Whether life insurance is a pyramid scheme or not mostly depends on the business model. Usually, the main purpose of life insurance is to have the necessary funds to cover expenses during emergencies. On the other hand, a pyramid scheme is when one person hires two people under him to sell products and the two people also hire another two people to sell the same products. Usually, in life insurance, an agent doesn’t hire other people to work for him and they don’t hire others to sell insurance policies.
Key Takeaways
- Health insurance companies offer various health-related services in exchange for monthly premium payments
- Term Life Insurance has a coverage period of 10-30 years
- Universal Life Insurance is the most expensive type of life insurance
- If a life insurance company has a “Recruitment Over Production” business model then it is sign of a pyramid scheme
What Is Life Insurance?
There are many companies available that offer various financial health services in exchange for monthly premium payments. You can use the money for various health emergencies or the beneficiaries can use the money for whatever purpose they choose. Every life insurance policy is different and each state’s laws regulating insurance policies are also different. However, most of the insurance policies identify the following:
1. The Insurer: Company that provides life insurance
2. The Policyholder: The person who buys the insurance policy
3. The Insured: The person whose life is insured
4. The Death Benefit: The amount of money the insurance company will pay if the insured passes away.
5. The Beneficiaries: People who will receive the death benefit
6. The Policy Length: The length of the agreement between the insurance company and the insured
7. The Premium: The monthly payment that the policyholder has to pay
8. The Cash Value: Permanent life insurance policies have a cash value
Different Kinds Of Life Insurance Policies
| Insurance Type | Term Life Insurance | Whole Life Insurance | Universal Life Insurance |
| Coverage period | Limited to a specific term (typically 10-30 years) | Permanent lifetime protection | Permanent lifetime protection |
| Builds cash value | No | Yes | Yes |
| Cost for a given death benefit | Less expensive than whole or universal | More expensive than term | More expensive than term |
| Premiums | Can vary | Typically fixed | Can vary |
| Tax-free death benefit | Yes, typically | Yes, typically | Yes, typically |
| Primary uses | Death benefit income protection and replacement | Death benefit income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer | Death benefit income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer |
6 Signs Insurance Company Is A Pyramid Scheme
Usually, insurance companies don’t have any pyramid schemes but recently many people complained that some companies are approaching with insurance policies that look like pyramid schemes. So what are the signs of insurance companies that promote pyramid schemes? Let’s check them out!
Sign #1 – Recruitment Over Production
Recruitment overproduction is one of the main signs of MLM-type organizations. Usually, pyramid schemes focus solely on recruitment rather than production. Here the insurance company will give you money, once they collect it from other clients. They want to create a network of people to collect more money. This type of company might ask you to recruited new people or sell insurance policies to others.
#2 – Flagrant Conspicuous Consumption
This is also a key sign that indicates the insurance agent is offering pyramid health insurance schemes. For example, the agent might pass his Rolex around with everyone looking at it. It’s like they are marketing how quickly they are earning money and leading a luxurious life. Sometimes they pass around actual money to entice people to buy the insurance policy and join the team. So, if you see any insurance agent is showing his/her wealth then try to avoid them.
Sign #3 – Jumping Jacks, Push-ups, Yelling
When you visit a health insurance company and see lots of jumping jacks, push-ups, yelling, hooting, hollering, dancing, etc. then it is also a sign that the company is an MLM company. Usually, MLM organizations try to physically invigorate rather than thoughtful contemplation. There is a difference between motivational speeches and skill development lectures.
Sign #4 – The Ladder To Climb
The business strategies of MLM organizations are different from general health insurance companies that you will easily spot. For example, MLM organizations have an “arbitrary” ladder system and a pecking order, and everyone knows where they stand on the system.
Sign #5 – An Inner Circle
Usually, every team of an MLM organization has an inner circle and the members of the cycles talk alike. This is also a common sign that indicates you are dealing with pyramid schemes instead of a proper health insurance policy. Here, each group has a specific language, which members use to establish themselves as a part of the “in-group.”
Sign #6 – A Flamboyant Charismatic Frontman
Every organization has a frontman but there is a fine line between a confident businessman and a cult mascot. For an MLM organization, you will find the leader of the team ludicrously important. The members of the company considered the leader as the heart and soul of the company and they are viewed as “untouchable.”
How Insurance Companies Are Different From Pyramid Schemes
There are significant differences between insurance policies and pyramid schemes. For health insurance, if you stop paying the premiums then the insurance company will stop paying any claims for you. Moreover, you won’t receive any money from the insurance company if there are no claims from you. Here, you are paying for “in case of emergency” situations. On the other hand, in a pyramid scheme, you’re investing your money specifically for the return. You won’t stop investing money as long as the returns are stable. This type of scheme will eventually die if new investors stop coming. But for insurance companies, if new insured stopped coming, the company would still have their current insured to collect premiums from.
How Hard Is A Career Selling Life Insurance
Selling life insurance is not an easy career. It is quite difficult to make a living and an even more difficult way to sustain a lucrative, long-lasting career. However, if you can start your career with a renowned life insurance company then it will be easier for you to progress quickly. Now, let’s check some of the benefits and difficulties of a career selling life insurance!
Benefits Of Career Selling Life Insurance
1. Job Prospects
If you compare other careers in finance, then you will find the career of a life insurance agent is very easy. The education requirement is also less for this type of job. Having a high school diploma is enough to secure a job in this sector. Moreover, the demand for health insurance is increasing so jobs selling life insurance are everywhere. Usually, insurance companies offer jobs to anyone who is interested in this sector.
2. Potential For High Salary
In the insurance industry, life insurance companies offer the largest commissions. Though, the commission depends on the type of insurance being sold. For example, an auto insurance agent earns a percentage of the policy that is purchased. But for life insurance, the agent earns a percentage of the policy as well as receives commission when the policy is renewed each time. According to the U.S. Bureau of Labor Statistics, life insurance sales agents earn a wide range of salaries. The bottom 10% only earn an estimated $28,000 a year, but in the high range (90%) earn $125,000.
3. Renewal Commissions
The best part of life insurance policies is, the commission you earn on a life insurance policy sale is not limited to the first year. Here, you will keep getting paid as long as the policy is active and renewed every year. So, it is like having a royalty income. You might keep earning 5% to 10% as long as the policyholder pays their monthly premium!
Difficulties Of Career Selling Life Insurance
1. Commission-Based Pay
One of the disadvantages of a life insurance agent is, most insurance companies classify their agents as independent contractors. So, there won’t be any base salaries or benefits. So, it means if an insurance agent is not able to put sales on the books then he or she will go without a paycheck. Therefore, you will need a ton of hours if you want any chance at making a decent living as a life insurance agent.
2. Customer Acquisition
This is a very important part of health insurance, where you have to find qualified life insurance prospects. Nowadays, it is very difficult to find new prospects because the competition is very high as there are lots of health insurance companies available and they also offer very lucrative policies. So, if you fail to find new prospects then you won’t be able to generate new sales and it will affect your monthly income.
3. The Sales Process
Finding a qualified life insurance prospect doesn’t mean you have an easy sell. Life insurance is a very difficult product to sell. You have to create urgency so that the prospect buys the insurance policy right away. The process of creating urgency is a bit difficult because life insurance doesn’t provide instant gratification.
Final Thoughts
Finally, many insurance companies might fit many of the criteria for a pyramid scheme but they are not MLM companies, and therefore, selling life insurance is not a pyramid scheme. On the other hand career as a life insurance agent is very difficult and most insurance agents do not last a year in the business. However, if you manage to persevere for at least five years then you will be rewarded immensely with renewal commissions!
References:
1. https://webnews21.com/is-selling-life-insurance-a-pyramid-scheme/
2. https://businessreview.berkeley.edu/selling-insurance-to-people-selling-insurance_a_pyramid_scheme_story/
Last Updated on October 5, 2022 by Magalie D.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.
