t see anything there. The only thing I can recall at the moment was that the known tontines had not done so and didn’t have a chance of doing so even if all the participants lived to be 100. Something may jog my memory about this. Obviouly enough money in any such scheme could exceed a nation’s ability to cover the check in the end if it goes on long enough, or the economy of that country got bad enough. The idea of paying these things out all through the lifetime of the partcipants would reduce any danger. Also, Cecil doesn’t mention anything about this in his article, but bankrupting a national treasury was the only reason I heard for banning this scheme when I first learned of it from watching The Wrong Box. I’d say it is obviously completely impossible that a tontine could bankrupt a government under any real-world conditions. There’s no such thing as _ **a** _ tontine. You have to distinguish between the many types of formal and informal arrangements people have made over the past several hundred years. If one was an agreement between a few private individuals, then clearly the payment is limited. You have to examine formal government creations. Those were run similarly to life insurance today. People were paid annuities on the money they put in and the total grew through additional interest payments. When a member died, their dividends ended and their share redistributed. As with any banking scheme, this depends on the moneyholder’s ability to lend the money out at greater interest than is being paid. If you are promised, say, 2% a year in dividends and 4% a year in accrued interest, then the bank has to earn 6% just to stay even. If not, then it is possible for any individual account to lose money when payout arrives. But this is a) limited to those few individuals who happen to be living with a favorable arrangement and b) correctable over time. Any new tontines created would contract for smaller returns, just as mortgages, life insurance payouts, and bank interest changes with economic conditions. Or else - just as insurance companies do - they’d stop issuing contracts to high risk individuals. This was a huge issue. People exploited tontines by enrolling babies and found ways to roll over contracts so that a death didn’t end the payments. It was these practices that forced government insurers to give up on them. Like all banking (and gambling) you set up the rules so that the house always wins. Exploiting a tontine is like being a card counter. It may be legal, but you better be first to do it because they’ll just change the game so you can’t play. The tontines that were established in the 17th century often failed because they didn’t have the understanding of actuarial calculations that we have. But that’s not the same thing as bankrupting a government. Those tontines were created as another means of financing the countries’ endless wars that were bankrupting the countries in any case. The tontines were tiny aspects of a much larger whole. Any losses, long before bankruptcy, would bring them to an end. And did. ---
**Author:** ![yoyodyne](https://avatars.discourse-cdn.com/v4/letter/y/a9a28c/32.png) [@yoyodyne](https://boards.straightdope.com/u/yoyodyne)\ **Post date:** [October 24, 2012, 5:32pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/22 "2012-10-24T17:32:06Z")
> [@Tom\_Tildrum](#): > > Note that [viatical settlements](http://en.wikipedia.org/wiki/Viatical_settlement), in which someone covered by a life insurance policy assigns to a third party the right to the death benefit in exchange for an upfront payment, are permissible. There was an interesting story on _[This American Life](http://www.thisamericanlife.org/radio-archives/episode/473/loopholes?act=1)_ recently about a lawyer who started buying policies on people who were near death. ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [October 24, 2012, 5:51pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/23 "2012-10-24T17:51:09Z")
> [@Exapno\_Mapcase](#): > > As with any banking scheme, this depends on the moneyholder’s ability to lend the money out at greater interest than is being paid. If you are promised, say, 2% a year in dividends and 4% a year in accrued interest, then the bank has to earn 6% just to stay even. If not, then it is possible for any individual account to lose money when payout arrives. This is basically what was explained to me when I first heard of a tontine. The problem was supposed to be that the prinicipal would grow larger than the amount of money in a national bank. Considering how this could work now makes that seem like nonsense. Especially since any national bank would just ‘reorganize’ the debt if such a thing even became a danger to it’s monetary supply. Cecil’s article mentions that corruption was a major cause for making tontine’s illegal which is a much more rational argument. Thanks for the info. ---
**Author:** ![Darth\_Panda](https://avatars.discourse-cdn.com/v4/letter/d/ee7513/32.png) [@Darth\_Panda](https://boards.straightdope.com/u/Darth_Panda)\ **Post date:** [October 24, 2012, 5:58pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/24 "2012-10-24T17:58:03Z")
> [@leahcim](#): > > The fact that Wal-Mart took insurance out on every cashier was considered bizarre and scandalous. It would have been less bizarre but more scandalous if they had them all transferred to their Iraqi Security Contractor Force a month later. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 24, 2012, 6:04pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/25 "2012-10-24T18:04:32Z")
I suppose the basic problem is, it is gambling. Life insurance might be thought of as gambling, but it is intended usually to cover potential loss. Most insurance companies will not insure someone unless the beneficiary would suffer a loss if the insured died unexpectedly. A tontine, however, generally lacks that. Not just that it encourages murder, but that it creates a windfall for no validbusiness reason. After all, the guy who wins is the only one who did NOT suffer a loss. Remember the hostility to gambling comes as a puritan-type reaction to the misbehaviour of especially the rich, who wasted and gambled away family fortunes for no productive result, a common complaint of the 1600’s and 1700’s aristocracy. (The Earl of Sandwich, for example, supposely could not stop gambling to even eat.) A gamble that ties up huge sums of money for decades is probably the least productive use of money, and raised the ire of the anti-gaming types. ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [October 24, 2012, 6:49pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/26 "2012-10-24T18:49:59Z")
> [@md2000](#): > > (The Earl of Sandwich, for example, supposely could not stop gambling to even eat.) Something similar was true of the Earl of Depends. ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [October 24, 2012, 7:04pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/27 "2012-10-24T19:04:04Z")
> [@Grumman](#): > > That’s correct. You are only allowed to buy insurance covering _your_ loss. If Joe Random dies it doesn’t affect you, so there is no loss to be insured. > If so, they are only being insured on the cost of lost productivity and hiring a replacement. They are not allowed to buy sufficient insurance that they can _profit_ from your death, only break even. If Cracked is to believe, they still collect even after you leave the company. ---
**Author:** ![njtt](https://avatars.discourse-cdn.com/v4/letter/n/ecd19e/32.png) [@njtt](https://boards.straightdope.com/u/njtt)\ **Post date:** [October 24, 2012, 7:07pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/28 "2012-10-24T19:07:25Z")
> [@md2000](#): > > I suppose the basic problem is, it is gambling. > > Life insurance might be thought of as gambling, but it is intended usually to cover potential loss. Most insurance companies will not insure someone unless the beneficiary would suffer a loss if the insured died unexpectedly. A tontine, however, generally lacks that. Not just that it encourages murder, but that it creates a windfall for no validbusiness reason. After all, the guy who wins is the only one who did NOT suffer a loss. > > Remember the hostility to gambling comes as a puritan-type reaction to the misbehaviour of especially the rich, who wasted and gambled away family fortunes for no productive result, a common complaint of the 1600’s and 1700’s aristocracy. (The Earl of Sandwich, for example, supposely could not stop gambling to even eat.) A gamble that ties up huge sums of money for decades is probably the least productive use of money, and raised the ire of the anti-gaming types. I am pretty sure that tontines are illegal in countries apart from America, and that have a much more relaxed attitude to gambling. Britain has betting shops in every high street, but I am under the impression that tontines are illegal here ([Wikipedia](http://en.wikipedia.org/wiki/Tontine) confirms this.). Furthermore, American culture seemingly very much approves of investing money, in bonds or the stock market or whatever. Tontine money is very much available for long-term investment, and, I should imagine, usually was invested (in something safe) in the days when tontines were allowed. ---
**Author:** ![denquixote](https://avatars.discourse-cdn.com/v4/letter/d/b9bd4f/32.png) [@denquixote](https://boards.straightdope.com/u/denquixote)\ **Post date:** [October 26, 2012, 5:59am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/29 "2012-10-26T05:59:59Z")
> [@hogarth](#): > > Employees usually aren’t “complete strangers”. This may well be true, but their familiarity with the fact of the agreement is the same as that of a stranger. There is no need for the employee to be aware of the agreement and in fact they usually are not. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 26, 2012, 12:15pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/30 "2012-10-26T12:15:23Z")
> [@njtt](#): > > I am pretty sure that tontines are illegal in countries apart from America, and that have a much more relaxed attitude to gambling. Britain has betting shops in every high street, but I am under the impression that tontines are illegal here ([Wikipedia](http://en.wikipedia.org/wiki/Tontine) confirms this.). Furthermore, American culture seemingly very much approves of investing money, in bonds or the stock market or whatever. Tontine money is very much available for long-term investment, and, I should imagine, usually was invested (in something safe) in the days when tontines were allowed. But… The biggest reason for not wanting people to gamble or give away their money was that, in the days before welfare, the government preferred that money be invested or spent productively to support yourself and your family. giving away money, or tying up a part of the family wealth in what was effectively a “bet”, with a very good chance there would be no benefit at all, is not productive. ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [October 26, 2012, 3:40pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/31 "2012-10-26T15:40:52Z")
> [@md2000](#): > > But… The biggest reason for not wanting people to gamble or give away their money was that, in the days before welfare, the government preferred that money be invested or spent productively to support yourself and your family. giving away money, or tying up a part of the family wealth in what was effectively a “bet”, with a very good chance there would be no benefit at all, is not productive. Ludicrous. Name the government that set such a policy. Tontines were in fact government run, so why in the world would they create them if this was their attitude? ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 26, 2012, 4:43pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/32 "2012-10-26T16:43:10Z")
Ahh, I was thinking more of “The Wrong Box”; no dividend payout, winner take all. A government tontine with dividends is probably better called “social security”. ---
**Author:** ![Spectre\_of\_Pithecanthropus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/spectre_of_pithecanthropus/32/12343_2.png) [@Spectre\_of\_Pithecanthropus](https://boards.straightdope.com/u/Spectre_of_Pithecanthropus)\ **Post date:** [October 29, 2012, 5:17am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/33 "2012-10-29T05:17:39Z")
> [@Terr](#): > > I didn’t see any mention of a specific law banning this scheme in the US. Is it banned? If so - under what law? IIRC it’s a separate law in each of the 50 states and DC. Traditionally insurance, unlike banking, has been regulated at the state level, although broadly speaking the 51 Insurance Codes are all quite similar to each other. Now that the old prohibitions against banks selling insurance have been lifted, I’m not sure to what extent that’s still true. ---
**Author:** ![Spectre\_of\_Pithecanthropus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/spectre_of_pithecanthropus/32/12343_2.png) [@Spectre\_of\_Pithecanthropus](https://boards.straightdope.com/u/Spectre_of_Pithecanthropus)\ **Post date:** [October 29, 2012, 5:24am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/34 "2012-10-29T05:24:39Z")
> [@md2000](#): > > (The Earl of Sandwich, for example, supposely could not stop gambling to even eat.) According to Woody Allen, the Ear of Sandwich, at one point while developing his eponymous lunchtime option, was so short of funds that he had to skip meals to pay for food. 😃 ---
**Author:** ![Leo\_Bloom](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/leo_bloom/32/10377_2.png) [@Leo\_Bloom](https://boards.straightdope.com/u/Leo_Bloom)\ **Post date:** [October 29, 2012, 8:32am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/35 "2012-10-29T08:32:24Z")
> [@denquixote](#): > > Big businesses do this all of the time with respect to their employees. A recent GQ thread was on exactly this question. After you on the search :). ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [October 29, 2012, 4:29pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/36 "2012-10-29T16:29:19Z")
> [@Spectre\_of\_Pithecanthropus](#): > > According to Woody Allen, the Ear of Sandwich, at one point while developing his eponymous lunchtime option, was so short of funds that he had to skip meals to pay for food. > > 😃 Tongue sandwiches are delicious and I’m sure Woody Allen has had some in New York delis. (Although he’s known to prefer tuna fish.) But ear sandwiches? That’s a meal I’d skip too. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 29, 2012, 6:09pm UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/37 "2012-10-29T18:09:39Z")
> [@Exapno\_Mapcase](#): > > Tongue sandwiches are delicious and I’m sure Woody Allen has had some in New York delis. (Although he’s known to prefer tuna fish.) > > But ear sandwiches? That’s a meal I’d skip too. What, you don’t want to order the Mike Tyson Special? ---
**Author:** ![chappy51](https://avatars.discourse-cdn.com/v4/letter/c/9fc348/32.png) [@chappy51](https://boards.straightdope.com/u/chappy51)\ **Post date:** [May 12, 2013, 2:28am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/38 "2013-05-12T02:28:50Z")
so the agreement I have with seven of my senior friends…concerning the fine bottle of irish whiskey that goes to and is opened by the last two survivors at the death of the third remaing…is illegal? murder is already illegal. making a tontine illegal doesn’t change anything. it just makes my friends and I criminals. but then again that is the purpose of many/most laws the gov’t passes. hmmmmmm. certainly no gov’t intervention there. ---
**Author:** ![Northern\_Piper](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/northern_piper/32/5304_2.png) [@Northern\_Piper](https://boards.straightdope.com/u/Northern_Piper)\ **Post date:** [May 12, 2013, 3:57am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/39 "2013-05-12T03:57:48Z")
> [@Exapno\_Mapcase](#): > > [QUOTE=TriPolar] > > There is an idea that the interest accumulated in a tontine could bankrupt a nation. I think has been disproven. I’m curious about this, which I haven’t heard. Can you supply some details? [/QUOTE] I think **TriPolar** may be confusing tontines with the _[Thelluson Act](http://en.wikipedia.org/wiki/Thellusson_v_Woodford)_, also called the _Accumulations Act_. Thelluson was a wealthy banker who died in England at the turn of the 19th century. Under his will, all of his estate was to be invested and held to be distributed to his surviving great-grandchildren, bypassing his children and grandchildren. Parliament passed the Act to prevent such accumulations in the future, on the concern that the accumulated capital would tie up a significant portion of the national economy. This concern proved groundless, as when the estate was eventually distributed in the middle of the 19th century, it wasn’t much larger than the original amount, because of the costs of litigation to determine who were the heirs. (Neither Parliament nor Mr Thelluson had taken into account the anti-accumulations instincts of the bar. 🙂 ) It’s thought that this case was the inspiration for the fictional case of _Jarndyce and Jarndyce_ in Dickens’ _Bleak House_. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [May 12, 2013, 4:06am UTC](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680/40 "2013-05-12T04:06:51Z")
Isn’t that sort of thing already covered by the Rule of Perpetuities? [Previous page](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680.md?page=1) [Next page](https://boards.straightdope.com/t/why-are-tontines-illegal-but-life-insurance-isnt/638680.md?page=3)