Is Life Insurance a Ponzi Scheme?

Is Life Insurance a Ponzi Scheme?

by Leslie Freeland, February 23, 2017

Some people have asked: “Is life insurance a Ponzi scheme?”

Life insurance is not a Ponzi scheme.


What is a Ponzi Scheme?

Before we explain why life insurance is not a Ponzi scheme, it’s important to understand what a Ponzi Scheme is. To put it simply, it’s investment fraud. Much like a pyramid scheme, a Ponzi scheme involves multiple people, but there is no chain of recruitment like there is in a pyramid scheme (you don’t need to recruit anyone).

In a Ponzi scheme, one or more people convince others to give them money to invest. The people give the schemer the investment money, but instead of investing with real companies, the Ponzi schemer pockets the money for themselves, stealing directly from the investors.

Basically, if you give a Ponzi schemer your money to invest, know it’s going into the schemers bank account and not towards any actual investments. The Ponzi schemer might give you what appears to be ‘profits’ from your ‘(fake) investment,’ but those ‘profits’ are actually just money from other victims of the scheme. They are giving you stolen money.

Read more about how to identify a Ponzi scheme in our article: Watch Out for Ponzi schemes.

Life insurance is not a Ponzi scheme:

Why not?

Where does the life insurance money (the death benefit) come from?

The answer: From legitimate investments.

The insurance companies take everyone’s monthly payments and invest that money in actual companies. The returns on these investments pay the death benefits (the insurance money your family get when you pass away). In addition to legitimate investments, an insurance company may also be financially affected by:


Surprisingly, many life insurance policies go unclaimed. If you or someone you know might be a beneficiary to a life insurance policy, make sure to read our article “Are You a Life Insurance Beneficiary” to see your options on locating the missing policy.


Then there are the people who purchase policies, pay their monthly payments for years and years, then just suddenly stop making their payments.

NOTE: Don’t let this be you! Canceling your policy is often the best choice in some situations, but it depends on why you are canceling. Do you still want insurance but can’t afford the payments anymore? There is often a way to adjust your monthly payments to make this happen. Do you just no longer want or need the insurance. No problem! But you may actually have the option to sell your insurance to someone else, called a life settlement. Just walking away cold might end up costing you, whether it’s the lost insurance altogether because you couldn’t afford the payments or the lost opportunity to sell it. Always contact an insurance agent or financial advisor before making any sort of drastic change.


Not everyone who purchases life insurance ends up using it. For example, if you purchased a 20-year, term life insurance policy, and you did not die during that 20-year period of time, the insurance will expire. Unless you buy what is called a ‘return-of-premium’ rider, you will not get a refund for your monthly payments. However, you can usually add more time onto your life insurance policy if you want to extend it.

Detected Fraud

Some of the people who purchase life insurance turn out to be scammers, making monthly payments and hoping the insurance company won’t notice when they pass away. For example, someone might have cancer and lie about it when they apply for life insurance. If someone is caught doing this, the insurance company will not pay out the death benefit, and the scammer or the scammer’s beneficiaries will not receive the money back that they originally paid to defraud the insurance company. And they definitely won’t receive the insurance money (death benefit) that they purchased.


The Main Differences Between Ponzi Schemes and Life Insurance

  • The money paid to the insurance company is going directly to legitimate investments.
  • You will be able to confirm that the companies being invested in are real.
  • There will be contracts and paperwork. No paperwork or contracts is a big warning sign.
  • Your insurance agent will be licensed and easily looked up in your state’s insurance agent registry.
  • Your payments will always go directly to the insurance company, not to the insurance agent.
  • The agent and company will be selective about who they sell to. A Ponzi schemer doesn’t care.

Not an Investment-only tool

Life insurance is not meant to be used as a savings account or an all-encompassing, investment tool. Term life insurance is never an investment. You will not earn interest, and it expires. There is a life insurance product called permanent life insurance that does have an investment component*. Something to keep in mind, permanent life insurance is ‘life insurance’ with investment benefits. It is not an investment-only vehicle. If you just want to invest and don’t think you need life insurance, then you should consult with a financial advisor to see what your options are.

Permanent life insurance can certainly be part of a well-rounded, retirement plan.

Meet With an Advisor

There are many life insurance and investment options, and the best thing to do is to speak with a licensed insurance agent to go over your personal needs. After speaking with an agent, you can decide whether life insurance is right for you at this point in your life. You will discuss your needs and goals (for example, do you have a family to provide for?) and then discuss what types of life insurance would work best for you. After this discussion, you may even decide that you are really looking for an investment product and not life insurance. In that case, your next move would be to meet with a financial planner.

If you are ever concerned that the insurance agent you are working with is a Ponzi schemer, do not purchase anything at that moment. Look at the policies they offer; then do some research. For example, is the insurance company on the contract legitimate? Does that company have a website and contact information, separate from the agent’s contact information?

When it comes to protecting your family financially, it’s vital that you purchase a life insurance policy from a well-established company who has a track record of consistent payouts.

Are You a Victim?

If you find yourself a victim of a Ponzi scheme, you should report the scam and begin your recovery process. See our article “Fight Back Against Insurance Scams” for more information.




Asurea offers Life Insurance, Mortgage Protection Life Insurance, Medicare Supplement Insurance, Final Expense Insurance, Disability Insurance, Long-term Care Insurance, Retirement Planning products and more. For additional information, click on the ‘Learn more’ button below. Want to have articles just like this delivered to your inbox? Just enter your email address in the box below and click ‘Subscribe.’

This information is provided for general consumer educational purposes only and is not intended to provide legal, tax or investment advice. 

*Loans borrowed from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim. Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Dollar amounts are for illustrative purposes, not actual.


Leslie Freeland

Leslie Freeland

Marketing Communications Coordinator at Asurea
Leslie joined Asurea as the Marketing Communications Coordinator in February 2015. Since then, she has been working closely with insurance professionals to educate the public on the importance of life insurance and protect the public from common scams with informational articles.
Leslie Freeland

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