Is Selling Life Insurance a Pyramid Scheme?

February 13, 2024

The short answer is ‘no,’ but life insurance does require some explanation in the context of the insurance pyramid scheme, including cases when life insurance can become a downright pyramid 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, and is selling life insurance a pyramid scheme? Let’s explain the math behind insurance pyramid schemes and life insurance.

Life Insurance in a Nutshell

There are about 750 life insurance companies in the United States, each 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, insurance pyramid schemes, and multi-level marketing businesses.

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

The pyramid scheme insurance segment is one of the most profitable types of businesses globally. GMInsights states that global market capitalization reached $8 trillion in 2022. Analysts forecast that the industry’s value will reach $12.4 trillion in 2032, indicating sector growth with a CAGR of 4.5%.

Life Insurance a Pyramid Scheme

Source: Global Market Insights

The infographic shows that the life insurance segment is not dominant in the market, but its share is still quite significant. Thanks to insurance, providers’ clients can receive compensation for their own treatment or even for the funerals of family members if the need arises.

Unfortunately, the insurance industry is not immune to fraud. Every day, thousands of people enter search queries like “Is Globe Life insurance a pyramid scheme?” and “Is Family First life pyramid scheme?” Potential clients take their time to research such questions, trying to avoid manipulations with health and life insurance.

Today, we will answer this and other questions about life insurance scams and explain why you shouldn’t fear an insurance pyramid scheme by choosing providers wisely.

So, without further ado, let’s explore the topic of selling insurance pyramid schemes and how to identify one. We will also try to answer several common questions, including:

  • Is senior life insurance company a pyramid scheme?
  • Is selling life insurance a pyramid scheme?
  • Is Transamerica a pyramid scheme?

We guarantee that the information will be insightful and helpful.

The Definition of Pyramid Scheme and How It Appeared

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.

Life Insurance a Pyramid Scheme

Source: Investopedia

In short, an insurance pyramid scheme is a mechanism for attracting an audience motivated by rapid income growth without capital investment. At least, this is how a financial pyramid is defined.

The typical earning model is the Ponzi scheme, which guarantees investors high dividends in the short term. And it does work, at least for the first three levels of the pyramid, as profitability is guaranteed by the massiveness of investments from lower levels (usually from the pockets of new investors).

The pyramid model is quite similar in the insurance segment but differs in principle. In this sector, other algorithms play the role of motivation, such as:

  • For insurance agents, it’s increasing income by rewarding for each additional client.
  • For clients, it’s the opportunity to reduce costs through a bonus program, such as adding family members to policies.

There is also a model of autonomy here, where, hypothetically, a client can requalify as an agent and start working for the company, earning profits for each subsequent client. And yes, this can be called a life insurance scam in a certain sense, but as long as payments and their amounts are maintained, the company cannot be accused.

The only Achilles’ heel of the pyramid lies in its instability. Despite millions of clients seemingly serving as the foundation, it ultimately collapses as there is no remaining untapped audience, and the lion’s share of profits goes directly to the pyramid’s organizers and its top levels (top management).

The Largest Pyramid Schemes in History

Life Insurance a Pyramid Scheme

Source: Visual Capitalist

We can cite examples such as MMM or Madoff Investment Securities, but they primarily involve stories with financial investments. In the insurance segment, there is a prominent case of a classic Ponzi scheme known as Mutual Benefits Corporation. Let’s delve into its history.

The story began in 1994 when not everyone knew of Joel Steinger’s life insurance pyramid scheme. The uniqueness of this life insurance scam lay in dealing with terminally ill patients and those eager to profit from compensation for their deaths.

The scheme was as follows:

  • The company sought terminally ill patients in clinics in the USA and offered them to take out an insurance policy, guaranteeing a one-time payment upfront.
  • These policies were then resold to ordinary citizens who paid monthly contributions to receive substantial compensation after the patient’s death.
  • The second category covered expenses for the first category of clients, and by attracting a new audience, the criminals managed to expand the fund and increase payouts.

While initially, the scheme was relatively transparent, over time, policies were resold to clients with fabricated diagnoses and doctors’ reports for non-existent patients. Consequently, this marked the beginning of the collapse of the pyramid of the whole life insurance scheme.

The company existed for about 10 years and disappeared from the market in 2004 after a series of investigations involving a doctor falsifying patient documents. In fact, he initiated the investigation by providing the scheme’s algorithms and its organizer to the police in 2001.

During its existence, the company sold around 30,000 policies, amounting to $1.25 billion. This provides the answer to the question, “Is life insurance a pyramid scheme?”.

How Pyramid Schemes Work

Life Insurance a Pyramid Scheme

Source: Investor

Is life insurance a scam? Yes and no. Examining life insurance through the pyramid lens leads to an unsettling conclusion: the Ponzi scheme thrives even in 2024. While it has transformed and adapted to current legislation, it has become more sophisticated while retaining its key attributes.

All insurance pyramid scheme companies, irrespective of their type or model, share three common features that may be veiled but are also evident. Here, we return to the question, “Is selling insurance a pyramid scheme?” To get an accurate answer to this question, you need to check the company’s website for these elements:

  1. 100% guaranteed profitability: Promises of investment returns in the form of dividends, bonuses for new clients, and short-term payouts. An inflated ROI, typically ranging from 250-5000%, is a significant indicator of a life insurance scam.
  2. Lack of physical equivalent of investments (with exceptions): The company doesn’t offer any tangible product for your investment, signaling that it may be a life insurance scheme. For example, promises of future payments contingent on certain conditions. The only exception is having documented proof of investment (contract) or bonds ensuring the conversion of securities into money (MMM).
  3. Dependency on external factors for dividends: The more new clients you bring into the pyramid and the more audience they attract, the higher your earnings. However, this rule applies only to the first three levels; the rest receive minimal compensation and do not recoup their costs during model collapse.

These conditions are so blatantly deceptive in a hypothetical Syncis pyramid scheme that people subconsciously begin to believe the promises and associate their finances with such companies. The result is lamentable, but the typical audience stubbornly refuses to learn from the mistakes of entire generations.

Step-by-Step Analysis of How Life Insurance Pyramid Scheme Companies Operate

While we consistently refer to the Ponzi Scheme, we haven’t explained its key algorithm. Let’s rectify that.

The pyramid’s working principle, including the pyramid scheme life insurance, is as follows:

  • An initiator devises a scam plan, works on wealth accumulation, and generates a compelling UTP, attracting the first investors from the closest circle, forming the second level.
  • Initial investors bring in new clients, typically from friends, acquaintances, and family members. The third level is formed, including 50 to 100 people, known as the “top management” of the pyramid and the main capital holder.
  • New levels appear, roughly x10 in size from the previous ones (on average, 10 people brought in by each participant). Thus, about 1,000 at level IV, 10,000 at level V, 100,000 at level VI, and so on.
  • The bottom of the pyramid consists of the vast majority of investors, nearly the entire deceived contingent—millions of people. Just calculate how many investments such a number of participants can bring with a minimum contribution of, say, $50.
  • Consequently, the flow of finances moves inversely proportional from the masses’ pockets to the leader’s wallet and their closest circle. All other levels also receive temporary passive income, except the lowest.
  • In fact, the last level, due to its sheer mass, becomes the reason for the collapse of the hypothetical national income life pyramid scheme. Since this layer of investors does not receive the promised profit, it is the first to sound the alarm and initiate various inspections. As a result, the pyramid crumbles, and sometimes culprits are identified. However, in this process, the most vulnerable category of investors simply loses money without the possibility of recovery.

The most unfortunate part is that the initiator and their circle often escape punishment for organizing the scheme, preserving their profits through financial manipulations like money laundering through third-party legal entities, offshore money migration, and so on.

Fortunately, in 2024, OSINT companies are evolving to overcome such schemes.

Types of Pyramid Schemes

In the 21st century, we witness numerous examples of how quickly pyramids are built and crumble. This applies not only to the insurance industry but also to one-day digital banks, certain cryptocurrencies, investment funds, startups, technological projects, and more. Virtually every segment has its own Madoff, Stanford, Bertges, Stoica, and Steinger, who create stunningly efficient pyramid models and benefit from them, earning people’s trust.

Typically, criminals operate under one of two schemes: the classical (Ponzi) and the more modern one (MLM). They have several differences, so we consider it our duty to tell you more about each of them.

Ponzi Scheme

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 ripped investors off of more than $65 billion, which indicates that such schemes can live for decades before the stream of investors runs dry.

This scheme is also used as a basis for life insurance scamming. Formally, this looks like generating finances from the lower levels to meet the needs of the upper levels. With each subsequent layer of investors, potential expenses for organizers increase, so they have to expand the pyramid.

Life Insurance a Pyramid Scheme

Source: NYULJB

The scheme operates as long as the organization can provide the pyramid with new investments and collapses as soon as the financial flow is interrupted. Typically, this resembles a bubble effect, expanding actively for a certain period and instantly bursting in the end.

Multi-level Marketing (MLM)

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.

Life Insurance a Pyramid Scheme

Source: Investopedia

So, is selling life insurance a scam? Formally, it cannot be said that selling life insurance is a scam in MLM, as this pyramid model differs significantly from the Ponzi scheme, and here’s how:

  • Presence of restrained incentives: Clients receive bonuses for attracting new audiences, commissions for their expenses, rewards for plan fulfillment, and more. There are no guarantees of payouts or sky-high short-term profits. This is a crucial indicator that insurance is not a pyramid scheme.
  • Presence of physical or digital goods/services: A company operating under the MLM scheme provides services or sells products. Thus, this justifies claims that insurance is not a pyramid scheme. Clients genuinely receive policies and payouts, and documents are not resold to third parties, avoiding the characteristic scheme of Ponzi.
  • Presence of physical or digital goods/services: A company operating under the MLM scheme provides services or sells products. Thus, this justifies claims that insurance is not a pyramid scheme. Clients genuinely receive policies and payouts, and documents are not resold to third parties, avoiding the characteristic scheme of Ponzi.

The key principle lies in the marketing component (this also answers the question, “How are life insurance agents paid?”). The company encourages clients to advertise its services and bring in new audiences. Rewards include discounts, bonuses, monthly dividends, and more.

However, there are drawbacks to both the Ponzi and MLM schemes. Over time, as the pyramid grows, the upper levels simply receive income, and the mechanism functions without their intervention.

Consequently, the lower levels remain without profits, although they do not lose anything, as they still receive paid goods or services.

Example of an Insurance Pyramid Scheme

Let’s model an effective scheme using data from Forbes. It will help you understand how pyramids work and how their organizers make huge amounts of money from clients.

A standard $1 million term life insurance policy for 30 years costs about $669/year for a 30-year-old man. Let’s build a scheme where net income increases proportionally to the number of pyramid levels.

  • In the first level, the organizer sells policies at $669/year, promising clients certain portions of the policy every 10 years and dividends from the expenses of each client they bring in.
  • The second level, the initial clients, brings in new clients with similar conditions. Now, the expenses for payouts to the second level are covered by the third.
  • The scheme expands within 6-12 months, accumulating hundreds of thousands of clients and around 6-7 levels. The fund grows and is filled with millions, compensating for current payouts and dividends.
  • The pyramid operates for about ten years, growing with new clients, after which the first levels that reach the time for initial compensation receive their payouts.
  • Next, events can unfold in two ways:
    • The pyramid continues to operate as long as there are enough funds for compensation.
    • Only the first hypothetical six levels receive compensation, after which the fund moves offshore, and the company declares bankruptcy.
  • In the end, the lower levels are left with nothing, as even their policies are annulled without compensation or guarantee of funds return.

After creating the fifth level, the fund will have approximately $6.6 billion (excluding dividends), assuming each client brings in ten people to the company. Yes, this is a utopian scenario, but it illustrates the potential funds that criminals could potentially operate with.

How Pyramid Schemes Collapse

Looking at the previous model, we can identify three fundamental problems:

  1. Companies need to constantly expand their audience.
  2. Dividends should be provided, at least in the early stages.
  3. It is necessary to operate within the law and avoid arousing suspicion.

In case any of these points are violated, the pyramid collapses into a pile of stones, making it challenging to find justice. We can consider these three conditions as potential points of pyramid collapse.

However, schemes usually persist for quite some time until the company can no longer meet the audience’s needs and sustain its operations. For instance, when the influx of clients decreases or disappears, which is particularly critical for high-level pyramids.

Also, if the organizer makes mistakes in handling finances, the pyramid can disappear even in the initial stages. For example, if greed comes into play, and the volume of funds transferred offshore prevents sustaining the scheme during periods of stagnation (when the pyramid expands too slowly). The result will be the same instantaneous ruin through the company declaring bankruptcy.

What Are the Differences Between a Legitimate Multi-Level Marketing Company and a Pyramid Scheme?

MLM is a marketing mechanism that guarantees certain benefits to ALL clients and ENSURES them. These may include direct dividends for referred clients, an accumulation system, bonus programs, discounts, etc.

A classic pyramid involves forming a stabilization fund that supports its existence for a certain period. However, actual benefits are received only by the higher levels of the scheme, while the lower levels lose their funds since there are no physical or digital equivalents to investments.

Why Do Pyramid Schemes Always Fail? And Why Do Legitimate Multi-Level Companies Sometimes Survive?

A classic pyramid is a scheme that heavily depends on the speed and volume of generating an audience. The faster it accumulates the necessary number of people, the quicker it collapses; the slower the expansion, the more likely expenses won’t be covered, leading to ruin.

MLM works in the long term because the scheme’s goal is not just to generate a customer base but also to retain it with the brand. Therefore, the strategy can be adjusted, and terms of operation can change according to the current market situation. This is what allows marketing pyramids to exist for an extended period.

Now, it’s time to deliver on our promise. We present you a Q&A round, delving into the most common questions about life insurance scamming.

Frequently Asked Questions About Life Insurance Pyramid Schemes

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 Pyramid Scheme?

Family First Life is not an insurance 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 USHealth Advisors a Pyramid Scheme?

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

Is New York Life Insurance Pyramid Scheme?

New York Life Insurance is neither an insurance 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 insurance 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.

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.

Like other segments related to financial activities, the insurance industry often becomes a target for criminals. Hence, people have questions like:

  • Is USHealth Advisors a pyramid scheme?
  • Is National Life Group pyramid scheme?
  • Is New York life insurance pyramid scheme?
  • Is Colonial Life a pyramid scheme?

However, not all insurance companies are dishonest towards their clients. While a significant number of providers use MLM schemes for audience expansion and retention, it is not critical, as all participants benefit and are guaranteed compensation according to purchased policies.

Since the market is still saturated with unscrupulous entrepreneurs, we recommend carefully studying information about the companies you plan to work with. For example, check for:

  • Overblown income promises
  • Unrealistic rates
  • Extremely high performance indicators for previous periods

These recommendations will help you avoid falling into the clutches of criminals and preserve your money.

Is Selling Life Insurance a Pyramid Scheme? 7

Oleksandr Rohovnin is a Content Marketer at and an expert contributor to CoverExplore. His passion is digital marketing, innovative technologies, tech industries, and – above all – distilling vast amounts of complex information into engrossing narratives anyone can relate to. At CoverExplore, Oleksandr stokes passion for auto insurance and the automotive industry in general in every story he curates.