Is Selling Life Insurance a Pyramid Scheme?

Rumor has it that selling life insurance is a pyramid scheme. Find out whether this is true, and learn the math behind life insurance.

The short answer is ‘no,’ but it does require some explanation, including cases when life insurance can become a downright pyramid scheme or contain unwanted elements of multi-level marketing.

Fifty-two percent of Americans own life insurance, and about 41 million are thinking about purchasing one. But rumor has it that selling life insurance is a pyramid scheme where insurance companies rely on the money of new clients to pay old debts.

So who’s right? Let’s explain the math behind life insurance.

Life Insurance in a Nutshell

There are about 750 life insurance companies in the United States, each one doing exactly the same – offering a death benefit to the beneficiaries upon the death of a policyholder at the expense of a lifetime premium paid by the policyholder.

The nuances may vary, but that’s beyond the point. You’ve got the gist of it.

And now to the second part of the puzzle: Ponzi schemes, pyramid schemes, and Multi-Level Marketing businesses.

Understanding Ponzi Schemes, Pyramid Schemes, and Multi-Level Marketing Business

Ponzi Schemes

Ponzi schemes pay investors with the money of newcomers. Unlike what they say, they do not make profits by running a business, as there’s no business in the first place. The biggest Ponzi scheme in the history of the United States screwed investors for more than $65 billion, which indicates that such schemes can live for decades before the stream of investors runs dry.

Pyramid Schemes

Just as fraudulent as Ponzis, pyramids are based on constant recruitment. Every participant is pushed to invite new members – the more, the better. Product? There’s no product. Most profits go to those at the top of the scheme, whereas new members make do with peanuts.

Multi-Level Marketing

Unlike Ponzis and pyramids, multi-level marketing (MLM) is a legitimate business. It is frowned upon by experts and customers alike, but there are still lots of people willing to try their luck in this high-risk endeavor.

The difference between MLM and a pyramid scheme is that the former does have a product. In MLM, the participants are incentivized to sell services to their families, friends, and even strangers, giving away most of the profits to those at the top of the business. Two famous MLM companies are Amway and Herbalife.

Is Selling Life Insurance a Pyramid Scheme

Do Life Insurance Companies Have Signs of Ponzi Schemes, Pyramids, or MLM?

Now, the real question is, do life insurance companies fall into one of the three categories: Ponzi, pyramids, or MLM?

Nope. Reputable life insurance companies:

  • Do not incentivize policyholders to invite new policyholders or sell policies
  • Do not distribute their income the way Ponzis, pyramids, or MLM businesses do

Therefore, selling life insurance does not have any signs of a pyramid scheme.

If Life Insurance Is Legit, How Come They Can Pay So Much?

How can an insurance company pay the beneficiary more than the total amount of premium paid by the policyholder during his or her lifespan? Isn’t it suspicious? At the end of the day, insurance companies won’t work at a loss, will they?

Here are a few things that you may overlook in your calculations:

  • Your premium increases as you age. You will have to pay a higher premium as you age and your health declines, which increases the risks for your insurance company.
  • You pay until you die. The longer you live, the more money you pay to your insurer, adding to the death benefits pool.
  • Not all life insurance contracts remain valid. There are many ways to nullify the contract – for example, a suicide, or if you stop paying. It goes without saying that insurance companies will not return money to those invalidating the contract.
  • Life insurance companies have abundant reserves. Each client of a life insurance company creates a reserve that helps the insurer remain solvent even when things go wrong.
  • Inflation takes its toll. With inflation at its peak in 2022, it’s obvious that the money that you’ve paid, say, in 2021 has lost at least 15% of its value. The time value of money is always on the side of your insurer.

Here Is How Life Insurance Companies Really Work

Whether you like it or not, your insurance company makes an educated guess on how long you will live and then determines your premium accordingly. They just do the math based on the data they have.


Is Selling Life Insurance Hard?

Selling life insurance is hard, mainly because you have to acknowledge that your prospects are eventually going to die. This, of course, is not an excuse for the manipulation and fraud that some illegal companies resort to.

Is Selling Insurance an MLM?

Insurance companies may or may not have elements of multi-level marketing. However, the very presence of MLM elements doesn’t make a company fraudulent. MLM can be a successful legitimate business if the revenue model is reasonable.

Is Family First Life a Pyramid Scheme?

Family First Life is not a pyramid scheme, but it does have MLM elements (for example, a focus on acquiring new agents). Whether to tolerate this type of structure is up to you.

Is US Health Advisors a Pyramid Scheme?

USHealth Advisors is neither a pyramid scheme nor an MLM scheme.

Is New York Life Insurance a Pyramid Scheme?

New York Life Insurance is neither a pyramid scheme nor an MLM scheme. It’s one of the most trustworthy insurance companies in the United States, ranked 67th on the 2021 Fortune 500 list of the largest U.S. companies by total revenue.

Is Transamerica a Pyramid Scheme?

Transamerica is a possible pyramid scheme. Make sure to do your own research to protect yourself from fraud.

Is American Income Life a Pyramid Scheme?

American Income Life is a possible pyramid scheme, although it claims otherwise. At the very least, research reviews on the Internet.

How to Detect Fraud in Life Insurance?

The signs that should raise suspicion are:

  • Impact on recruitment, not sales
  • Demonstration of posh lifestyle
  • Absence of clear details of insurance contracts

If you encounter any of the aforementioned suspicions, make sure to double-check the company – it may be MLM at best and a pyramid or Ponzi scheme at worst. Besides, you can work with a reliable insurance broker who will search for a life insurance policy for you.

What Is a Life Insurance Pyramid Scheme and How Does It Work?

A life insurance pyramid scheme is when a fake insurance company pays existing clients the money brought in by new clients. The main characteristic of a pyramid scheme is that such a company doesn’t have a product.

Can Life Insurance Companies Commit Fraud?

Theoretically, an unscrupulous insurance company can defraud you. But this can only happen if the company is illegal. To prevent fraud, check if your insurance company is licensed and has a spotless background.


Oleksandr is an expert in deep research. He covers insurance topics across four major insurance verticals – auto, health, life, and home insurance – while taking into account the legal landscape of the state in question. Come rain or shine, you can expect regular quality blogs and timely updates from Oleksandr.

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