Life Insurance: Pyramid Scheme Or Legit Business?

Life insurance is a tough way to make a living and an even more difficult way to sustain a lucrative, long-lasting career. Some industry analysts report agents burning out within a year. The pay is usually commission-based, and it can be notoriously difficult to find qualified customers. However, selling life insurance does offer some benefits, such as an easy route into the profession, high commission percentages, and passive income from renewal commissions.

There are around 750 life insurance companies in the United States, and 52% of Americans own life insurance, with a further 41 million considering purchasing a policy. However, there are rumours that selling life insurance is a pyramid scheme, with companies relying on new clients' money to pay old debts.

So, is selling life insurance a pyramid scheme? The short answer is 'no', but it does require some explanation in the context of insurance pyramid schemes and multi-level marketing.

Is selling life insurance a pyramid scheme?

The short answer is no, selling life insurance is not a pyramid scheme. However, there are nuances to this answer, as there are cases where life insurance can become a pyramid scheme or contain unwanted elements of multi-level marketing.

A pyramid scheme is a mechanism for attracting an audience motivated by rapid income growth without capital investment. Pyramids are based on constant recruitment, where every participant is pushed to invite new members, with most profits going to those at the top of the scheme, and new members making very little.

There are about 750 life insurance companies in the United States, all offering a death benefit to beneficiaries upon the death of a policyholder. While the nuances of each company differ, they all function in a similar way.

Some life insurance companies operate using multi-level marketing (MLM), which is a legitimate business strategy. In MLM, participants are incentivised to sell services to their family and friends, giving away most of the profits to those at the top of the business. While this may sound similar to a pyramid scheme, there are some key differences.

In MLM, participants receive bonuses for attracting new audiences, commissions for their expenses, and rewards for plan fulfilment, with no guarantees of payouts or high short-term profits. There are also physical or digital goods and services provided, meaning clients receive genuine policies and payouts, and documents are not resold to third parties.

There are some signs to look out for that may indicate a life insurance company is a pyramid scheme:

• A focus on recruitment over production
• Conspicuous consumption, e.g. passing around Rolexes and cash during meetings
• A focus on creating a sense of belonging and status, rather than skill development
• A flamboyant, charismatic leader
• Emphasis on exclusivity and prestige

Always do your research before signing up to any insurance policy. Look out for overblown income promises and extremely high performance indicators for previous periods. You can also work with a reliable insurance broker who will search for a life insurance policy for you.

How does a pyramid scheme work?

A pyramid scheme is a mechanism for attracting an audience motivated by rapid income growth without capital investment. The typical earning model is the Ponzi scheme, which guarantees investors high dividends in the short term. The profitability of the scheme is guaranteed by the massiveness of investments from lower levels, usually from the pockets of new investors.

The pyramid model is similar in the insurance segment but differs in principle. In this sector, other algorithms play the role of motivation, such as increasing income by rewarding insurance agents for each additional client and offering clients the opportunity to reduce costs through a bonus program, such as adding family members to policies.

There is also a model of autonomy where a client can requalify as an agent and start working for the company, earning profits for each subsequent client. While this can be considered a life insurance scam, as long as payments and their amounts are maintained, the company cannot be accused.

The only weakness 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.

• Emphasis on recruitment over production: The culture focuses solely on recruitment rather than the actual selling of products or services.
• Flagrant conspicuous consumption: There is an emphasis on extreme material wealth, with displays of luxury items and large amounts of cash.
• High-pressure sales tactics: The use of high-pressure tactics, such as creating a sense of urgency or using manipulative language, to recruit new members.
• Lack of focus on the product or service: The company may have a vague or non-existent product or service, or the quality of the product may be questionable.
• Complex or unclear compensation plans: The compensation structure may be difficult to understand, with multiple levels and bonuses that are hard to achieve.
• Emphasis on recruitment rather than sales: The company may put more emphasis on recruiting new members than on selling products or services.

What are the signs of a pyramid scheme?

Pyramid schemes are illegal and immoral businesses that promise wealth and financial success to their members. They are called pyramid schemes because they follow a hierarchical structure, with a small number of people at the top and a large number of people at the bottom. The people at the top of the pyramid profit from the recruitment of new members, who are placed at the bottom of the pyramid and are encouraged to recruit more members themselves. This process continues until the market is saturated and the pyramid collapses, leaving the majority of members with minimal earnings or losses.

• Recruitment Over Production: In a pyramid scheme, the focus is primarily on recruiting new members rather than producing or selling products. The members are encouraged to bring in their network of people, who are then pressured to join and recruit others.
• Conspicuous Consumption: The leaders or members of a pyramid scheme often flaunt their wealth and material possessions, such as expensive watches, cars, or large amounts of cash, to entice potential recruits.
• Cult-like Behaviour: Pyramid schemes often employ cult-like tactics to attract and retain members. This may include motivational speeches, chanting, dancing, or other forms of "rah-rah" behaviour designed to create a sense of belonging and excitement.
• The Ladder to Climb: Pyramid schemes create an arbitrary ladder or hierarchy to give members a sense of status and achievement. However, this ladder is often meaningless and only serves to reward members with titles and respect rather than economic success.
• The Inner Circle: Pyramid schemes often have an inner circle of senior members who are revered and considered untouchable. They are seen as extremely important to the organisation and are often the main focus of recruitment efforts.
• The Charismatic Leader: Every pyramid scheme has a charismatic leader who is seen as the heart and soul of the organisation. This leader is usually demigod-like and is followed fervently by the members.
• Emphasis on Recruitment: Pyramid schemes rely on constant recruitment to sustain themselves. They may disguise this by offering products or services, but the primary goal is always to bring in new members.
• Lack of Physical Products: In a pyramid scheme, there is usually no physical product being sold. Members are instead encouraged to invest money with the promise of high returns, which are funded by the investments of new members.
• High-Pressure Sales Tactics: Members of a pyramid scheme often use high-pressure sales tactics, such as creating a sense of exclusivity or urgency, to convince potential recruits to join. They may also use manipulation or prey on people's vulnerabilities to make them feel like they need to join.
• Conflicts of Interest: Pyramid schemes often involve conflicts of interest, where the organisers or leaders have different incentives than the members. For example, the leaders may be more focused on their own financial gain rather than the success of the members.

It is important to note that not all multi-level marketing (MLM) organisations are pyramid schemes. MLMs are legal and focus on selling products or services through a network of distributors. However, some MLMs may exhibit pyramid scheme-like behaviours, so it is crucial to do your research and understand the structure and incentives of the organisation before joining.

How is life insurance sold?

Life insurance is sold by agents who are either self-employed or work for larger brokerage firms, individual insurance carriers, or agencies. The majority of life insurance companies classify their agents as independent contractors, meaning they offer no base salary or benefits. Agents are typically paid in commissions and must find customer leads themselves. This can be difficult, as even the few leads that a company may provide have usually been contacted by many agents already.

Life insurance is a challenging product to sell. People are reluctant to discuss their mortality, and the product offers no instant gratification. However, life insurance sales jobs are abundant and easy to find. Commission percentages are also high compared to other types of insurance, and agents continue to earn a commission on a policy for as long as it remains in force.

Some companies offer employee status to agents, which includes a small base salary and benefits, but these agents are held to rigid production quotas.

The process of selling life insurance often involves cold-calling and door-knocking, and it requires perseverance and thick skin. Building relationships with potential clients is key, as is focusing on solving their problems rather than making a sale.

Is selling life insurance a good career?

Selling life insurance is a tough way to make a living and an even more difficult way to sustain a lucrative, long-lasting career. Some industry analysts report agents burning out within a year. However, selling life insurance does have its benefits, and for some, it can be a rewarding career path.

Advantages of selling life insurance

• Life insurance sales jobs are abundant and easy to find.
• Commission percentages are very high compared to other insurance sales, such as health insurance.
• Life insurance agents get paid commission renewals for as long as a sold policy is in force, creating a passive income stream.
• Compared to most finance careers, becoming a life insurance agent is easy. No educational requirements exist beyond a high school diploma at most.
• Jobs selling life insurance are everywhere. The online job search sites are full of them.
• Life insurance sales offer the largest commissions in the insurance industry. For example, on a $100 per month policy, with a six-month advance, you would receive a check for $600 the day the policy is issued.
• Life insurance agents do not have to work set hours and can set their own schedule.

Disadvantages of selling life insurance

• The pay is usually straight commission, so if an agent puts no sales on the books, they go without a paycheck.
• Finding qualified customers yourself is notoriously difficult, and the few leads that your company may give you have usually been contacted by dozens of agents already.
• Even when you locate a good prospect, the product itself is hard to sell. People are loath to discuss or even acknowledge their own mortality.
• The product provides no instant gratification, and leaving the appointment without signed paperwork almost always means you have lost that prospect forever.

Tips for being good at selling life insurance

• Learn about customer service and focus on developing good relationships with potential clients.
• Focus on solving your customer's problems. When a customer comes to you, they know they have a problem that needs to be solved, but they may not know what they want to buy.
• Build a professional network and connect with more experienced agents who may be able to mentor you or provide advice.
• Make a professional impression, even if you are self-employed or meeting with clients outside of an office. Consider how you dress and communicate to present a professional appearance.
• Be patient and play the long game. Focus on developing a relationship and understanding your customer's needs rather than being pushy or too focused on making a sale.

Yes, you can make a good living selling life insurance, especially if you continue to earn commissions on policies you have already sold. However, it is not an easy career, as it requires constantly working to find leads, build relationships, and make sales.

Frequently asked questions