<PAGE> 1
As Filed with the Securities and Exchange Commission on April 29, 1998
Registration No. 333-01949
811- 07569
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
(Exact name of trust)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Complete address of depositor's principal executive offices)
Corporate Secretary
Continental Assurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
(Name and complete address of agent for services)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan, LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004-2404
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant of paragraph (b).
/x/ On May 1, 1998 pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(1).
/ / On (date) pursuant to paragraph (a)(1) of Rule 485.
PURSUANT TO RULE 24f-2 of the Investment company Act of 1940, the Registrant
has elected to register an indefinite amount of the securities being offered.
Pursuant to rule 24f-(b)(2), the Registrant did not file a Rule 24f-2 notice
because it did not sell any securities pursuant to such declaration during the
most recent fiscal year.
Securities Being Offered: Individual Flexible Premium Variable Life Insurance
Policies.
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VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
VALLEY FORGE LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
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1 Cover Page
2 Cover Page
3 Not Applicable
4 Sale of the Policies
5 The Variable Account
6 The Variable Account
7 Not Applicable
8 Not Applicable
9 Legal Matters
10 Summary and Diagram of the Policy; The Policy;
Withdrawal Privilege; Surrender Privilege; Transfers
of Policy Values; Premium Payments; Net Premium
Allocations; Voting Privileges; Modification of the
Policy
11 The Funds
12 The Funds
13 Charges and Deductions
14 Purchasing a Policy
15 Premium Payments; Net Premium Allocations
16 Net Premium Allocations; Variable Policy Value;
The Funds
17 Withdrawal Privileged; Surrender Privilege
18 The Variable Account
19 Reports to Owners
20 Other Policy Benefits and Provisions
21 Policy Loans
22 Not Applicable
23 Not Applicable
24 Not Applicable
25 The Company; Other Information About the Policies and
the Company
26 Chargers and Deductions
27 The Company; Other Information About the Policies and
the Company
28 The Company Directors and Executive Officers
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Variable Account
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36 Not Applicable
37 Not Applicable
38 Sale of the Policies
39 Sale of the Policies
40 Sale of the Policies
41 Sale of the Policies
42 Not Applicable
43 Not Applicable
44 Variable Policy Value
45 Not Applicable
46 Variable Policy Value
47 The Variable Account; The Funds
48 The Company
49 Not Applicable
50 Not Applicable
51 The Policy; Other Policy Benefits and Provisions
52 The Variable Account
53 Tax Considerations
54 Not Applicable
55 Illustrations of Policy Values, Surrender Values,
Death Benefits and Accumulated Premium Payments
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
<PAGE> 4
PROSPECTUS
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE AND
FIXED LIFE INSURANCE POLICY
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE
SEPARATE ACCOUNT
------------------------
This prospectus describes an individual flexible premium variable and fixed
life insurance policy (the "Policy") offered by Valley Forge Life Insurance
Company (the "Company" or "VFL"). The Policy is designed to provide insurance
protection on the life of the Insured named in the Policy, and at the same time
provide the Owner with the flexibility to vary the amount and timing of premium
payments and, within certain limits, to change the amount of Death Benefits
payable under the Policy. This flexibility permits the Owner to provide for
changing insurance needs with a single insurance policy.
The Owner may, within limits, allocate Net Premium Payments and Policy
Value to one or more Subaccounts of the Valley Forge Life Insurance Company
Variable Life Separate Account (the "Variable Account") and the Company's
general account (the "Fixed Account"). Discussions of values under the Policy in
this prospectus generally relate only to the values allocated to the Variable
Account. The assets of each Subaccount of the Variable Account are invested in a
corresponding investment portfolio (each, a "Fund") of The Alger American Fund,
Federated Insurance Series, MFS Variable Insurance Trust, SoGen Variable Funds,
Inc., Van Eck Worldwide Insurance Trust and Fidelity Variable Insurance Products
Fund and Variable Insurance Products Fund II.
The prospectuses for the Funds describe the investment objectives and risks
of investing in the Subaccount corresponding to each. The Owner bears the entire
investment risk for Policy Value allocated to a Subaccount. Consequently, except
as to Policy Value allocated to the Fixed Account, the Policy has no guaranteed
minimum Policy Value.
It may not be advantageous to replace existing insurance with this Policy.
Within certain limits, you may return the Policy, or convert it to a Policy that
provides benefits that do not vary with the investment results of the Variable
Account by exercising the Special Transfer Right.
PLEASE READ THIS PROSPECTUS AND THE PROSPECTUS FOR THE FUNDS CAREFULLY AND
RETAIN BOTH FOR FUTURE REFERENCE. THIS PROSPECTUS MUST BE ACCOMPANIED OR
PRECEDED BY THE CURRENT PROSPECTUSES FOR THE FUNDS.
------------------------
AN INVESTMENT IN THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, NOR IS THE POLICY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE POLICY INVOLVES CERTAIN RISKS, INCLUDING THE LOSS RISK OF PREMIUM PAYMENTS
(PRINCIPAL).
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
May 1, 1998
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THIS PAGE INTENTIONALLY
LEFT BLANK
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TABLE OF CONTENTS
<TABLE>
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DEFINITIONS................................................. 1
SUMMARY AND DIAGRAM OF THE POLICY........................... 4
FUND EXPENSES............................................... 8
Fee Table Annual Fund Expenses............................ 8
GENERAL INFORMATION ABOUT THE COMPANY, THE VARIABLE ACCOUNT
AND THE FUNDS............................................. 10
The Company............................................... 10
The Variable Account...................................... 10
The Funds................................................. 11
THE POLICY.................................................. 14
Purchasing a Policy....................................... 14
Cancellation Privilege.................................... 14
Premium Payments.......................................... 14
Net Premium Allocations................................... 15
Policy Lapse and Reinstatement............................ 15
Variable Policy Value..................................... 16
Fixed Policy Value........................................ 17
Transfers of Policy Values................................ 18
Surrender Privilege....................................... 19
Withdrawal Privilege...................................... 19
Policy Loans.............................................. 20
Maturity Benefits......................................... 21
Death Benefit Proceeds.................................... 21
Settlement Options........................................ 23
Telephone Transaction Privileges.......................... 25
THE FIXED ACCOUNT........................................... 25
The Fixed Account......................................... 25
Interest Credited on Fixed Policy Value................... 25
CHARGES AND DEDUCTIONS...................................... 26
Sales Charges............................................. 26
Premium Tax Charge........................................ 26
Federal Tax Charge........................................ 26
Surrender Charge.......................................... 26
Other Taxes............................................... 28
Monthly Deduction......................................... 28
Daily Mortality and Expense Risk Charge................... 29
Transfer Processing Fee................................... 30
Fund Expenses............................................. 30
OTHER POLICY BENEFITS AND PROVISIONS........................ 30
Ownership................................................. 30
The Company's Right to Contest the Policy................. 31
Suicide Exclusion......................................... 31
Misstatement of Age or Sex................................ 31
Modification of the Policy................................ 31
Suspension or Delay in Payments........................... 32
Reports to Owners......................................... 32
Supplemental Benefits and/or Riders....................... 32
TAX CONSIDERATIONS.......................................... 33
Tax Status of the Policies................................ 33
Tax Treatment of Policy Benefits.......................... 34
</TABLE>
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<TABLE>
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OTHER INFORMATION ABOUT THE POLICIES AND THE COMPANY........ 36
Sale of the Policies...................................... 36
Voting Privileges......................................... 36
Directors and Executive Officers.......................... 37
Company Holidays.......................................... 38
State Regulation.......................................... 38
Impact of Year 2000 on VFL................................ 38
Additional Information.................................... 39
Experts................................................... 39
Legal Matters............................................. 39
Independent Auditor's Report.............................. 40
FINANCIAL STATEMENTS........................................ 41
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES, DEATH
BENEFITS AND ACCUMULATED PREMIUM PAYMENTS
Appendix.................................................... A-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, THE PROSPECTUS OF THE FUNDS, OR THE STATEMENT OF ADDITIONAL
INFORMATION OF THE FUNDS.
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<PAGE> 8
DEFINITIONS
ATTAINED AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date, plus the number of complete Policy Years since the Policy
Effective Date.
BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds are paid
upon the death of the Insured. The Owner may designate primary, contingent, and
irrevocable Beneficiaries.
CANCELLATION PERIOD -- The period shown in the Policy during which the
Owner may cancel the Policy for a refund by returning it to the Company.
CASH VALUE -- Policy Value minus any applicable Surrender Charge.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds
are paid upon the death of the Insured if the primary Beneficiary (or
Beneficiaries) is not living.
DEATH BENEFIT -- The amount payable to the Beneficiary under a Death
Benefit Option before adjustments if the Insured dies while the Policy is in
force before the Maturity Date.
DEATH BENEFIT OPTION -- One of two options that an Owner may select for the
computation of the Death Benefit Proceeds.
DEATH BENEFIT PROCEEDS -- The total amount payable to the Beneficiary if
the Insured dies while the Policy is in force before the Maturity Date.
DUE PROOF OF DEATH -- Proof of death satisfactory to the Company. Due Proof
of Death may consist of the following: (a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or (c) any
other proof satisfactory to the Company.
FIXED ACCOUNT -- Part of the Company's General Account to which Policy
Value may be transferred or Net Premium Payments may be allocated under a
Policy.
FIXED POLICY VALUE -- The Policy Value in the Fixed Account.
FUND -- Any open-end management investment company or investment portfolio
thereof, or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT -- The assets of the Company other than those allocated to
the Variable Account or any other separate account of the Company.
GRACE PERIOD -- A 61-day period during which an Owner may make premium
payments to cover the overdue (and other specified) monthly deductions and
thereby prevent the Policy from Lapsing.
GUIDELINE ANNUAL PREMIUM -- The "guideline annual premium" as defined in
applicable regulations under the Investment Company Act of 1940, as amended.
INITIAL SPECIFIED AMOUNT -- The Specified Amount on the Policy Effective
Date.
INSURED -- The person whose life is insured by the Policy.
ISSUE AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date.
LAPSE -- Termination of the Policy at the expiration of the Grace Period
while the Insured is still living before the Maturity Date.
LOAN ACCOUNT -- A portion of the Company's General Account to which
Variable Policy Value or Fixed Policy Value is transferred to provide collateral
for any loan taken under the Policy.
LOAN ACCOUNT VALUE -- The Policy Value in the Loan Account.
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LOAN AMOUNT -- At any time other than a Policy Anniversary, the Loan
Account Value plus any interest charges accrued on the Loan Account Value up to
that time. On a Policy Anniversary, the Loan Amount equals the Loan Account
Value.
MATURITY DATE -- The date shown in the Policy on which the Owner is paid
the Surrender Value, if any, provided the Insured is still living while the
Policy is in force. It is the Policy Anniversary nearest the Insured's 95th
birthday.
MINIMUM INITIAL PREMIUM PAYMENT -- The amount shown in the Policy that the
Owner must pay before coverage becomes effective under the Policy.
MINIMUM MONTHLY PREMIUM PAYMENT -- The minimum amount of monthly premium
payments (or the equivalent) that an Owner must make in order for the Lapse
Prevention Guarantee to remain in effect.
MONTHLY ANNIVERSARY DAY -- The same day as the Policy Effective Date for
each succeeding month.
NET AMOUNT AT RISK -- As of any Monthly Anniversary Day, the Death Benefit
under the Policy (discounted for the upcoming month) less the Policy Value
(before the deduction of the monthly policy fee, monthly first-year issue fee
and the cost of additional benefits provided by rider).
NET ASSET VALUE PER SHARE -- The value per share of any Fund on any
Valuation Day. The method of computing the Net Asset Value is described in the
prospectuses for the Funds.
NET PREMIUM PAYMENT -- Any premium payment less any premium tax charge,
deferred acquisition cost tax charge, and sales charge deducted from the premium
payment.
OWNER -- The person or persons who owns (or own) the Policy and who is
(are) entitled to exercise all rights and privileges provided in the Policy. The
maximum number of joint Owners is two. References in this prospectus to an
action by the "Owner" mean, in the case of joint Owners, both Owners acting
jointly.
PLANNED PERIODIC PREMIUM PAYMENT -- The premium payment selected by the
Owner as a level amount that he or she (or they) plans to pay on a monthly,
quarterly, semi-annual or annual basis over the life of the Policy.
POLICY ANNIVERSARY -- The same date in each Policy Year as the Policy
Effective Date.
POLICY EFFECTIVE DATE -- The date shown in the Policy from which Policy
Years and various other periods described in this prospectus are measured. The
Policy Effective Date is never the 29th, 30th or 31st of a month.
POLICY VALUE -- The sum of the Variable Policy Value, the Fixed Policy
Value, and the Loan Account Value.
POLICY YEAR -- A twelve-month period beginning on the Policy Effective Date
or on a Policy Anniversary.
SEC -- The U.S. Securities and Exchange Commission.
SERVICE CENTER -- The offices of the Company's administrative department,
at PO Box 305139, Nashville, Tennessee 37270-5139 (1-800-262-1755).
SETTLEMENT OPTION -- The manner in which an Owner or Beneficiary (or
Contingent Beneficiary) elects to receive the amount of any surrender or
withdrawal or the Death Benefit Proceeds.
SETTLEMENT PAYMENT -- Payments made by the Company under a Settlement
Option.
SPECIFIED AMOUNT -- A dollar amount selected by the Owner and shown in the
Policy that is used to determine the Death Benefit.
SUBACCOUNT -- A subdivision of the Variable Account, the assets of which
are invested in a corresponding Fund.
SUBACCOUNT VALUE -- The Policy Value in a Subaccount.
2
<PAGE> 10
SURRENDER VALUE -- The Cash Value minus any Loan Amount.
TARGET PREMIUM PAYMENT -- An amount of premium payments, computed
separately for each increment of Specified Amount under a Policy, used to
compute sales charges and sales surrender charges.
THE COMPANY -- Valley Forge Life Insurance Company.
UNIT -- A unit of measurement used to calculate Variable Policy Value.
VALUATION DAY -- For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in this
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD -- The period that starts at the close of regular trading
on the New York Stock Exchange on any valuation day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT -- Valley Forge Life Insurance Company Variable Life
Separate Account.
VARIABLE POLICY VALUE -- The sum of all Subaccount Values.
WRITTEN NOTICE -- A written notice or request in a form satisfactory to the
Company that is signed by the Owner and received at the Service Center.
3
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SUMMARY AND DIAGRAM OF THE POLICY
The following summary of prospectus information and diagram of the Policy
should be read in conjunction with the detailed information appearing elsewhere
in this prospectus. Unless otherwise indicated, the description of the Policy in
this prospectus assumes that the Insured is alive, the Policy is in force and
there is no outstanding Loan Amount.
The Policy is similar in many ways to a fixed-benefit life insurance
policy. As with a fixed-benefit life insurance policy, the Owner of a Policy
makes premium payments in return for insurance coverage on the person insured.
Also, like many fixed-benefit life insurance policies, the Policy provides for
accumulation of Net Premiums and a Surrender Value which is payable if the
Policy is surrendered during the Insured's lifetime. As with many fixed-benefit
life insurance policies, the Surrender Value during the early Policy Years is
likely to be substantially lower than the aggregate premium payments made.
However, the Policy differs from a fixed-benefit life insurance policy in
several important respects. Unlike a fixed-benefit life insurance policy, under
the Policy, the Death Benefit may and the Policy Value will increase or decrease
to reflect the investment performance of any Subaccounts to which Policy Value
is allocated. Also, unless the entire Policy Value is allocated to the Fixed
Account, there is no guaranteed minimum Surrender Value. If Policy Value is
insufficient to pay charges due, then, after a grace period, the Policy will
Lapse without value. (See "Policy Lapse and Reinstatement.") However, the
Company guarantees that the Policy will remain in force during the first five
Policy Years as long as certain requirements related to the Minimum Monthly
Premium Payment have been met. (See "Policy Lapse and Reinstatement.") If a
Policy Lapses while loans are outstanding, certain amounts may become subject to
income tax and a 10% penalty tax. (See "TAX CONSIDERATIONS.")
The most important features of the Policy, such as charges and deductions,
Policy Value benefits, Death Benefits, and calculation of Policy values, are
summarized in the diagram on the following pages.
PURPOSE OF THE POLICY. The Policy is designed to provide lifetime insurance
benefits and long-term investment of Policy Value. A prospective Owner should
evaluate the Policy in conjunction with other insurance coverage that he or she
may have, as well as their need for insurance and the Policy's long-term
investment potential. It may not be advantageous to replace existing insurance
coverage with the Policy. In particular, replacement should be carefully
considered if the decision to replace existing coverage is based solely on a
comparison of Policy illustrations (see below).
POLICY BENEFITS. Two Death Benefit options are available under the Policy:
a level Death Benefit ("Option 1") and a Death Benefit that may increase or
decrease ("Option 2"). The Company guarantees that the Death Benefit Proceeds
will never be less than the Specified Amount (less any outstanding Loan Amount
and past due charges) as long as sufficient premiums payments are made to keep
the Policy in force. The Policy provides for a Surrender Value that an Owner may
obtain by surrendering the Policy. The Policy also permits loans and
withdrawals, within limits.
ILLUSTRATIONS. Illustrations in this prospectus or used in connection with
the purchase of a Policy are based on hypothetical rates of return. These rates
are not guaranteed. They are illustrative only and should not be considered a
representation of past or future performance. Actual rates of return may be
higher or lower than those reflected in Policy illustrations, and therefore,
actual Policy values will be different from those illustrated.
TAX CONSIDERATIONS. The Company intends for the Policy to satisfy the
definition of a life insurance contract under Section 7702 of the Code. A Policy
may be a "modified endowment contract" under federal tax law depending upon the
amount of premium payments made in relation to the Death Benefit provided under
the Policy. The Company will monitor Policies and will attempt to notify you on
a timely basis if your Policy is in jeopardy of becoming a modified endowment
contract. For further discussion of the tax status of a Policy and the tax
consequences of being treated as a life insurance contract or a modified
endowment contract, see "TAX CONSIDERATIONS."
4
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CANCELLATION PRIVILEGE AND SPECIAL TRANSFER RIGHT. For a limited time after
the Policy is issued, the Owner may cancel the Policy and receive a refund. (See
"Cancellation Privilege.") In certain states, until the end of this
"Cancellation Period," the Company will allocate Net Premium Payments to the
Subaccount investing in the Prime Money Market Fund (the "Money Market
Subaccount"). (See "Net Premium Allocations.") At any time within 24 Policy
Months after the date that coverage begins under the Policy, the Owner may
transfer the entire Variable Policy Value to the Fixed Account without payment
of any transfer fee and without the transfer counting as one of the 12 transfers
per Policy Year that may be made without incurring a transfer fee. (See "Special
Transfer Privilege.")
OWNER INQUIRIES. If you have any questions, you may write or call the
Company's Service Center at P.O. Box 305139, Nashville, Tennessee 37230-5139,
1-800-262-1753.
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CNA Payment Charts
6
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CNA POLICY CHARTS
7
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FUND EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory fees and other expenses incurred by the corresponding Fund in which the
Subaccount invests. See the prospectus for the Funds.
FEE TABLE ANNUAL FUND EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
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MANAGEMENT
(ADVISORY) OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated High Income Bond Fund II.................... 0.51% 0.29% 0.80%[1]
Federated Prime Money Fund II......................... 0.30% 0.50% 0.80%[1]
Federated Utility Fund II............................. 0.48% 0.37% 0.85%[1]
VARIABLE INSURANCE PRODUCTS FUND (VIP) AND
VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP Equity-Income Portfolio.................. 0.50% 0.08% 0.58%[2]
Fidelity VIP II Asset Manager Portfolio............... 0.55% 0.10% 0.65%[2]
Fidelity VIP II Contrafund Portfolio.................. 0.60% 0.11% 0.71%[2]
Fidelity VIP II Index 500 Portfolio................... 0.24% 0.04% 0.28%[2]
THE ALGER AMERICAN FUND:
Alger American Growth Portfolio....................... 0.75% 0.04% 0.79%
Alger American MidCap Growth Portfolio................ 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio......... 0.85% 0.03% 0.89%
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series............................ 0.75% 0.15% 0.90%[4]
MFS Growth With Income Series......................... 0.75% 0.25% 1.00%[4][5]
MFS Limited Maturity Series........................... 0.55% 0.45% 1.00%[4][5]
MFS Research Series................................... 0.75% 0.17% 0.92%[4]
MFS Total Return Series............................... 0.75% 0.60% 1.35%[4][5]
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund.......................... 0.75% 1.25% 2.00%[6]
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Emerging Markets Fund............... 0.80% 0.00% 0.80%[7]
Van Eck Worldwide Hard Assets Fund.................... 1.00% 0.17% 1.17%[8]
- --------------------------------------------------------------------------------------------------
</TABLE>
[1] Federated Advisers has voluntarily agreed to waive a portion of its
management fee with respect to these funds. Absent this waiver, the
management fee would have been .60%, .50%, and .75% for the Federated High
Income Bond Fund II, Federated Prime Money Fund II and Federated Utility
Fund II, respectively and total annual expenses would have been 0.89%, 1.00%
and 1.12% for the Federated High Income Bond Fund II, Federated Prime Money
Fund II and Federated Utility Fund II, respectively.
[2] A portion of the brokerage commissions that these funds pay was used to
reduce fund expenses. In addition, these funds have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented
in the table would have been .57%, .64% and .68% for the Equity-Income,
Asset Manager and Contrafund portfolios, respectively.
[3] Fidelity Management and Research Company has agreed to reimburse a portion
of this fund's expenses during the period. Absent this reimbursement, the
fund's management fee would have been .27% and its total annual expenses
would have been .40%.
[4] Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such
8
<PAGE> 16
arrangements and directed brokerage arrangements (which would also have the
effect of reducing its expenses). Any such fee reductions are not reflected
under "Other Expenses".
[5] Massachusetts Financial Services Company has agreed to bear expenses for
these funds, subject to reimbursement by each fund, such that each fund's
"Other Expenses" shall not exceed the following percentages of the average
daily net assets of the series during the current fiscal year: .45% for the
Limited Maturity Series and .25% for each of the Emerging Growth Series and
Total Return Series. Absent this arrangement, actual other expenses would
have been .35%, 5.65%, and .27% and total operating expenses would have been
1.10%, 6.20% and 1.02% for the Growth With Income Series, Limited Maturity
Series, and Total Return Series, respectively.
[6] The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1997 would have been 16.07% without the effect of
earnings credits, and the investment advisory fee waiver and expense
reimbursement provided by the advisor.
[7] For the period January 1, 1997 to January 10, 1997, Van Eck Associates
Corporation agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses. For the period January 11, 1997 to February 4, 1997, the Adviser
agreed to waive expenses exceeding 1% of average daily net assets. Absent
this waiver and reimbursement, management fees, other expenses and total
annual expenses would have been 1.00%, 0.34%, and 1.34%, respectively. The
fund has a fee arrangement, based on cash balances left on deposit with the
custodian, which reduces the funds operating expenses.
[8] The fund directs certain portfolio trades to a broker that, in turn, pays a
portion of the Fund's operating expenses. Absent this arrangement,
management fees, other expenses, and total annual expenses would have been
1.00%, 0.18% and 1.18%, respectively.
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the
costs and expenses that he or she will bear directly or indirectly. The table
reflects the anticipated expenses of the Variable Account and reflect the actual
expenses for each Fund for the year ended December 31, 1997. Expenses for these
Funds are estimates and are not based on past experience. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
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GENERAL INFORMATION ABOUT THE COMPANY,
THE VARIABLE ACCOUNT AND THE FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of the
Commonwealth of Pennsylvania in 1956 and is authorized to transact business in
the District of Columbia, Puerto Rico, Guam and all states except New York. The
Company's home office is located at 401 Penn St., Reading, Pennsylvania 19601,
and its executive office is located at CNA Plaza, Chicago, Illinois 60685. The
Company is a wholly-owned subsidiary of Continental Assurance Company
("Assurance"), a life insurance company which, as of December 31, 1997, had
consolidated assets of approximately $14.7 billion. Subject to a coinsurance
pooling agreement (a type of reinsurance arrangement) with Assurance, the
Company assumes all insurance risks under the Policies, and the Company's
assets, which as of December 31, 1997 exceeded $2.3 billion, support the
benefits under the Policies. See "Other Information About The Policies And The
Company," for more detail regarding the Company.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company
established under Pennsylvania law on October 18, 1995. The Company owns the
assets of the Variable Account. These assets are held separate from the
Company's general account and its other accounts. That portion of the Variable
Account's assets that is equal to the reserves and other Policy liabilities of
the Variable Account is not chargeable with liabilities arising out of any other
business the Company may conduct. If the assets exceed the required reserves and
other Policy liabilities, the Company may transfer the excess to the Company's
general account. The Variable Account's assets will at all times equal or exceed
the sum of the Subaccount Values of all policies funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or the Company. The Variable Account also is governed by
the laws of Pennsylvania, the Company's state of domicile, and may also be
governed by laws of other states in which the Company does business.
The Variable Account has 18 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of the Company.
Where permitted by applicable law, the Company may make the following
changes to the Variable Account:
1. Any changes required by the 1940 Act or other applicable law or
regulation;
2. Combine separate accounts, including the Variable Account;
3. Add new subaccounts to or remove existing subaccounts from the
Variable Account or combine Subaccounts;
4. Make Subaccounts (including new subaccounts) available to such
classes of Policies as the Company may determine;
5. Add new Funds or remove existing Funds;
6. Substitute new Funds for any existing Fund if shares of the Fund
are no longer available for investment or if the Company determines that
investment in a Fund is no longer appropriate in light of the purposes of
the Variable Account;
7. Deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
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8. Operate the Variable Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is
either an open-end diversified management investment company or a separate
investment portfolio of such a company and is managed by a registered investment
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
FEDERATED INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Federated Insurance Series ("IS"). IS
issues five "series" or classes of shares, each of which represents an interest
in a Fund of IS. Three of these series of shares are available as investment
options under the Contracts. The investment objectives of these Funds are set
forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Advisers.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
ASSET MANAGER PORTFOLIO. This Fund seeks high total return with
reduced risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
CONTRAFUND PORTFOLIO. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or out-of-favor.
EQUITY-INCOME PORTFOLIO. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital appreciation.
INDEX 500 PORTFOLIO. This Fund seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the Standard & Poor's 500 Composite Index
of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
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<PAGE> 19
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds
(i.e., investment portfolios) of The Alger American Fund ("AAF"). AAF issues six
"series" or classes of shares, each of which represents an interest in a Fund of
AAF. Three of these series of shares are available as investment options under
the Policies. The investment objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization between $750 million and $3.5 billion.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with total
market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity, MFS
Research and MFS Total Return Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of MFS Variable Insurance Trust ("MFSVIT").
MFSVIT issues 12 "series" or classes of shares, each of which represents an
interest in a Fund of MFSVIT. Five of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which have
the potential to become major enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS LIMITED MATURITY SERIES. This Fund seeks to provide as high a
level of current income as is believed to be consistent with prudent
investment risk, with capital protection as a secondary objective.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFSVIT is advised by Massachusetts Financial Services Company.
SOGEN VARIABLE FUNDS, INC.
The SoGen Overseas Variable Fund invests in shares of a corresponding Fund
(i.e., investment portfolio) of SoGen Variable Funds, Inc. ("SGVF"). SGVF issues
one "series" or class of shares, which represents an interest in a Fund of SGVF.
This series of shares is available as an investment option under the Policies.
The investment objective of this Fund is set forth below.
SOGEN OVERSEAS VARIABLE FUNDS. This Fund seeks long-term growth of
capital by investing primarily in securities of small and medium size
non-U.S. companies.
SGVF is advised by Societe Generale Asset Management Corp.
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<PAGE> 20
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues five "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Policies. The
investment objectives of these Funds are set forth below.
WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND POLICIES.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund that accompanies this prospectus and the
current Statement of Additional Information for the Funds. The Funds' prospectus
should be read carefully before any decision is made concerning the allocation
of premium payments or transfers among the Subaccounts.
Not all of the Funds described in the prospectuses for the Funds are
available with the Contract. Moreover, the Company cannot guarantee that each
Fund will always be available for its variable annuity contracts, but in the
unlikely event that a Fund is not available, the Company will take reasonable
steps to secure the availability of a comparable fund. Shares of each Fund are
purchased and redeemed at net asset value, without a sales charge.
The Company has entered into agreements with the investment advisers of
several of the Funds pursuant to which each such investment adviser will pay the
Company a servicing fee based upon an annual percentage of the average aggregate
net assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser will not increase the fees paid by the
Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with the Company or each other, a practice known as
"shared funding." They are also sold to separate accounts to serve as the
underlying investment for both variable annuity contracts and variable life
insurance contracts, a practice known as "mixed funding." As a result, there is
a possibility that a material conflict may arise between the interests of
Owners, whose Policy Values are allocated to the Variable Account, and of owners
of other policies whose policy values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold to certain pension and retirement plans qualifying under
Section 401 of the Code. As a result, there is a possibility that a material
conflict may arise between the interests of Owners or owners of other policies
(including policies issued by other companies), and such retirement plans or
participants in such retirement plans. In the event of any such material
conflicts, the Company will consider what action may be appropriate, including
removing the Fund from the Variable Account or replacing the Fund with another
Fund. There are certain risks associated with mixed and shared funding and with
the sale of shares to qualified pension and retirement plans, as disclosed in
each Fund's prospectus.
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<PAGE> 21
THE POLICY
PURCHASING A POLICY
To purchase a Policy, a prospective Owner must submit a completed
application and the Minimum Initial Premium Payment through a licensed agent of
the Company who is also a registered representative of broker-dealer having a
selling agreement with CNA Investor Services, Inc. ("CNA/ISI"), the principal
underwriter of the Policies. The Company requires satisfactory evidence of the
Insured's insurability, which may include a medical examination of the Insured.
Generally, the Company issues Policies covering Insureds up to age 75 if
evidence of insurability satisfies the Company's underwriting criteria.
Acceptance of an application is subject to the Company's underwriting criteria,
and the Company reserves the right to reject an application for any reason.
Insurance coverage under a Policy begins on the later of the Policy
Effective Date or the date that the Company receives the Minimum Initial Premium
Payment. Generally the Company establishes the Policy Effective Date (shown on
the Policy) after it completes the underwriting process and accepts the
application. Where the Minimum Initial Premium Payment is received by the
Company after the Policy Effective Date, coverage under the Policy is
conditioned upon the Insured's state of health being the same as that described
in the application.
With the Company's prior approval, in order to obtain a lower Issue Age, an
Owner may "backdate" a Policy by electing a Policy Effective Date up to six
months prior to the date of the original application. A lower Issue Age for the
Insured generally results in slightly more favorable cost of insurance rates.
Charges for the monthly deduction for the backdated period are deducted as of
the Policy Effective Date.
Insurance coverage under the Policy terminates upon the first to occur of
the following events: (1) the Insured dies, (2) the Owner surrenders the Policy,
(3) the Policy reaches the Maturity Date, or (4) the Policy Lapses.
CANCELLATION PRIVILEGE
An Owner may cancel a Policy for a refund during the Cancellation Period by
returning it to the Service Center or to the sales representative who sold it
along with a Written Notice requesting cancellation. The Cancellation Period is
determined by the law of the state in which the Owner resides or in which the
application is signed and is shown on the Policy. In most states it expires at
the latest of (1) ten days after the Owner first receives the Policy, (2) 45
days after the Owner signs the application, or (3) 10 days after the Company
mails or delivers a notice of the Owners withdrawal rights. Return of the Policy
by mail is effective upon receipt at the Service Center. When cancelled, the
Policy is treated as if it had never been issued. Within seven calendar days
after receiving the returned Policy, the Company will refund an amount equal to
the sum of (1) the difference between premium payments made (including any fees
and charges deducted) and the amounts allocated to the Fixed Account and to the
Subaccounts, (2) Fixed Policy Value determined as of the date the returned
Policy is received, and (3) Variable Policy Value determined as of the date the
returned Policy is received. This amount may be more or less than the aggregate
premium payments made under the Policy. In states where required, the Company
will instead refund premium payments.
PREMIUM PAYMENTS
MINIMUM INITIAL PREMIUM PAYMENT. The Minimum Initial Premium Payment
required depends on a number of factors, including the sex, Issue Age, and risk
class of the proposed Insured, the initial Specified Amount requested by the
applicant, any supplemental benefits and/or riders requested by the applicant,
and the Planned Periodic Premium Payments that the applicant selects. Owners
should consult their sales representative for information about the Minimum
Initial Premium Payment required for the coverage that they seek.
PLANNED PERIODIC PREMIUMS PAYMENTS. Owners may establish a schedule of
monthly (bank draft or pre-authorized payment only), quarterly, semi-annual or
annual Planned Periodic Premium Payments. Subject to
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<PAGE> 22
the Company's approval, Owners may change the amount or frequency of Planned
Periodic Premium Payments by Written Notice. The Company will send Owners
reminder notices for Planned Periodic Premium Payments. The Company also may
arrange with Owners to have Planned Periodic Premium Payments made under a
pre-authorized payment arrangement. Owners are not required to pay Planned
Periodic Premium Payments.
UNPLANNED PREMIUM PAYMENTS. Subject to the limitations described below,
Owners generally may make additional premium payments at any time before the
Maturity Date while the Insured is alive and the Policy is in force. Unless the
Owner specifies otherwise in the application or by subsequent Written Notice,
the Company considers all unplanned premium payments first as repayments of any
outstanding Loan Amounts under the Policy.
PREMIUM PAYMENT LIMITATIONS. Unless otherwise approved by the Company, all
premium payments must be made payable to "Valley Forge Life Insurance Company"
at the Service Center. No premium payments are accepted after a Policy's
Maturity Date.
Premium payments must be at least $50 (unless paid pursuant to a
pre-authorized payment arrangement) and must be remitted to the Service Center.
The Company reserves the right to reject any premium payment in the event that
it determines that acceptance of such payment would cause a Policy to fail to
qualify as a life insurance contract under the Code or applicable regulations or
rulings thereunder. The Company will promptly return any premium payment that it
rejects for this reason. The Company will monitor Policies and will attempt to
notify the Owner on a timely basis if his or her Policy is in jeopardy of
becoming a modified endowment contract under the Code. (See "Tax
Considerations.")
PREMIUM PAYMENTS UPON INCREASE IN SPECIFIED AMOUNT. Depending on the Policy
Value at the time of an increase in the Specified Amount and the amount of the
increase requested, an additional premium payment may be necessary or a change
in the amount of Planned Periodic Premium Payments may be advisable. (See "Death
Benefit Proceeds.")
NET PREMIUM ALLOCATIONS
Net Premium Payments are allocated among and between the Subaccounts and
the Fixed Account as of the date that they are received at the Service Center
according to the Owner's allocation instructions in the application or in a
subsequent Written Notice. Allocation instructions must be in whole percentages
and the minimum amount that the Company can allocate to any Subaccount or the
Fixed Account is 1% of any Net Premium Payment. The Company reserves the right
to establish additional limitations on premium payment allocations.
For Policies issued in states where, upon cancellation during the
Cancellation Period, the Company refunds premium payments, the Company allocates
Net Premium Payments it receives during the Cancellation Period (including that
related to the Minimum Initial Premium Payment) that are to be allocated to any
Subaccount, to the Money Market Subaccount for a period equal to the number of
days in the Cancellation Period. At the end of this period, the Money Market
Subaccount Value will be reallocated to each other Subaccount selected by the
Owner based on the proportion that the Owner's allocation percentage bears to
the Variable Policy Value.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike a conventional life insurance policy, failure to make Planned
Periodic Premium Payments does not necessarily cause a Policy to Lapse.
Conversely, making all Planned Periodic Premium Payments does not necessarily
prevent a Policy from Lapsing. Rather, except when the Lapse Prevention
Guarantee is in effect, whether a Policy Lapses depends on whether its Surrender
Value is sufficient to cover the monthly deduction on each Monthly Anniversary
Day. Surrender Value could become insufficient to cover the monthly deduction if
investment experience has been sufficiently unfavorable that it has resulted in
a decrease in Policy Value or the Policy Value has decreased because the Owner
did not make sufficient Net Premium Payments to offset prior monthly deductions.
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<PAGE> 23
If the Surrender Value on a Monthly Anniversary Day is insufficient to
cover the monthly deduction due on that Day, the Company will mail to the Owner
and to any assignee of record at their last known address(es), a notice stating
that the Policy will only remain in force for 61 days from the date that the
notice was mailed. This 61 day period is called the Grace Period. If the Owner
does not make sufficient premium payments to cover the monthly deduction(s)
through the end of the Grace Period by the end of the Grace Period, then the
Policy will terminate without value and all coverage under the Policy will
terminate. The notice mailed to the Owner and to any assignee of record will
indicate how much in additional premium payments the Owner must make before the
end of the Grace Period to keep the Policy in force. Coverage under the Policy
continues during the Grace Period and the Company will deduct unpaid monthly
deductions when computing Death Benefit Proceeds if the Insured dies during the
Grace Period.
REINSTATEMENT. If the Policy Lapses, the Owner may reinstate it at any time
within five years of Lapse but before the Maturity Date. A Policy that has been
surrendered cannot be reinstated. To reinstate a Policy, the Owner must submit
to the Service Center:
1. evidence of insurability satisfactory to the Company;
2. premium payments in an amount sufficient to result (along with any
loan repayments) in a positive Surrender Value; and
3. premium payments in an amount sufficient that the resulting Net
Premium Payments equal or exceed the amount of the next two monthly
deductions.
Upon reinstatement of the Policy, the Company will reinstate any remaining
Loan Amount. The Policy Value of a reinstated Policy is the amount provided by
the Net Premium Payments submitted with the application for reinstatement. The
effective date of a reinstated Policy is the Monthly Anniversary Date that falls
on or next follows the later of the date that the application for reinstatement
is approved or the above-listed items are received at the Service Center.
LAPSE PREVENTION GUARANTEE. The Company guarantees that a Policy will not
Lapse during the first five Policy Years, regardless of the Surrender Value, if,
throughout that period, (a) exceeds (b) where:
(a) is the aggregate premium payments made less the amount of any
withdrawals (including applicable surrender charges) less any Loan Amount,
and
(b) is the Minimum Monthly Premium Payment multiplied by the number of
complete months since the Policy Effective Date, including the current
month.
If the Policy's Specified Amount is increased while the Lapse Prevention
Guarantee is in effect, the Company will recalculate the Minimum Monthly Premium
Payment, which will generally increase following an increase in Specified
Amount. The Company will notify Owners of any increase in the Minimum Monthly
Premium Payment and will amend the Policy to reflect the change.
VARIABLE POLICY VALUE
The Variable Policy Value is the sum of all Subaccount Values and therefore
reflects the investment experience of the Subaccounts to which it is allocated.
THERE IS NO GUARANTEED MINIMUM VARIABLE POLICY VALUE.
SUBACCOUNT VALUE. The Subaccount Value of any Subaccount as of the Policy
Effective Date is equal to the amount of the initial Net Purchase Payment
allocated to that Subaccount. On subsequent Valuation Days prior to the Maturity
Date, the Subaccount Value is equal to that part of any Net Purchase Payment
allocated to the Subaccount and any Policy Value transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses, realized or
unrealized, and decreased by withdrawals (including any applicable surrender
charges) and any Policy Value transferred out of that Subaccount.
UNITS. For each Subaccount, Net Premium Payment(s) allocated to a
Subaccount or amounts of Policy Value transferred to a Subaccount are converted
into Units. The number of Units credited to a Policy is determined by dividing
the dollar amount directed to each Subaccount by the value of the Unit for that
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<PAGE> 24
Subaccount for the Valuation Day as of which the Net Premium Payment(s) or
transferred amount is invested in the Subaccount. Therefore, Net Premium
Payments allocated to or amounts transferred to a Subaccount under a Policy
increase the number of Units of that Subaccount credited to the Policy.
Certain events reduce the number of Units of a Subaccount credited to a
Policy. Withdrawals or transfers of Subaccount Value from a Subaccount result in
the cancellation of the appropriate number of Units of that Subaccount as do:
surrender of the Policy; payment of the Death Benefit Proceeds; and the
deduction of the monthly deduction. Units are cancelled as of the end of the
Valuation Period in which the Company receives Written Notice regarding the
event.
UNIT VALUE. For each Subaccount there exist two types of Units: A Units and
B Units. A Units represent Subaccount Value during the first ten Policy Years
under any Policy, while B Units represent Subaccount Value during Policy Years
11 and later. On the tenth Policy Anniversary, all A Units of any Subaccount
under a Policy are automatically exchanged for B Units on an equivalent dollar
value basis.
A Units and B Units both represent a fractional undivided interest in a
Subaccount. They differ only in their value as a result of the fact that the
mortality and expense risk charge deducted from each Subaccount is larger for
Policies in the first ten Policy Years than the charge deducted for Policies in
Policy Years 11 and later. This difference in charges is reflected in a
different Net Investment Factor (described below) for A Units and B Units for
each Valuation Period.
The A Unit and B Unit values for each Subaccount were arbitrarily set
initially at $10 when that Subaccount began operations. Thereafter, the Unit
Value at the end of every Valuation Day is the Unit Value at the end of the
previous Valuation Day multiplied by the Net Investment Factor for that type of
Unit (either A or B), as described below. The Subaccount Value for a Policy is
determined on any Valuation Day by multiplying the number of Units of the
appropriate type (either A or B) attributable to the Policy in that Subaccount
by the value for that type of Unit for that Subaccount on that day.
NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of either A Units or B Units of a Subaccount
from one Valuation Period to the next. The Net Investment Factor for any
Subaccount for any Valuation Period is determined by dividing 1 by 2 and
subtracting 3 from the result, where:
1. is the result of:
a. the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the Fund held in the Subaccount, if the "ex-dividend" date occurs
during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by the Company to have resulted from the operations of the
Subaccount.
2. is the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the last prior Valuation Period.
3. is a daily factor representing the mortality and expense risk charge for
the type of Unit deducted from the Subaccount adjusted for the number of days in
the Valuation Period.
FIXED POLICY VALUE
The Fixed Policy Value on any Valuation Day is equal to:
1. aggregate Net Premium Payments allocated to the Fixed Account; plus
2. Policy Value transferred to the Fixed Account; plus
3. interest credited to the Fixed Account; less
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<PAGE> 25
4. any withdrawals (including any applicable surrender charges
deducted) or transfers (including any applicable transfer charge deducted)
from the Fixed Account; less
5. any surrender charges deducted in the event of a decrease in
Specified Amount; less
6. the portion of monthly deductions made from Fixed Policy Value.
See "The Fixed Account," for a discussion of how interest is credited to
the Fixed Account.
TRANSFERS OF POLICY VALUES
GENERAL. Before the Maturity Date while the Insured is still living and the
Policy is in force, the Owner may, by Written Notice, transfer all or part any
Subaccount Value to another Subaccount(s) (subject to its availability) or to
the Fixed Account, or transfer all or part of Fixed Policy Value to any
Subaccount(s), (subject to its availability) subject to the following
restrictions and the additional restrictions for transfers from the Fixed
Account shown below:
1. the minimum transfer amount is $500 (or, the entire Subaccount
Value or Fixed Policy Value, if less); and
2. a transfer request that would reduce any Subaccount Value or the
Fixed Policy Value below $500 is treated as a transfer request for the
entire Subaccount Value or Fixed Policy Value.
The first 12 transfers during each Contract Year are free. The Company
assesses a transfer processing fee of $25 for each transfer in excess of 12
during a Contract Year. (See "Charges and Deductions.")
RESTRICTIONS ON TRANSFERS OF FIXED POLICY VALUE. An Owner may transfer all
or part of the Fixed Policy Value to a Subaccount. Only one transfer may be made
each Policy Year from the Fixed Account to one or more Subaccounts and this
transfer must be at least 12 calendar months after the most recent transfer from
the Fixed Account. An unused transfer option does not carry over to the next
year. The maximum transfer amount is 25% of the Fixed Policy on the date of the
transfer, unless the balance after the transfer is less than $500.
SPECIAL TRANSFER PRIVILEGE. During the first 24 Policy Months following the
date that coverage begins under the Policy, Owners may make one transfer of the
entire Variable Policy Value to the Fixed Account without imposition of the
transfer processing fee or the transfer counting as one of the 12 free transfers
for a Policy Year. Likewise, during the first 24 Policy Months following the
effective date of any Specified Amount increase, Owners may make one transfer of
that portion of the Variable Policy Value attributable to the increase to the
Fixed Account without imposition of the transfer processing fee or the transfer
counting as one of the 12 free transfers for a Policy Year.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Maturity Date while the Insured is still living and
the Policy is in force by Written Notice, an Owner may systematically transfer
(on a monthly, quarterly, semi-annual or annual basis) specified dollar amounts
from the Money Market Subaccount to other Subaccounts. This is known as the
"dollar-cost averaging" method of investment. The fixed-dollar amount purchases
more Units of a Subaccount when their value is lower and fewer Units when their
value is higher. Over time, the cost per Unit averages out to be less than if
all purchases of Units had been made at the highest value and greater than if
all purchases had been made at the lowest value. The dollar-cost averaging
method of investment reduces the risk of making purchases only when the price of
Units is high. It does not assure a profit or protect against a loss in
declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected,
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transfers under the dollar-cost averaging facility continue until the Money
Market Subaccount Value is depleted, the Maturity Date occurs or until the Owner
cancels the election by Written Notice at least seven days in advance of the
next transfer date. Alternatively, Owners may specify in advance a date for
transfers under the facility to cease. There is no additional charge for using
the dollar-cost averaging facility. Transfers under the facility do not count
towards the 12 transfers permitted without a transfer processing fee in any
Policy Year. The Company reserves the right to discontinue offering the
dollar-cost averaging facility at any time and for any reason or to change its
features.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested at any time thereafter prior to the Maturity Date while the Insured is
still living and the Policy is in force by Written Notice, an Owner may instruct
the Company to automatically transfer (on a quarterly, semi-annual or annual
basis) Variable Policy Value between and among specified Subaccounts in order to
achieve a particular percentage allocation of Variable Policy Value among such
Subaccounts ("automatic Subaccount Value rebalancing"). Such percentage
allocations must be in whole numbers. Once elected, automatic Subaccount Value
rebalancing begins on the first Valuation Day of the next calendar quarter or
other period (or, if later, the next calendar quarter or other period after the
expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time at least
seven calendar days before the first Valuation Day in a new period. Owners may
specify allocations between and among as many Subaccounts as are available at
the time automatic Subaccount Value rebalancing is elected. Once automatic
Subaccount Value rebalancing has been elected, any subsequent allocation
instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to or termination of automatic
Subaccount Value rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one of the 12 transfers available
without a transfer processing fee during any Policy Year. If automatic
Subaccount Value rebalancing is elected at the same time as the dollar-cost
averaging facility or when the dollar-cost averaging facility is being utilized,
automatic Subaccount rebalancing will be postponed until the first Valuation Day
in the calendar quarter or other period following the termination of dollar-cost
averaging facility. The Company reserves the right to discontinue offering the
automatic Subaccount Value rebalancing facility at any time and for any reason
or to change its features.
SURRENDER PRIVILEGE
At any time while the Insured is still living and the Policy is in force
prior to the Maturity Date, the Owner may, by Written Notice, surrender it for
its Surrender Value. A surrender is effective as of the date on which a Written
Notice requesting surrender is received at the Service Center. If the Owner
surrenders the Policy during the first 14 Policy Years, or the first 14 Policy
Years following an increase in Specified Amount, the Company will deduct a
surrender charge. (See "Surrender Charge.") Once the Policy is surrendered, all
coverage and other benefits under it cease and it cannot be reinstated.
WITHDRAWAL PRIVILEGE
After the first Policy Year, while the Insured is still living and the
Policy is in force prior to the Maturity Date, an Owner may, by Written Request,
withdraw any part of the Surrender Value of the Policy, subject to certain
conditions. A withdrawal is effective as of the date on which a Written Notice
requesting withdrawal is received at the Service Center. As of that date, Policy
Value is reduced by the amount of the withdrawal plus any applicable surrender
charge. The minimum amount that may be withdrawn is $500. If the Owner has
selected Death Benefit Option 1, the Company will reduce the Specified Amount by
the amount of the withdrawal plus any applicable surrender charge deduction.
(See "Death Benefit Proceeds.")
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Unless otherwise indicated in the Written Request for Withdrawal, amounts
withdrawn and surrender charges deducted in connection with the withdrawals are
taken from Subaccount Values and Fixed Policy Value based on the proportion that
each Subaccount Value and the Fixed Policy Value bear to Policy Value. If the
Owner requests a decrease in Specified Amount or requests a change in the Death
Benefit Option as of the same date as a withdrawal request, then the withdrawal
is effected after the decrease in Specified Amount or change in Death Benefit
Option.
Notwithstanding the foregoing, the Company reserves the right to reject a
withdrawal request if the request would cause the Specified Amount to be reduced
below the minimum Specified Amount shown in the Policy. Likewise, the Company
reserves the right to deny a withdrawal request if the request would cause the
Policy to fail to qualify as a life insurance contract under the Code or
regulations or rulings thereunder, as interpreted by the Company.
POLICY LOANS
GENERAL. At any time prior to the Maturity Date while the Insured is still
living and the Policy is in force, the Owner may, by Written Notice, borrow
money from the Company using the Policy as the sole security for the loan
provided that (a) a written loan agreement is signed by the Owner, and (b) the
Owner makes a satisfactory assignment of the Policy to the Company. In taking a
loan, an Owner must borrow at least $500. The maximum amount that an Owner may
borrow is 90% of the Surrender Value of the Policy as of the date of the loan.
INTEREST. The Company charges interest on amounts borrowed by Owners. The
interest rate charged is 8% and is an effective annual rate compounded annually
on the Policy Anniversary. Interest is charged in arrears from the date of the
loan and is due from Owners on each Policy Anniversary for the prior Policy
Year. If the Owner does not pay such interest when due, the amount of the
interest is added to the outstanding Loan Amount. Thus, unpaid interest is
charged interest during the ensuing Policy Year. For Policies in the 11th Policy
Year or later, the Company charges a preferred 6% effective annual interest rate
on amounts borrowed up to an amount equal to Policy Value less aggregate premium
payments made to date.
The Company credits Loan Account Value with interest at an effective annual
rate of 6%. On each Policy Anniversary, interest earned on Loan Account Value
since the preceding Anniversary is transferred to the Subaccounts and the Fixed
Account. Unless the Owner specifies otherwise, such transfers are allocated in
the same manner as transfers of collateral to the Loan Account.
LOAN COLLATERAL. When the Company makes a loan to Owners, it transfers an
amount of Cash Value sufficient to secure the loan out of the Subaccounts and
the Fixed Account and into the Loan Account. Owners may specify how this
transferred Cash Value is allocated from among the Subaccount Values and the
Fixed Policy Value. If an Owner does not specify the allocation, the Company
makes the allocation based on the proportion that each Subaccount Value and the
Fixed Policy Value bear to the Cash Value as of the date that the transfer is
made. If unpaid interest is due from an Owner on a Policy Anniversary it is
added to the Loan Amount. Cash Value in the amount of the interest also is
transferred to the Loan Account as of that Anniversary. The Cash Value
transferred in connection with unpaid interest is allocated on the same basis as
other Cash Value transferred by the Company to the Loan Account.
Loan Account Value is recalculated when interest is added to the Loan
Amount, a loan repayment is made, or a new loan is made under Policy.
NON-PAYMENT OF POLICY LOANS. If Loan Account Value exceeds Cash Value, then
the Owner must make either a loan repayment or a premium payment sufficient to
raise the Cash Value or lower the Loan Account Value so that Cash Value exceeds
the Loan Account Value. The Company will send the Owner and any assignee of
record a notice indicating the amount that must be paid. If payment is not
received at the Service Center within 30 days of the notice being mailed, the
Grace Period will begin. (See "Policy Lapse and Reinstatement.") If the Grace
Period expires without the payment being made, then the Policy Lapses.
LOAN REPAYMENT. The Owner may repay a loan or repay any part of a loan at
any time while the Insured is still living and the Policy is in force prior to
the Maturity Date. Upon repayment of any part of a loan, Loan
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Account Value in an amount equal to the payment is transferred to the
Subaccounts and the Fixed Account as of the date that the payment is received at
the Service Center. Unless the Owner specifies otherwise, the amount transferred
is allocated among or between the Subaccounts and the Fixed Account in
accordance with the Owner's allocation instructions for Net Premium Payments in
effect at that time.
EFFECT OF POLICY LOAN. A loan, whether or not repaid, has a permanent
effect on the Death Benefit and Policy values because the investment results of
the Subaccounts and current interest rates credited on Fixed Policy Value do not
apply to Policy Value in the Loan Account. The larger the loan and the longer
the loan is outstanding, the greater will be the effect of Policy Value being
held as collateral in the Loan Account. Depending on the investment results of
the Subaccounts or credited interest rates for the Fixed Account while the loan
is outstanding, the effect could be favorable or unfavorable. Policy loans also
may increase the potential for lapse if investment results of the Subaccounts to
which Surrender Value is allocated is unfavorable. If a Policy lapses with loans
outstanding, certain amounts may be subject to income tax and a 10% penalty tax.
See "Tax Considerations," for a discussion of the tax treatment of Policy loans.
In addition, if a Policy is a "modified endowment contract," loans may be
currently taxable and subject to a 10% penalty tax.
MATURITY BENEFITS
The Company will pay the Surrender Value, if any, to the Owner on the
Maturity Date. In some states, the Maturity Date is the Policy Anniversary
nearest the Insured's 95th birthday. In other states, the Owner may elect to
extend the Policy beyond the Policy Anniversary nearest the Insured's 95th
birthday, in which case the death benefit would be the greater of Cash Value or
101% of the Policy Value. The tax consequences associated with extending the
maturity date beyond age 100 are unclear. A tax advisor should be consulted on
the issue.
DEATH BENEFIT PROCEEDS
Upon receipt of Due Proof of Death of the Insured at the Service Center
while the Policy is in force before the Maturity Date, the Company will pay the
Death Benefit Proceeds to the Beneficiary (or Beneficiaries) or the Contingent
Beneficiary (or Contingent Beneficiaries). The Company pays the Death Benefit
Proceeds in a lump sum unless the Beneficiary (or Contingent Beneficiary) elects
to receive the Proceeds under a Settlement Option. (See "Settlement Options.")
Under certain circumstances, payment of the Death Benefit Proceeds may be
delayed. (See "Suspension or Delay in Payments.")
CALCULATION OF DEATH BENEFIT PROCEEDS. The Death Benefit Proceeds are
determined as of the date of the Insured's death and are equal to:
1. the Death Benefit under the Death Benefit Option selected by the
Owner; plus
2. any death benefit under any rider to the Policy; less
3. any Loan Amount; and less
4. any unpaid monthly deductions if the Insured dies during the Grace
Period.
Under certain circumstances, the amount of the Death Benefit Proceeds may
be further adjusted. (See "The Company's Right to Contest the Policy" and
"Misstatement of Age or Sex.")
If part or all of the Death Benefit is paid in one sum, the Company will
pay interest on this sum as required by applicable state law from the date of
receipt of due proof of the Insured's death to the date of payment.
DEATH BENEFIT OPTIONS. The Owner may select one of two Death Benefit
Options.
1. Death Benefit Option 1 is the greater of:
(a) the Specified Amount on the date of the Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
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2. Death Benefit Option 2 is the greater of:
(a) the Specified Amount plus the Policy Value on the date of the
Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
The specified percentage is 250% if the Insured dies at Attained Age 40 or
less, and decreases with each year of Attained Age thereafter so that the
percentage is 100% if the Insured dies at an Attained Age of 95. A table showing
these percentages for Attained Ages 0 to 94 and examples of Death Benefit
calculations for both Death Benefit Options are found in the Appendix.
Under Death Benefit Option 1, the Death Benefit remains level at the
Specified Amount unless the Policy Value multiplied by the specified percentage
exceeds that Specified Amount, in which event the Death Benefit will vary as the
Policy Value varies. Owners who are satisfied with the amount of their insurance
coverage under the Policy and who prefer to have favorable investment
performance and additional Net Premium Payments reflected in higher Policy
Value, rather than increased Death Benefits, generally should select Option 1.
Under Death Benefit Option 2, the Death Benefit always varies as the Policy
Value varies (although it is never less than the Specified Amount). Owners who
prefer to have favorable investment performance and additional Net Premium
Payments reflected in increased Death Benefits generally should select Option 2.
CHANGING THE DEATH BENEFIT OPTION. After the first Policy Anniversary while
the Insured is still living and the Policy is in force prior to the Maturity
Date, the Owner may request a change in the Death Benefit Option. A Death
Benefit Option change becomes effective on the Monthly Anniversary Day on or
next following the date that the Company accepts a request for the change. The
Company may require satisfactory evidence of insurability before permitting a
change in the Death Benefit Option. After a change in Death Benefit Option, the
Company will send the Owner a supplemental policy specifications page showing
the new Death Benefit and Specified Amount. Changing the Death Benefit Option
could have federal tax consequences. (See "TAX CONSIDERATIONS.")
INCREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary, while the
Insured is living and the Policy is in force prior to the Maturity Date, the
Owner may submit a supplemental application for an increase in Specified Amount.
The Company requires evidence of insurability before agreeing to an increase in
Specified Amount and may, depending upon the circumstances, also require
additional premium payments or the repayment of part or all of any Loan Amount
under the Policy. The Insured's Attained Age at the time of the increase may not
exceed 75. The amount of any requested increase in Specified Amount must be at
least $25,000 and not more than the amount that would increase the total
Specified Amount above the maximum specified amount for which the Company would
issue a new Policy.
An increase in Specified Amount causes an increase in the Minimum Monthly
Premium Payment. Each increase in Specified Amount has a Target Premium Payment
and a Guideline Annual Premium Payment associated with it.
Any increase in Specified Amount is effective as of the date that the
Company approves it. Each increase in Specified Amount creates an increment of
Specified Amount to which a portion of Policy Value is thereafter attributed for
the purpose of computing sales surrender charges, the Net Amount at Risk and the
monthly cost of insurance charge and for the purpose of exercising the Special
Transfer Privilege. An additional monthly cost of insurance charge is deducted
for each additional increment in Specified Amount. This additional cost of
insurance charge is deducted from Policy Value attributable to the increase in
Specified Amount. Each increase in Specified Amount also results in additional
surrender charges. After an increase in Specified Amount, the Company will send
the Owner a supplemental policy specifications page showing the effective date
of the increase, the monthly cost of insurance charge for the increase,
additional sales surrender charges arising as a result of the increase and any
changes to premium payment information from the previous or original policy
specifications page.
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The cancellation privilege applies to any increase in Specified Amount
except that when no additional premium payments are required for an increase,
only the monthly deduction(s) for the increase made before the cancellation is
refunded if the increase is cancelled. (See "Cancellation Privilege.")
Increasing the Specified Amount could have federal tax consequences. (See "Tax
Considerations.")
DECREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary while the
Insured is still living and the Policy is in force prior to the Maturity Date,
the Owner may by Written Notice request a decrease of Specified Amount. The
amount of any requested decrease in Specified Amount must be at least $25,000
and not be more than the amount that would decrease the total Specified Amount
below $100,000. Specified Amount may not be decreased when, to do so, would
cause Surrender Value to fall below zero. Any decrease becomes effective on the
Monthly Anniversary Day on or next following the date that the Company accepts
the request for the decrease. The decrease is first applied to reduce prior
increases in Specified Amount in the reverse order in which they occurred. After
all prior increases in Specified Amount have been eliminated, a decrease is
applied to reduce the initial Specified Amount.
A decrease of Specified Amount may result in the imposition of a surrender
charge. In this event, the charge is deducted from Policy Value as of the
effective date of the decrease. (See "Charges and Deductions.") A decrease in
Specified Amount causes a decrease in the Minimum Monthly Premium Payment and in
the Target Premium Payment and Guideline Annual Premium Payment associated with
the increment of Specified Amount being decreased. After a decrease in Specified
Amount, the Company will send the Owner a supplemental policy specifications
page showing the effective date of the decrease, the monthly cost of insurance
charge after the decrease, surrender charges deducted as a result of the
decrease, and any changes to premium payment information from the previous or
original specifications page.
The Company reserves the right to deny a request for a decrease in
Specified Amount for 12 months following the most recent increase in Specified
Amount and to limit decreases in Specified Amount to one per Policy Year.
If a decrease in the Specified Amount would result in total premiums paid
exceeding the premium limitations prescribed under current tax law to qualify
the Policy as a life insurance contract, the Company will contact the Owner and
inquire whether he or she wants to receive the excess above the premium
limitations or to forego the decrease. The Company reserves the right to decline
a requested decrease in the Specified Amount if compliance with the guideline
premium limitations under current tax law would require payment of excess
premium to the Owner in an amount that would exceed the Surrender Value under
the Policy. Decreasing the Specified Amount could have federal tax consequences.
(See "Tax Considerations.")
SETTLEMENT OPTIONS
SELECTING A SETTLEMENT OPTION. The Company pays Owners or Beneficiaries (or
Contingent Beneficiaries), as appropriate, the amount of any surrender,
withdrawal, or Death Benefit Proceeds in a lump sum unless the Owner has, by
Written Notice, selected one of the Settlement Options described below. If the
amount being paid by the Company is less than $5,000, however, payment is only
made in a lump sum. In addition, if the Owner or Beneficiary (or Contingent
Beneficiary) receiving payment is an executor, administrator, trustee, or not a
natural person, payment is made in a lump sum unless the Company specifically
consents to payment under one of the Settlement Options.
Owners may select a Settlement Option for payment of the Death Benefit
Proceeds in lieu of a lump sum, at any time while the Insured is still living
and the Policy is in force prior to the Maturity Date. If no election is made by
the Owner before the Insured's death, then, upon the Insured's death, the
Beneficiary (or Contingent Beneficiary) may elect a Settlement Option before the
Death Benefit Proceeds are paid. The Owner also may elect to receive the
Surrender Value of a Policy or the amount of a withdrawal in the form of a
Settlement Option at any time before the payment of the Surrender Value or
withdrawal. For purposes of describing the Settlement Options, the term "Payee"
means Owner or Beneficiary (or Contingent Beneficiary), as appropriate.
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FREQUENCY OF PAYMENTS. If Settlement Option 1, 2, or 3 is selected,
payments will be made every 1 year, 6 months, 3 months, or every month. The
Payee must specify the payment frequency when selecting a settlement option. If
settlement option 4, 5, or 6 is selected, payments will be made monthly. If
payment under any option would be less than $50, the Company will adjust the
frequency of payments so that each payment is at least $50.
FIRST PAYMENT. Depending on the payment frequency selected, the first
payment under Settlement Option 1 is made as of 1 year, 6 months, 3 months, or 1
month from the date of the Insured's death. Depending on the payment frequency
selected and subject to the Company's right to suspend or delay payments (see
"Suspension or Delay in Payments"), the first payment under Settlement Option 1
is made as of 1 year, 6 months, 3 months, or 1 month from the effective date of
any surrender or withdrawal. The first payment under any other Settlement Option
is made, subject to the Company's right to suspend or delay payments, as of the
date of the Insured's death or the effective date of any surrender or
withdrawal.
BETTERMENT OF RATES. If, under Settlement Options 4, 5, or 6, the Company's
regular annuity purchase rates on the date of the Insured's death or the
effective date of any surrender or withdrawal are more favorable than those upon
which Options 4, 5, or 6 are based, the Company shall compute payments using the
regular annuity rates. The Company will furnish information about the regular
annuity rates upon request.
DEATH OF PAYEE. Unless instructed otherwise at the time that the Settlement
Option is selected, at the death of the Payee the Company pays the amounts below
in a lump sum to the Payee's estate:
1. Under Settlement Option 1, the amount left on deposit with the
Company to accumulate interest.
2. Under Settlement Option 2, 3, or 5, the commuted value of the
amount payable at the Payee's death as provided under the Option selected.
The commuted value is based on interest at the rate that would have been
used to compute the first of the remaining Payments under that option.
OPTION 1, INTEREST PAYMENTS. The Company holds the Death Benefit Proceeds
(or the Surrender Value or the amount of a withdrawal) as principal and pays
interest to the Payee. The interest rate is 3% per year compounded annually. The
Company pays interest every 1 year, 6 months, 3 months, or 1 month, as specified
at the time this option is selected. At the death of the Payee, the value of the
remaining payments are paid as stated above.
OPTION 2, PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Death
Benefit Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments every 1 year, 6 months, 3 months, or 1 month. The amount and frequency
of the payments is specified at the time this option is selected. After each
payment, interest is added to the remaining amount applied under this option
that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, the Company pays the value of the
remaining payments as stated above.
OPTION 3, INSTALLMENTS FOR A SPECIFIED PERIOD. The Company pays the Death
Benefit Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments for the number of years specified when the option is selected. Payments
are made every 1 year, 6 months, 3 months, or 1 month, as specified when the
option is selected. The amount of each payment for each $1,000 applied under
this option is shown in Policy. These amounts are calculated at an interest rate
of 3% per year compounded annually. If the Payee dies before the expiration of
the specified number of years, the Company pays the value of the remaining
payments as stated above.
OPTION 4, LIFE ANNUITY. The Company makes monthly payments to the Payee for
as long as he or she lives. The amount of each payment for each $1,000 applied
under this option is shown in the Policy.
OPTION 5, LIFE ANNUITY WITH PERIOD CERTAIN. The Company makes monthly
payments to the Payee for as long as the Payee lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Payee dies before the specified period certain ends, the payments to the
Payee's estate will continue until the end of the specified period. The amount
of the monthly payments therefore depends on the
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period certain selected. The amount of each payment for each period certain
available is shown in the Policy. The amounts shown are for each $1,000 applied
under this option. If at any age the amount of the payments is the same for two
or more periods certain, payment will be made as if the longest period certain
was selected.
OPTION 6, JOINT LIFE AND SURVIVORSHIP ANNUITY. The Company makes monthly
payments to two Payees while both are living. After the death of either Payee,
payments continue to the other Payee for as long as the other Payee lives. The
amount of each payment for each $1,000 applied under this option is shown in the
Policy.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company,
an Owner may make transfers or change allocation instructions by telephoning the
Service Center. A telephone authorization form received by the Company at the
Service Center is valid until it is rescinded or revoked by Written Notice or
until a subsequently dated form signed by the Owner is received at the Service
Center. The Company will send Owners a written confirmation of all transfers and
allocation instructions made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If the Company follows these procedures, it is
not liable for any losses due to unauthorized or fraudulent transactions. The
Company reserves the right to suspend telephone transaction privileges at any
time for any reason.
THE FIXED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 nor has the
Fixed Account been registered as an investment company under the Investment
Company Act of 1940. Accordingly, neither the Fixed Account nor any interests
therein are subject to the provisions of these Acts and, as a result, the staff
of the Securities and Exchange Commission has not reviewed the disclosure in
this Prospectus relating to the Fixed Account. The disclosure regarding the
Fixed Account may, however, be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
THE FIXED ACCOUNT
The Fixed Account consists of assets owned by the Company with respect to
the Policies, other than those in the Variable Account. It is part of the
Company's General Account assets. The Company's general account assets are used
to support its insurance and annuity obligations other than those supported by
separate accounts, and are subject to the claims of the Company's general
creditors. Subject to applicable law, the Company has sole discretion over the
investment of the assets of the Fixed Account. The Loan Account is part of the
Fixed Account. Guarantees of Net Premiums allocated to the Fixed Account, and
interest credited thereto, are supported by the Company. The Fixed Policy Value
is calculated daily. (See "Fixed Policy Value.")
INTEREST CREDITED ON FIXED POLICY VALUE
The Company guarantees that it will credit interest on Fixed Policy Value
at an effective annual rate of not less than 4.0%. In its discretion, the
Company will credit interest at rates higher than 4.0%. The Company may vary the
way in which it credits interest on Fixed Policy Value from time to time. The
following is a description of the Company's current method for crediting
interest on Fixed Policy Value.
"FULL-YEAR" RATES. Before the beginning of each calendar year, the Company
publishes an effective annual rate at which it will credit Fixed Policy Value
under the Policies for that year. Fixed Policy Values at the beginning of the
calendar year under all Policies are credited with that rate of interest for the
entire calendar year.
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"NEW-MONEY" RATES. The Company credits Net Premium Payments allocated to
and Policy Value transferred to the Fixed Account during a calendar year with
interest at an effective annual rate in effect on the date that the Net Premium
Payment is received at the Service Center or the date that as of which the
transfer is made. These amounts are credited with interest at this rate until
the end of the calendar year. The Company publishes this "new money" rate from
time to time during a calendar year and may change the "new money" rate at its
discretion throughout any calendar year.
For purposes of crediting interest, Policy Value deducted, transferred, or
withdrawn from the Fixed Account, is accounted for on a "first-in, first-out"
basis.
CHARGES AND DEDUCTIONS
SALES CHARGES
The Company deducts a sales charge from certain premium payments. In Policy
Years 1 through 10, the sales charge deducted is 4% of premium payments received
up to a Target Premium Payment for the initial Specified Amount. In Policy Year
11 and each Policy Year thereafter, the sales charge deducted is 2% of premium
payments received up to a Target Premium Payment for the initial Specified
Amount. Absent an increase in Specified Amount, no sales charge is deducted in
any Policy Year from premium payments in excess of a Target Premium Payment for
the initial Specified Amount.
If the Owner increases the Specified Amount, a Target Premium Payment is
established for the increase. Therefore, there is a Target Premium Payment for
each increment of Specified Amount. The Company deducts the sales charge from
premium payments attributable to the increase. For purposes of computing and
deducting sales charges, all Premium Payments made after an increase in
Specified Amount are apportioned to each increment of Specified Amount on the
basis of the relative Guideline Annual Premium Payments for each such increment.
For the first ten 12-month periods following an increase in Specified Amount,
the charge is 4% of premium payments made in each such 12-month period
attributable to the increase up to a Target Premium Payment for the increase.
For subsequent 12-month periods, the sales charge is 2% of premium payments made
during the 12-month period attributable to the increase in Specified Amount up
to a Target Premium Payment for the increase.
PREMIUM TAX CHARGE
A 2.25% charge for state and local premium taxes is also deducted from each
premium payment. The state and local premium tax charge reimburses the Company
for premium taxes associated with the Policies. The Company expects to pay an
average state and local premium tax rate of approximately 2.25% of premium
payments for all states. This tax can range generally from 2% to 16% of premium
payments and generally varies by the applicant's state of residence.
FEDERAL TAX CHARGE
The Company also deducts a charge for federal taxes from each premium
payment. This charge is 1.25% of all premium payments and compensates the
Company for its federal income tax liability resulting from Section 848 of the
Code. The amount of this charge, which may be increased or decreased, is
reasonable in relation to the Company's increased federal tax burden under
Section 848 resulting from the receipt of premium payments under the Policies.
SURRENDER CHARGE
GENERAL. If the Owner surrenders the Policy, makes a withdrawal, decreases
the Specified Amount or if the Policy lapses, the Company may deduct a surrender
charge. The purpose of the surrender charge is to reimburse the Company for some
of the expenses incurred in the distribution of the Policies. The surrender
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charge consists of two parts, a sales surrender charge (i.e., a contingent
deferred sales charge) and an administration surrender charge. The total
surrender charge declines over time as follows:
100% of the total Surrender Charge in Policy Years 1 through 6
80% of the total Surrender Charge in Policy Year 7
70% of the total Surrender Charge in Policy Year 8
60% of the total Surrender Charge in Policy Year 9
50% of the total Surrender Charge in Policy Year 10
40% of the total Surrender Charge in Policy Year 11
30% of the total Surrender Charge in Policy Year 12
20% of the total Surrender Charge in Policy Year 13
10% of the total Surrender Charge in Policy Year 14
No Charge in Policy Years 15 and later
DEDUCTION OF THE SURRENDER CHARGE. If assessed upon the surrender of the
Policy, the surrender charge reduces the amount otherwise paid to the Owner. If
assessed upon Lapse of the Policy, the amount of the charge is not restored to
Policy Value in the event that the Policy is reinstated. If assessed upon a
decrease in Specified Amount, the charge is deducted from the remaining Policy
Value and reduces the amount of any remaining applicable surrender charge. If
assessed on a withdrawal, the surrender charge is deducted from the remaining
Policy Value and reduces the amount of any remaining applicable surrender
charge. Unless otherwise indicated in the request for a decrease or a
withdrawal, surrender charges deducted in connection with decreases in Specified
Amount or withdrawals are taken from Subaccount Values and Fixed Policy Value
based on the proportion that each Subaccount Value and the Fixed Policy Value
bear to the Policy Value before the deduction.
If taken upon a decrease in Specified Amount, the surrender charge is the
pro-rata portion of the total surrender charge based on the ratio that the
Specified Amount decrease bears to the total Specified Amount before the
decrease. If assessed upon a withdrawal, the surrender charge is the pro-rata
portion of the total surrender charge based on the ratio that the withdrawn
amount bears to the total Surrender Value before the withdrawal.
SALES SURRENDER CHARGE IN CONNECTION WITH THE INITIAL SPECIFIED AMOUNT. In
the first Policy Year, the sales surrender charge in connection with the initial
Specified Amount is 34% of premium payments received up to a Target Premium
Payment for the initial Specified Amount, and, in each of Policy Years 2 through
6, the charge is 33% of premium payments received up to the Target Premium
Payment for the initial Specified Amount in each year until the total sales
surrender charge equals 100% of a single Target Premium Payment for the initial
Specified Amount. Notwithstanding the foregoing, the sales surrender charge in
connection with the initial Specified Amount during the first two Policy Years
is never more than the sum of: (1) 26% of the first Guideline Annual Premium
Payment for the initial Specified Amount, (2) 6% of the second Guideline Annual
Premium Payment for the initial Specified Amount, and (3) 5% of all additional
Premium Payments attributable to the initial Specified Amount.
ADMINISTRATION SURRENDER CHARGE. The Administration Surrender Charge is
$2.00 per $1,000 of initial Specified Amount for Policies on Insureds age 25 or
less on the Policy Effective Date, and $5.00 per $1,000 of initial Specified
Amount for Policies on Insureds age 35 or older on the Policy Effective Date.
For Insureds of other ages, the Administration Surrender Charge is the following
per $1,000 of Specified Amount: age 26 - $2.30, age 27 - $2.60, age 28 - $2.90,
age 29 - $3.20, age 30 - $3.50, age 31 - $3.80, age 32 - $4.10, age 33 - $4.40,
age 34 - $4.70.
SALES SURRENDER CHARGE IN CONNECTION WITH INCREASES IN SPECIFIED
AMOUNT. The surrender charge is computed and assessed separately for the initial
Specified Amount and for each increase in Specified Amount. Only the sales
charge component of the surrender charge, however, is assessed for an increase
in Specified Amount. For purposes of computing and assessing the sales surrender
charge attributable to an increase in Specified Amount, all premium payments
made after an increase in Specified Amount are apportioned to each increment of
Specified Amount on the basis of the relative Guideline Annual Premium Payments
for each such increment. Likewise, Policy Value is apportioned to each increment
of Specified Amount on the basis of
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the relative Guideline Annual Premium Payments for each such increment. The
sales surrender charge for an increase in Specified Amount is as follows: In the
first 12 months following the increase, the sales surrender charge is 34% of
premium payments received up to a Target Premium Payment for the increase in
Specified Amount, and, in each of the five subsequent 12-month periods following
the increase, the charge is 33% of premium payments received up to a Target
Premium Payment for the increase in Specified Amount in each such 12-month
period until the total sales surrender charge for the increase equals 100% of a
single Target Premium Payment for the increase in Specified Amount.
Notwithstanding the foregoing, during the first 24 months following an increase
in Specified Amount, the sales surrender charge for the increase is never more
than the sum of: (1) 26% of the first Guideline Annual Premium Payment for the
increase in Specified Amount, (2) 6% of the second Guideline Annual Premium
Payment for the increase in Specified Amount, and (3) 5% of all additional
Premium Payments attributable to the increase in Specified Amount. In addition,
the sales surrender charge for an increase in Specified Amount declines over the
7th through the 15th 12-month period following the increase in the same manner
as the surrender charge in connection with the initial Specified Amount.
OTHER TAXES
Currently a charge for federal income taxes is not deducted from the
Variable Account of the Policy Value. The Company reserves the right in the
future to make a charge to the Variable Account or the Policy Value for any
federal, state or local income taxes that the Company incurs that it determines
to be properly attributable to the Variable Account of the Policies. The Company
will notify Owners promptly of any such charge.
MONTHLY DEDUCTION
The monthly deduction is a charge made by the Company as of the Policy
Effective Date and every Monthly Anniversary Day thereafter by reducing
Subaccount Values (i.e., liquidating Units) and Fixed Policy Value in the
proportion that each Subaccount Value and Fixed Policy Value bears to Policy
Value. The monthly deduction consists of (1) the monthly cost of insurance
charge, (2) the monthly policy fee, (3) the monthly first-year issue fee (when
applicable), (4) the monthly Specified Amount increase fee (when applicable),
and (5) the cost of any riders (when applicable).
MONTHLY COST OF INSURANCE CHARGE. The monthly cost of insurance charge is
computed at the beginning of each Policy month by subtracting 2 from 1 and
multiplying the result by 3, where:
1. is the Death Benefit on the first day of the Policy month divided
by 1 plus the monthly equivalent of 4.0%;
2. is the Policy Value before deduction of the monthly policy fee, the
monthly first-year issue fee (when applicable), the monthly Specified
Amount increase fee (when applicable), and the cost of any riders (when
applicable); and
3. is the cost of insurance rate as described below.
The monthly cost of insurance charge is computed separately for the initial
Specified Amount and for each increment of Specified Amount resulting from
increases in Specified Amount. For the purpose of computing the Net Amount at
Risk (the result of subtracting 2 from 1 above), Policy Value is apportioned to
each increment of Specified Amount on the basis of the relative Guideline Annual
Premium Payments for each such increment. Where the Death Benefit is a percent
of Policy Value the monthly cost of insurance charge is computed separately, and
Policy Value is apportioned to, an increment of Death Benefit corresponding to
each increment of Specified Amount.
The monthly cost of insurance rate for a Policy is based on the sex,
Attained Age, Issue Age, risk class, and number of years that the Policy or
increment of Specified Amount has been in force. The Issue Age of the Insured
will usually be different for each increase in Specified Amount. The Company
reviews monthly cost of insurance rates on an ongoing basis (at least once every
5 years) based on its expectations as to future mortality experience, investment
earnings, persistency, taxes and other expenses. Any changes in cost of
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<PAGE> 36
insurance rates are made on a uniform basis for Insureds of the same class as
defined by sex, Attained Age, Issue Age, risk class, and Policy duration. The
Company guarantees that the cost of insurance rates used to calculate the
monthly cost of insurance charge will not exceed the maximum cost of insurance
rates set forth in the Policies.
The Company places each Insured in a risk class when a Policy is first
underwritten. This risk class applies to the initial Specified Amount. When an
Owner requests an increase in Specified Amount, the Company conducts additional
underwriting before approving the increase to determine whether a different risk
class should apply to the increase. If the risk class for the increase would
have a lower cost of insurance rate than the class for the initial Specified
Amount (or a previous increase), the risk class for the increase is applied to
the initial Specified Amount (or any previous increases in Specified Amount). If
the risk class for the increase would have a higher cost of insurance rate than
the class for the initial Specified Amount (or a previous increase), then the
risk class for the increase only applies to the increase in Specified Amount.
In connection with the cost of insurance rates guaranteed in the Policy,
the Company places Insureds into standard smoker and standard nonsmoker risk
classes. The guaranteed rates for standard classes are based on the 1980
Commissioners' Standard Ordinary Mortality Tables, Male or Female, Smoker or
Nonsmoker Mortality Rates ("1980 CSO Tables"). The guaranteed rates for
substandard classes are based on multiples of or additions to the 1980 CSO
Tables. In connection with current cost of insurance rates, the Company places
Insureds into the following risk classes: standard smoker, standard nonsmoker,
preferred smoker, preferred nonsmoker and preferred plus nonsmoker.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker class are less than or equal to rates for an Insured of the same age
and sex in the same smoker class. Cost of insurance rates (whether guaranteed or
current) for an Insured in a nonsmoker or smoker standard class are generally
lower than guaranteed rates for an Insured of the same age and sex and smoking
status in a substandard class.
MONTHLY POLICY FEE, MONTHLY FIRST-YEAR ISSUE FEE, AND MONTHLY SPECIFIED
AMOUNT INCREASE FEE. These charges compensate the Company for administration
expenses associated with the Policies and the Variable Account. These expenses
relate to premium payment billing and collection, recordkeeping, processing
death benefit claims, Policy loans, Policy changes, reporting and overhead
costs, processing applications and establishing Policy records. The monthly
policy fee is $6.00 per month. The monthly first-year issue fee is $20.00 per
month during the first Policy Year, and the monthly Specified Amount increase
fee is $10.00 per month for the first 12 months after an increase in Specified
Amount.
SUPPLEMENTAL BENEFIT AND/OR RIDER CHARGES. See "Supplemental Benefits
and/or Riders."
DAILY MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of the Variable Account
to compensate it for mortality and expense risks that it assumes under the
Policy. The daily charge is at the rate of 0.002477% (approximately equivalent
to an effective annual rate of 0.90%) of the net assets of the Variable Account
during the first 10 Policy Years and .001236% (approximately equivalent to an
effective annual rate of 0.45%) of the net assets of the Variable Account during
Policy Years 11 and thereafter. During the first 10 Policy Years, approximately
.35% of this annual charge is for the assumption of mortality risk and .55% is
for the assumption of expense risk. During Policy Years 11 and thereafter,
approximately .35% of this annual charge is for the assumption of mortality risk
and .10% is for the assumption of expense risk.
The mortality risk that the Company assumes is the risk that Insureds, as a
group, will live for a shorter period of time than the Company estimated when it
established the guaranteed costs of insurance rates in the Policy. Because of
these guarantees, each Owner is assured that the morbidity of a particular
Insured will not have an adverse effect on the Death Benefit Proceeds that a
Beneficiary would receive. The expense risk that the Company assumes is the risk
that the monthly Policy fee, monthly first-year issue fee, and monthly Specified
Amount increase fee (and the transfer processing fee, imposed) may be
insufficient to cover the actual expenses of administering the Policies.
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TRANSFER PROCESSING FEE
The first 12 transfers during each Policy Year are free. The Company
assesses a Transfer Processing Fee of $25 for each transfer in excess of 12
during a Policy Year. For the purposes of assessing the Transfer Processing Fee,
each Written Notice of transfer is considered to be one transfer, regardless of
the number of Subaccounts affected by the transfer. The Transfer Processing Fee
is deducted from the amount being transferred.
FUND EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory fees and other expenses incurred by the corresponding Fund in which the
Subaccount invests. See the prospectus for the Funds. For a summary of
investment advisory fees and other expenses as a percentage of Fund average net
assets, see "Fee Table Annual Fund Expenses" on page 8.
OTHER POLICY BENEFITS AND PROVISIONS
OWNERSHIP
GENERAL. The Policy belongs to the Owner. An Owner may exercise all of the
rights and options described in the Policy. The Insured is the Owner unless the
application specifies a different person as Owner.
CHANGING THE OWNER. The Owner may change the Owner by Written Notice at any
time while the Insured is alive and the Policy is in force prior to the Maturity
Date. A change of Ownership is effective as of the date that the Written Notice
is signed; however, the Company is not liable for payments it makes before it
receives a Written Notice of a change in Ownership. A change in Owner may have
significant tax consequences. (See "TAX CONSIDERATIONS.")
CONTINGENT OWNER. If the Owner is not the Insured, he or she may name a
Contingent Owner in the application or by subsequent Written Notice. The
Contingent Owner becomes the Owner in the event that the Owner dies before the
Insured. If no Contingent Owner survives the Owner, then upon the death of the
last surviving Owner, that Owner's estate becomes the Owner.
ASSIGNMENT. By Written Notice the Owner may assign his or her rights under
this Policy. The Company is not bound by the assignment unless it receives a
duplicate of the original assignment at the Service Center. The Company is not
responsible for the validity or sufficiency of any assignment and is not liable
for any payment it makes before receipt of the duplicate original assignment. An
assignment does not change or revoke the Beneficiary designation in effect at
the time that the assignment is made. If an assignment is absolute, the Owner's
rights and privileges under the Policy, including any right to change the
Beneficiary, pass to the assignee. If an assignment is collateral, the
collateral assignee has priority over the interest of any revocable Beneficiary
or revocable payee under any optional method of settlement selected by the
Owner. Any claim under any assignment is subject to proof of interest and the
extent of the assignment. An assignment is subject to any Loan Amount.
SELECTING THE BENEFICIARY. The Owner designates the Beneficiary in the
application. Any Beneficiary designation is revocable unless otherwise stated in
the designation. Owners may designate Contingent Beneficiaries. Where more than
one Beneficiary or more than one Contingent Beneficiary is designated, each
Beneficiary or Contingent Beneficiary, as appropriate, shares in any Death
Benefit Proceeds equally unless the Beneficiary designation states otherwise.
CHANGING THE BENEFICIARY. The Owner may change the Beneficiary by Written
Notice at any time while the Insured is alive and the Policy is in force before
the Maturity Date. If, however, the Owner previously irrevocably named a
Beneficiary, that Beneficiary's written consent must be provided to the Company
before a new Beneficiary is designated. Any change of Beneficiary is effective
as of the date Written Notice is signed by the Owner but the Company is not
liable for any payments it makes under the Policy prior to the time it receives
Written Notice of any Beneficiary change.
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THE COMPANY'S RIGHT TO CONTEST THE POLICY
The Company has the right to contest the validity of the Policy or to
resist a claim under it on the basis of any material misrepresentation of a fact
stated in the application or any supplemental application. The Company also has
the right to contest the validity of any increase of Specified Amount or other
change to the Policy on the basis of any material misrepresentation of a fact
stated in the application (or supplemental application) for such increase in
coverage or change. In issuing this Policy, the Company relies on all statements
made by or for the Insured in the application or in a supplemental application.
In the absence of fraud, the Company considers statements made in the
application(s) to be representations and not warranties.
In the absence of fraud, the Company cannot bring any legal action to
contest the validity of the Policy after it has been in force during the
lifetime of the Insured for two years from the Policy Effective Date, or if
reinstated, for two years from the date of reinstatement. Likewise, the Company
cannot contest any increase in coverage effective after the Policy Effective
Date, or any reinstatement thereof, after such increase or reinstatement has
been in force during the lifetime of the Insured for two years from its
effective date.
SUICIDE EXCLUSION
If the Insured commits suicide, while sane or insane, within two years of
the Policy Effective Date, the Company's liability is limited to an amount equal
to the Policy Value less any Loan Amount. The Company will pay this amount to
the Beneficiary in one sum.
If the Insured commits suicide, while sane or insane, within two years from
the effective date of any increase in Specified Amount, the Company's liability
with respect to that increase is limited to an amount equal to the cost of
insurance attributable to the increase from the effective date of the increase
to the date of death.
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Insured has been stated incorrectly in the
application or any supplemental application, the Company will adjust the Death
Benefit and any benefits provided by rider or endorsement it pays under this
Policy to the amount that would have been payable at the correct age and sex
based on the most recent deduction for cost of insurance and the cost of any
benefits provided by rider or endorsement. If the age of the Insured has been
overstated or understated, the Company will recalculate the Policy Value using
the cost of insurance (and the cost of benefits provided by rider or
endorsement) based on the Insured's correct age and sex.
MODIFICATION OF THE POLICY
Only an officer of the Company may modify this Policy or waive any of the
Company's rights or requirements under this Policy. Any modification or waiver
must be in writing. No agent may bind the Company by making any promise not
contained in this Policy.
Upon notice to the Owner, the Company may modify the Policy to:
1. conform the Policy or the operations of the Company or of the
Variable Account to the requirements of any law (or regulation issued by a
government agent) to which the Policy, the Company or the Variable Account
is subject);
2. assure continued qualification of the Policy as a life insurance
contract under the Code; or
3. reflect a change (permitted by the Policy) in the operation of the
Variable Account.
In the event of any such modification, the Company will make appropriate
endorsements to the Policy. If any provision of the Policy conflicts with the
laws of a jurisdiction that govern the Policy, the Policy provides that such
provision be deemed to be amended to conform with such laws.
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SUSPENSION OR DELAY IN PAYMENTS
The Company usually pays the amounts of any surrender, withdrawals, Death
Benefit Proceeds, or settlement options within seven business days after receipt
of all applicable Written Notices and/or Due Proofs of Death. However, the
Company can postpone such payments if:
1. the New York Stock Exchange is closed, other than customary weekend
and holiday closing, or trading on the exchange is restricted as determined
by the SEC; or
2. the SEC permits, by an order, the postponement for the protection
of Owners; or
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Variable Account or the determination of
their value not reasonably practicable.
If a recent check or draft has been submitted, the Company has the right to
defer payment of surrenders, withdrawals, Death Benefit Proceeds, or payments
under a settlement option until such check or draft has been honored.
The Company has the right to defer payment of any surrender, withdrawal, or
transfer of Fixed Policy Value for up to six months from the date of receipt of
your Written Notice.
REPORTS TO OWNERS
At least annually, or more often as required by law, the Company will mail
to Owners at their last known address a report showing the following items as of
the end of the report period:
1. the period covered by the report;
2. the current Policy Value, Cash Value and Surrender Value;
3. the current Variable Policy Value (including each Subaccount
Value), Fixed Policy Value and Loan Account Value;
4. the current Loan Amount;
5. any premium payments, withdrawals, or surrenders made, Death
Benefit Proceeds paid and charges deducted since the last report;
6. current Net Premium Payment allocations; and
7. any other information required by law.
Owners may request additional copies of reports from the Company, but the
Company reserves the right to charge a fee for such additional copies. In
addition, the Company will send written confirmations of premium payments and
other financial transactions requested by Owners. Owners will also be sent
copies of the annual and semi-annual report to shareholders for each Fund in
which they are indirectly invested.
SUPPLEMENTAL BENEFITS AND/OR RIDERS
The following supplemental benefits and/or riders are available and may be
added to a Policy. Monthly charges for these benefits and/or riders are deducted
from Policy Value as part of the monthly deduction. The supplemental benefits
and/or riders available with the Policies provide fixed benefits that do not
vary with the investment experience of the Variable Account.
CHILDREN'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of a covered child. This rider has no cash value.
SPOUSE'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of an Owner's spouse. This rider has no cash value.
DISABILITY BENEFIT RIDER. This rider provides for the waiver of the monthly
deduction under the Policy during the total disability of the Owner.
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Additional rules and limits apply to these supplemental benefits and/or
riders.
TAX CONSIDERATIONS
The following summary provides a general description of the federal income
tax considerations associated with a Policy and does not purport to be complete
or to cover all situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisers should be consulted for more complete
information. This discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "Service"). No representation is made as to the
likelihood of continuation of the present federal income tax laws or of the
current interpretations by the Service.
TAX STATUS OF THE POLICIES
Section 7702 of the Code sets forth a definition of a life insurance
contract for federal income tax purposes. Although the Secretary of the Treasury
(the "Treasury") is authorized to prescribe regulations implementing Section
7702, while proposed regulations and other interim guidance has been issued,
final regulations have not been adopted. In short, guidance as to how Section
7702 is to be applied is limited. If a Policy were determined not to be a life
insurance contract for purposes of Section 7702, the Policy would not provide
the tax advantages normally provided by a life insurance contract.
With respect to a Policy issued on a standard basis, the Company believes
that such a Policy should meet the Section 7702 definition of a life insurance
contract. With respect to a Policy that is issued on a substandard basis (i.e.,
a premium class with extra rating involving higher than standard mortality
risk), there is less guidance, in particular as to how the mortality and other
expense requirements of Section 7702 are to be applied in determining whether
such a Policy meets the Section 7702 definition of a life insurance contract.
Thus, it is not clear whether or not a Policy issued on a substandard basis
would satisfy Section 7702, particularly if the Owner pays the full amount of
premium payments permitted under the Policy.
If it is subsequently determined that a Policy does not satisfy Section
7702, the Company may take whatever steps are appropriate and reasonable to
attempt to cause such a Policy to comply with Section 7702. For these reasons,
the Company reserves the right to restrict Policy transactions as necessary to
attempt to qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of each of the
Subaccounts must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code (discussed above). The Subaccounts, through the
Funds, intend to comply with the diversification requirements prescribed in
Treas. Reg. ss. 1.817-5, which affect how each Fund's assets are to be invested.
The Company believes that the Subaccounts will, thus, meet the diversification
requirements, and the Company will monitor continued compliance with this
requirement.
In certain circumstances, owners of variable life insurance policies may be
considered the owners, for federal income tax purposes, of the assets of the
subaccounts used to support their policies. In those circumstances, income and
gains from the subaccount assets would be includible in the variable policy
owner's gross income. The IRS has stated in published rulings that a variable
policy owner will be considered the owner of subaccount assets if the policy
owner possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury has also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the Policy Owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which Policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of subaccount
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<PAGE> 41
assets. For example, an Owner has additional flexibility in allocating Net
Premium payments and transferring Policy Value. These differences could result
in an Owner being treated as the owner of a pro-rata portion of the assets of
the Subaccounts. In addition, the Company does not know what standards will be
set forth, if any, in the regulations or rulings which the Treasury has stated
it expects to issue. The Company therefore reserves the right to modify the
Policy as necessary to attempt to prevent an Owner from being considered the
Owner of a pro-rata share of the assets of the Subaccounts.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. The Company believes that the Death Benefit Proceeds and Policy
Value increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for federal income tax purposes. Thus, the
Death Benefit Proceeds under the Policy should be excludible from the gross
income of the Beneficiary under Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option, an increase or decrease in the Policy's face
amount, a Policy loan, a withdrawal, a surrender, a change in Ownership, or an
assignment of the Policy may have federal income tax consequences. In addition,
federal, state and local transfer, and other tax consequences of Ownership or
receipt of distributions from a Policy depends on the circumstances of each
Owner or Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of
the Policy Value, including increments thereof, until there is a distribution.
The tax consequences of distributions from, and loans taken from or secured by,
a Policy depend on whether the Policy is classified as a "Modified Endowment
Contract" (discussed below). Whether a Policy is or is not a Modified Endowment
Contract, upon a surrender or Lapse of a Policy or when benefits are paid at a
Policy's Maturity Date, if the amount received plus the Loan Amount exceeds the
total investment in the Policy, the excess will generally be treated as ordinary
income subject to tax.
The Policy may also be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, Owners contemplating
the use of a Policy in any arrangement the value of which depends in part on its
tax consequences, should be sure to consult a qualified tax adviser regarding
the tax attributes of the particular arrangement.
In recent years, Congress has adopted new rules relating to life insurance
owned by businesses. Any business contemplating the purchase of a new Policy or
a change in an existing Policy should consult a tax advisor.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts." The rules
relating to whether a Policy will be treated as a Modified Endowment Contract
are extremely complex and cannot be completely described in this summary. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premium payments made at any time during the first seven Policy Years exceed the
sum of the net level premium payments which would have been paid on or before
such time if the Contract provided for paid-up future benefits after the payment
of seven level annual premiums. A Policy may also become a Modified Endowment
Contract after a material change. The determination of whether a Policy will be
a Modified Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Value at the time of such change
and the additional premium payments made in the seven years following the
material change.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In view of
the foregoing, a current or prospective Owner should consult with a tax adviser
to determine whether a Policy transaction will cause the Policy to be treated as
a Modified Endowment Contract. However, at the time that a premium payment is
credited which, in the
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Company's view, would cause the Policy to become a Modified Endowment Contract,
the Company will notify the Owner that unless a refund of the excess premium
(with any appropriate interest) is requested by the Owner, the Policy will
become a Modified Endowment Contract. The Owner will have 30 days after
receiving such notification to request the refund.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as Modified Endowment Contracts will be subject
to the following tax rules: First, all distributions, including distributions
upon surrender and partial surrender from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Policy Value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from or secured by
such a Policy, are treated as distributions from the Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10% additional income tax is imposed on the portion
of any distribution from, or loan taken from or secured by, such a Policy that
is included in income except where the distribution or loan is made on or after
the Owner attains age 59 1/2, is attributable to the Owner's becoming disabled,
or is part of a series of substantially equal periodic payments for the life (or
life expectancy) of the Owner or the joint lives (or joint life expectancies) of
the Owner and the Owner's beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a Modified Endowment Contract
are generally treated as first, recovering the investment in the Policy
(described below) and then, only after the return of all such investment in the
Policy, as distributing taxable income. An exception to this general rule occurs
in the case of a decrease in the Policy's Death Benefit or any other change that
reduces benefits under the Policy in the first 15 years after the Policy is
issued and that results in a cash distribution to the Owner in order for the
Policy to continue complying with the Section 7702 definitional limits. Such a
cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
Loan Amounts. It is, however, possible that loans in effect after the eleventh
Policy Year could be treated as distributions rather than loans.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional income tax rule. If a Policy which is
not a Modified Endowment Contract becomes a Modified Endowment Contract, then
any distributions made from the Policy within two years prior to the change in
such status will become taxable in accordance with the Modified Endowment
Contract rules discussed above.
POLICY LOAN INTEREST. Generally, interest paid on any loan under a Policy
is not deductible. A qualified tax adviser should be consulted before deducting
any Policy loan interest.
INVESTMENT IN THE POLICY. Investment in the Policy means: (i) the aggregate
amount of any premium payments or other consideration paid for a Policy, minus
(ii) the aggregate amount received under the Policy which is excluded from gross
income of the Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by the
Company (or its affiliates) to the same Owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includible in an Owner's gross income under Section 72(e) of the Code.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the Policy
could change by legislation or otherwise. For instance, the President's 1999
Budget Proposal recommended legislation that, if enacted, would adversely modify
the federal taxation of this Policy. It is possible that any legislative change
could be retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Policy.
35
<PAGE> 43
OTHER INFORMATION ABOUT THE POLICIES AND THE COMPANY
SALE OF THE POLICIES
CNA Investor Services, Inc. ("CNA/ISI"), which is located at CNA Plaza,
Chicago, Illinois 60685, is principal underwriter and distributor of the
Policies as well as of other policies issued through other separate accounts of
the Company or affiliates of the Company. CNA/ISI is an affiliate of the
Company, is registered with the SEC as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). The Company pays
CNA/ISI for acting as principal underwriter under a distribution agreement. The
Policies are offered on a continuous basis and the Company does not anticipate
discontinuing the offer.
Applications for Policies are solicited by agents who are licensed by
applicable state insurance authorities to sell the Company's insurance contracts
and who are registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers generally receive commissions based
on a percent of premium payments made (up to a maximum of 90%). The writing
agent receives a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions. Total commissions may be as high as 120% of target
premium which would be split between wholesale and retail broker dealer.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, the Company
votes Fund shares held in the Variable Account at regular and special
shareholder meetings of the Funds in accordance with instructions received from
persons having voting interests in the corresponding Subaccounts. If, however,
the 1940 Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner has the right to instruct is calculated
separately for each Subaccount, and may include fractional votes. While the
Insured is still living and the Policy is in force prior to the Maturity Date,
an Owner holds a voting interest in each Subaccount to which Variable Policy
Value is allocated. For each Owner, the number of votes attributable to a
Subaccount is determined by dividing the Owner's Subaccount Value by the Net
Asset Value Per Share of the Fund in which that Subaccount invests.
After the Maturity Date, the Payee under a Settlement Option has a voting
interest in each Subaccount from which variable Settlement Payments are made.
For each such Payee, the number of votes attributable to a Subaccount is
determined by dividing the liability for future variable Settlement Payments to
be paid from that Subaccount by the Net Asset Value Per Share of the Fund in
which that Subaccount invests. This liability for future payments is calculated
on the basis of the mortality assumptions, the selected Benchmark Rate of Return
and the Settlement Unit value of that Subaccount on the date that the number of
votes is determined. As Variable Settlement Payments are made to the Payee, the
liability for future payments decreases as does the number of votes.
The number of votes available to an Owner or Payee is determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions will be solicited by written communication
prior to such meeting in accordance with procedures established for the Fund.
Each Owner or Payee having a voting interest in a Subaccount will receive proxy
materials and reports relating to any meeting of shareholders of the Fund in
which that Subaccount invests.
Fund shares as to which no timely instructions are received and shares held
by the Company in a Subaccount as to which no Owner or Payee has a beneficial
interest are voted in proportion to the voting instructions that are received
with respect to all Policies participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon will be applied to reduce
the total number of votes eligible to be cast on a matter. Under the 1940 Act,
certain actions affecting the Variable Account may require Owner approval. In
that case, an Owner will be entitled to vote in proportion to his or her
Variable Policy Value.
36
<PAGE> 44
The Company may, if required by state insurance regulators, disregard Owner
and Payee voting instructions if such instructions would require Fund shares to
be voted so as to cause a change in sub-classification or investment objectives
of a Fund, or to approve or disapprove an investment management agreement or an
investment advisory agreement. In addition, the Company may under certain
circumstances disregard voting instructions that would require changes in an
investment management agreement, investment manager, an investment advisory
agreement or an investment adviser of a Fund, provided that the Company
reasonably disapproves of such changes in accordance with applicable regulations
under the 1940 Act. If the Company ever disregards voting instructions, Owners
and Payees will be advised of that action and of the reasons for such action in
the next semiannual report for the appropriate Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business
experience during the past five years for the Company's directors and executive
officers are listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF THE COMPANY
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dennis H. Chookaszian 54 Director, Chairman of the Board and Chief Executive
CNA Plaza Chairman of the Officer of CNA since September 1992. Prior
Chicago, IL 60685 Board and Chief thereto, Mr. Chookaszian was President and
Executive Chief Operating Officer of CNA. Mr.
Officer Chookaszian has served as a Director of the
Company since April 1978.
- ----------------------------------------------------------------------------------------------------
Philip L. Engel 57 Director and President of CNA since September 1992. Prior
CNA Plaza President thereto, Mr. Engel was Executive Vice
Chicago, IL 60685 President of CNA. Mr. Engel has served as a
Director of the Company since September 1992.
- ----------------------------------------------------------------------------------------------------
Michael C. Garner 45 Senior Vice Senior Vice President of CNA since September
CNA Plaza President and 1993. Prior thereto, Mr. Garner was a partner
Chicago, IL 60685 Director of Coopers & Lybrand LLP. Mr. Garner has
served as a Director of the Company since
October 1996.
- ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 51 Executive Vice Executive Vice President and Chief Operating
CNA Plaza President and Officer of CNA since February 1998. Prior
Chicago, IL 60685 Chief Operating thereto, Mr. Hengesbaugh was Senior Vice
Officer President of CNA since November 1990.
- ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 50 Director and Senior Vice President of CNA since November
CNA Plaza Senior Vice 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 President November 1990 through October 1997. Mr. Jokiel
served as a Director of the Company from July
1992 through October 1997.
- ----------------------------------------------------------------------------------------------------
Jonathan D. Kantor 42 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.* Mr. Kantor has served
as a Director of the Company since April 1997.
- ----------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 45
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF THE COMPANY
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Patricia L. Kubera 42 Group Vice Group Vice President and Controller of CNA
CNA Plaza President, since January 1993. Prior thereto, Ms. Kubera
Chicago, IL 60685 Controller and was Assistant Vice President of CNA. Ms.
Director Kubera has served as a Director of the Company
since November 1994.
- ----------------------------------------------------------------------------------------------------
W. James MacGinnitie 59 Senior Vice Senior Vice President and Chief Financial
CNA Plaza President, Chief Officer of CNA since October 1997. From 1994
Chicago, IL 60685 Financial through 1997, Mr. MacGinnitie was a partner at
Officer and Ernst & Young. Prior thereto, Mr. MacGinnitie
Director was a principal with Tillinghast. Mr.
MacGinnitie has served as a Director of the
Company since October 1997.
- ----------------------------------------------------------------------------------------------------
William H. Sharkey, Jr. 50 Senior Vice Senior Vice President of CNA since January
CNA Plaza President and 1994. Prior thereto, Mr. Sharkey was Senior
Chicago, IL 60685 Director Vice President of Cigna Healthcare from
October 1991 through February 1994. Mr.
Sharkey has served as a Director of the
Company since November 1994.
- ----------------------------------------------------------------------------------------------------
</TABLE>
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of the Company. Executive officers serve at the discretion of the
Board of Directors.
* Shea & Gould declared bankruptcy in 1995.
COMPANY HOLIDAYS
The Company is closed on the following days in 1997: New Year's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after
Thanksgiving Day, and Christmas Day.
STATE REGULATION
The Company is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines the financial
condition and operations of the Company. The Company is also subject to the
insurance laws and regulations of all jurisdictions where it does business. The
Policy described in this prospectus has been filed with and, where required,
approved by, insurance officials in those jurisdictions where it is sold.
The Company is required to submit annual statements of operations,
including financial statements, to the insurance departments of the various
jurisdictions where it does business to determine solvency and compliance with
applicable insurance laws and regulations.
IMPACT OF YEAR 2000 ON VFL
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates after the year 1999. Such malfunctions
could lead to business delays and disruptions. All subsidiaries of CNAF,
including VFL, utilize the same systems in conducting day-to-day operations. VFL
is in the process of replacing many of its legacy systems and is upgrading its
systems to accommodate business for the year 2000 and beyond. VFL believes that
it is on schedule to resolve the year 2000 issue in a timely manner. VFL's cost
to upgrade and replace its systems will be included as part of the total cost
incurred by CNAF to replace and upgrade its systems. Based upon current
assessments, CNAF estimates its total cost will be approximately $60 to $70
million. VFL will be allocated its proportionate share of this cost upon
completion of the upgrade; however, a reasonable estimate of this cost is
38
<PAGE> 46
not currently available. Due to the interdependent nature of computer systems,
VFL may be adversely impacted depending upon whether it or other entities not
affiliated with VFL (vendors and business partners) address this issue
successfully. To mitigate this impact, CNAF is communicating with its vendors
and business partners to coordinate the year 2000 conversion. At this time,
management is unable to determine whether the adverse impact, if any, in
connection with the foregoing circumstances would be material to VFL.
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
EXPERTS
The balance sheets of the Company as of December 31, 1997 and 1996, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1997, have been audited by Deloitte & Touche, LLP,
independent auditors, as set forth in their report thereon and included herein.
Such financial statements are included in this prospectus in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. Actuarial matters included in this prospectus have been examined by
Rodney A. Haviland, A.S.A. whose opinion is filed as an exhibit to the
registration statement.
LEGAL MATTERS
Sutherland, Asbill & Brennan, LLP of Washington, D.C. has provided advice
on certain matters relating to the federal securities laws.
39
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a
wholly-owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 1997 and 1996 and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 18, 1998
40
<PAGE> 48
The following financial statements are those of Valley Forge Life Insurance
Company and not those of the Separate Account. They are included for the purpose
of informing investors as to the financial position and operations of the
Company.
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (cost: $466,267 and
$321,432).............................................. $ 471,707 $ 321,066
Equity securities available-for-sale (cost: $981 and
$1,073)................................................ 2,260 2,959
Policy loans............................................ 66,971 60,267
Other invested assets................................... 433 --
Short-term investments.................................. 4,597 42,757
---------- ----------
TOTAL INVESTMENTS................................... 545,968 427,049
Cash...................................................... 24,565 24,759
Receivables:
Reinsurance receivables................................. 1,586,471 1,320,583
Premium and other insurance receivables................. 65,196 61,390
Less allowance for doubtful accounts.................... (285) (378)
Deferred acquisition costs................................ 95,354 74,589
Accrued investment income................................. 5,245 4,945
Receivables for securities sold........................... 744 --
Deferred income taxes..................................... -- 312
Due from affiliates....................................... 35,999 67,499
Other..................................................... 228 54
Separate Account business................................. 8,941 --
- -------------------------------------------------------------------------------------
TOTAL ASSETS $2,368,426 $1,980,802
=====================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits.................................. $1,906,899 $1,621,504
Claims.................................................. 81,242 60,568
Policyholders' funds.................................... 39,928 38,145
Payables for securities purchased......................... 497 --
Federal income taxes payable.............................. 5,975 3,824
Deferred income taxes..................................... 4,098 --
Commissions and other payables............................ 19,787 22,004
Other..................................................... 84,799 35,217
Separate Account business................................. 8,941 --
---------- ----------
TOTAL LIABILITIES................................... 2,152,166 1,781,262
---------- ----------
Commitments and contingent liabilities--Note 7 and 9
Stockholder's Equity
Common stock ($50 par value; Authorized-200,000 shares;
Issued-50,000 shares)................................... 2,500 2,500
Additional paid-in capital................................ 39,150 39,150
Retained earnings......................................... 170,230 156,900
Net unrealized investment gains........................... 4,380 990
---------- ----------
TOTAL STOCKHOLDER'S EQUITY.......................... 216,260 199,540
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,368,426 $1,980,802
=====================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
41
<PAGE> 49
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums.................................................. $332,172 $325,486 $296,653
Net investment income..................................... 29,913 29,312 31,494
Realized investment gains................................. 4,200 4,771 13,783
Other..................................................... 6,872 8,217 4,818
-------- -------- --------
373,157 367,786 346,748
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 307,207 304,840 270,936
Amortization of deferred acquisition costs................ 11,818 1,177 6,066
Other operating expenses.................................. 33,505 36,022 35,036
-------- -------- --------
352,530 342,039 312,038
-------- -------- --------
Income before income tax................................ 20,627 25,747 34,710
Income tax expense.......................................... 7,297 9,028 12,200
================================================================================================
NET INCOME $ 13,330 $ 16,719 $ 22,510
================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
42
<PAGE> 50
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
BALANCE, JANUARY 1, 1995................................... $2,500 $39,150 $117,671 $ (3,125) $156,196
Net income............................................... -- -- 22,510 -- 22,510
Change in net unrealized gains/(losses).................. -- -- -- 16,766 16,766
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1995................................. 2,500 39,150 140,181 13,641 195,472
Net income............................................... -- -- 16,719 -- 16,719
Change in net unrealized gains/(losses).................. -- -- -- (12,651) (12,651)
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1996................................. 2,500 39,150 156,900 990 199,540
Net income............................................... -- -- 13,330 -- 13,330
Change in net unrealized gains/(losses).................. -- -- -- 3,390 3,390
=======================================================================================================================
BALANCE, DECEMBER 31, 1997 $2,500 $39,150 $170,230 $ 4,380 $216,260
=======================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
43
<PAGE> 51
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 13,330 $ 16,719 $ 22,510
--------- --------- ---------
Adjustments to reconcile net income to net cash flows from
operating activities:
Net realized investment gains, pre-tax.................. (4,200) (4,771) (13,783)
Amortization of bond discount........................... (2,438) (4,922) (3,921)
Changes in:
Insurance receivables, net............................ (269,787) (254,549) (151,415)
Deferred acquisition costs............................ (20,765) (23,989) (9,267)
Accrued investment income............................. (300) (258) 69
Due from affiliates................................... 31,500 (62,563) (55,308)
Federal income taxes.................................. 2,151 4,399 (28)
Deferred income taxes................................. 2,581 3,309 453
Insurance reserves.................................... 221,252 198,239 156,530
Commissions and other payables........................ (2,217) 9,368 5,594
Other, net............................................ 49,429 (17,744) 29,619
--------- --------- ---------
TOTAL ADJUSTMENTS............................... 7,206 (153,481) (41,457)
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES........ 20,536 (136,762) (18,947)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities............................. (464,361) (535,263) (361,579)
Proceeds from fixed maturities:
Sales................................................... 278,459 530,828 336,731
Maturities, calls and redemptions....................... 45,442 36,726 51,046
Purchases of equity securities............................ (1,334) (728) --
Proceeds from sales of equity securities.................. 2,447 1,306 --
Change in short-term investments.......................... 39,301 (2,851) 1,901
Change in policy loans.................................... (6,704) (4,259) (9,007)
Change in other invested assets........................... (580) -- --
Other, net................................................ -- 72 85
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES........ (107,330) 25,831 19,177
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for investment contracts credited to policyholder
account balances........................................ 111,478 98,091 40,398
Return of policyholder account balances in investment
contracts............................................... (24,878) (4,504) (451)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES........ 86,600 93,587 39,947
--------- --------- ---------
NET CASH FLOWS.................................. (194) (17,344) 40,177
Cash at beginning of period................................. 24,759 42,103 1,926
- -----------------------------------------------------------------------------------------------
CASH AT END OF PERIOD....................................... $ 24,565 $ 24,759 $ 42,103
===============================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid................................. $ 2,488 $ 1,965 $ 6,531
===============================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
44
<PAGE> 52
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Valley Forge Life Insurance Company ("VFL") is a wholly-owned subsidiary of
Continental Assurance Company ("Assurance"). Assurance is a wholly-owned
subsidiary of Continental Casualty Company ("Casualty") which is wholly-owned by
CNA Financial Corporation ("CNAF"). Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, pension and accident and health, consisting primarily of major medical and
hospitalization.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business, to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). Certain amounts applicable to
prior years have been reclassified to conform to classifications followed in
1997.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INSURANCE
Premium revenue--Revenues on universal life type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Future policy benefit reserves--Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method using actuarial assumptions as to interest rates, mortality,
morbidity, withdrawals and expenses. Actuarial assumptions include a margin for
adverse deviation and generally vary by plan, age at issue and policy duration.
Interest rates range from 3% to 11%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses
beyond the premium paying period. Reserves for universal life-type contracts are
equal to the account balances that accrue to the benefit of the policyholders.
Interest crediting rates ranged from 4.9% to 7.3% for the three years ended
December 31, 1997.
Claim reserves--Claim reserves include provisions for reported claims in
the course of settlement and estimates of unreported losses based upon past
experience.
Reinsurance--In addition to the pooling agreement with Assurance, VFL also
assumes and cedes insurance with other insurers and reinsurers and members of
various reinsurance pools and associations. VFL utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
to the specific risk characteristics of each product line with VFL's retained
amount varying by type of coverage. VFL's reinsurance includes quota
45
<PAGE> 53
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
share, yearly renewable term and facultative programs. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability.
Deferred acquisition costs--Life acquisition costs are capitalized and
amortized based on assumptions consistent with those used for computing policy
benefit reserves. Acquisition costs on traditional life business are amortized
over their assumed premium paying periods. Universal life and annuity
acquisition costs are amortized in proportion to the present value of the
estimated gross profits over the products' assumed durations, which are
regularly evaluated and adjusted, as appropriate. Based on 1996 evaluations, the
assumed interest rate spreads were adjusted, the effect of which was to reduce
amortization by approximately $3.0 million for the year ended December 31, 1996.
INVESTMENTS
Valuation of investments--VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. VFL has no real estate or mortgage loans. VFL
accounts for its derivative securities under the fair value method. Under this
method the derivative securities are recorded at fair value at the reporting
date with changes in fair value reflected in realized investment gains and
losses. VFL's derivatives are made up of interest rate caps and purchased
options and are classified as other invested assets.
Investment gains and losses--All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes. Investments are
written down to estimated fair values and losses are charged to income when a
decline in value is considered to be other than temporary.
Securities sold under repurchase agreements--VFL has a securities lending
program where securities are loaned to third parties, primarily major brokerage
firms. Borrowers of these securities must deposit 100% of the fair value of the
securities if the collateral is cash, or 102% if the collateral is securities.
Cash deposits from these transactions are invested in short-term investments
(primarily commercial paper). VFL continues to receive the interest on the
loaned debt securities, as beneficial owner and, accordingly, the loaned debt
securities are included within fixed maturities. The liabilities for securities
sold subject to repurchase agreements are recorded at their contractual
repurchase amounts. VFL had no securities on loan at December 31, 1997 or 1996.
Separate Account business--VFL writes certain annuity contracts and
universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate account
liabilities are principally obligations due to contractholders, which are
carried at contract values.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities under the liability method. Temporary differences
primarily relate to insurance reserves, investment valuation differences, net
unrealized investment gains/losses and deferred acquisition costs.
46
<PAGE> 54
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Fixed maturities:
Taxable bonds............................................. $20,669 $21,597 $21,576
Tax exempt bonds.......................................... 1 12 23
Equity securities........................................... 72 59 64
Policy loans................................................ 4,264 3,669 3,925
Short-term investments...................................... 4,885 4,197 6,037
Security repurchase transactions............................ -- -- 135
Other....................................................... 200 -- 2
------- ------- -------
30,091 29,534 31,762
Investment expense.......................................... 178 222 268
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $29,913 $29,312 $31,494
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Realized investment gains (losses):
Fixed maturities.......................................... $ 3,333 $ 4,123 $13,674
Equity securities......................................... 1,021 578 --
Other..................................................... (154) 70 109
------- -------- -------
4,200 4,771 13,783
Income tax expense.......................................... (1,470) (1,670) (4,824)
------- -------- -------
NET REALIZED INVESTMENT GAINS....................... 2,730 3,101 8,959
------- -------- -------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... 5,806 (20,726) 25,405
Equity securities......................................... (607) 1,263 389
Other, principally Separate Account business.............. 20 -- --
------- -------- -------
5,219 (19,463) 25,794
Income tax (expense) benefit.............................. (1,829) 6,812 (9,028)
------- -------- -------
CHANGE IN NET UNREALIZED INVESTMENT GAINS
(LOSSES)............................................ 3,390 (12,651) 16,766
- ------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) $ 6,120 $ (9,550) $25,725
================================================================================================
</TABLE>
SUMMARY OF GROSS REALIZED
INVESTMENT GAINS (LOSSES) FOR FIXED
MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Proceeds from sales......................... $278,459 $2,447 $530,828 $1,306 $336,731 $ --
======== ====== ======== ====== ======== =====
Gross realized gains........................ $ 4,793 $1,113 $ 7,927 $ 578 $ 18,185 --
Gross realized losses....................... (1,460) (92) (3,804) -- (4,511) --
- -------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS ON SALES $ 3,333 $1,021 $ 4,123 $ 578 $ 13,674 $ --
=========================================================================================================================
</TABLE>
47
<PAGE> 55
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS
(LOSSES) INCLUDED IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities............................................ $6,227 $(787) $ 5,440 $3,226 $(3,592) $ (366)
Equity securities........................................... 1,279 -- 1,279 1,886 -- 1,886
Other, principally Separate Account business................ 20 -- 20 -- -- --
------ ----- ------- ------ ------- ------
$7,526 $(787) 6,739 $5,112 $(3,592) 1,520
====== ===== ====== =======
Deferred income tax expense................................. (2,359) (530)
- --------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 4,380 $ 990
==========================================================================================================================
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
United States Treasury securities and obligations of
government agencies....................................... $299,066 $2,073 $ 711 $300,428
Asset-backed securities..................................... 68,612 147 74 68,685
Corporate securities........................................ 72,431 2,384 2 74,813
Other debt securities....................................... 26,158 1,623 -- 27,781
-------- ------ ------ --------
Total fixed maturities.................................. 466,267 6,227 787 471,707
Equity securities........................................... 981 1,279 -- 2,260
- -----------------------------------------------------------------------------------------------------------------
TOTAL $467,248 $7,506 $ 787 $473,967
=================================================================================================================
DECEMBER 31, 1996
United States Treasury securities and obligations of
government agencies....................................... $117,213 $ 141 $2,486 $114,868
Asset-backed securities..................................... 113,376 641 767 113,251
States, municipalities and political
subdivisions-tax-exempt................................... 30 -- -- 30
Corporate securities........................................ 55,196 988 335 55,849
Other debt securities....................................... 35,617 1,456 4 37,068
-------- ------ ------ --------
Total fixed maturities.................................. 321,432 3,226 3,592 321,066
Equity securities........................................... 1,073 1,886 -- 2,959
- -----------------------------------------------------------------------------------------------------------------
TOTAL $322,505.. $5,112 $3,592 $324,025
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- --------------------------------------------------------------------------------------------------------------
1997 1996
--------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
DECEMBER 31 COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
Due in one year or less..................................... $ 2,249 $ 2,255 $ 3,299 $ 3,305
Due after one year through five years....................... 302,053 301,749 118,507 116,223
Due after five years through ten years...................... 54,663 56,502 47,998 48,866
Due after ten years......................................... 38,690 42,516 38,252 39,421
Asset-backed securities not due at a single maturity date... 68,612 68,685 113,376 113,251
- --------------------------------------------------------------------------------------------------------------
TOTAL $466,267 $471,707 $321,432 $321,066
==============================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
48
<PAGE> 56
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1997 and 1996. There are no
investments in a single issuer, other than the U.S. government, that when
aggregated exceed 10% of stockholder's equity.
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in a current market exchange. Any
difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs,
reinsurance receivables, deferred income taxes and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, premium and other insurance receivables,
accrued investment income, receivables for securities sold, payables for
securities purchased and certain other assets and other liabilities because of
their short-term nature. Accordingly, these financial instruments are not listed
in the table below.
The carrying amounts and estimated fair values of VFL's other financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
Fixed maturities.......................................... $471,707 $471,707 $321,066 $321,066
Equity securities......................................... 2,260 2,260 2,959 2,959
Policy loans.............................................. 66,971 63,756 60,267 56,169
Other invested assets..................................... 433 433 -- --
Separate Account business:
Fixed maturities.......................................... 3,198 3,198 -- --
Equity securities......................................... 5,233 5,233 -- --
Other..................................................... 305 305 -- --
FINANCIAL LIABILITIES
Premium deposits and annuity contracts...................... 266,093 247,567 167,049 153,676
===========================================================================================================
</TABLE>
The following methods and assumptions were used by VFL in estimating the
fair value amounts for financial instruments:
Fixed maturities and equity securities are based on quoted market
prices, where available. For securities not actively traded, fair values
are estimated using values obtained from independent pricing services,
costs to settle, or quoted market prices of comparable instruments.
The fair values for policy loans are estimated using discounted cash
flow analyses at interest rates currently offered for similar loans to
borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
49
<PAGE> 57
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED):
Valuation techniques to determine fair value of other Separate Account
business assets consist of discounted cash flows and quoted market prices
of (a) the investments or (b) comparable instruments. The fair value of
other Separate Account business liabilities approximates their carrying
value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1997. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1997 totaled $50
million. The gross notional principal or contractual amounts of derivative
financial instruments in the Separate Accounts totaled $1.5 million at December
31, 1997. VFL had no derivative financial instrument holdings at December 31,
1996. The contract or notional amounts are used to calculate the exchange of
contractual payments under the agreements and are not representative of the
potential for gain or loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the fair value of the instruments and will vary based on the
creditworthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial
instruments in the general account and Separate Accounts at December 31, 1997
totaled $.4 million and $.3 million, respectively. Net realized losses on
derivative financial instruments held in the general account totaled $.1 million
for the year ended December 31, 1997, while net realized losses on derivatives
in the Separate Accounts were negligible for the same period.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
NOTE 4. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted by the Pennsylvania
Insurance Department. Prescribed statutory accounting
50
<PAGE> 58
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
practices are set forth in a variety of publications of the National Association
of Insurance Commissioners as well as state laws, regulations, and general
administrative rules. VFL has no material permitted accounting practices. VFL
had statutory net losses of $1.0 million and $2.7 million for the years ended
December 31, 1997 and 1996, and net income of $8.9 million for the year ended
December 31, 1995. The statutory net losses for 1997 and 1996 were primarily due
to the immediate expensing of acquisition costs which were substantial as a
result of the increase in sales of individual life and annuity products. Under
GAAP, such costs are capitalized and amortized to income over the duration of
these contracts. Statutory capital and surplus for VFL was $125.3 million and
$124.3 million at December 31, 1997 and 1996, respectively.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1997 and 1996, approximately $12.5 million and $12.4 million, respectively,
was not subject to prior Insurance Department approval.
NOTE 5. BENEFIT PLANS:
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over who have completed at least one year of service. Casualty is included
in the CNA Employees' Retirement Plan and VFL is allocated their proportionate
share of these expenses. While the benefits for the plans vary, they are
generally based on years of credited service and the employee's highest sixty
consecutive months of compensation.
CNAF's funding policy is to make contributions in accordance with
applicable governmental regulatory requirements. The assets of the plans are
invested primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
The funded status is determined using assumptions at the end of the year.
Underfunded plans are those plans for which the accumulated benefit obligation
is in excess of plan assets. Overfunded plans are those plans for which plan
assets exceed the accumulated benefit obligations. Pension cost is determined
using assumptions at the beginning of the year.
The net pension cost allocated to VFL was $4.0 million, $3.6 million and
$1.7 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the plans' funded status and amounts
recognized in CNAF's consolidated financial statements at December 31, 1997,
1996 and 1995:
ACCUMULATED BENEFIT OBLIGATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Actuarial present value of accumulated plan benefits:
Vested................................................ $1,339,708 $517,221 $622,548 $491,052 $646,017
Nonvested............................................. 76,992 37,718 32,369 28,346 14,126
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $1,416,700 $554,939 $654,917 $519,398 $660,143
===========================================================================================================================
</TABLE>
51
<PAGE> 59
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 5.--(CONTINUED):
NET PENSION ASSET (LIABILITY)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Projected benefit obligation........................... $1,779,799 $777,755 $ 788,333 $ 769,999 $ 809,308
Plan assets at fair value.............................. 1,312,592 701,854 503,623 629,673 496,264
---------- -------- --------- --------- ---------
Plan assets less than projected benefit obligation... (467,207) (75,901) (284,710) (140,326) (313,044)
Unrecognized net asset at January 1, 1986, being
recognized over 12 years............................. (2,124) (7,099) -- (12,176) --
Unrecognized prior service costs....................... 88,006 19,077 77,747 21,445 104,042
Unrecognized net gain (loss)........................... 218,204 122,173 (11,793) 164,585 13,508
- --------------------------------------------------------------------------------------------------------------------------
NET PENSION (LIABILITY) ASSET $ (163,121) $ 58,250 $(218,756) $ 33,528 $(195,494)
==========================================================================================================================
</TABLE>
NET PERIODIC PENSION COST
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Net periodic pension cost:
Service cost-benefits attributed to employee service
during the year.................................... $ 54,321 $ 36,489 $ 18,825 $ 32,118 $ 11,596
Interest cost on projected benefit obligation........ 118,668 53,549 56,771 51,056 32,760
Actual return on plan assets......................... (102,950) (31,106) (29,013) (115,363) (43,432)
Net amortization and deferral........................ 17,370 (16,059) (5,982) 72,415 19,547
- --------------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 87,409 $ 42,873 $ 40,601 $ 40,226 $ 20,471
==========================================================================================================================
</TABLE>
Actuarial assumptions are set forth in the following table:
ASSUMPTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discount rate............................................... 7.25% 7.50% 7.25% 8.50%
Rate of increase in compensation levels*.................... 2.75 2.75 2.75 4.00
Expected long-term rate of return on plan assets............ 7.50 7.75-8.50 7.50-8.50 8.75
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes age/service related merit and productivity increases.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health and dental care benefits for eligible
retirees, through age 64, and provides life insurance and reimbursement of
Medicare Part B premiums for all eligible retired persons. CNAF funds benefit
costs principally on the basis of current benefit payments.
The net postretirement benefit cost allocated to VFL was $2.1 million, $1.3
million and $.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
52
<PAGE> 60
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 5.--(CONTINUED):
The following table sets forth the amounts recognized in CNAF's
consolidated financial statements at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
- ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Accumulated postretirement benefit obligation:
Retirees.................................................. $201,985 $171,950 $185,507
Fully eligible, active plan participants.................. 72,818 89,009 59,173
Other active plan participants............................ 87,207 88,191 62,540
-------- -------- --------
Total accumulated postretirement benefit obligation..... 362,010 349,150 307,220
Plan assets at fair value................................... (509) -- --
Unrecognized prior service cost............................. (203) (70) --
Unrecognized net (loss) gain................................ (8,197) (12,215) 7,380
- ------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $353,101 $336,865 $314,600
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET PERIODIC POSTRETIREMENT BENEFIT COST
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service
during the year......................................... $ 10,156 $ 11,935 $ 5,969
Interest cost on accumulated post retirement benefit
obligation.............................................. 25,135 24,146 17,506
Expected return on assets................................. (25) -- --
Amortization.............................................. (322) 374 (941)
- ------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 34,944 $ 36,455 $ 22,534
================================================================================================
</TABLE>
* The 1995 data includes The Continental Corporation Retirement Plans from
acquisition date.
<TABLE>
<CAPTION>
ASSUMPTIONS
- ------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate:
Assumptions used in determining net periodic benefit
cost.................................................... 7.50% 7.25% 8.50%
Assumptions used in determining the projected benefit
obligation (liability).................................. 7.25% 7.50% 7.25%
- ------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% in 1997, declining to an ultimate rate
of 5% in 2002. The health care cost trend rate assumption has a significant
effect on the amount of the benefit obligation and periodic cost reported. An
increase in the assumed health care cost trend rate of 1% in each year would
increase CNAF's accumulated postretirement benefit obligation as of December 31,
1997 by $23.9 million and the aggregate net periodic postretirement benefit cost
for 1997 by $2.9 million.
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan which is a
contributory plan that allows employees to make regular contributions of up to
6% of their salary. VFL is allocated its proportionate share of CNA Employees'
Savings Plan expenses. CNAF contributes an additional amount equal to 70% of the
employee's regular contribution. Employees may also make an additional
contribution of up to 10% of their salaries for which there is no additional
contribution by CNAF. CNAF contributions allocated to and expensed by VFL for
the Savings Plan were $.2 million, $1.0 million and $.7 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
53
<PAGE> 61
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6. INCOME TAXES:
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included in the consolidated
Federal income tax return with CNAF and its eligible subsidiaries (CNA Tax
Group), which in turn is included in the consolidated Federal income tax return
of Loews and its eligible subsidiaries. The Federal income tax provision of VFL
is computed as if VFL were filing its own separate return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $121.8 million and $100.0 million at December
31, 1997 and 1996, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1997
and 1996. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has not provided for such a tax as VFL has no plans for
such a distribution.
Significant components of VFL's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are shown in the table below:
<TABLE>
<CAPTION>
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Insurance reserves.......................................... $ 24,961 $ 17,166
Deferred acquisition costs.................................. (33,374) (22,078)
Investment valuation........................................ 6,129 5,411
Net unrealized gains........................................ (2,359) (530)
Receivables................................................. (2,486) (646)
Other, net.................................................. 3,031 989
- ---------------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITIES) ASSETS $ (4,098) $ 312
=================================================================================
</TABLE>
At December 31, 1997, gross deferred tax assets and liabilities amounted to
$35.1 million and $39.2 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1996, amounted to $24.9 million and $24.6 million,
respectively. VFL has not established a valuation reserve at December 31, 1996
as it believes that all deferred tax assets are fully realizable.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Current tax expense......................................... $4,716 $5,719 $11,747
Deferred tax expense........................................ 2,581 3,309 453
- ---------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $7,297 $9,028 $12,200
=============================================================================================
</TABLE>
The components of total income tax expense are allocated between operating
income and realized capital gains and losses in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Income tax expense on:
Operating income.......................................... $5,827 $7,358 $ 7,376
Realized investment gains................................. 1,470 1,670 4,824
- ---------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $7,297 $9,028 $12,200
=============================================================================================
</TABLE>
54
<PAGE> 62
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1997 INCOME 1996 INCOME 1995 INCOME
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates............................ $7,219 35.0 $9,011 35.0 $12,149 35.0
Other...................................................... 78 0.4 17 0.1 51 0.2
- ---------------------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES $7,297 35.4 $9,028 35.1 $12,200 35.2
===========================================================================================================================
</TABLE>
NOTE 7. REINSURANCE:
The ceding of insurance does not discharge primary liability of the
original insurer. VFL places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in VFL's state of domicile, VFL
receives collateral, primarily in the form of bank letters of credit. Such
collateral totaled approximately $0.1 million at both December 31, 1997 and
1996.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums are from short duration contracts. The effects of reinsurance on
premium revenues are shown in the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PREMIUMS
----------------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1997
Life.................................................... $564,891 $81,502 $567,217 $ 79,176 103%
Accident and Health..................................... 2,776 252,996 2,776 252,996 100
-------- -------- -------- -------- ---
Total premiums........................................ $567,667 $334,498 $569,993 $332,172 101%
======== ======== ======== ======== ===
1996
Life.................................................... $422,700 $72,718 $424,907 $ 70,511 103%
Accident and Health..................................... 1,080 254,975 1,080 254,975 100
-------- -------- -------- -------- ---
Total premiums........................................ $423,780 $327,693 $425,987 $325,486 101%
======== ======== ======== ======== ===
1995
Life.................................................... $316,011 $75,053 $316,577 $ 74,487 101%
Accident and Health..................................... 422 222,166 422 222,166 100
-------- -------- -------- -------- ---
Total premiums........................................ $316,433 $297,219 $316,999 $296,653 100%
===================================================================================================================
</TABLE>
Transactions with Assurance, as part of the pooling agreement described in
Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $116.2 million, $43.0 million and $9.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Additionally,
insurance claims and policyholder benefits are net of reinsurance recoveries
from non-affiliated companies of $77.8 million, $7.0 million and $6.1 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Reinsurance receivables reflected on the balance sheet are recoverables
from reinsurers related to insurance reserves. These balances were approximately
$1.6 billion and $1.3 billion at December 31, 1997 and 1996, respectively, are
principally due from Assurance pursuant to the Reinsurance Pooling Agreement.
55
<PAGE> 63
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED)
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
--------------------------------------- ASSUMED/NET
DIRECT ASSUMED CEDED NET %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
December 31, 1997.......................................... $166,308 $25,557 $168,353 $23,512 108.7%
December 31, 1996.......................................... 108,126 22,085 109,873 20,338 108.6
December 31, 1995.......................................... 57,138 16,996 58,442 15,692 108.3
==================================================================================================================
</TABLE>
NOTE 8. RELATED PARTIES:
As discussed in Note 1, VFL is party to a pooling agreement with its
parent, Assurance. In addition, VFL is party to the CNA Intercompany Expense
Agreement whereby expenses incurred by CNAF and each of its subsidiaries are
allocated to the appropriate company. All acquisition and underwriting expenses
allocated to VFL are further subject to the Reinsurance Pooling Agreement with
Assurance, so that acquisition and underwriting expenses recognized by VFL
approximate ten percent of the combined acquisition and underwriting expenses of
VFL and Assurance. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$45.3 million, $37.2 million and $41.1 million for 1997, 1996 and 1995,
respectively. Expenses of VFL exclude $9.9 million, $12.3 million and $5.5
million of general and administrative expenses incurred by VFL and allocated to
CNAF for the years ended December 31, 1997, 1996 and 1995, respectively. VFL had
a $36.0 million and $67.5 million affiliated receivable at December 31, 1997 and
1996, respectively, for net cash settlements due from Assurance in the normal
course of operations related to pooling and general expense reimbursements.
There are no interest charges on intercompany receivables or payables.
NOTE 9. LEGAL:
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or equity of VFL.
56
<PAGE> 64
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONCLUDED
NOTE 10. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
REVENUES
Individual................................................ $ 72,204 $ 70,208 $ 69,577
Group..................................................... 296,753 292,807 263,388
Realized gains............................................ 4,200 4,771 13,783
---------- ---------- ----------
Total............................................... $ 373,157 $ 367,786 $ 346,748
========== ========== ==========
INCOME BEFORE INCOME TAX
Individual................................................ $ 9,952 $ 12,752 $ 8,611
Group..................................................... 6,475 8,224 12,316
Realized gains............................................ 4,200 4,771 13,783
---------- ---------- ----------
Total............................................... $ 20,627 $ 25,747 $ 34,710
========== ========== ==========
NET INCOME
Individual................................................ $ 6,345 $ 8,209 $ 5,597
Group..................................................... 4,255 5,409 7,954
Realized gains............................................ 2,730 3,101 8,959
---------- ---------- ----------
Total............................................... $ 13,330 $ 16,719 $ 22,510
========== ========== ==========
ASSETS
Individual................................................ $1,824,854 $1,522,900 $1,360,942
Group..................................................... 543,572 457,902 280,496
---------- ---------- ----------
Total............................................... $2,368,426 $1,980,802 $1,641,438
======================================================================================================
</TABLE>
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
insurance segments.
Group revenues include $211.5 million, $210.1 million and $187.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively, under
contracts covering U.S. government employees and their dependents ("FEHBP").
* * * *
57
<PAGE> 65
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES,
DEATH BENEFITS AND ACCUMULATED PREMIUM PAYMENTS
The following tables have been prepared to illustrate hypothetically how
certain values under a Policy change with investment performance over an
extended period of time. The tables illustrate how Policy Values, Surrender
Values and Death Benefits under a Policy covering an Insured of a given age on
the Policy Effective Date, would vary over time if the Planned Periodic Premium
Payments were paid annually and the return on the assets in each fund were an
assumed uniform gross annual rate of 0%, 6% and 12%. The values would be
different from those shown if the returns averaged 0%, 6% or 12% but fluctuated
over and under those averages throughout the years shown. The tables also show
Planned Periodic Premium Payments accumulated at 5% interest compounded
annually. THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF
RETURN. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return illustrated and will depend on a
number of factors including the investment allocations made by an Owner and
prevailing rates. These illustrations assume that the Net Premiums are allocated
equally among the 18 Subaccounts available under the Policy, and that no amounts
are allocated to the Fixed Account.
The illustrations reflect the fact that the net investment returns on the
assets held in the Subaccounts is lower than the gross after tax return of the
selected Funds. The tables assume an average annual expense ratio of 0.92% of
the average daily net assets of the Funds available. The following information
summarizes the expenses by fund: Alger American Growth (0.79%), Alger American
MidCap Growth (0.84%), Alger American Small Capitalization (0.89%), Federated
High Income Bond II (0.80%), Federated Prime Money Fund II (0.80%), Federated
Utility Fund II (0.85%), VIP II Asset Manager Portfolio (0.65%), VIP II
Contrafund Portfolio (0.71%), VIP Equity-Income Portfolio (0.58%), VIP II Index
500 Portfolio (0.28%), MFS Emerging Growth Series (.90%), MFS Growth With Income
Series (1.00%), MFS Limited Maturity Series (1.00%), MFS Research Series (.92%),
SoGen Overseas Portfolio (2.00%), Worldwide Emerging Markets (.80%) and
Worldwide Hard Assets Fund (1.17%).
In addition, the illustrations reflect the daily charge to the Variable
Account for assuming mortality and expense risk, which is equivalent to an
effective annual charge of 0.90% during Policy Years 1-10 and 0.45% during
Policy Years 11 and later. After deduction of Fund expenses and the mortality
and expense risk charge, the illustrated gross annual investment rates of return
of 0%, 6% and 12% would correspond to approximate net annual rates of -1.82%,
4.18% and 10.18% , respectively during Policy Years 1-10 and -1.37% , 4.63% and
10.63% during Policy Years 11 and later.
The illustrations also reflect the deduction of the Sales Charges, Premium
Tax Charge, Federal Tax Charge and Monthly Deduction for the hypothetically
insured. The Surrender charge is reflected in the Surrender Value column. The
Company's current cost of insurance charges and the guaranteed maximum cost of
insurance charges that the Company has the contractual right to charge, are
reflected in separate illustrations on each of the following pages. All the
illustrations reflect the fact that no charges for federal or state income taxes
are currently made against the Variable Account and assumes no Loan Amount or
partial withdrawals/surrenders or charges for supplemental and/or rider
benefits.
The illustrations are based on the Company's Preferred Nonsmoker risk
class. Upon request, Owner(s) will be furnished with a comparable illustration
based on the proposed Insured's individual circumstances. Such illustrations may
assume different hypothetical rates of return than those illustrated in the
following tables. Because the Death Benefit values vary depending on the Death
Benefit Option in effect, level and increasing death benefit options are
illustrated separately.
The illustrations show contract values that would result based upon the
hypothetical investment rates of return if premiums are paid as indicated and
all net premiums are allocated to subaccounts.
<PAGE> 66
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,226 352 100,000
2.............................. 4,318 2,646 1,504 100,000
3.............................. 6,640 4,018 2,418 100,000
4.............................. 9,078 5,342 3,742 100,000
5.............................. 11,638 6,615 5,015 100,000
6.............................. 14,326 7,837 6,237 100,000
7.............................. 17,148 9,004 7,724 100,000
8.............................. 20,112 10,110 8,990 100,000
9.............................. 23,224 11,153 10,193 100,000
10............................. 26,491 12,127 11,327 100,000
11............................. 29,922 13,110 12,470 100,000
12............................. 33,524 14,019 13,539 100,000
13............................. 37,307 14,851 14,531 100,000
14............................. 41,278 15,602 15,442 100,000
15............................. 45,448 16,264 16,264 100,000
16............................. 49,827 16,829 16,829 100,000
17............................. 54,424 17,286 17,286 100,000
18............................. 59,252 17,623 17,623 100,000
19............................. 64,320 17,824 17,824 100,000
20............................. 69,643 17,871 17,871 100,000
21............................. 75,231 17,747 17,747 100,000
22............................. 81,099 17,437 17,437 100,000
23............................. 87,260 16,921 16,921 100,000
24............................. 93,729 16,181 16,181 100,000
25............................. 100,522 15,189 15,189 100,000
26............................. 107,654 13,902 13,902 100,000
27............................. 115,143 12,217 12,217 100,000
28............................. 123,006 10,163 10,163 100,000
29............................. 131,262 7,604 7,604 100,000
30............................. 139,932 4,438 4,438 100,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF YEARS.
<PAGE> 67
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,318 444 100,000
2.............................. 4,318 2,915 1,773 100,000
3.............................. 6,640 4,555 2,955 100,000
4.............................. 9,078 6,241 4,641 100,000
5.............................. 11,638 7,970 6,370 100,000
6.............................. 14,326 9,746 8,146 100,000
7.............................. 17,148 11,564 10,284 100,000
8.............................. 20,112 13,423 12,303 100,000
9.............................. 23,224 15,321 14,361 100,000
10............................. 26,491 17,255 16,455 100,000
11............................. 29,922 19,334 18,694 100,000
12............................. 33,524 21,462 20,982 100,000
13............................. 37,307 23,640 23,320 100,000
14............................. 41,278 25,869 25,709 100,000
15............................. 45,448 28,147 28,147 100,000
16............................. 49,827 30,475 30,475 100,000
17............................. 54,424 32,851 32,851 100,000
18............................. 59,252 35,272 35,272 100,000
19............................. 64,320 37,736 37,736 100,000
20............................. 69,643 40,240 40,240 100,000
21............................. 75,231 42,785 42,785 100,000
22............................. 81,099 45,375 45,375 100,000
23............................. 87,260 48,015 48,015 100,000
24............................. 93,729 50,714 50,714 100,000
25............................. 100,522 53,479 53,479 100,000
26............................. 107,654 56,315 56,315 100,000
27............................. 115,143 59,203 59,203 100,000
28............................. 123,006 62,198 62,198 100,000
29............................. 131,262 65,288 65,288 100,000
30............................. 139,932 68,493 68,493 100,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 68
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE AGE 45 PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,411 537 100,000
2.............................. 4,318 3,195 2,053 100,000
3.............................. 6,640 5,137 3,537 100,000
4.............................. 9,078 7,253 5,653 100,000
5.............................. 11,638 9,560 7,960 100,000
6.............................. 14,326 12,076 10,476 100,000
7.............................. 17,148 14,820 13,540 100,000
8.............................. 20,112 17,812 16,692 100,000
9.............................. 23,224 21,078 20,118 100,000
10............................. 26,491 24,643 23,843 100,000
11............................. 29,922 28,697 28,057 100,000
12............................. 33,524 33,156 32,676 100,000
13............................. 37,307 38,073 37,753 100,000
14............................. 41,278 43,504 43,344 100,000
15............................. 45,448 49,516 49,516 100,000
16............................. 49,827 56,183 56,183 100,000
17............................. 54,424 63,596 63,596 100,000
18............................. 59,252 71,859 71,859 100,000
19............................. 64,320 81,099 81,099 100,653
20............................. 69,643 91,351 91,351 111,448
21............................. 75,231 102,638 102,638 123,165
22............................. 81,099 115,044 115,044 136,903
23............................. 87,260 128,679 128,679 151,841
24............................. 93,729 143,662 143,662 168,085
25............................. 100,522 160,127 160,127 185,747
26............................. 107,654 178,217 178,217 204,950
27............................. 115,143 198,151 198,151 223,910
28............................. 123,006 220,172 220,172 244,391
29............................. 131,262 244,520 244,520 266,527
30............................. 139,932 271,493 271,493 290,498
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 69
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,388 514 100,000
2.............................. 4,318 2,930 1,788 100,000
3.............................. 6,640 4,390 2,790 100,000
4.............................. 9,078 5,798 4,198 100,000
5.............................. 11,638 7,179 5,579 100,000
6.............................. 14,326 8,536 6,936 100,000
7.............................. 17,148 9,872 8,592 100,000
8.............................. 20,112 11,186 10,066 100,000
9.............................. 23,224 12,479 11,519 100,000
10............................. 26,491 13,751 12,951 100,000
11............................. 29,922 15,074 14,434 100,000
12............................. 33,524 16,361 15,881 100,000
13............................. 37,307 17,604 17,284 100,000
14............................. 41,278 18,835 18,675 100,000
15............................. 45,448 20,045 20,045 100,000
16............................. 49,827 21,122 21,122 100,000
17............................. 54,424 22,135 22,135 100,000
18............................. 59,252 23,086 23,086 100,000
19............................. 64,320 23,966 23,966 100,000
20............................. 69,643 24,770 24,770 100,000
21............................. 75,231 25,500 25,500 100,000
22............................. 81,099 26,143 26,143 100,000
23............................. 87,260 26,700 26,700 100,000
24............................. 93,729 27,165 27,165 100,000
25............................. 100,522 27,515 27,515 100,000
26............................. 107,654 27,755 27,755 100,000
27............................. 115,143 27,860 27,860 100,000
28............................. 123,006 27,835 27,835 100,000
29............................. 131,262 27,668 27,668 100,000
30............................. 139,932 27,322 27,322 100,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 70
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,485 611 100,000
2.............................. 4,318 3,217 2,075 100,000
3.............................. 6,640 4,966 3,366 100,000
4.............................. 9,078 6,762 5,162 100,000
5.............................. 11,638 8,632 7,032 100,000
6.............................. 14,326 10,583 8,983 100,000
7.............................. 17,148 12,619 11,339 100,000
8.............................. 20,112 14,745 13,625 100,000
9.............................. 23,224 16,966 16,006 100,000
10............................. 26,491 19,284 18,484 100,000
11............................. 29,922 21,809 21,169 100,000
12............................. 33,524 24,438 23,958 100,000
13............................. 37,307 27,171 26,851 100,000
14............................. 41,278 30,042 29,882 100,000
15............................. 45,448 33,050 33,050 100,000
16............................. 49,827 36,107 36,107 100,000
17............................. 54,424 39,279 39,279 100,000
18............................. 59,252 42,577 42,577 100,000
19............................. 64,320 46,005 46,005 100,000
20............................. 69,643 49,570 49,570 100,000
21............................. 75,231 53,288 53,288 100,000
22............................. 81,099 57,165 57,165 100,000
23............................. 87,260 61,220 61,220 100,000
24............................. 93,729 65,469 65,469 100,000
25............................. 100,522 69,926 69,926 100,000
26............................. 107,654 74,617 74,617 100,000
27............................. 115,143 79,567 79,567 100,000
28............................. 123,006 84,812 84,812 100,000
29............................. 131,262 90,392 90,392 100,000
30............................. 139,932 96,325 96,325 103,068
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 71
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$2,006 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 2,106 1,583 709 100,000
2.............................. 4,318 3,516 2,375 100,000
3.............................. 6,640 5,590 3,990 100,000
4.............................. 9,078 7,848 6,248 100,000
5.............................. 11,638 10,335 8,735 100,000
6.............................. 14,326 13,079 11,479 100,000
7.............................. 17,148 16,108 14,828 100,000
8.............................. 20,112 19,452 18,332 100,000
9.............................. 23,224 23,144 22,184 100,000
10............................. 26,491 27,221 26,421 100,000
11............................. 29,922 31,876 31,236 100,000
12............................. 33,524 37,023 36,543 100,000
13............................. 37,307 42,713 42,393 100,000
14............................. 41,278 49,034 48,874 100,000
15............................. 45,448 56,048 56,048 100,000
16............................. 49,827 63,774 63,774 100,000
17............................. 54,424 72,346 72,346 100,000
18............................. 59,252 81,871 81,871 103,158
19............................. 64,320 92,399 92,399 114,575
20............................. 69,643 104,015 104,015 126,898
21............................. 75,231 116,835 116,835 140,202
22............................. 81,099 130,969 130,969 155,853
23............................. 87,260 146,553 146,553 172,932
24............................. 93,729 163,734 163,734 191,569
25............................. 100,522 182,671 182,671 211,898
26............................. 107,654 203,547 203,547 234,079
27............................. 115,143 226,599 226,599 256,057
28............................. 123,006 252,077 252,077 279,805
29............................. 131,262 280,259 280,259 305,482
30............................. 139,932 311,454 311,454 333,256
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 72
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,865 3,710 2,836 103,710
2.............................. 9,972 7,565 6,328 107,565
3.............................. 15,335 11,321 9,721 111,321
4.............................. 20,967 14,980 13,380 114,980
5.............................. 26,880 18,537 16,937 118,537
6.............................. 33,088 21,995 20,395 121,995
7.............................. 39,607 25,346 24,066 125,346
8.............................. 46,452 28,587 27,467 128,587
9.............................. 53,639 31,713 30,753 131,713
10............................. 61,186 34,718 33,918 134,718
11............................. 69,110 37,791 37,151 137,791
12............................. 77,430 40,742 40,262 140,742
13............................. 86,166 43,568 43,248 143,568
14............................. 95,338 46,264 46,104 146,264
15............................. 104,970 48,820 48,820 148,820
16............................. 115,083 51,225 51,225 151,225
17............................. 125,702 53,469 53,469 153,469
18............................. 136,851 55,536 55,536 155,536
19............................. 148,558 57,408 57,408 157,408
20............................. 160,851 59,065 59,065 159,065
21............................. 173,758 60,491 60,491 160,491
22............................. 187,310 61,673 61,673 161,673
23............................. 201,540 62,595 62,595 162,595
24............................. 216,482 63,243 63,243 163,243
25............................. 232,171 63,596 63,596 163,596
26............................. 248,644 63,621 63,621 163,621
27............................. 265,940 63,222 63,222 163,222
28............................. 284,102 62,465 62,465 162,465
29............................. 303,172 61,232 61,232 161,232
30............................. 323,195 59,470 59,470 159,470
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 73
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,865 3,953 3,079 103,953
2.............................. 9,972 8,287 7,050 108,287
3.............................. 15,335 12,772 11,172 112,772
4.............................. 20,967 17,411 15,811 117,411
5.............................. 26,880 22,207 20,607 122,207
6.............................. 33,088 27,164 25,564 127,164
7.............................. 39,607 32,281 31,001 132,281
8.............................. 46,452 37,559 36,439 137,559
9.............................. 53,639 42,998 42,038 142,998
10............................. 61,186 48,594 47,794 148,594
11............................. 69,110 54,621 53,981 154,621
12............................. 77,430 60,842 60,362 160,842
13............................. 86,166 67,264 66,944 167,264
14............................. 95,338 73,887 73,727 173,887
15............................. 104,970 80,709 80,709 180,709
16............................. 115,083 87,727 87,727 187,727
17............................. 125,702 94,936 94,936 194,936
18............................. 136,851 102,328 102,328 202,328
19............................. 148,558 109,889 109,889 209,889
20............................. 160,851 117,604 117,604 217,604
21............................. 173,758 125,461 125,461 225,461
22............................. 187,310 133,449 133,449 233,449
23............................. 201,540 141,555 141,555 241,555
24............................. 216,482 149,767 149,767 249,767
25............................. 232,171 158,065 158,065 258,065
26............................. 248,644 166,415 166,415 266,415
27............................. 265,940 174,713 174,713 274,713
28............................. 284,102 183,023 183,023 283,023
29............................. 303,172 191,219 191,219 291,219
30............................. 323,195 199,233 199,233 299,233
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 74
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,865 4,196 3,322 104,196
2.............................. 9,972 9,040 7,803 109,040
3.............................. 15,335 14,342 12,742 114,342
4.............................. 20,967 20,147 18,547 120,147
5.............................. 26,880 26,500 24,900 126,500
6.............................. 33,088 33,457 31,857 133,457
7.............................. 39,607 41,069 39,789 141,069
8.............................. 46,452 49,395 48,275 149,395
9.............................. 53,639 58,502 57,542 158,502
10............................. 61,186 68,459 67,659 168,459
11............................. 69,110 79,731 79,091 179,731
12............................. 77,430 92,112 91,632 192,112
13............................. 86,166 105,713 105,393 205,713
14............................. 95,338 120,658 120,498 220,658
15............................. 104,970 137,076 137,076 237,076
16............................. 115,083 155,111 155,111 255,111
17............................. 125,702 174,919 174,919 274,919
18............................. 136,851 196,671 196,671 296,671
19............................. 148,558 220,551 220,551 320,551
20............................. 160,851 246,760 246,760 346,760
21............................. 173,758 275,526 275,526 375,526
22............................. 187,310 307,103 307,103 407,103
23............................. 201,540 341,770 341,770 441,770
24............................. 216,482 379,834 379,834 479,834
25............................. 232,171 421,633 421,633 521,633
26............................. 248,644 467,525 467,525 567,525
27............................. 265,940 517,835 517,835 617,835
28............................. 284,102 573,101 573,101 673,101
29............................. 303,172 633,720 633,720 733,720
30............................. 323,195 700,200 700,200 800,200
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 75
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,865 3,875 3,001 103,875
2.............................. 9,972 7,854 6,617 107,854
3.............................. 15,335 11,702 10,102 111,702
4.............................. 20,967 15,449 13,849 115,449
5.............................. 26,880 19,120 17,520 119,120
6.............................. 33,088 22,723 21,123 122,723
7.............................. 39,607 26,259 24,979 126,259
8.............................. 46,452 29,729 28,609 129,729
9.............................. 53,639 33,135 32,175 133,135
10............................. 61,186 36,477 35,677 136,477
11............................. 69,110 39,937 39,297 139,937
12............................. 77,430 43,322 42,842 143,322
13............................. 86,166 46,624 46,304 146,624
14............................. 95,338 49,881 49,721 149,881
15............................. 104,970 53,080 53,080 153,080
16............................. 115,083 56,082 56,082 156,082
17............................. 125,702 58,971 58,971 158,971
18............................. 136,851 61,750 61,750 161,750
19............................. 148,558 64,404 64,404 164,404
20............................. 160,851 66,928 66,928 166,928
21............................. 173,758 69,324 69,324 169,324
22............................. 187,310 71,571 71,571 171,571
23............................. 201,540 73,672 73,672 173,672
24............................. 216,482 75,618 75,618 175,618
25............................. 232,171 77,380 77,380 177,380
26............................. 248,644 78,962 78,962 178,962
27............................. 265,940 80,335 80,335 180,335
28............................. 284,102 81,508 81,508 181,508
29............................. 303,172 82,467 82,467 182,467
30............................. 323,195 83,170 83,170 183,170
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 76
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,658 4,123 3,249 104,123
2.............................. 9,972 8,596 7,359 108,596
3.............................. 15,335 13,194 11,594 113,194
4.............................. 20,967 17,948 16,348 117,948
5.............................. 26,880 22,893 21,293 122,893
6.............................. 33,088 28,039 26,439 128,039
7.............................. 39,607 33,397 32,117 133,397
8.............................. 46,452 38,974 37,854 138,974
9.............................. 53,639 44,781 43,821 144,781
10............................. 61,186 50,826 50,026 150,826
11............................. 69,110 57,380 56,740 157,380
12............................. 77,430 64,207 63,727 164,207
13............................. 86,166 71,310 70,900 171,310
14............................. 95,338 78,741 78,581 178,741
15............................. 104,970 86,502 86,502 186,502
16............................. 115,083 94,463 94,463 194,463
17............................. 125,702 102,716 102,716 202,716
18............................. 136,851 111,277 111,277 211,277
19............................. 148,558 120,145 120,145 220,145
20............................. 160,851 129,325 129,325 229,325
21............................. 173,758 138,832 138,832 238,832
22............................. 187,310 148,658 148,658 248,658
23............................. 201,540 158,820 158,820 258,820
24............................. 216,482 169,321 169,321 269,321
25............................. 232,171 180,144 180,144 280,144
26............................. 248,644 191,309 191,309 291,309
27............................. 265,940 202,795 202,795 302,795
28............................. 284,102 214,626 214,626 314,626
29............................. 303,172 226,801 226,801 326,801
30............................. 323,195 239,288 239,288 339,288
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 77
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45, PREFERRED NON-SMOKER
$4,633 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 4,865 4,371 3,497 104,371
2.............................. 9,972 9,368 8,131 109,368
3.............................. 15,335 14,807 13,207 114,807
4.............................. 20,967 20,759 19,159 120,759
5.............................. 26,880 27,305 25,705 127,305
6.............................. 33,088 34,509 32,909 134,509
7.............................. 39,607 42,437 41,157 142,437
8.............................. 46,452 51,163 50,043 151,163
9.............................. 53,639 60,767 59,807 160,767
10............................. 61,186 71,339 70,539 171,339
11............................. 69,110 83,353 82,713 183,353
12............................. 77,430 96,609 96,129 196,609
13............................. 86,166 111,230 110,910 211,230
14............................. 95,338 127,398 127,238 227,398
15............................. 104,970 145,266 145,266 245,266
16............................. 115,083 164,862 164,862 264,862
17............................. 125,702 186,457 186,457 286,457
18............................. 136,851 210,264 210,264 310,264
19............................. 148,558 236,501 236,501 336,502
20............................. 160,851 265,417 265,417 365,417
21............................. 173,758 297,298 297,298 397,298
22............................. 187,310 332,433 332,433 432,433
23............................. 201,540 371,169 371,169 471,169
24............................. 216,482 413,874 413,874 513,874
25............................. 232,171 460,939 460,939 560,939
26............................. 248,644 512,827 512,827 612,827
27............................. 265,490 570,016 570,016 670,016
28............................. 284,102 633,075 633,075 733,075
29............................. 303,172 702,611 702,611 802,611
30............................. 323,195 779,262 779,262 879,262
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 78
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 986 214 100,000
2.............................. 3,675 2,176 1,140 100,000
3.............................. 5,651 3,327 2,027 100,000
4.............................. 7,726 4,439 3,139 100,000
5.............................. 9,905 5,511 4,211 100,000
6.............................. 12,192 6,542 5,242 100,000
7.............................. 14,594 7,530 6,490 100,000
8.............................. 17,117 8,742 7,562 100,000
9.............................. 19,765 9,366 8,586 100,000
10............................. 22,546 10,211 9,561 100,000
11............................. 25,465 11,074 10,554 100,000
12............................. 28,531 11,890 11,500 100,000
13............................. 31,750 12,660 12,400 100,000
14............................. 35,130 13,388 13,258 100,000
15............................. 38,679 14,071 14,071 100,000
16............................. 42,405 14,705 14,705 100,000
17............................. 46,318 15,280 15,280 100,000
18............................. 50,427 15,785 15,785 100,000
19............................. 54,740 16,203 16,203 100,000
20............................. 59,270 16,519 16,519 100,000
21............................. 64,026 16,726 16,726 100,000
22............................. 69,020 16,817 16,817 100,000
23............................. 74,263 16,789 16,789 100,000
24............................. 79,769 16,642 16,642 100,000
25............................. 85,550 16,367 16,367 100,000
26............................. 91,620 15,941 15,941 100,000
27............................. 97,993 15,333 15,333 100,000
28............................. 104,685 14,495 14,495 100,000
29............................. 111,712 13,370 13,370 100,000
30............................. 119,090 11,897 11,897 100,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 79
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 1,063 291 100,000
2.............................. 3,675 2,399 1,363 100,000
3.............................. 5,651 3,773 2,473 100,000
4.............................. 7,726 5,186 3,886 100,000
5.............................. 9,905 6,639 5,339 100,000
6.............................. 12,192 8,131 6,831 100,000
7.............................. 14,594 9,662 8,622 100,000
8.............................. 17,117 11,233 10,323 100,000
9.............................. 19,765 12,840 12,060 100,000
10............................. 22,546 14,486 13,836 100,000
11............................. 25,465 16,263 15,743 100,000
12............................. 28,531 18,094 17,704 100,000
13............................. 31,750 19,986 19,726 100,000
14............................. 35,130 21,943 21,813 100,000
15............................. 38,679 23,969 23,969 100,000
16............................. 42,405 26,064 26,064 100,000
17............................. 46,318 28,226 28,226 100,000
18............................. 50,427 30,450 30,450 100,000
19............................. 54,740 32,729 32,729 100,000
20............................. 59,270 35,058 35,058 100,000
21............................. 64,026 37,438 37,438 100,000
22............................. 69,020 39,874 39,874 100,000
23............................. 74,263 42,375 42,375 100,000
24............................. 79,769 44,952 44,952 100,000
25............................. 85,550 47,612 47,612 100,000
26............................. 91,620 50,356 50,356 100,000
27............................. 97,993 53,184 53,184 100,000
28............................. 104,685 56,090 56,090 100,000
29............................. 111,712 59,072 59,072 100,000
30............................. 119,090 62,131 62,131 100,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 80
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 1,140 368 100,000
2.............................. 3,675 2,631 1,595 100,000
3.............................. 5,651 4,256 2,956 100,000
4.............................. 7,726 6,028 4,728 100,000
5.............................. 9,905 7,961 6,661 100,000
6.............................. 12,192 10,069 8,769 100,000
7.............................. 14,594 12,372 11,332 100,000
8.............................. 17,117 14,887 13,977 100,000
9.............................. 19,765 17,633 16,853 100,000
10............................. 22,546 20,637 19,987 100,000
11............................. 25,465 24,054 23,534 100,000
12............................. 28,531 27,820 27,430 100,000
13............................. 31,750 31,979 31,719 100,000
14............................. 35,130 36,581 36,451 100,000
15............................. 38,679 41,679 41,679 100,000
16............................. 42,405 47,330 47,330 100,000
17............................. 46,318 53,599 53,599 100,000
18............................. 50,427 60,559 60,559 100,000
19............................. 54,740 68,295 68,295 100,000
20............................. 59,270 76,911 76,911 100,000
21............................. 64,026 86,523 86,523 103,828
22............................. 69,020 97,143 97,143 115,600
23............................. 74,263 108,843 108,843 128,434
24............................. 79,769 121,735 121,735 142,429
25............................. 85,550 135,941 135,941 157,691
26............................. 91,620 151,593 151,593 174,332
27............................. 97,993 168,876 168,876 190,829
28............................. 104,685 187,966 187,966 208,642
29............................. 111,712 209,070 209,070 227,886
30............................. 119,090 232,426 232,426 248,696
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 81
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 1,157 385 100,000
2.............................. 3,675 2,499 1,463 100,000
3.............................. 5,651 3,795 2,495 100,000
4.............................. 7,726 5,049 3,749 100,000
5.............................. 9,905 6,271 4,971 100,000
6.............................. 12,192 7,463 6,163 100,000
7.............................. 14,594 8,621 7,581 100,000
8.............................. 17,117 9,752 8,842 100,000
9.............................. 19,765 10,859 10,079 100,000
10............................. 22,546 11,941 11,291 100,000
11............................. 25,465 13,073 12,553 100,000
12............................. 28,531 14,187 13,797 100,000
13............................. 31,750 15,286 15,026 100,000
14............................. 35,130 16,355 16,225 100,000
15............................. 38,679 17,412 17,412 100,000
16............................. 42,405 18,437 18,437 100,000
17............................. 46,318 19,426 19,426 100,000
18............................. 50,427 20,375 20,375 100,000
19............................. 54,740 21,286 21,286 100,000
20............................. 59,270 22,158 22,158 100,000
21............................. 64,026 22,984 22,984 100,000
22............................. 69,020 23,766 23,766 100,000
23............................. 74,263 24,497 24,497 100,000
24............................. 79,769 25,177 25,177 100,000
25............................. 85,550 25,804 25,804 100,000
26............................. 91,620 26,365 26,365 100,000
27............................. 97,993 26,863 26,863 100,000
28............................. 104,685 27,282 27,282 100,000
29............................. 111,712 27,619 27,619 100,000
30............................. 119,090 27,851 27,851 100,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 82
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 1,239 467 100,000
2.............................. 3,675 2,742 1,706 100,000
3.............................. 5,651 4,286 2,986 100,000
4.............................. 7,726 5,875 4,575 100,000
5.............................. 9,905 7,521 6,221 100,000
6.............................. 12,192 9,228 7,928 100,000
7.............................. 14,594 10,994 9,954 100,000
8.............................. 17,117 12,830 11,920 100,000
9.............................. 19,765 14,740 13,960 100,000
10............................. 22,546 16,726 16,076 100,000
11............................. 25,465 18,895 18,375 100,000
12............................. 28,531 21,165 20,775 100,000
13............................. 31,750 23,543 23,283 100,000
14............................. 35,130 26,022 25,892 100,000
15............................. 38,679 28,623 28,623 100,000
16............................. 42,405 31,334 31,334 100,000
17............................. 46,318 34,159 34,159 100,000
18............................. 50,427 37,099 37,099 100,000
19............................. 54,740 40,165 40,165 100,000
20............................. 59,270 43,364 43,364 100,000
21............................. 64,026 46,699 46,699 100,000
22............................. 69,020 50,181 50,181 100,000
23............................. 74,263 53,816 53,816 100,000
24............................. 79,769 57,616 57,616 100,000
25............................. 85,550 61,594 61,594 100,000
26............................. 91,620 65,756 65,756 100,000
27............................. 97,993 70,122 70,122 100,000
28............................. 104,685 74,704 74,704 100,000
29............................. 111,712 79,522 79,522 100,000
30............................. 119,090 84,597 84,597 100,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 83
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$1,707 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 1,792 1,321 549 100,000
2.............................. 3,675 2,996 1,960 100,000
3.............................. 5,651 4,817 3,517 100,000
4.............................. 7,726 6,804 5,504 100,000
5.............................. 9,905 8,983 7,683 100,000
6.............................. 12,192 11,376 10,076 100,000
7.............................. 14,594 14,001 12,961 100,000
8.............................. 17,117 16,891 15,981 100,000
9.............................. 19,765 20,073 19,293 100,000
10............................. 22,546 23,578 22,928 100,000
11............................. 25,465 27,582 27,062 100,000
12............................. 28,531 32,018 31,628 100,000
13............................. 31,750 36,935 36,675 100,000
14............................. 35,130 42,375 42,245 100,000
15............................. 38,679 48,411 48,411 100,000
16............................. 42,405 55,093 55,093 100,000
17............................. 46,318 62,495 62,495 100,000
18............................. 50,427 70,698 70,698 100,000
19............................. 54,740 79,798 79,798 100,000
20............................. 59,270 89,880 89,880 109,654
21............................. 64,026 101,019 101,019 121,223
22............................. 69,020 113,320 113,320 134,851
23............................. 74,263 126,903 126,903 149,745
24............................. 79,769 141,901 141,901 166,024
25............................. 85,550 158,463 158,463 183,817
26............................. 91,620 176,747 176,747 203,259
27............................. 97,993 196,956 196,956 222,560
28............................. 104,685 219,295 219,295 243,417
29............................. 111,712 243,998 243,998 265,958
30............................. 119,090 271,328 271,328 290,321
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 84
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 2,886 2,114 102,886
2.............................. 7,998 5,937 4,901 105,937
3.............................. 12,300 8,912 7,612 108,912
4.............................. 16,816 11,810 10,510 111,810
5.............................. 21,559 14,630 13,330 114,630
6.............................. 26,538 17,372 16,072 117,372
7.............................. 31,767 20,033 18,993 120,033
8.............................. 37,257 22,612 21,702 122,612
9.............................. 43,021 25,104 24,324 125,104
10............................. 49,074 27,510 26,860 127,510
11............................. 55,429 29,980 29,460 129,980
12............................. 62,102 32,372 31,982 132,372
13............................. 69,109 34,686 34,426 134,686
14............................. 76,466 36,925 36,795 136,925
15............................. 84,190 39,087 39,087 139,087
16............................. 92,302 41,165 41,165 141,165
17............................. 100,818 43,151 43,151 143,151
18............................. 109,761 45,029 45,029 145,029
19............................. 119,150 46,780 46,780 146,780
20............................. 129,009 48,386 48,386 148,386
21............................. 139,362 49,840 49,840 149,840
22............................. 150,231 51,133 51,133 151,133
23............................. 161,644 52,267 52,267 152,267
24............................. 173,628 53,241 53,241 153,241
25............................. 186,211 54,049 54,049 154,049
26............................. 199,423 54,669 54,669 154,669
27............................. 213,296 55,068 55,068 155,068
28............................. 227,862 55,199 55,199 155,199
29............................. 243,157 55,007 55,007 155,007
30............................. 259,216 54,441 54,441 154,441
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 85
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 3,077 2,305 103,077
2.............................. 7,998 6,507 5,471 106,507
3.............................. 12,300 10,057 8,757 110,057
4.............................. 16,816 13,729 12,429 113,729
5.............................. 21,559 17,528 16,228 117,528
6.............................. 26,538 21,455 20,155 121,455
7.............................. 31,767 25,513 24,473 125,513
8.............................. 37,257 29,704 28,794 129,704
9.............................. 43,021 34,027 33,247 134,027
10............................. 49,074 38,486 37,836 138,486
11............................. 55,429 43,298 42,778 143,298
12............................. 62,102 48,286 47,896 148,286
13............................. 69,109 53,456 53,196 153,456
14............................. 76,466 58,821 58,691 158,821
15............................. 84,190 64,386 64,386 164,386
16............................. 92,302 70,151 70,151 170,151
17............................. 100,818 76,117 76,117 176,117
18............................. 109,761 82,274 82,274 182,274
19............................. 119,150 88,611 88,611 188,611
20............................. 129,009 95,116 95,116 195,116
21............................. 139,362 101,787 101,787 201,787
22............................. 150,231 108,622 108,622 208,622
23............................. 161,644 115,626 115,626 215,626
24............................. 173,628 122,805 122,805 222,805
25............................. 186,211 130,158 130,158 230,158
26............................. 199,423 137,668 137,668 237,668
27............................. 213,296 145,308 145,308 245,308
28............................. 227,862 153,030 153,030 253,030
29............................. 243,157 160,780 160,780 260,780
30............................. 259,216 168,500 168,500 268,500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 86
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 3,269 2,497 103,269
2.............................. 7,998 7,101 6,065 107,101
3.............................. 12,300 11,295 9,995 111,295
4.............................. 16,816 15,888 14,588 115,888
5.............................. 21,559 20,918 19,618 120,918
6.............................. 26,538 26,426 25,126 126,426
7.............................. 31,767 32,456 31,416 132,456
8.............................. 37,257 39,058 38,148 139,058
9.............................. 43,021 46,284 45,504 146,284
10............................. 49,074 54,195 53,545 154,195
11............................. 55,429 63,161 62,641 163,161
12............................. 62,102 73,029 72,639 173,029
13............................. 69,109 83,894 83,634 183,894
14............................. 76,466 95,863 95,733 195,863
15............................. 84,190 109,051 109,051 209,051
16............................. 92,302 123,578 123,578 223,578
17............................. 100,818 139,575 139,575 239,575
18............................. 109,761 157,182 157,182 257,182
19............................. 119,150 176,545 176,545 276,545
20............................. 129,009 197,832 197,832 297,832
21............................. 139,362 221,235 221,235 321,235
22............................. 150,231 246,970 246,970 346,970
23............................. 161,644 275,280 275,280 375,280
24............................. 173,628 306,439 306,439 406,439
25............................. 186,211 340,737 340,737 440,737
26............................. 199,423 378,483 378,483 478,483
27............................. 213,296 420,006 420,006 520,006
28............................. 227,862 465,654 465,654 565,654
29............................. 243,157 515,804 515,804 615,804
30............................. 259,216 570,875 570,875 670,875
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 87
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 3,058 2,286 103,058
2.............................. 7,998 6,266 5,230 106,266
3.............................. 12,300 9,390 8,090 109,390
4.............................. 16,816 12,436 11,136 112,436
5.............................. 21,559 15,415 14,115 115,415
6.............................. 26,538 18,328 17,028 118,328
7.............................. 31,767 21,171 20,131 121,171
8.............................. 37,257 23,955 23,045 123,955
9.............................. 43,021 26,681 25,901 126,681
10............................. 49,074 29,348 28,698 129,348
11............................. 55,429 32,119 31,599 132,119
12............................. 62,102 34,845 34,455 134,845
13............................. 69,109 37,530 37,270 137,530
14............................. 76,466 40,157 40,027 140,157
15............................. 84,190 42,749 42,749 142,749
16............................. 92,302 45,279 45,279 145,279
17............................. 100,818 47,743 47,743 147,743
18............................. 109,761 50,134 50,134 150,134
19............................. 119,150 52,457 52,457 152,457
20............................. 129,009 54,709 54,709 154,709
21............................. 139,362 56,881 56,881 156,881
22............................. 150,231 58,974 58,974 158,974
23............................. 161,644 60,978 60,978 160,978
24............................. 173,628 62,895 62,895 162,895
25............................. 186,211 64,719 64,719 164,719
26............................. 199,423 66,434 66,434 166,434
27............................. 213,296 68,044 68,044 168,044
28............................. 227,862 69,525 69,525 169,525
29............................. 243,157 70,874 70,874 170,874
30............................. 259,216 72,060 72,060 172,060
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 88
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 3,256 2,484 103,256
2.............................. 7,998 6,857 5,821 106,857
3.............................. 12,300 10,582 9,282 110,582
4.............................. 16,816 14,438 13,138 114,438
5.............................. 21,559 18,441 17,141 118,441
6.............................. 26,538 22,598 21,298 122,598
7.............................. 31,767 26,909 25,869 126,909
8.............................. 37,257 31,391 30,481 131,391
9.............................. 43,021 36,049 35,269 136,049
10............................. 49,074 40,892 40,242 140,892
11............................. 55,429 46,150 45,630 146,150
12............................. 62,102 51,645 51,255 151,645
13............................. 69,109 57,388 57,128 157,388
14............................. 76,466 63,375 63,245 163,375
15............................. 84,190 69,638 69,638 169,638
16............................. 92,302 76,163 76,163 176,163
17............................. 100,818 82,956 82,956 182,956
18............................. 109,761 90,024 90,024 190,024
19............................. 119,150 97,380 97,380 197,380
20............................. 129,009 105,035 105,035 205,035
21............................. 139,362 112,993 112,993 212,993
22............................. 150,231 121,267 121,267 221,267
23............................. 161,644 129,861 129,861 229,861
24............................. 173,628 138,790 138,790 238,790
25............................. 186,211 148,064 148,064 248,064
26............................. 199,423 157,678 157,678 257,678
27............................. 213,296 167,652 167,652 267,652
28............................. 227,862 177,977 177,977 277,977
29............................. 243,157 188,664 188,664 288,664
30............................. 259,216 199,695 199,695 299,695
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 89
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
FEMALE AGE 45 PREFERRED NON-SMOKER
$3,716 ANNUAL PLANNED PREMIUM
$100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL GROSS INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.............................. 3,902 3,453 2,681 103,453
2.............................. 7,998 7,472 6,436 107,472
3.............................. 12,300 11,870 10,570 111,870
4.............................. 16,816 16,688 15,388 116,688
5.............................. 21,559 21,979 20,679 121,979
6.............................. 26,538 27,791 26,491 127,791
7.............................. 31,767 34,171 33,131 134,171
8.............................. 37,257 41,187 40,277 141,187
9.............................. 43,021 48,901 48,121 148,901
10............................. 49,074 57,384 56,734 157,384
11............................. 55,429 67,034 66,514 167,034
12............................. 62,102 77,699 77,309 177,699
13............................. 69,109 89,489 89,229 189,489
14............................. 76,466 102,504 102,374 202,504
15............................. 84,190 116,897 116,897 216,897
16............................. 92,302 132,787 132,787 232,787
17............................. 100,818 150,327 150,327 250,327
18............................. 109,761 169,683 169,683 269,683
19............................. 119,150 191,050 191,050 291,050
20............................. 129,009 214,639 214,639 314,639
21............................. 139,362 240,673 240,673 340,673
22............................. 150,231 269,413 269,413 369,413
23............................. 161,644 301,134 301,134 401,134
24............................. 173,628 336,150 336,150 436,150
25............................. 186,211 374,806 374,806 474,806
26............................. 199,423 417,468 417,468 517,468
27............................. 213,296 464,562 464,562 564,562
28............................. 227,862 516,533 516,533 616,533
29............................. 243,157 573,893 573,893 673,893
30............................. 259,216 637,178 637,178 737,178
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that planned premium is paid in the beginning of each year. Values
would be different if premiums are paid with a different frequency or in
different amounts.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT
ALLOCATIONS BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH
BENEFIT AND POLICY VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF
THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF
YEARS.
<PAGE> 90
APPENDIX
EXAMPLES OF DEATH BENEFIT COMPUTATIONS
UNDER OPTIONS 1 AND 2
EXAMPLES OF OPTION 1. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 1, a Policy with a $100,000 Specified Amount will generally
pay $100,000 in Death Benefits. However, because the Death Benefit must be equal
to or be greater than 250% of the Policy Value, any time that the Policy Value
exceeds $40,000, the Death Benefit will exceed the $100,000 Specified Amount.
Each additional dollar of Policy Value above $40,000 will increase the Death
Benefit by $2.50. A Policy with a $100,000 Specified Amount and a Policy Value
of $60,000 will provide Death Benefit of $150,000 ($60,000 X 250%); a Policy
Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X 250%); a
Policy Value of $100,000 will provide a Death Benefit of $250,000 ($100,000 X
250%).
Similarly, as long as Policy Value exceeds $40,000, each dollar taken out
of Policy Value will reduce the Death Benefit by $2.50. If, for example, the
Policy Value is reduced from $50,000 to $40,000 because of partial surrenders,
charges, or negative investment performance, the Death Benefit will be reduced
from $125,000 to $100,000. If at any time, however, the Policy Value multiplied
by the applicable percentage is less than the Specified Amount, the Death
Benefit will equal the current Specified Amount of the Policy.
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than between 0 and 40), the Policy Value
percentage would be 185%. The Death Benefit would not exceed the $100,000
Specified Amount unless the Policy Value exceeded approximately $54,054 (rather
than $40,000), and each dollar then added to or taken from the Policy Value
would change the Death Benefit by $1.85 (rather than $2.50).
EXAMPLES OF OPTION 2. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 2, a Policy with a Specified Amount of $100,000 will
generally provide a Death Benefit of $100,000 plus Policy Value. Thus, for
example, a Policy with a Policy Value of $10,000 will have a Death Benefit of
$110,000 ($100,000 + $10,000); a Policy Value of $20,000 will provide a Death
Benefit of $120,000 ($110,000 + $20,000). The Death Benefit, however, must be at
least 250% of the Policy Value. As a result, if the Policy Value exceeds
$66,667, the Death Benefit will be greater than the Specified Amount plus Policy
Value. Each additional dollar of Policy Value above $66,667 will increase the
Death Benefit by $2.50. A Policy with a Specified Amount of $100,000 and a
Policy Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X
250%); a Policy Value of $120,000 will provide a Death Benefit of $300,000
($120,000 X 250%).
Similarly, any time Policy Value exceeds $66,667, each dollar taken out of
Policy Value will reduce the Death Benefit by $2.50. If, for example, the Policy
Value is reduced from $80,000 to $70,000 because of partial surrenders, charges,
or negative investment performance, the Death Benefit will be reduced from
$200,000 to $175,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Specified Amount plus the Policy Value,
then the Death Benefit will be the current Specified Amount plus the Policy
Value.
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than under 40), the Policy Value percentage would
be 185%. The amount of the Death Benefit would be the sum of the Policy Value
plus $100,000 unless the Policy Value exceeded $117,647 (rather than $66,667),
and each dollar then added to or taken from the Policy Value would change the
Death Benefit by $1.85 (rather than $2.50).
A-1
<PAGE> 91
TABLE OF POLICY VALUE PERCENTAGES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- ----------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243% 51 178% 61 128% 71 113%
42 236% 52 171% 62 126% 72 111%
43 229% 53 164% 63 124% 73 109%
44 222% 54 157% 64 122% 74 107%
45 215% 55 150% 65 120% 75-90 105%
46 209% 56 146% 66 119% 91 104%
47 203% 57 142% 67 118% 92 103%
48 197% 58 138% 68 117% 93 102%
49 191% 59 134% 69 116% 94 101%
- ----------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE> 92
Part II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission (the "Commission") such supplementary and
periodic information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The registrant has no officers, directors or employees. The depositor and
the registrant do not indemnify the officers, directors of employees of the
depositor. CNA-Financial Corporation, ("CNAFC") a parent of the depositor,
indemnifies the depositor's officers, directors and employees in their capacity
as such. Most of the depositor's officers, directors and employees are also
officers, directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of CNAFC) by reason of the fact that he is or was a director,
officer, employee or agent of CNAFC, or was serving at the request of CNAFC as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of CNAFC, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of CNAFC to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of CNAFC, or was serving at the
request of CNAFC as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
<PAGE> 93
against expenses (including attorney's fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made, however,
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to CNAFC unless and only to the extent that a court determines that,
despite the adjudication of liability but in view of all of the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the court deems proper.
To the extent that any person referred to above is successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
above, or in defense of any claim, issue or matter, therein, CNAFC will
indemnify such person against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith. CNAFC may advance to such a
person, expenses incurred in defending a civil or criminal action, suit or
proceeding as authorized by CNAFC's board of directors upon receipt of an
undertaking by (or on behalf of) such person to repay the amount advanced unless
it is ultimately determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific case upon
a determination that such indemnification or advancement of expenses is proper
in the circumstances because he has met the applicable standard of conduct.
Such determination must be made by a majority vote of a quorum of CNAFC's board
of directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
Section 26(e)(2)(A) Representation
Valley Forge Life Insurance Company hereby represents that the fees
and charges deducted under the Policy, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by Valley Forge Life Insurance Company.
<PAGE> 94
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 84 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Section 26(e)(2)(A)
The signatures.
Written consents.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolution of the Board of Directors of Valley Forge
Life Insurance Company (the "Company") establishing
Valley Forge Life Insurance Company Variable Life
Separate Account (the "Variable Account")***
(2) Copy of Agreement for Lockbox Services*
(3) (a) Not Applicable
(b) Form of underwriting/distribution agreement
between the Company and CNA Investor
Services, Inc.****
(c) Schedule of Sales Commissions****
(4) Not applicable
(5) (a) Specimen Individual Flexible Premium
Variable and Fixed Life Insurance Policy
(the "Policy")**
(b) Form of Waiver of Monthly Deduction Rider**
(c) Form of Term Insurance on Spouse Rider**
(d) Form of Term Insurance on Children Rider**
<PAGE> 95
(6) (a) Amended and restated Articles of Incorporation of the
Company***
(b) By-laws of the Company***
(7) Not applicable
(8) (a) Form of participation agreement between The Alger American
Fund and the Company*
(b) Form of participation agreement between Variable Insurance
Products Fund and the Company*
(c) Form of participation agreement between Variable Insurance
Products Fund II and the Company*
(d) Form of participation agreement between MFS Variable
Insurance Trust and the Company*
(e) Form of participation agreement between SoGen Variable
Funds, Inc. and the Company*
(f) Form of participation agreement between Van Eck Worldwide
Insurance Trust and the Company*
(g) Form of participation agreement between Insurance
Management Series and the Company*
(9) Not applicable
(10) Policy Application****
(11) Description of issuance, transfer and redemption procedures****
B. Not applicable
C. Not applicable
2. Opinion and Consent of Lynne Gugenheim, Esquire
3. Not applicable
4. Not applicable
5. Financial Data Schedule
6. Opinion and consent of Rodney Haviland, F.S.A. as to actuarial matters
pertaining to the securities being registered
7. (a) Consent of Deloitte & Touche LLP
(b) Consent of Sutherland, Asbill & Brennan, LLP
- ----------------------
* Incorporated by reference to the Form N-4 Registration Statement filed
with the Securities and Exchange Commission on September 4, 1996
(File No. 333-1087).
** Incorporated herein by reference to the registrant's initial filing of Form
S-6 on March 25, 1996 (File No. 333-01949).
*** Incorporated by reference to the N-4 Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No. 333-1087)
**** Incorporated by reference to the registrant's Pre-effective Amendment
No.1 filing on Form S-6 on September 4, 1996 (File No. 333-01949).
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant, Valley Forge Life Insurance Company
Variable Life Separate Account, certifies that it meets all of the requirements
for effectiveness of this registration statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this registration statement to
be signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, all in the City of Chicago, State of
Illinois, on this 29th day of April, 1998.
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
(Registrant)
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
Attest: BY:
--------------------- --------------------
Pursuant to the requirements of the Securities Act of 1933, Valley Forge Life
Insurance Company has duly caused this registration statement to be signed on
its behalf by the undersigned persons in their capacities with Valley Forge
Insurance company thereunto authorized, and its seal to be hereunto affixed and
attested, all in the City of Chicago, State of Illinois, this 29th day of
April, 1998.
Attest: S/MARY A. RIBIKAWSKIS BY: S/W. JAMES MACGINNITIE
--------------------- -------------------------------
Mary A. Ribikawskis W. James MacGinnitie
Assistant Secretary Senior Vice President
Chief Financial Officer,
Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
PRINCIPAL OFFICERS
<S> <C> <C>
Signature Title Date
- ----------------------- ------------------- -------------------
- ----------------------- Chairman of the Board, April 29, 1998
Dennis H. Chookaszian Chief Executive Officer
Director
</TABLE>
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on this 29th day of April, 1998
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
Attest: /s/ JONATHAN D. KANTOR By: /s/ W. JAMES. MACGINNITIE
------------------ ----------------------
Jonathan D. Kantor W. JAMES. MACGINNITIE
Senior Vice President, Senior Vice President,
Secretary and General Chief Financial Officer,
Counsel, Director Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------ --------------------
<S> <C> <C>
/s/ DENNIS H. CHOOKASZIAN Chairman of the Board, April 29, 1998
- ---------------------------- Chief Executive Officer
Dennis H. Chookaszian
/s/ PHILIP L. ENGEL President, Director April 29, 1998
- ----------------------------
Philip L. Engel
/s/ MICHAEL C. GARNER Senior Vice President, April 29, 1998
- ---------------------------- Director
Michael C. Garner
/s/ BERNARD L. HENGESBAUGH Executive Vice President, April 29, 1998
- ---------------------------- Chief Operating Officer
Bernard L. Hengesbaugh
/s/ JONATHAN D. KANTOR Senior Vice President, Secretary, April 29, 1998
- ---------------------------- General Counsel,
Jonathan D. Kantor Director
/s/ PATRICIA L. KUBERA Group Vice President, April 29, 1998
- ---------------------- Controller, Director
Patricia L. Kubera
/s/W. JAMES MACGINNITIE Senior Vice President, April 29, 1998
- ------------------------- Chief Financial Officer,
W. James MacGinnitie Director
/s/WILLIAM H. SHARKEY, JR. Senior Vice President, April 29, 1998
- ------------------------- Director
William H. Sharkey, Jr.
</TABLE>
-4-
<PAGE> 1
EXHIBIT 2
Board of Directors
CNA INSURANCE COMPANIES
CNA Plaza, Chicago, Illinois 60685
April 29, 1998
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 23-S
Chicago, Illinois 60685
Directors:
I have acted as counsel to Valley Forge Life Insurance Company (the
"Company"), a Pennsylvania insurance company, and Valley Forge Life Insurance
Company Variable Life Separate Account (the "Account") in connection with the
registration of an indefinite amount of securities in the form of flexible
premium variable life insurance contracts (the "Contracts") with the Securities
and Exchange Commission under the Securities Act of 1933, as amended. I have
examined such documents (including the Post Effective Amendment No. 2 to Form
S-6 registration statement) and reviewed such questions of law as I considered
necessary and appropriate, and on the basis of such examination and review, it
is my opinion that:
1. The Company is a corporation duly organized and validly
existing as a stock life insurance company under the laws of
the Commonwealth of Pennsylvania and is duly authorized to
by the Insurance Department of the Commonwealth of
Pennsylvania to issue the Contracts.
2. The Account is a duly authorized and existing separate
account established pursuant to the provisions of Section
40-37-109 of the Pennsylvania Unconsolidated Statutes.
3. To the extent so provided under the Contracts, that portion
of the assets of the Account equal to the reserves and other
contract liabilities with respect to the Account will not be
chargeable with liabilities arising out of any other
business that the Company may conduct.
4. The Contracts, when issued as contemplated by the Form S-6
registration statement, will constitute legal, validly
issued and binding obligations of the Company.
I hereby consent to the filing of this opinion as an exhibit to the Post
Effective Amendment No. 2 of Form S-6 registration statement for the
Contracts and the Account.
Sincerely,
S/LYNNE GUGENHEIM
-------------------------
Lynne Gugenheim
Vice President and
Associate General Counsel
<PAGE> 1
EXHIBIT 6
April 29, 1998 Rodney A. Haviland
Actuarial Analyst
Individual Life/Annuity Products
Board of Directors 615-316-7112
Valley Forge Life Insurance Company 615-316-7126 (Fax)
CNA Plaza, 43S
Chicago, IL 60685
Directors:
In my capacity as Actuarial Analyst of Valley Forge Life Insurance
Company (the "Company"), I have provided actuarial advice concerning and
participated in the design of the Company's flexible premium variable life
insurance contract (the "Contracts"). I also have provided actuarial advice
concerning the preparation of Post-effective amendment No. 2 to a
registration statement on Form S-6 (File No. 333-01949) for filing with
the Securities and Exchange Commission ("SEC") under the Securities Act of 1933,
as amended, in connection with the Contracts.
It is my professional opinion that:
1. The illustrations of contract values, surrender values, death benefits
and accumulated premium payments in the prospectus contained in the
registration statement, are based on the assumptions stated in the
illustrations, and are consistent with the provisions of the
Contracts. The rate structure of the Contracts has not been designed
so as to make the relationship between premiums and benefits, as shown
in the illustrations, appear to be more favorable to prospective
purchasers of Contracts age 45, in the rate classes illustrated, than
to prospective purchasers of Contracts, for males or females, at other
ages and rate classes.
2. The 1.25% federal tax charge for deferred acquisition costs is
reasonable to cover the increased cost incurred by the company as a
result of the enactment of Section 848 of the Internal Revenue Code of
1986, as amended. In addition, using a 10% rate of return on capital
is reasonable in computing the federal tax charge, and the assumptions
upon which this rate is based, are appropriate for the company's life
insurance products.
3. The information contained in the examples in the Appendix is based on
the assumptions stated in the examples, and is consistent with the
provisions of the contracts.
I hereby consent to the filing of this opinion as an exhibit
to Post-effective amendment No. 2 to the registration statement and to the
inclusion of my name under the heading "Experts" in the prospectus.
Sincerely,
/S/ Rodney A. Havelind
Rodney A. Haviland
Actuarial Analyst
Individual Life/Annuity Products
<PAGE> 1
EXHIBIT 7A
[Deloitte & Touche Letterhead]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-01949 on Form S-6 of Valley Forge Life Insurance Company
Variable Life Separate Account of our report dated February 18, 1998,
accompanying the financial statements of Valley Forge Life Insurance Company as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
April 29, 1998
<PAGE> 1
EXHIBIT 7(B)
[SUTHERLAND, ASBILL & BRENNAN LETTERHEAD]
April 28, 1998
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza
Chicago, Illinois 60685
Directors:
We hereby consent to the reference to our name under the
caption "Legal Matters" in the prospectus filed as part of post-effective
amendment No. 2 to the Registration Statement on Form S-6 filed by Valley
Forge Life Insurance Company and Valley Forge Life Insurance Company Variable
Life Separate Account (Reg. File No. 333-01949) with the Securities and
Exchange Commission. In giving this consent, we do not admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very Truly Yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
/s/ Stephen E. Roth
By: _________________________
Stephen E. Roth
