By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
Private placement life insurance (PPLI) costs come in two layers: a one-time charge on each premium (in California that includes the state’s 2.35% tax on insurance premiums) and ongoing annual charges on the account value, on top of the fees of the funds inside the policy. Carriers quote these policy by policy. The worked example below assumes 3% up front and 1% a year as illustrative figures, not market quotes, so treat them as a starting point for questions, not a price. The bigger question for a high-income W-2 family in California or Washington is whether you qualify at all and whether the tax you avoid is larger than those costs. For most families under about $5 million in investments, the honest answer today is not yet.
What PPLI is, in one paragraph
PPLI is a variable universal life insurance policy sold privately instead of to the public. You pay premiums, the insurer invests them in separate accounts or insurance-dedicated funds, and the account grows without annual income tax as long as the policy meets the federal definition of life insurance under IRC §7702 and the investment diversification rules of IRC §817(h). At death, the payout to beneficiaries is generally excluded from income under IRC §101(a). Because it is a private placement, it is only offered to investors who meet federal wealth tests.
Who can buy PPLI: the two federal tests
Most carriers require at least accredited investor status, and many of the insurance-dedicated funds inside PPLI policies also require qualified purchaser status.
- Accredited investor. Per the SEC, income over $200,000 individually or $300,000 with a spouse in each of the prior two years (with the same expected this year), or net worth over $1 million excluding your primary residence. Almost every family we write for meets this on income alone.
- Qualified purchaser. Under Investment Company Act §2(a)(51), a natural person who owns not less than $5,000,000 in investments. Your primary home does not count as an investment, and how other assets (such as a concentrated employer stock position) count can depend on how they are held, so check this with your adviser, not a rule of thumb.
A $1.2 million household in Palo Alto with $2.5 million in brokerage and 401(k) assets is accredited but usually not a qualified purchaser. That family is not the PPLI buyer yet, no matter what a salesperson says.
How much PPLI costs, line by line
Ask for every item below in writing before you sign. The percentages in the third column are the kind of figures you should expect to see on a quote, not a market survey.
| Cost | When it is charged | What to ask |
|---|---|---|
| State premium tax | On each premium paid | California’s gross premiums tax is 2.35% (Cal. Rev. & Tax. Code §12202). Washington’s is 2% (RCW 48.14.020). Ask which state’s tax applies to your policy and whether it is passed through at cost. |
| Federal DAC charge | On each premium paid | Carriers pass through the cost of a federal tax rule on insurer acquisition costs. Ask for it as a separate line. |
| Placement or structuring fee | Up front, sometimes spread over years | Who is paid, how much, and whether it is a commission. Fee-only structures without a commission exist; ask for one. |
| Mortality and expense (M&E) and administration | Annually, as a % of account value | The rate, and whether it steps down as the account grows. |
| Cost of insurance (COI) | Monthly, based on the amount at risk and your age and health | The COI schedule for the minimum death benefit design. Healthy parents in their 30s and 40s pay far less than buyers in their 60s. |
| Fund fees | Inside each insurance-dedicated fund | Management and performance fees. For hedge or credit funds these can exceed every insurance charge combined. |
| Surrender and exit costs | If you cancel | Any surrender charge, plus the income tax on gains when you surrender (see below). |
Worked example: a California couple with $3 million in a tax-inefficient fund
Assumptions (illustrative, not a quote): a married couple in San Mateo County, one a biotech executive and one a physician, with $1.4 million in W-2 income in 2026 and $8 million in investments, so they are qualified purchasers. They want to hold $3 million in a private credit fund that pays about 7% a year, all taxed as ordinary income. Assume one-time charges of 3% of premium (including the 2.35% California premium tax) and ongoing policy charges of 1% a year. For simplicity, the $3 million goes in as a single premium and the example ignores COI changes over time.
Held in a taxable account. At their income, each extra dollar of interest is taxed at 37% federal for 2026 (the married filing jointly 37% bracket starts at $768,700 of taxable income, Rev. Proc. 2025-32), plus the 3.8% Net Investment Income Tax, plus California’s 13.3% top rate (12.3% bracket plus 1% on taxable income over $1 million, per the FTB 2025 schedules). That is 54.1% combined. The 7% yield becomes about 3.21% after tax. Paying tax from the account each year, $3 million grows to about $5.65 million after 20 years.
Held inside PPLI. The 3% upfront charge takes the invested amount to $2.91 million, of which $70,500 is California premium tax. Net of the 1% annual charge, it compounds at 6%. After 20 years it is about $9.33 million, roughly $3.7 million more than the taxable account.
The catch. That advantage exists only if the policy stays in force until death. Tax-free access through policy loans is available only for a policy that is not a modified endowment contract (MEC), and the single-premium design in this example would usually be a MEC, so its loans and withdrawals would be taxed as income first (see common mistakes below). If the couple surrenders the policy in year 20, the gain above their $3 million of premiums is taxed as ordinary income. At 54.1%, that leaves about $5.91 million, only a little better than the taxable account after two decades of fees and paperwork.
Same couple in Washington. Interest is not subject to Washington’s capital gains tax, and Washington has no wage income tax in 2026, so the combined rate is 40.8% federal. Keeping the same 3% upfront charge for simplicity (Washington’s premium tax is 2%, not 2.35%), the taxable account grows to about $6.76 million, and the PPLI advantage shrinks to about $2.6 million. Washington’s new 9.9% income tax on AGI over $1 million starts January 1, 2028 (WA DOR), and how it treats investment income is still pending guidance, so Washington families should rerun this math once the rules are final.
When PPLI can make sense for a W-2 family with young children
- You already use every simpler shelter. 401(k) deferrals, the mega backdoor Roth up to the $72,000 total additions limit for 2026 (Notice 2025-67), 529 plans for each child, and an HSA if you have a qualifying plan.
- You hold tax-inefficient assets on purpose. Private credit, bond funds, and actively traded strategies produce ordinary income every year. A broad stock index fund held for decades already defers most of its tax, so wrapping it in PPLI mostly adds fees.
- The money is for your children, not for you. PPLI works best as capital you do not expect to spend. Money you may need for a house down payment in five years is usually better held in a brokerage account.
- Estate tax is a real issue. The federal exemption is $15,000,000 per person for 2026 (IRS), so most families in this income range will not owe federal estate tax. Washington is different: its estate tax exclusion is $3,000,000 for deaths from July 1 to December 31, 2026 (WA DOR). A Seattle family with an $8 million estate can face Washington estate tax. A PPLI policy owned by an irrevocable life insurance trust can keep the death benefit outside the taxable estate. California no longer levies any tax at death (California Legislative Analyst’s Office).
Common mistakes with PPLI
- Funding too fast and creating a modified endowment contract (MEC). If premiums exceed the seven-pay limit in IRC §7702A, loans and withdrawals are taxed as income first and can carry a 10% penalty before age 59½. Many designs spread premiums over several years to stay a non-MEC. A single-premium policy like the simplified example above would usually be a MEC.
- Directing the investments yourself. Under the investor control doctrine (Rev. Rul. 2003-91), if the policyholder picks specific securities, the IRS can treat you as the owner and tax the income. The Tax Court applied this in Webber v. Commissioner, 144 T.C. 324 (2015). You choose among funds; you do not run them.
- Treating the policy as an emergency fund. Loans reduce the death benefit and, if the policy lapses with loans outstanding, the gain becomes taxable at once.
- Buying on an illustration. Illustrations assume steady returns. Ask to see the same policy at a lower return and with higher COI charges.
For how PPLI compares with retail cash-value policies, see our pieces on 7702 plan disadvantages and private placement life insurance carriers.
A decision checklist for your next meeting
- Are we qualified purchasers today, counted correctly?
- Have we filled the 401(k), mega backdoor Roth, 529 and HSA first?
- Which assets would go in, and how much ordinary income do they produce each year?
- What is the all-in cost in dollars in year 1 and year 10, from a written quote?
- Will we realistically hold this until the second death, without needing the money?
- Who owns the policy: us, or an irrevocable trust set up with our estate planning attorney?
What to write down for your children
A PPLI policy held in trust can last 50 years or more. Your children will be the beneficiaries long after the adviser who sold it has retired. Write a one-page note: why you bought it, what it is meant to pay for, who the trustee is, and what would make you surrender it. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”
Frequently asked questions
Is PPLI worth it if we have $2 million invested?
Usually not yet. You likely do not meet the $5,000,000 qualified purchaser test that many insurance-dedicated funds require, and the fixed setup work spreads poorly over a smaller account. Filling your 401(k), mega backdoor Roth and 529s, and holding tax-efficient index funds in taxable accounts, typically does more for a family at this stage.
Is PPLI the same as whole life insurance?
No. Whole life credits a rate set by the insurer, and commissions are often built into the premium. PPLI is variable life: the account rises and falls with the funds you choose, and costs are usually shown as separate charges. If you already own whole life and are unsure about it, read how to get out of a whole life policy.
Does PPLI help with California taxes?
It can. California taxes interest and capital gains as ordinary income at up to 13.3% (2025 rates), and growth inside a qualifying policy is not taxed each year. The 2.35% California premium tax is the entry cost, so the benefit depends on how much ordinary income the assets produce and how long you hold the policy.
Next step
Before you take a PPLI meeting, list your investments by type and by how much taxable income each one threw off last year. That single page shows whether there is enough tax to shelter to cover the costs. If you would like a second set of eyes on it, our tax management team reviews this as part of the Tax & Wealth Assessment, alongside your investment risk picture.
This is general education, and the right move depends on your family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Estate Planning for high-income W-2 families at Bright Advisers.
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