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Topic 29: Life Insurance - 95 (2) Taxation of dividends The IRS has taken the position that dividends paid on life insurance policies are a return of excess premium When a policy owner receives dividends from a life insurance company, those dividends are income tax free If the cumulative dividends paid exceed the cumulative premiums paid for the policy, the excess dividends are reportable as ordinary income for tax purposes (3) Taxation of cash surrender The taxable amount is the total surrendered value minus the policy owner s current basis in the policy (a) Surrender value = policy loan + net cash value (b) Tax basis = premiums paid dividends (c) Taxable gain = surrender value tax basis (4) IRC Section 1035 Exchange Under IRC Section 1035, a life insurance policy or an annuity may be exchanged for a similar contract with no adverse income tax consequences (a) The funds must be transferred company to company, not through the hands of the policy owner (b) The basis in the original policy becomes the basis in the new policy (c) The new policy cannot have a later maturity date than the original policy This means that an endowment at age 65 may not be exchanged for a whole life policy that endows at age 100 (d) A life insurance policy may be exchanged for an annuity, but an annuity may not be exchanged for a life insurance policy (e) The new policy must cover the same insured(s) or annuitant(s) C Gift taxation of life insurance (1) If a life insurance policy is transferred from one individual to another, or to a trust, there is a potential gift tax The value of the policy is the interpolated terminal reserve For the most part, this is close to the cash value of the policy (2) Gift tax can apply if a policy owned by one individual on another s life matures by reason of the insured s death and a person other than the policy owner is named bene ciary For example, if a wife owns a policy on her husband s life and the children are bene ciaries, the proceeds are payable to the children instead of to her In this case, the policy owner (wife) has made a gift to the bene ciaries (children) D Estate taxation of life insurance is in uenced by ownership (1) If an insured owns a policy on his or her life, then at death the death bene t will be included in his or her estate in determining whether any estate taxes are due (2) If the insured had an incident of ownership within three years of death, the proceeds of the policy will be included in his or her estate 9 Policy ownership issues and strategies, including split-dollar A The following are the three popular ownership choices available to purchasers in order to avoid having the proceeds included in the estate of the deceased: (1) If an irrevocable trust is the owner of the policy, the insured makes payments to the trust to cover the premiums on the life insurance policy The trust is the bene ciary and designates how the bene ts are to be distributed However, the proceeds are added back into the estate if death occurs within three years after the transfer of the insurance policy to the trust (2) A charity chosen by the client can be the owner and bene ciary of an insurance policy A yearly tax-deductible gift to the charity pays the policy s premium.



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In measuring throughput, we have ignored the cost of the systems we are analyzing If a system costing $100 can handle 1,000 transactions per second and a system costing $500,000 can handle 1,200 transactions per second, the latter obviously has better throughput but it's gained at a much higher cost The idea of measuring throughput and its relationship to price is something that has been popularized by the Transaction Processing Council (TPC), which has created database benchmarks, better known as the TPC-style benchmarks There are three TPC benchmarks: TPC-A, TPC-B, and TPC-C The most recently developed (as of this writing) is the TPC-C It measures database transaction processing in terms of how efficiently it supports a mythical ordering system Specifically, it measures how many "new order" transactions can be handled while the system is busy handling four other types of order-related transactions (payment, status, etc) While the TPC specification is meant to measure database throughput, you can use the same principle with your systems After all, Web application transactions are at their core a set of database transactions Although it is unlikely that you will benchmark your system against another, you can measure how well your system is improving or lagging over its own evolution For example, if release 1 of your application requires $100,000 worth of hardware and software and nets 10,000 transaction per second, you can calculate a price/performance index by dividing the price by the performance:

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96 - Insurance Planning and Risk Management (3) The insured can make children the bene ciaries and owners of a policy Parents can pay premiums without paying gift taxes, if under limits The child receives the face amount free from federal income and estate tax when the parent dies B Split-dollar life insurance: The owner can be either the insured s employer or the insured (1) Endorsement method The employer owns the policy and has the primary responsibility for paying premiums (2) Collateral assignment method The insured employee owns the policy and has primary responsibility for paying premiums

This doesn't mean that it costs $10 to execute a transaction on your system It is simply a measure of throughput as it relates to the overall cost of the system Suppose that a year later, release 2 of your application requires $150,000 worth of hardware and handles 40,000 transactions per second The release 2 price/performance index would be:

know its value, and put it to use When people nd nancial wealth they are quick to announce it and take ownership of it Many can t wait to brag about their winnings Can you imagine feeling the same way about your value that can t be measured nancially What is happening to these treasures as they lie buried or hidden What can the darkness do to them Their value can decay Before you give it any more thought, which could only lead to trepidation, you must go and start digging Dig with all your heart Put your back into it Put everything you have into it so that you feel every muscle straining Your heart will be pumping and fueling the sharp, quick search of your life Feel rst Then think This type of search can lead to either bitter disappointment or incredible power.

Obviously, release 2 is more efficient than release 1 by evidence of its lower price/ performance figure My interest in price/performance in this section is a reminder of the more general bias throughout this book: Favor architectural strategies over resources when developing your application Once the application is deployed, you can always buy more resources to meet demand On the other hand, rewriting code, changing designs, or re-architecting your application after deployment comes at a much higher cost The best solution is obviously good design at the outset for scalability and performance Not only does this eliminate the need for massive design changes after deployment, but it also typically leads to more cost-efficient resource acquisitions CPUs, memory, disk, and other resources are purchased less frequently for applications that are inherently fast and scalable In short, well-designed systems adapt and evolve much better than poorly designed ones do

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Thus far, I've given you a set of abstract reasons why Web services are an attractive idea But unless you've designed many Web applications or struggled with application integration issues, these reasons may not strike a chord Let me provide a more practical motivation

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