As people live longer their cash requirements can increase exponentially. My Blog colleague, Audrey Miller, recently told me that, in Ontario, publically funded Nursing home expenses for a private room start at $30,000 per year and private retirement residences are much more expensive. There are other potential cash requirements such as the expense of personal care assistants. In addition to being faced with increasing costs of living, the problem is compounded by the fact that a senior’s ability to generate cash decreases (often because of a decrease in the ability/desire to take on investment risk). The result is that savings accumulated over a lifetime must be used. This in and of itself is not a bad thing but it might adversely affect estate plans.
I recently read an article in the NY Times about the Society of Actuaries in Schaumberg, Illinois researching the reintroduction of the Tontine. The Tontine is a form of annuity with the chance of increasing payments as you get older. The premise of a Tontine is for a group of people (members) to put money into a pooled investment with a specified return/payment. Each member in the pool receives an equal share of the specified payment. When one of the members passes away, then the surviving members receive the deceased’s members share. As more members die, the survivors get an ever increasing payment, until the last survivor receives all the payments.
By way of example, a Tontine is formed with 10 members; each is 60 years old and, each contributes $1000. Based on an actuarial calculation it is determined that each member will receive $60 per year for life. After 15 years let’s say there are 6 surviving members. At this point, the payments that would have gone to the deceased members are distributed to the surviving members, thereby increasing their payments from $60 to $100 per year. Then after 30 years let’s assume there are only 2 members still alive. Each member would receive $300 per year. At this point each surviving member is 90, at a point in life when perhaps they are incurring substantial expenses.
This is not a new idea. Tontines were around in Europe over 300 years ago. At that time the purpose was to raise funds to fight wars. For a variety of reasons they fell out of favour. Tontines may not be an easy product to bring back to the industry as insurance laws and gambling laws may be factors. But the concept is certainly interesting.
I appreciate some may think of this as a morbid investment structure however, it could address the needs of the people who live the longest and are faced with very large long term care expenses.