Is that insurance agency a pyramid scheme? How to tell

Somebody you know, or somebody who knows somebody you know, has asked you to coffee. The pitch was warm and a little vague: financial education, helping families, owning your own business, part time to start.

On the drive home you typed the agency’s name and the words “pyramid scheme” into your phone. You got the agency saying it is not one. You got two rivals saying it is not a scam, but they would never join. And you got a forum thread full of people who are certain in both directions. Nobody put the law and the arithmetic on the same page. This article does. It works for any agency, because the test is the same whatever name is on the business card.

First, where we stand. The Kenswick Partners is a journal, and partner agencies may compensate us when a reader asks to be introduced to them. Some of those agencies pay commission through a chain of levels. We are not licensed to sell insurance and do not recommend products. We wrote this because a person who joins an agency with clear eyes tends to stay. A person who joins on a slogan tends to leave in month four. Both outcomes land on our desk.

The honest answer has two halves. The first is about the law, and it is simpler than the internet makes it. The second is about money, which is where most of the arguments really live.

No. 01What is a pyramid scheme, legally?

In shortA pyramid scheme pays people for signing up other people, not for selling anything to a real customer. There is no percentage test. Courts look at how the plan works on paper and in real life.

“Pyramid scheme” is a legal term before it is an insult. In plain words, the illegal setup works like this. You pay the company to get in. In return you get two things: the right to sell its product, and the right to be paid for bringing in more people. That second payment is the problem when it has nothing to do with anyone buying the product. Picture a gym where the real money is not in using the gym or selling memberships to people who want to work out. It is in signing up friends, who pay to get in and then make their money by signing up their own friends. Hardly anyone exercises. The money just moves from newer members to older ones.

The Federal Trade Commission’s business guidance on multi-level marketing, dated April 2024, says the same thing in official terms. The unlawful structure is one with “payment by participants of money to the company in return for which they receive (1) the right to sell a product” and “(2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.”¹ Courts have used that test since a 1975 FTC decision. The second half is the whole of it: rewards for recruiting that have nothing to do with selling anything to a real customer.

The FTC adds two things that recruiters rarely mention and critics rarely quote. One: “There is no percentage-based test to determine whether an MLM is a pyramid scheme.” There is no magic ratio of recruiting money to sales money that settles it. Two: courts “will look at the structure of the organization, both on paper and in practice.” A pay plan can be legal on paper and still be run as a recruiting machine. And a plan that looks like a ladder on paper can, in real life, be a plain sales force.

So the first question to ask about any agency is not “does it have levels?” Most do. It is “where does the money come from, and what is it for?”

No. 02How a legitimate commission hierarchy actually works

In shortA family buys a policy. The insurance company pays a commission. The agency splits that commission down a written schedule. Nobody in the chain is paid unless a customer bought something.

In insurance the money comes from one place. A household buys a policy from an insurance company, which the industry calls a carrier. The household pays the carrier a yearly price for the policy, called the premium. The carrier pays the agency that placed the policy a cut of that premium, called the commission. The agency then splits the commission by a written schedule. The agent who sat with the family gets a stated share. The people above that agent, who recruited and trained them, get the gap between their own rate and the agent’s rate. That gap is called an override. It works much like a real-estate office. The agent who sold the house gets a share of the commission, and the broker who runs the office and trained them keeps the rest. Neither is paid until a house actually sells.

Read the last line of the drawing twice, because it is the legal test in one sentence. In a legitimate agency, nobody in the chain is paid a cent unless a customer bought a policy. The overrides flow out of sales to real people. That is why a licensed agency with five levels of overrides passes the FTC’s test, and a company that pays you for signing up three friends does not. The org charts can look the same. The source of the money is not.

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Several levels of overrides is multi-level pay. Whether that makes a company “an MLM” is an argument about labels. Whether you can live on the bottom rung is a question about cash.

Two more facts set insurance apart from the products most people picture when they hear “MLM”. First, agents hold a state license. Getting one takes a course, an exam, fingerprints in most states, and a fee. The state can take it away.

Second, there is no inventory. Nobody at an insurance agency is sitting on a garage full of product bought with their own money. That garage is what bankrupts people in the worst schemes. These two facts do not make every agency a good place to work. They do make the pyramid-scheme label, in its legal sense, the wrong one.

No. 03Why the earnings slide is the real test

In shortShowing the leaders’ average without the everyone average is, in the FTC’s words, likely to generate a deceptive impression. Ask for both. Then read them against the government’s middle figure for the whole field.

Here is where the arguments really live, and where the FTC has the most useful thing to say. Question 13 of the same guidance says: “Any earnings claim should reflect what the typical person to whom the representation is directed is likely to achieve in income, profit, or appreciation,” and “Claims about earnings should take into account both what participants earn and what they spend.” Then comes the sentence that should be taped to every recruiting slide: “Presenting atypical earnings to consumers considering an income opportunity is likely to generate a deceptive impression.” And: “A ‘results not typical,’ ‘results are not guaranteed,’ or similar disclosure is not enough.”²

Apply that to the meeting you were invited to. Agencies that publish earnings figures almost always publish two kinds. The first is an overall average across every licensed agent, before the agents’ own expenses. It is usually modest. That is because it counts part-time agents, people who wrote one policy and left, and first-month agents right alongside the veterans.

The second is an average for a named leadership level: people with a team under them who sold at least one policy. It is usually large. Both numbers can be true at once. The FTC’s point is that showing you the second without the first is likely deceptive, whatever the footnote says. A school that posts only its top graduate’s starting pay is telling the truth about one person. It is telling you nothing about the class.

The neutral anchor, for any agency, is the Bureau of Labor Statistics. It tracks all insurance sales agents in the United States, every line of insurance and every length of service. The median annual wage was $62,280 in May 2025. The median is the middle: half of agents earned more, half earned less. The lowest tenth earned under $37,330 and the highest tenth over $138,140. Read any recruiter’s figure against that spread. A leadership average far above the top tenth describes a rare person. An agency average far below the bottom tenth describes a lot of people who did not stay.

No. 04The signs that are normal, and the signs that are not

In shortWorking as a contractor, being paid by commission only, and starting with people you know are all normal. Fees that keep coming before you earn, and levels you can only reach by recruiting, should slow you down.

A few things frighten people who are new to the field and should not. Working as an independent contractor is normal. Most insurance agents are contractors, and the tax form they get at year end is a 1099 instead of a W-2. Our article on what a 1099 contract really means walks through the tax side. Being paid by commission only is normal. That pay is front-loaded, meaning most of it arrives in a policy’s first year, and our article on how agents actually get paid explains it policy by policy. Starting with people you know is normal; every first-year agent does it. A person above you being paid when you make a sale is normal too. Think of a referral bonus at work: the person who brought you in has a reason to want you to do well. It is why they return your calls.

The signs that should slow you down are the ones in the right-hand column above. They share a shape: money or pressure that flows toward recruiting instead of toward customers.

Suppose the levels that pay well can only be reached by building a team. Suppose the fees arrive before the commissions and keep arriving. Suppose the person recruiting you cannot say what share of their own income came from their own sales. You are not necessarily looking at an illegal scheme. You are looking at a place where the bottom rung is built to be temporary. You should know that before you stand on it.

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You are not necessarily looking at an illegal scheme. You are looking at a place where the bottom rung is built to be temporary.

No. 05Five questions to ask the person recruiting you

In shortAsk for your rate in dollars on an example policy, every fee in writing, how much of their own income came from selling versus overrides, what happens to your renewals if you leave, and whether you are expected to recruit.

Ask for the answers in writing, by text or email, before you pay anything. A straight recruiter will answer all five without flinching. One who answers with a story about someone else’s success has just shown you the slide the FTC warns about.

1. What is my starting contract level, and on a $1,200-a-year term policy, how many dollars would I be paid in year one? Your contract level is the share of the commission you keep. You want that percentage and a dollar figure from a real commission schedule, not “it depends.” Then ask what the person above you is paid on that same policy.
2. What will I pay, and what does each payment buy? The pre-licensing course, the exam, the state application, the background check, errors-and-omissions coverage, platform or tools fees, events. Monthly costs and one-time costs, listed separately, in writing.
3. Of your own income last year, what share came from your own sales and what share from overrides on your team? This is the most revealing question on the list. It tells you whether the person recruiting you makes a living selling insurance or recruiting people who sell insurance. That tells you what they will need from you.
4. If I leave in two years, what happens to renewals on policies I sold, and who owns the client relationship? Renewals are the smaller commissions paid in later years while a client keeps paying. Also ask about chargebacks: the money the carrier takes back if a client stops paying after you were already paid. And ask whether your pay is advanced (paid up front, before the client has paid a full year) or as-earned (paid as the client pays).
5. Am I expected to recruit, and what happens to my progress if I never do? Ask how many people at your intended level got there on their own sales alone. If the honest answer is “very few,” you have learned what the ladder is for. You can then decide whether to climb it knowing that, rather than finding out later.

No. 06What we think

In shortNot a pyramid scheme: that is the law’s real answer. Whether it pays your bills is a separate question. Start on it with the average paid to every agent at that agency.

A licensed insurance agency that pays commission on real policies is not a pyramid scheme, and a chain of overrides does not make it one. That is the law’s answer, and it is a real answer. Your bank account is a separate question. The honest way to start on it is the overall average paid to every agent at that agency, read beside the leadership figure and beside the government’s median for the whole field.

If you go to the coffee meeting, go with the five questions and this page open on your phone. If the person across the table has read it too, that is a good sign. If you would rather see how one agency answers them on the record before you sit down with anyone, the overview below is where we send people.