Registration No. 333-94575
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No.1
To
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Valley Forge Life Insurance Company Variable Life Separate Account
(Exact Name of Trust)
B. Valley Forge Life Insurance Company
(Name of Depositor)
C. CNA Plaza, 43 South
Chicago, Illinois 60685
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Jonathan D. Kantor
Senior Vice President, General Counsel and Secretary
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Copies to:
Lynn Korman Stone
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
E. Flexible Premium Variable Life Insurance Policy
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
H. Approximate date of proposed public offering:
As soon as practicable after the effective date of this filing.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- ------------------------------------------------------------------------------
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
- ------------ ------------------------------
1(a) Other Information
(b) The Variable Life Insurance Policy
2 Other Information
3 Not Applicable
4 Other Information
5 Other Information
6(a) Not Applicable
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases; Investment Options; Access to Your Money
11 Investment Options
12 Investment Options
13 Expenses
14 Purchases
15 Purchases
16 Purchases; Investment Options
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Other Information
25 Other Information
26 Expenses
27 The Company
28 Executive Officers and Directors
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Investment Options; Other Information
46 Purchases; Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Other Information; Purchases
52 Investment Options
53 Other Information
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE
SEPARATE ACCOUNT
AND
VALLEY FORGE LIFE INSURANCE COMPANY
This prospectus describes the Flexible Premium Variable Life Insurance Policy
that we (Valley Forge Life Insurance Company) are offering.
The policy is a variable benefit policy. We have designed the policy for use in
estate and retirement planning and other insurance needs of individuals.
You, the policyowner, have a number of investment choices in the policy. These
investment choices include fixed account options as well as the investment
options listed below. When you buy a policy and allocate funds to the investment
options you are subject to investment risk. This means that the value of your
policy may increase and decrease depending upon the investment performance of
the investment option(s) you select. Under some circumstances, the death benefit
and the duration of the policy will also increase and decrease depending upon
investment performance. The duration of a policy (how long a policy will
remain in force) is affected by how much cash value the policy has, which
increases and decreases depending upon investment performance.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management
Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged All Cap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SOGEN VARIABLE FUNDS, INC.)
Advised by Arnhold and S. Bleichroeder Advisers, Inc.
First Eagle SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research
Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series
MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, Class 2 Shares
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Securities Fund (formerly, Templeton Developing
Markets Fund)
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean Witter
Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
Life Insurance Policy. The Securities and Exchange Commission (SEC) maintains a
Web site (http://www.sec.gov) that contains information regarding companies that
file electronically with the SEC.
The policy:
* is not a bank deposit.
* is not federally insured.
* is not endorsed by any bank or government agency.
The policy is subject to investment risk. You may be subject to loss of
principal.
The Securities and Exchange Commission has not approved or disapproved these
securities nor has it determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
This prospectus is not an offering of the securities in any state, country, or
jurisdiction in which we are not authorized to sell the policies. You should
rely only on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with information
that is different.
Date: May 15, 2000
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TABLE OF CONTENTS
Page
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HIGHLIGHTS........................................................................................................
THE COMPANY.......................................................................................................
THE VARIABLE LIFE INSURANCE POLICY................................................................................
EXPENSES .........................................................................................................
PURCHASES........................................................................................................
INVESTMENT CHOICES...............................................................................................
DEATH BENEFIT....................................................................................................
TAXES ........................................................................................................
ACCESS TO YOUR MONEY.............................................................................................
OTHER INFORMATION................................................................................................
MORE INFORMATION.................................................................................................
Executive Officers and Directors........................................................................
Voting ...............................................................................................
Disregard of Voting Instructions........................................................................
Legal Opinions..........................................................................................
Our Right to Contest....................................................................................
Federal Tax Status......................................................................................
Reports to Owners.......................................................................................
Legal Proceedings.......................................................................................
Experts ...............................................................................................
Financial Statements....................................................................................
APPENDIX A - Illustrations of Policy Values......................................................................
APPENDIX B - Examples of Additional Insurance Rider .............................................................
APPENDIX C - Rates of Return ....................................................................................
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INDEX OF SPECIAL TERMS
This prospectus is written in plain English to make it as understandable as
possible. However, by the very nature of the policy, the use of certain
technical words or terms are unavoidable. We have identified some of these words
or terms. For some we have provided you with a definition below. For the
remainder, we believe that you will find an adequate discussion in the text. We
have identified these terms and provided you with a page number that indicates
where you will find the explanation for the word or term. The word or term on
the page is in italics.
Death Proceeds: The amount of money payable to the beneficiary if the insured
dies while this policy is in force.
Debt: Any amount you owe us as the result of a policy loan. This includes any
accrued loan interest.
General Account: Our assets other than those allocated to the Variable Account
or any other separate account.
Investment Option: An investment choice within Valley Forge Life Insurance
Company Variable Life Separate Account available under the policy.
Policy Loan Account: That portion of the cash value resulting from a policy
loan.
Riders: An endorsement that is incorporated into your policy.
Specified Amount: A dollar amount used to determine the death benefit of your
policy. This amount is chosen by you. The minimum specified amount is $100,000.
Target Premium: A premium calculated when a policy is issued, based on the
insured's age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the surrender charge.
Page
Beneficiary, Contingent Beneficiary
Business Day
Cash Value, Net Cash Value, Cash Surrender Value
Fixed Account I, Fixed Account II
Insured
Monthly Date
Monthly Anniversary
Owner, Joint Owner, Contingent Owner
Policy Year, Policy Anniversary
Policy Date
HIGHLIGHTS
The Variable Life Insurance Policy
The variable life insurance policy is a contract between you, the owner, and us,
an insurance company. The policy provides for life insurance coverage on the
insured. It has cash values, a death benefit, surrender rights, loan privileges
and other characteristics associated with traditional and universal life
insurance. However, since the policy is a variable life insurance policy, the
value of your policy will increase or decrease depending upon the investment
experience of the investment option(s) you choose. The death benefit associated
with the policy is distributed free from federal income taxes to the named
beneficiary. However, estate taxes may apply. We will issue the policy as an
individual policy in most states; and as a group life insurance policy in other
states.
Expenses
The policy has both insurance and investment features, and there are costs
related to each that reduce the return on your investment. We deduct:
* a premium charge from each premium payment made;
* an expense charge daily from amounts allocated to the investment options;
* a monthly deduction from cash value for: cost of insurance; cost of any
rider(s); and monthly policy fee; and
* daily investment option charges which apply to the average daily value of
the investment options.
We may assess a surrender charge if you take out money from your policy. If you
make more than 12 transfers in any policy year, unless the transfer is
pre-scheduled, we will charge a transfer processing fee. Also, for the first 12
months after an increase in the specified amount, we will deduct $10 each month
from your policy.
Once the insured turns 95, we will no longer deduct the Monthly Deduction.
There are fees and expenses which are deducted from the assets of the investment
options
Purchases
You purchase the policy by completing the proper forms. In some circumstances,
we may contact you for additional information regarding the insured. We may
require the insured to provide us with medical records, physicians' statements
or a complete paramedical examination.
The minimum initial premium payment we accept is computed for you based on the
specified amount you request. The policy is designed for the payment of
subsequent premiums. The minimum subsequent premium payment you can make is $50.
Investment Choices
You can put your money in the fixed account options and/or in any of the
investment options. Currently, you may invest in all investment choices at any
one time. However, we reserve the right to limit this in the future.
Death Benefit
The amount of the death benefit depends on:
* the specified amount of insurance of your policy;
* the death benefit option in effect at the time of death;
* under some circumstances, your cash value; and
* the death benefit of any rider.
There are two death benefit options: Option 1 and Option 2. Under certain
circumstances you can change death benefit options. You can also change the
specified amount under certain circumstances after your policy has been in force
for one year.
If death benefit Option 1 is in effect, the death benefit is the greater of your
specified amount, or your cash value on the date of death multiplied by the
applicable factor. Under this option, the amount of the death benefit is fixed,
except when we use the factor to determine the benefit percentage.
If death benefit Option 2 is in effect, the death benefit is the greater of your
specified amount in effect plus the cash value, or the cash value on the date of
death multiplied by the applicable factor. Under this option, the amount of the
death benefit is variable.
Taxes
Your policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the policy
should be excludable from the gross income of your beneficiary. Any earnings in
your policy are not taxed until you take them out. The tax treatment of the loan
proceeds and surrender proceeds will depend on whether the policy is considered
a Modified Endowment Contract (MEC). Proceeds taken out of a MEC are considered
to come from earnings first and are includible in taxable income. If you are
younger than 59 1/2 when you take money out of a MEC, you may also be subject to
a 10% federal tax penalty on the earnings withdrawn.
Access to Your Money
You can make a total surrender of your policy at any time and we will pay you
the net cash value. You may make a partial surrender at any time after the 5th
policy anniversary, or earlier if required by state law. When you make a total
or partial surrender, a surrender charge may be assessed.
You can also borrow some of your net cash value.
Other Information
Free Look. You can cancel the policy within 10 days after you receive it (or
whatever period is required in your state). We will refund an amount equal to
the cash value plus fees or charges deducted from premium payments less any
debt. When we receive your initial net premium, we will credit the amount to
your policy on the policy date. Your initial premium will be allocated to the
selected investment options on the latest of:
* two business days after the policy date;
* two business days after our receipt of your initial premium at our
Administrative Office; or
* the date our underwriters approve your application for a policy.
Additional Features. The following additional features are offered:
* You can arrange to have a regular amount of money automatically transferred
from the Federated Prime Money Fund II to selected investment options or
our general account each month, theoretically giving you a lower
average cost per unit over time than a single one time purchase. We call
this feature the dollar cost averaging option.
* You can arrange to have us automatically rebalance amounts in selected
investment options and Fixed Account I to return to your original
percentage allocations. We call this feature the automatic transfer option.
* In some states, at any time during the first 18 months your policy is in
force, you can convert the policy to any permanent non-variable policy
offered by us in your state. We call this feature the right to convert.
* If the insured becomes terminally ill, we will pay you a portion of the
death benefit. We call this feature the accelerated benefit.
* If the insured becomes disabled, under certain circumstances, we will waive
the monthly deductions. We call this the waiver of monthly deduction
benefit.
* We also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
Inquiries
If you need more information about buying a policy, please contact us at:
Valley Forge Life Insurance Company
100 CNA Drive
Nashville, TN 37214
(800) 262-1755
THE COMPANY
Valley Forge Life Insurance Company, with its administrative office located at
100 CNA Drive, Nashville, TN 37214, 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 ("CNA"). Loews Corporation owns approximately 86% of the
outstanding common stock of CNA as of December 31, 1999.
We are principally engaged in the sale of life insurance and annuities. We are
licensed in the District of Columbia, Guam, Puerto Rico and all states except
New York, where we are only admitted as a reinsurer.
THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy is a contract between you, the owner, and us,
an insurance company. The policy described in this prospectus is a flexible
premium variable life insurance policy. The policy is "flexible" because:
* the frequency and amount of premium payments can vary;
* you can choose between death benefit options; and
* you can increase or decrease the amount of insurance coverage, all within
the same policy of insurance.
The policy is "variable" because the cash value, when allocated to the
investment options, may increase or decrease depending upon the investment
results of the selected investment options. Under certain circumstances, the
death benefit and the duration of your policy may also vary. The death
benefit may vary because investment performance of the selected investment
options may be sufficient to result in the death benefit being greater than the
specified amount. The duration of your policy is also affected by investment
performance because charges under the policy, when coupled with poor
performance, may mean that at sometime there may not be enough cash value in
your policy to pay the charges and your policy will terminate unless you make a
premium payment(s).
During the life of the insured, you can surrender the policy for all or part of
its net cash value. You may also obtain a policy loan using the policy as
security and by properly assigning it to us.
We also make available a number of riders to meet a variety of your estate
planning needs.
To the extent you select any of the investment options, you bear the investment
risk. If your net cash value is insufficient to pay any expense charges, the
policy may terminate.
Because the policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named beneficiary. These proceeds should
be excludable from the gross income of the beneficiary, however estate taxes may
apply. The income tax-free death proceeds makes this an excellent way to
accumulate money you do not think you will use in your lifetime. It is also a
tax-efficient way to provide for those you leave behind. If you need access to
your money, you can borrow from the policy or make a total or partial surrender.
We will issue the policy as an individual policy in most states, and as a
group certificate under a group life insurance policy in other states. As used
in this prospectus, the term policy refers to either: the individual life
policy, or to a certificate issued under a group life policy.
Purchasing Considerations
The policy is designed for individuals and businesses that have a need for death
protection but who also desire to potentially increase the values in their
policies through investments in the investment options. The policy offers the
following to individuals:
* create or conserve one's estate;
* supplement retirement income; and
* access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the policy described in
this prospectus is appropriate. Replacement of an existing policy with this
policy may not be advantageous to your situation.
EXPENSES
There are charges and other expenses associated with the policy that reduce the
return on your investment in the policy. The charges and expenses are described
below.
Premium Charge
We deduct a premium charge from each premium payment you make to reimburse us
for the expenses associated with selling the policy and for tax charges and
costs we incur. The premium charge is as follows:
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Policy Years 1-10: 7.5% of all premiums up to the target premium.
Policy Years 11 and later: 5.5% of all premiums up to the target premium.
All Years: 3.5% of all premiums in excess of the target premium.
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Monthly Deductions
Each monthly date, we will make certain deductions from the cash value of your
policy. The monthly deduction is for:
* the cost of insurance for the following month;
* the monthly cost of any riders attached to your policy; and
* the monthly policy fee.
The first monthly deduction will be determined as of the policy date. The
monthly deduction will be deducted on a pro-rata basis from the cash surrender
value allocated to the investment options and fixed accounts.
Cost of Insurance. This charge compensates us for the insurance coverage we
provide in the month following the charge. We determine the monthly cost of
insurance rate each year as of the policy anniversary. The rate will be charged
for the next policy year. The cost of insurance rate for a specified amount of
insurance portion for a policy month equals the sum of:
* the standard cost of insurance rate for that month from the table of our
standard cost of insurance rates; and
* an additional rate or charge for any extra mortality risk classification
(substandard insurance) that applies for the specified amount of insurance
portion.
The additional rate or charge for an extra mortality risk classification for any
policy month equals the amount of extra mortality that the risk classification
represents for that month. Each portion of the specified amount will have its
own cost of insurance rate which may be different from any other portion.
The total cost of insurance rate for a policy month will be uniform for all
specified amount of insurance portions that:
* are in the same specified amount band, sex, and risk classification;
* take effect when the insureds are the same age; and
* have been in force the same length of time.
We may charge less than the maximum cost of insurance rates shown in your policy
from time to time based on our expectations as to future cost elements such as:
investment earnings, mortality, persistency, expenses and taxes. Any change we
make will apply to all specified amount portions in the same risk
classification.
Since the mortality tables used with the policy distinguish between males and
females, the cost of insurance and the benefits payable will differ between
males and females of the same age. Employers, employee plans and employee
organizations should seek legal advice to determine whether the Civil Rights Act
of 1964, Title VII, or other applicable law prohibits the use of sex distinct
mortality tables. We will offer the policy based upon unisex mortality tables
where required.
Monthly Cost of Riders. The amount of any charges associated with riders, if
any, each policy month is determined in accordance with the rider and is shown
on the schedule page of your policy.
Monthly Policy Fee. There is a monthly policy fee which is equal to $26 per
policy month for the first policy year. Thereafter, the fee is $6 per policy
month. The charges reimburse us for expenses incurred in the administration of
the policies. Such expenses include: confirmations, annual account statements,
maintenance of policy records, maintenance of variable account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
policy owner servicing and all accounting, valuation, regulatory and updating
requirements.
Expense Charge
We deduct an expense charge from each investment option each business day. The
expense charge is equal to:
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Policy Years 1-10: Approximately .90%, on an annual basis, of the
cash value of each investment option.
Policy Years 11 and later: Approximately .45%, on an annual basis, of the
cash value of each investment option.
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This charge compensates us for some of the mortality risks we assume, and the
risk that we will experience costs above that for which we are compensated. It
also compensates us for some of the administrative costs in administering the
policy. We expect to profit from the charge.
Surrender Charges
A surrender charge may be deducted if you make a full or partial surrender.
A surrender charge may also be applicable when you reduce the specified
amount. The surrender charge varies by issue age, specified amount, sex,
smoking status, and contract duration. The surrender charge is a percentage of
specified amount of insurance for the first 6 policy years. The charge then
grades down to zero over policy years 7 through 15 as shown in the following
table:
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Policy Years % of Surrender Charge
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1-6 100%
7 80%
8 70%
9 60%
10 50%
11 40%
12 30%
13 20%
14 10%
15+ No Surrender Charge
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Transfer Processing Fee
You may transfer values from one investment option to another, or to or from the
fixed accounts. The first 12 transfers in a policy year are free. The fee for
each additional transfer is currently $25. The transfer processing fee is
deducted from the amount which is transferred. Prescheduled dollar cost
averaging transfers or automatic transfers are not counted when we determine
transfer processing fees. Each transfer request is considered to be
one request regardless of the number of investment options or any fixed account
involved in the transfer.
Charges after the Insured's 95th Birthday
Once the insured turns 95, we will no longer deduct the insurance related
charges, but will continue to deduct the asset based charges.
Waiver of Monthly Deduction Rider
If you choose the waiver of monthly deduction rider, we will waive monthly
deductions if the insured becomes totally disabled, as defined in the rider. The
waiver will begin on the latest date when:
* we have been notified of the onset of a total disability;
* we have received due proof of total disability; and
* total disability has continued for 6 consecutive months.
If you choose this feature, the monthly cost of this rider is shown on your
policy schedule. The rider will terminate:
* on the first policy anniversary on or after the insured's 65th birthday;
* if you give us written notice to terminate it; or
* when the policy terminates.
This benefit may not be available in your state.
The annual expenses of the portfolios for the year ended December 31, 2000
below are based on data provided by the respective fund groups. We have not
independently verified such data. Future expenses may be greater or less than
those shown.
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Investment Option Expenses: (as a percentage of the average daily net assets of
an investment option)
Other Total Annual
Expenses (after Expenses (after
waivers and/or waivers and/or
reimbursements reimbursements
with respect with respect
to certain to certain
Management 12b-1 investment investment
(Advisory Fees) Fees options) options)
--------------- ---- -------- --------
Federated Insurance Series (See Note 1)
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Federated High Income Bond Fund II 0.60% 0.19% 0.79%
Federated Prime Money Fund II 0.50% 0.23% 0.73%
Federated Utility Fund II 0.75% 0.19% 0.94%
The Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Mid-Cap Growth Portfolio 0.80% 0.05% 0.85%
Alger American Small Capitalization Portfolio 0.85% 0.05% 0.90%
Alger American Leveraged AllCap Portfolio (See Note 2) 0.85% 0.08% 0.93%
First Eagle SoGen Variable Funds, Inc. (See Note 3)
First Eagle SoGen Overseas Variable Fund 0.75% 0.75% 1.50%
Van Eck Worldwide Insurance Trust
Van Eck Worldwide Emerging Markets Fund (See Note 4) 1.00% 0.34% 1.34%
Van Eck Worldwide Hard Assets Fund 1.00% 0.26% 1.26%
Variable Insurance Products Fund (VIP) and Variable
Insurance Products Fund II (VIP II), (See Note 5)
Fidelity VIP II Asset Manager Portfolio 0.53% 0.09% 0.62%
Fidelity VIP II Contrafund Portfolio 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income Portfolio 0.48% 0.08% 0.56%
Fidelity VIP II Index 500 Portfolio 0.24% 0.04% 0.28%
MFS Variable Insurance Trust (See Note 6)
MFS Emerging Growth Series 0.75% 0.09% 0.84%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS Research Series 0.75% 0.11% 0.86%
MFS Total Return Series 0.75% 0.15% 0.90%
Janus Aspen Series, Institutional Shares (See Note 7)
Janus Aspen Series Capital Appreciation Portfolio 0.65% 0.04% 0.69%
Janus Aspen Series Growth Portfolio 0.65% 0.02% 0.67%
Janus Aspen Series Balanced Portfolio 0.65% 0.02% 0.67%
Janus Aspen Series Flexible Income Portfolio 0.65% 0.07% 0.72%
Janus Aspen Series International Growth Portfolio 0.65% 0.11% 0.76%
Janus Aspen Series Worldwide Growth Portfolio 0.65% 0.05% 0.70%
Alliance Variable Products Series Fund, Class B Shares
Alliance Premier Growth Portfolio 1.00% 0.25% 0.04% 1.29%
Alliance Growth and Income Portfolio 0.63% 0.25% 0.09% 0.97%
American Century Variable Portfolios, Inc. (See Note 8)
American Century VP Income & Growth Fund 0.70% - 0.00% 0.70%
American Century VP Value Fund 1.00% - 0.00% 1.00%
Franklin Templeton Variable Insurance
Products Trust, Class 2 Shares (See Note 9)
Templeton Developing Markets Securities
Fund (see Note 15) 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund (see Note 10) 0.60% 0.25% 0.18% 1.03%
Lazard Retirement Series (See Note 11)
Lazard Retirement Equity Portfolio 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap Portfolio 0.75% 0.25% 0.25% 1.25%
The Universal Institutional Funds, Inc. (See Note 12)
Morgan Stanley International Magnum Portfolio 0.29% - 0.87% 1.16%
Morgan Stanley Emerging Markets Equity Portfolio 0.42% - 1.37% 1.79%
</TABLE>
Notes to Table of Fees and Expenses
1. The Fund did not pay or accrue the shareholder services fee during the
fiscal year ended December 31, 1999. The Fund has no present intention of
paying or accruing the shareholder services fee during the fiscal year
ending December 31, 2000. The maximum shareholder services fee is 0.25%.
2. Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
3. The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1999 would have been 3.32% without the effect of
the investment advisory fee waiver and expense reimbursement provided
by the advisor.
4. For the year ended December 31, 1999, Van Eck Associates Corporation
(Adviser) agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.5% of average daily net assets for the period January
1, 1999 to May 12, 1999. For the period May 13, 1999 to December 31, 1999,
the Adviser agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.30% of average daily net assets. Without such waivers
and assumption of expenses, for the year ended December 31, 1999, other
expenses were .54% and total annual expenses were 1.54%
5. A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds', custodian credits realized as a
result of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. Without these reductions, the total operating
expenses presented in the table would have been .57% for Equity-Income
Portfolio, .63% for Asset Manager Portfolio, and .71% for Contrafund
Portfolio. FMR agreed to reimburse a portion of the Index 500 Portfolio's
expenses during the period. Without this reimbursement, the Portfolio's
management fee, other expenses and total expenses would have been .24%,
.10% and .34%, respectively.
6. 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 arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
7. Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for the Growth,
Capital Appreciation, International Growth, Worldwide Growth, and Balanced
Portfolios. All expenses are shown without the effect of expense offset
arrangements.
8. The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as the
funds' assets increase.
9. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
10. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Templeton Developing Markets Securities
Fund - Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses 0.29%, and
Total Annual Expenses 1.79%; Templeton Asset Strategy Fund - Management
Fees 0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total Annual
Expenses 0.99%. The fund's class 2 distribution plan or "rule 12b-1 plan"
is described in the fund's prospectus.
11. Effective May 1, 1999, Lazard Asset Management, the Fund's investment
adviser, has agreed to waive its fee and/or reimburse the Portfolios
through December 31, 2000 to the extent total annual portfolio expenses
exceed 1.25% of the Portfolio's average daily net assets. Absent such an
agreement, the other expenses and total annual portfolio expenses for the
year ended December 31, 1999 would have been 4.63% and 5.63% for the Lazard
Retirement Equity Portfolio and 6.31% and 7.31% for the Lazard Retirement
Small Cap Portfolio.
12. With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the
management fees and reimbursed other expenses of the portfolios to the
extent total operating expenses exceed the following percentages: Emerging
Markets Equity Portfolio 1.75%, International Magnum Portfolio 1.15%. The
adviser may terminate this voluntary waiver at any time at its sole
discretion. Absent such reductions, the "Management Fees" and "Other
Expenses" would have been as follows: 1.25% and 1.37%, respectively for the
Emerging Markets Equity Portfolio; and 0.80% and 0.87%, respectively for
the International Magnum Portfolio.
PURCHASES
Premiums
The initial premium is due on the policy date. The policy date is the date
coverage under the policy becomes effective. Other premiums may be required. All
premiums must be sent to us at our Administrative Office. Before we send out the
policy, the application and the premium must be in good order as determined by
our administrative rules.
Your first policy year starts on the day the coverage is effective under your
policy (the policy date). The twelve month period beginning on the policy date
and ending the day before the same date in the next calendar year (and each
succeeding twelve month period) is referred to as a policy year. Future policy
years start on the same day and month in each subsequent year. We call that date
a policy anniversary. Your monthly date is the same day as the policy date for
each succeeding month.
Application for a Policy
In order to purchase a policy, you must submit an application to us that
requests information about the proposed insured. In some cases, we may contact
you for additional information. We may request that the insured provide us with
medical records, a physician's statement or possibly require other medical
tests.
Subsequent Premiums
The policy is designed to allow you to make subsequent premium payments. You can
make premiums during the lifetime of the insured or until the insured's age 95.
You may change the amount and frequency of premiums. We have the right to limit
the amount of any increase. Each premium after the initial premium must be at
least $50. Unless you tell us otherwise, any subsequent payments will be
considered premiums and not loan repayments. Subsequent premium payments will be
credited to your policy as of the day they are received.
Allocation of Premium
The initial premium is credited on the policy date. The initial premium will be
allocated to the investment options on the latest of:
* 2 business days after the policy date;
* 2 business days after our receipt of your initial premium at our
administrative office; or
* the date our underwriters approve this policy.
Your premium is then allocated to the available fixed accounts or one
or more of the investment options, as selected by you. This allocation is not
subject to the transfer fee provision (see "Transfer Fee"). Currently, you can
select as many investment options as you wish. However, we reserve the right to
limit this in the future. All allocation percentages must be in whole numbers
and at least 1%.
You may change the allocation of future premiums by providing us with written
notice. The change will be effective on the date we receive your request at our
administrative office.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the policy to return any premiums paid which we have determined
will cause the policy to fail as life insurance. We also have the right to make
changes in the policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your policy to become a Modified Endowment
Contract (MEC), we will contact you prior to applying the premium to your
policy. If you elect to have the premium applied, we require that you
acknowledge in writing that you understand the tax consequences of a MEC before
we will apply the premiums.
Total Disability Waiver of Premium Rider
We make available a total disability waiver of premium rider. Under this rider,
we will credit a premium while the policy is in force if the insured becomes
totally disabled, as defined in the rider. The monthly premium credited
will be the lesser of:
* 1/12th of the waiver of premium amount shown on your policy schedule; or
* the monthly average of premiums paid on your policy over the last 36 policy
months.
In order to receive the benefits under the Total Disability Waiver of
Premium Rider, you must notify us of your total disability. You must also
provide us with proof of your total disability. You are not eligible for this
benefit until your total disability has continued for at least six consecutive
months. If you choose this feature, the monthly cost of this rider is shown
on your policy schedule. The rider will terminate:
* on the first policy anniversary on or after the insured's 65th birthday;
* if you give us written notice to terminate it; or
* when the policy terminates.
The rider may not be available in your state.
Grace Period
If the net cash value on any business day is not sufficient to cover any expense
charges which are due but unpaid, a grace period of 61 days will be allowed for
the payment of sufficient premium to keep your policy in force. We will send you
a notice at the start of the grace period to your last known address and to any
assignee. A minimum payment of an amount equal to 2 monthly deductions must be
paid. The grace period will end 61 days after we mail you the notice. If
sufficient premium is not paid by the end of the grace period, the policy will
terminate without value. If the insured dies during the grace period, we will
pay the death proceeds. If the lapse prevention guarantee described below is in
effect, the grace period will not apply until the beginning of the policy year
following the lapse prevention guarantee period.
Reinstatement
If your policy terminated at the end of a grace period and you have not
surrendered it for its cash surrender value, you can request that we reinstate
it (restore your insurance coverage). To reinstate your policy you must:
* submit a written request for reinstatement at any time within 3 years after
the end of the grace period;
* submit proof of insurability satisfactory to us;
* pay an amount large enough to cover the next 2 monthly deductions;
* pay any negative cash surrender value that existed at the end of the grace
period; and
* repay or reinstate any debt which existed at the end of the grace period.
The effective date of a reinstatement is the monthly date on or following the
day we approve the request for reinstatement.
If a surrender charge was applied when the policy lapsed, the surrender charge
applied will be credited to the cash value of your policy. The surrender charge
on the date of reinstatement is equal to the surrender charge on the date of
lapse. To determine the surrender charge on any date after the effective date of
reinstatement, we will not consider the period during which the policy was
lapsed. Unless you tell us otherwise, the allocation of the amount of the
surrender charge, additional premiums and loan repayments will be based on the
allocations in effect at the start of the grace period.
Lapse Prevention Guarantee
We guarantee that your policy will not lapse during the selected lapse
prevention guarantee period if throughout that period, (a) equals or exceeds (b)
where:
(a) is the aggregate premium payments made less the amount of any
surrenders (including applicable surrender charges) less any loan
amount; and
(b) is the minimum monthly lapse prevention guarantee premium multiplied
by the number of complete months since the policy date, including the
current month.
There are five lapse prevention guarantee periods you can select:
5 years
10 years
20 years
until you are 65
until you are 85
Cash Value
The cash value is the sum of the value in each investment option, any fixed
account and the policy loan account. On the policy date, the cash value in each
investment option is equal to the portion of the initial premium allocated to
the investment option. After the policy date the cash value equals the sum of
the value in the fixed accounts and in the investment options you have selected.
The cash value reflects:
* premiums paid;
* the monthly deductions;
* the investment experience of the investment options selected;
* any interest credited on any fixed account selected;
* any interest earned or interest charged on amounts allocated to the policy
loan account; and
* any deductions due as a result of a transfer or a partial surrender.
Cash Surrender Value and Net Cash Value
Your cash surrender value equals your cash value less the surrender charge. Your
net cash value equals the cash surrender value less any debt.
During the insured's life, you may:
* take loans based on the net cash value;
* make partial surrenders (after the 5th policy anniversary); or
* surrender the policy for its net cash value.
Method of Determining Your Cash Value Allocated to an Investment Option
The value of your policy will go up or down depending upon the investment
performance of the investment option(s) you choose and the charges and
deductions made against your cash value. In order to keep track of the value of
your cash value, we use a unit of measure we call an accumulation unit. (An
accumulation unit works like a share of a mutual fund.)
Every business day we determine the value of an accumulation unit by multiplying
the accumulation unit value for the immediately preceding business day by a
factor for the investment option for the current business day.
The factor is determined by:
* dividing the value of an investment option at the end of the current
business day by the value of an investment option for the previous business
day; and
* subtracting the expense charge.
The value of an accumulation unit may go up or down from day to day.
When you make a premium payment, we credit your policy with accumulation units.
The number of accumulation units credited is determined by dividing the amount
of premiums allocated to the investment option by the value of the accumulation
unit for that investment option. When we assess any charges we do so by
deducting accumulation units from your policy. When you take a loan we reduce
the number of the accumulation units in your policy and transfer the amount to
the loan account.
Our business day is each day that the New York Stock Exchange is open
for business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 p.m. Eastern time.
INVESTMENT CHOICES
The policy offers investment options which invest in various funds. The
investment options listed below are currently available in connection with the
policy.
You should read this prospectus and the accompanying prospectuses for the
investment options carefully before investing. Certain portfolios may not be
available under the policy offered by this prospectus.
The investment objectives and policies of certain investment options are similar
to the investment objectives and policies of other mutual funds that the
investment advisers manage. Although the objectives and policies may be similar,
the investment results of the investment options may be higher or lower than the
results of such other mutual funds. The investment advisers cannot guarantee,
and make no representation, that the investment results of similar funds will be
comparable even though the funds have the same advisers.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II (seeks high current income and moderate
capital appreciation by investing in securities of utility companies)
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged All Cap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Funds, Inc.)
Advised by Arnhold and S. Bleichroeder Advisers, Inc. (Prior to December 31,
1999, Societe Generale Asset Management Corp. was the adviser)
First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio (long-term capital appreciation)
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series (seeks long-term capital growth and future income)
MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST*, Class 2 Shares
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Securities Fund (formerly, Templeton
Developing Markets Fund)
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation
Fund)
*Effective May 1, 2000, the funds of Templeton Variable Products Series
Fund were merged into similar funds of Franklin Templeton Variable
Insurance Products Trust.
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
We may enter into certain arrangements under which we are reimbursed by the
investment options' advisers, distributors and/or affiliates for the
administrative services which we provide to the funds.
Substitution and Limitations on Further Investments
We may substitute one of the investment options you have selected with another
investment option. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
investment option. We will give you notice of our intention to do this.
Fixed Account Options
You may allocate premiums and cash values to one of our fixed account options.
Fixed Account I is part of our general account, and will offer a uniform
interest rate guaranteed for one policy year by us. At our discretion, we may
declare an excess interest rate for this account. Fixed Account II offers
various interest rates and time periods to select from. We have segregated our
assets in Fixed Account II from our general account. The interest rates offered
by Fixed Account II will depend on the time period you select. In certain
circumstances, if you make a surrender from Fixed Account II before the
expiration of the time period, you may be subject to an interest adjustment. The
adjustment may be positive or negative. We also offer a dollar cost
averaging option from our general account (see below).
Transfers
You can make transfers as described below. We have the right to terminate or
modify these transfer provisions.
You can make transfers by telephone. If you own the policy with a joint owner,
unless we are instructed otherwise, we will accept instructions from either you
or the other owner. We will use reasonable procedures to confirm that
instructions given to us by telephone are genuine. If we fail to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions. However, we will not be liable for following telephone
instructions that we reasonably believe to be genuine. We may tape record
telephone instructions.
Transfers are also subject to the following:
* Currently, you can make 12 transfers every policy year without charge.
* We will assess a $25 transfer fee for each transfer in excess of the
free 12 transfers allowed per policy year. Transfers made pursuant to
the dollar cost averaging option and the automatic transfer option
will not count in determining the application of any transfer fee.
* The minimum amount which you can transfer is $250 or your entire value
in the investment option or any fixed account option, if it is less.
This requirement is waived if the transfer is made in connection with
the dollar cost averaging option or the automatic transfer option.
* You may not make a transfer until after the end of the free-look
period.
* A transfer will be effected as of the end of the business day when we
receive transfer request that contains all the information that is
necessary for us to process the request.
* We are not liable for a transfer made in accordance with your
instructions.
* Your right to make transfers is subject to modification if we
determine, in our sole opinion, that the exercise of the right by one
or more owners is, or would be, to the disadvantage of other owners.
Restrictions may be applied in any manner reasonably designed to
prevent any use of the transfer right which is considered by us to be
to the disadvantage of other owners. A modification could be applied
to transfers to, or from, one or more of the investment options and
could include, but is not limited to:
a. the requirement of a minimum time period between each transfer;
or
b. not accepting a transfer request from an agent acting under a
power of attorney on behalf of more than one owner; or
c. limiting the dollar amount that may be transferred between
investment options by an owner at any one time.
* Transfers do not change your allocation instructions for future
premium payments.
Dollar Cost Averaging
Dollar cost averaging allows you to systematically transfer a set amount each
month a source account to any of the investment options or Fixed
Account I. By allocating amounts on a regularly scheduled basis as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations. Dollar cost averaging may not be available
in your state.
We offer two different Dollar Cost Averaging (DCA) riders. You can have only
one DCA account at a time. When you select a DCA option, we will open a dollar
cost averaging account for you. If you select DCA Rider I, you must have at
least $1,000 in the Federated Prime Money Fund II in order to participate in the
dollar cost averaging option. The minimum amount which can be transferred each
month is $100. If you select DCA Rider II, which is only available at issue, you
must commit at least $5,000 to the DCA account. Your DCA account II is part of
our general account assets and will be credited interest. You can select either
a 6 or 12 month period when you elect DCA Rider II.
Dollar cost averaging transfers will begin on the date you request, but no
sooner than 7 business days after we receive the request provided the transfers
do not begin until 30 days after the effective date of your policy. All dollar
cost averaging transfers are made effective the same day each month. However,
this day may not be later than the 28th of each month. If the calender day
selected is not a business day, transfers are made as of the next business day.
Dollar cost averaging will terminate when any of the following occurs:
* at the end of the selected month period you designate; or
* within 7 days of your written request to terminate these transfers.
If your DCA option is terminated, all money remaining in the dollar cost
averaging account will be transferred to the Federated Prime Money Fund II.
We have the right to modify, discontinue or suspend the dollar cost averaging
option. If you participate in the dollar cost averaging option, the transfers
made under the program are not taken into account in determining any transfer
fee. There is no additional charge for this option.
Dollar cost averaging does not assure a profit and does not protect against loss
in declining markets. Dollar cost averaging involves continuous investment in
the selected investment option(s) regardless of fluctuating price levels of the
investment option(s). You should consider your financial ability to continue the
dollar cost averaging option through periods of fluctuating price levels.
Automatic Transfer Option
Once your money has been allocated among the investment choices, the performance
of the elected options may cause your allocation to shift. You can direct us to
automatically rebalance your cash value in selected investment options and Fixed
Account I to return to your original percentage allocations by selecting our
automatic transfer option. The automatic transfer option may not be available in
your state.
You have the choice of rebalancing monthly, quarterly, semi-annually or
annually. All transfers must take place before the 28th of the month. Allocation
percentages must be in whole numbers.
If you participate in the automatic transfer option, the transfers made under
the program are not taken into account in determining any transfer fee. You may
stop the automatic transfer option at any time by written notice. We must
receive your written notice at least seven days before the first business day in
a new period. Once automatic transfer has been elected, any subsequent transfer
instructions that differ from the then current instructions are treated as a
request to change the automatic transfer allocation. All changes must be by
written notice.
Example:
Assume that you want your initial premium split between 2 investment
options. You want 80% to be in the MFS Growth With Income Series and 20% to
be in the Janus Aspen International Growth Portfolio. Over the next 2 1/2
months the domestic market does very well while the international market
performs poorly. At the end of the quarter, the MFS Growth With Income
Series now represents 86% of your holdings because of its increase in
value. If you had chosen to have your holdings rebalanced quarterly, on the
first day of the next quarter, we would sell some of your units in the MFS
Growth With Income Series to bring its value back to 80% and use the money
to buy more units in the Janus Aspen International Growth Portfolio to
increase those holdings to 20%.
DEATH BENEFIT
The amount of the death benefit depends on the total specified amount of
insurance, your cash value on the date of the insured's death and the death
benefit option (Option 1 or Option 2) in effect at that time. The insured is the
person whose life is covered by this policy. The insured is named on the
schedule page of your policy. The actual amount we pay the beneficiary will be
reduced by any outstanding debt and any due and unpaid charges .
The initial specified amount and the death benefit option in effect on the
policy date (the date when the insured's life is covered under the policy) are
shown on the schedule page of your policy.
Option 1. The amount of the death benefit under Option 1 is the greater of:
* the specified amount; or
* the applicable percentage of the cash value on the date of death.
Option 2. The amount of the death benefit under Option 2 is the greater of:
* the specified amount plus the cash value on the date of death; or
* the applicable percentage of the cash value on the date of death.
Death Proceeds
The death proceeds equal:
* the death benefit provided by your policy; plus
* any insurance on the insured's life that may be provided by riders to your
policy; less
* any debt; less
* any due and unpaid premiums.
We will pay the death proceeds after we receive due proof of death and any
other information that we reasonably require. The death proceeds may be
adjusted under certain conditions.
Change in Specified Amount
You may change the specified amount after this policy has been in force for
1 year subject to the following:
* You must request the change in writing.
* A decrease will be applied first against prior increases, if any, on a
last-in, first-out basis, then against the initial specified amount. A
decrease in specified amount will not reduce the specified amount lower
than $100,000. A prorata share of any applicable surrender charge may
apply.
* An increase in specified amount will require proof of insurability.
* Any change in the specified amount must be for at least $25,000.
If you increase the specified amount, we will deduct a $10.00 monthly specified
amount increase fee for the first 12 months after the increase.
A change will be effective on the monthly date following our approval or
recording of the change. We will show the effective date of any change in
specified amount in a supplemental policy schedule we will send you.
Change in Death Benefit Option
You may change the death benefit ,without the imposition of any charge,
option subject to the following:
* You must request the change in writing.
* If you want to change death benefit Option 1 to Option 2, you must submit
proof of insurability satisfactory to us. The specified amount will be
reduced by the amount of cash value so that the death benefit is not
increased as of the date of change.
* If you want to change death benefit Option 2 to Option 1, the specified
amount will be increased by the amount of cash value.
Other Riders
Accelerated Benefit Rider
You can elect the accelerated benefit rider. There is no additional charge
if you elect the Accelerated Benefit Rider. This rider provides that you
may elect to receive an advance of the death benefit proceeds of the policy if
the insured is terminally ill, as defined in the rider. Receipt of an
accelerated death benefit amount may be taxable. You should contact your
personal tax or financial adviser for specific information.
The maximum accelerated death benefit will be the lesser of:
* 75% of the policy death benefit on the day we receive the request; or
* $250,000 from all policies in force with us.
If payments are made in other than a lump sum, the minimum amount of any payment
will be $500. Surrender charges will not be assessed against any benefits paid
under this rider.
This rider terminates on the earliest of: the date the policy terminates, or the
date you give us written notice to terminate; or the date that the benefit
advance plus accrued interest equals the policy death benefit less all debt.
Death benefits, cash values, and loan values, if any, will be reduced if a
benefit is paid pursuant to this rider. Also, the receipt of an accelerated
death benefit amount may adversely affect the recipient's eligibility for
Medicaid or other government benefits or entitlements.
Accidental Death Benefit Rider
You can elect the accidental death benefit rider. This rider provides that if
the insured dies accidentally (as defined in the rider), we will pay the
accidental death benefit amount shown on your policy schedule. The injury that
causes the death must occur after attained age 1 and before the policy
anniversary on or immediately following the insured's 70th birthday.
This rider terminates on the policy anniversary on or after the insured's age
70; or if you give us written notice to terminate it; or when the policy
terminates.
Additional Insurance Rider
You can elect the additional insurance rider. This rider provides that we will
pay the additional insurance death benefit when we receive due written proof of
the insured's death. The additional insurance death benefit will be the
additional insurance specified amount shown on your policy schedule less the
excess, if any, of 1 over 2 or 3, where:
1. is the cash value on the date of death times the applicable percentage of
cash value shown on your policy schedule;
2. is the specified amount, if death benefit option 1 is shown on your policy
schedule; and
3. is the specified amount plus the cash value, if death benefit option 2 is
shown on your policy schedule.
To help you understand how this benefit works, we have set out some examples
in Appendix B.
This rider terminates when you give us written notice to terminate it; or on the
policy anniversary on or after the insured's age 95; or when the policy
terminates.
We require an additional premium for this rider as shown on your policy
schedule.
Term Insurance on Children Rider
You can elect the term insurance on children rider pursuant to our
underwriting guidelines and state laws. This rider provides that we will pay the
beneficiary an amount if a covered child's (as defined in the rider) death
occurs while the rider is in force or within a certain period as described
below:
* $250 if the covered child's death occurs after he/she is 14 days old and
before he/she is 6 months old; or
* $1,000 if the covered child's death occurs on or after he/she turns 6
months old and before the policy anniversary nearest the covered child's
22nd birthday.
If the policy terminates because the insured dies, existing coverage on any
child under this rider will be continued as fully paid-up insurance until the
child's 22nd birthday. At age 22, conversion will be allowed as provided in the
rider.
This rider terminates when you give us written notice to terminate it and send
us the policy to show the change; or on the policy anniversary on or nearest the
insured's age 65; or when the policy terminates.
The cost for this rider, as shown on your policy schedule, will be added to the
monthly deduction.
Other Insured Term Insurance Rider
You can elect the other insured term insurance rider. This rider provides that
we will pay the other insured (unless changed, the other insured is the person
named in the application for this rider) specified amount shown on your policy
schedule when we receive proof of the other insured's death.
Under certain conditions, you can change the other insured specified amount any
time after the rider is one year old by written notice to us.
This rider terminates at the earliest of: the policy date on or after the other
insured's 70th birthday; or the date you give us written notice to terminate it;
or the date the policy terminates.
We require an additional premium for this rider as shown on your policy
schedule.
YOU SHOULD READ THE RIDERS CAREFULLY FOR THE TERMS AND CONDITIONS OF EACH
SPECIFIC RIDER.
Settlements
When your policy becomes a claim because of the death of the insured, settlement
will be made upon due proof of death. Proceeds may be paid in a lump sum, or
under one of the optional modes of settlement described below. If no settlement
option has been chosen before the insured's death, the beneficiary may choose
one. Once the proceeds are applied under an optional mode of settlement, any
amounts payable are paid from our general account and will not be affected by
the investment experience of the investment options.
* Option 1 - Payment Certain. Under this option we pay you the cash value in
equal payments as specified. After each payment, interest of 3% compounded
annually is added to the remaining amount which has not been paid. Payments
are made until the amount applied, plus interest, is exhausted. The total
of all payments made each year must be at least 5% of the amount applied
under this option. Any outstanding balance may be withdrawn at any time.
* Option 2 - Period Certain. Under this option we pay the cash value in equal
payments over a designated period of time, as chosen by you. An
interest rate of at least 3% will be credited. Outstanding balances may be
withdrawn at any time, however, this will forfeit any future payments.
* Option 3 - Life Annuity. Under this option we make monthly payments during
the lifetime of the payee.
* Option 4 - Life Annuity with a Period Certain. Under this option we make
monthly payments while the payee lives. If the payee dies before we have
made all of the payments within the selected period, the payments will
continue until the end of the specified period. If, at any age, the amount
of payments is the same for 2 or more periods certain, payment will be made
as if the longest period was selected.
* Additional Options. We may make other options available.
The portion of the payments received under a settlement option which are in
excess of the death benefit proceeds will be treated as taxable income (see "Tax
Treatment of Settlement Options" under "More Information - Federal Tax Status").
TAXES
Note: We have prepared the following information on federal income taxes as a
general discussion of the subject. It is not intended as tax advice. You should
consult your tax adviser about your own circumstances. We have included an
additional discussion regarding taxes under the section "More Information."
Life Insurance in General
Life insurance, such as this policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code (Code) for life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance policy until you take the money out.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the insured. However, estate taxes may apply.
Taking Money Out of Your Policy
You, as the owner, will not be taxed on increases in the value of your policy
until a distribution occurs either as a surrender or as a loan. If your policy
is a MEC, any loans or surrenders from the policy will be treated as first
coming from earnings and then from your investment in the policy. Consequently,
these distributed earnings are included in taxable income.
The Code also provides that any amount received from a MEC which is included in
income may be subject to a 10% penalty. The penalty will not apply if the income
received is:
1) paid on or after the taxpayer reaches age 59 1/2 ;
2) paid if the taxpayer becomes totally disabled (as that term is defined in
the Code); or
3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If your policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the policy and to that extent will not be included
in taxable income. Furthermore, any loan will be treated as indebtedness under
the policy and not as a taxable distribution. See "Federal Tax Status" in the
section "More Information" for more details including an explanation of whether
your policy is a MEC.
Diversification
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. We believe that the portfolios are being managed so as
to comply with such requirements.
Under current federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
portfolios. If you are considered the owner of the investments, it will result
in the loss of the favorable tax treatment for the policy. It is unknown to what
extent owners are permitted to select portfolios, to make transfers among the
portfolios or the number and type of portfolios owners may select from without
being considered the owner of the shares. If guidance from the Internal Revenue
Service is provided which is considered a new position, the guidance would
generally be applied prospectively. However, if such guidance is considered not
to be a new position, it may be applied retroactively. This would mean that you,
as the owner of the policy, could be treated as the owner of the portfolios. Due
to the uncertainty in this area, we reserve the right to modify the policy in an
attempt to maintain favorable tax treatment.
ACCESS TO YOUR MONEY
Policy Loans
You may obtain a loan at any time while your policy is in force. Your request
for a loan must be in writing. The amount of the loan and all existing loans may
not be more than 90% of the net cash value as of the date of the loan. The
amount of the loan may not be less than $500. A loan will only be made upon
proper assignment of your policy to us with the policy as the sole security for
the loan.
When you take a policy loan, we will transfer an amount equal to the policy loan
from the investment option(s) or Fixed Account I to the policy loan account.
Unless you state otherwise, transfers from the investment options to the policy
loan account will be on a pro-rata basis as of the loan date. If you do not have
a sufficient amount in the investment option(s), we will transfer any remaining
amount from Fixed Account I. We will also transfer any loan interest that
becomes due and unpaid in the same manner. Amounts transferred to the policy
loan account will earn interest daily from the date of transfer. Policy loans
may also have federal tax consequences (see "Federal Tax Status").
Effect of a Loan
Policy loans will have a permanent effect on any death benefit and cash
surrender value of your policy. The effect may be favorable or unfavorable. If
loans are not repaid, the debt will reduce the amount of any death proceeds.
Loans have a permanent effect on the policy because the amount transferred to
the policy loan account will not share in the investment results of the
investment options while the loan is outstanding. If the policy loan account
earnings rate is less than the performance of the selected investment options
and/or Fixed Account I, the values and benefits under the policy will be reduced
(and the policy may even terminate) as a result of the loan.
Loan Interest
The loan interest rate charged is currently 8%. The loan interest credited to
your policy is currently 6%. Interest is charged daily and is payable at the end
of each policy year. Unpaid interest will be added to the existing debt as of
the due date and will be charged interest at the same rate as the rest of the
loan.
We will credit a higher effective annual interest rate in the following
circumstances;
* for amounts borrowed up to an amount equal to cash value less the aggregate
premium payments made to date (preferred loans); and
* for all loans against policies that are in the 11th policy year or later.
Preferred loans include the amount of any outstanding policy loan transferred in
a tax-free exchange.
Repaying Policy Debt
The debt, or any part, may be repaid at any time as long as the policy is in
force. Any debt outstanding will be deducted before any benefit proceeds are
paid. When you repay part or all of the loan, we will transfer an amount equal
to the amount you repay from the policy loan account to an investment option or
to any fixed account.
When there is debt outstanding, any payments received will be applied first as a
premium payment, rather than repayment of debt, unless we are instructed
otherwise. If total debt equals or exceeds the cash value less the surrender
charge, your policy will terminate without value. A termination of the policy
with a loan outstanding may have federal income tax consequences (see "More
Information - Federal Tax Status").
Partial Surrenders
You may make a partial surrender at any time after the 5th policy anniversary by
written notice.
When you make a partial surrender, we will reduce the cash value by the partial
surrender amount and any surrender charges. We will require that any partial
surrender amounts be first deducted from the cash value in the investment
options proportionately among all accounts unless the owner specifically
requests otherwise. We will also reduce the specified amount. The reduction in
specified amount will be proportional to the reduction in cash value due to the
partial surrender.
The minimum partial surrender amount is currently $500. We may assess a
surrender charge on the amount surrendered. See "Surrender Charges" above.
Partial surrenders will be allowed only if the policy continues to qualify as a
contract of life insurance under the Code. We will also limit the maximum amount
of all partial surrenders you can make in a policy year to the greater of:
* 10% of the total premium payments; or
* cash value less total premiums paid less any policy debt.
Full Surrenders
You may completely surrender your policy and receive the net cash value at any
time while the policy is in force. If you make a full surrender, we will require
that you return your policy.
The date of surrender will be the date we receive your written request. The net
cash value will be determined as of the end of the business day which
your written request is received. All coverage will end on the date of
surrender.
Partial and full surrenders may have federal tax consequences (see "Federal Tax
Status").
For your protection, a request for surrender, policy loan, or a change in
ownership must be by written notice. We may require the signature to be
guaranteed by a member firm of the New York, Boston, Midwest, Philadelphia, or
Pacific Stock Exchange, or by a commercial bank (not a savings bank), which is a
member of the Federal Deposit Insurance Corporation. In some cases, we may
require additional documentation of a customary nature.
OTHER INFORMATION
The Variable Account
We established a variable account, Valley Forge Life Insurance Company Variable
Life Separate Account (Variable Account), to hold the assets that underlie the
contracts. Our Board of Directors adopted a resolution to establish the Variable
Account under Illinois insurance law on February 12, 1996. We have registered
the Variable Account with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940.
The assets of the Variable Account are held in our name on behalf of the
Variable Account and legally belong to us. However, those assets that underlie
the contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
We reserve the right to modify the structure or operation of the Variable
Account. However, we guarantee that a modification will not affect the value of
your contract.
Distributor
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
CNA Investor Services, Inc. ("CNA/ISI") serves as the distributor for the
policies. CNA/ISI is located at CNA Plaza, Chicago, Illinois 60685.
Broker-dealers will be paid commissions up to 90% of premiums paid.
Suspension of Payments or Transfers
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
portfolios is not reasonably practicable or we cannot reasonably value
the shares of the portfolios;
4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We have the right to defer payment of any surrender or transfer of any fixed
account value for not more than 6 months from the date we receive your written
notice, unless otherwise provided by your state.
Ownership
Owner. You, as the owner of the policy or the certificate , have all of
the rights under the policy while the insured is living. Your rights in the
policy belong to your estate if you die before the insured dies and there is no
joint owner or contingent owner.
Joint Owner. The policy can be owned by joint owners. Joint owners have equal
ownership rights. Authorization of both joint owners is required for all policy
changes except for transfers and allocations.
Contingent Owner. The contingent owner, if any, is named in the application,
unless changed. You may name a contingent owner at any time while the insured is
living by providing us with written notice. Once recorded, the designation will
be effective as of the date the written notice was signed. Such change will not
affect any payment we make or action we take before it was recorded.
The contingent owner, if any, will become the owner if the named owner dies
before the date of the insured's death. If there are joint owners, the
contingent owner will become the owner if both named joint owners die before the
insured.
Beneficiary. The beneficiary is the person or entity you name to receive any
death proceeds. The primary beneficiary is the person who will be paid death
proceeds when the insured dies. The contingent beneficiary, if any, will become
the beneficiary if no primary beneficiary is living on the date of the insured's
death. More than one primary and contingent beneficiary can be named. If there
is more than one primary beneficiary alive when the insured dies, we will pay
the primary beneficiaries in equal shares unless you provide otherwise.
The primary beneficiary and contingent beneficiary on the policy date are named
in the application. While the insured is alive, you may change any beneficiary.
Any change must be by written notice. Once recorded, the change will take effect
as of the date you signed it. Such change will not affect any payment we make or
action we take before it was recorded. An irrevocable beneficiary must consent
in writing to any change in beneficiary.
If any beneficiary dies before the insured, that beneficiary's interest in the
death benefit will end. If any beneficiary dies at the same time as the insured,
or within 30 days of the insured, that beneficiary's interest in the death
benefit will end if no benefits have been paid to that beneficiary. If the
interest of all designated beneficiaries has ended when the insured dies, we
will pay the death benefit to you, or your estate if you are not living.
Assignment
You can assign any or all rights under your policy while the insured is living.
Assignment of all rights is a change of ownership. An irrevocable beneficiary
must consent in writing to any assignment. We are not responsible for the
sufficiency or validity of any assignment. An assignment will not affect any
payments we made or actions we have taken before we receive notice of the
assignment.
An assignment may be a taxable event. You should consult a tax adviser if you
want to assign the policy.
MORE INFORMATION
Executive Officers and Directors
The name, age, positions and offices, term as director, and business
experience during the past five years for the VFL's directors and executive
officers are listed in the following table:
<TABLE>
<CAPTION>
OFFICERS OF VFL
- - -------------------------------------------------------------------------------------------
POSITION(S)
HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH VFL DURING PAST FIVE YEARS
- - ---------------- --- ----------- -----------------------
<S> <C> <C> <C>
Bernard L. Hengesbaugh 52 Director, Chairman of the Board and Chief
CNA Plaza Chairman of Executive Officer of CNA since
Chicago, IL 60685 the Board and February, 1999. Prior thereto, Mr.
Chief Hengesbaugh was Executive Vice
Executive President and Chief Operating Officer
Officer of CNA since February, 1998. Prior
thereto, Mr. Hengesbaugh was Senior
Vice President of CNA since November,
1990. Mr. Hengesbaugh has served as a
Director of VFL since February, 1999.
Peter E. Jokiel 51 Senior Vice Senior Vice President of CNA since
CNA Plaza President November, 1990. Chief Financial
Chicago, IL 60685 Officer of CNA from November, 1990
through October, 1997. Mr. Jokiel
served as a Director of VFL from
July, 1992 through October, 1997.
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and
CNA Plaza President, General Counsel of CNA since April,
Chicago, IL 60685 Secretary, 1997. Group Vice President of CNA
General since April, 1994. Prior thereto, Mr.
Counsel and Kantor was a partner at the law firm
Director of Shea & Gould.* Mr. Kantor has
served as a Director of VFL since
April, 1997.
Robert V. Deutsch 39 Senior Vice Senior Vice President, Chief Financial
CNA Plaza President, Officer and Director since August 16,
Chicago, IL 60685 Chief 1998. Prior thereto, Officer for
Financial Executive Risk, Inc.
Officer,
Director
Thomas Pontarelli 51 Senior Vice Senior Vice President, Human Resources
CNA Plaza President, since April 2000. Prior thereto, Group
Chicago, IL 60685 Director Vice President, Human Resources. From
May 1974 to December 1997, series of
positions culminating in the position
of Chairman, CEO and President of
Washington National Insurance Company.
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate Finance
CNA Plaza President, Department since October 1998. Prior
Chicago, IL 60685 Director thereto, partner-in-charge of
PricewaterhouseCoopers LLP.
John M. Squarok 46 Group Vice Group Vice President of CNA since July
CNA Plaza President and 1998. Prior thereto, Mr. Squarok was
Chicago, IL 60685 Director Chief Financial Officer of various
businesses of GE Capital from August
1988 until July 1998. Director since
August 1998.
</TABLE>
- - ------------------------------------
* Shea & Gould declared bankruptcy in 1995.
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
Valley Forge. Executive officers serve at the discretion of the Board of
Directors.
Voting
Pursuant to our view of present applicable law, we will vote the shares of the
portfolios at special meetings of shareholders in accordance with instructions
received from all owners having a voting interest. We will vote shares for which
we have not received instructions and any shares that are ours in the same
proportion as the shares for which we have received instructions.
If the Investment Company Act of 1940 or any regulation thereunder is amended or
if the present interpretation of the Act changes so as to permit us to vote the
shares in our own right, we may elect to do so.
Disregard of Voting Instructions
We may, when required to do so by state insurance authorities, vote shares of
the portfolios without regard to instructions from owners. We will do this if
such instructions would require the shares to be voted to cause a portfolio to
make, or refrain from making, investments which would result in changes in the
sub-classification or investment objectives of the portfolio. We may also
disapprove changes in the investment policy initiated by owners or
trustees/directors of the portfolios, if such disapproval:
* is reasonable and is based on a good faith determination by us that
the change would violate state or federal law;
* the change would not be consistent with the investment objectives of
the portfolios; or
* varies from the general quality and nature of investments and
investment techniques used by other portfolios with similar investment
objectives underlying other variable contracts offered by us or of an
affiliated company.
In the event we do disregard voting instructions, a summary of this action and
the reasons for such action will be included in the next semi-annual report to
owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the policies.
Our Right to Contest
Except for accidental death and disability benefits, we cannot contest your
policy after it has been in force during the lifetime of the insured for two
years from the policy date; nor can we contest any increased benefit or
reinstatement after it has been in force, while the insured is alive, for two
years after the effective date of such increase or reinstatement.
We cannot contest your policy, any reinstatement or any increase in benefits
after the policy date of the policy, reinstatement, or increase in benefits
unless:
* an answer in the application for the policy, reinstatement or increase
in benefits was not true or correct; and
* if we had known the truth, we would not have issued the policy as we
did or increased the benefits.
Any statement made by the insured will not be used in any contest unless a copy
is furnished to the beneficiary.
Federal Tax Status
Note: The following description is based upon our understanding of current
federal income tax law applicable to life insurance in general. We cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the policies. Purchasers
bear the complete risk that the policies may not be treated as "life insurance"
under federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the policy prior
to the receipt of payments under the policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the policies. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these regulations, all securities of the same
issuer are treated as a single investment. The Code provides that, for purposes
of determining whether or not the diversification standards imposed on the
underlying assets of variable contracts by Section 817(h) of the Code have been
met, "each United States government agency or instrumentality shall be treated
as a separate issuer." We intend that each portfolio underlying the policies
will be managed by the investment managers in such a manner as to comply with
these diversification requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the separate account will cause the owner to be treated as the
owner of the assets of the separate account, thereby resulting in the loss of
favorable tax treatment for the policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policyowner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered the owner of the assets of the separate account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in you being retroactively
determined to be the owner of the assets of the separate account.
Due to the uncertainty in this area, we reserve the right to modify the policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a policy issued on a substandard risk basis
and thus it is even less clear whether a policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the policy should receive the same federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the Net Cash Value, including
increments thereon, under a policy until there is a distribution of such
amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of policy proceeds, depend on the circumstances of each
owner or beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 and fails to meet the 7-pay test. A policy fails to meet the 7-pay test
when the cumulative amount paid under the policy at any time during the first 7
policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the policy provided for paid-up future benefits
after the payment of seven (7) level annual premiums. A material change would
include any increase in the future benefits or addition of qualified additional
benefits provided under a policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven policy years; or (2) the
crediting of interest or other earnings (including policyholder dividends) with
respect to such premiums.
Furthermore, any policy received in exchange for a policy classified as a MEC
will be treated as a MEC regardless of whether it meets the 7-pay test. However,
an exchange under Section 1035 of the Code of a life insurance policy entered
into before June 21, 1988 for the policy will not cause the policy to be treated
as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each policy.
If the policy is classified as a MEC, then surrenders and/or loan proceeds are
taxable to the extent of income in the policy. Such distributions are deemed to
be on a last-in, first-out basis, which means the taxable income is distributed
first. Loan proceeds and/or surrender payments, including those resulting from
the lapse of the policy, may also be subject to an additional 10% federal income
tax penalty applied to the income portion of such distribution. The penalty
shall not apply, however, to any distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer
becoming disabled (within the meaning of Section 72(m)(7) of the Code); or (3)
which is part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
beneficiary.
If a policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the policy within the first fifteen years after the policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the policy.
Any loans from a policy which is not classified as a MEC, will be treated as
indebtedness of the owner and not a distribution. Upon complete surrender or
lapse of the policy, if the amount received plus loan indebtedness exceeds the
total premiums paid that are not treated as previously surrendered by the policy
owner, the excess generally will be treated as ordinary income.
Personal interest payable on a loan under a policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy owners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any policy.
Tax Treatment of Settlement Options. Under the Code, a portion of the settlement
option payments which are in excess of the death benefit proceeds are included
in the beneficiary's taxable income. Under a settlement option payable for the
lifetime of the beneficiary, the death benefit proceeds are divided by the
beneficiary's life expectancy and proceeds received in excess of these prorated
amounts are included in taxable income. The value of the death benefit proceeds
is reduced by the value of any period certain or refund guarantee. Under a fixed
payment or fixed period option, the death benefit proceeds are prorated by
dividing the proceeds over the payment period under the option. Any payments in
excess of the prorated amount will be included in taxable income.
Multiple Policies. The Code further provides that multiple MECs which are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC for purposes of determining the taxable portion of any
loans or distributions. Such treatment may result in adverse tax consequences
including more rapid taxation of the loans or distributed amounts from such
combination of contracts. You should consult a tax adviser prior to purchasing
more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a policy or the change of
ownership of a policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
policy.
Qualified Plans. The policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
At least once every policy year, we will send you a report showing current cash
values and other information required by laws and regulations. We will mail this
report to you at your last known address.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. We are
not involved in any litigation that is of material importance in relation to our
total assets or that relates to the Separate Account.
Experts
The financial statements for Valley Forge Life Insurance Company as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in the Statement of Additional Information which is part of
this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the Valley
Forge Life Insurance Company Variable Life Separate Account as of and for the
year ended December 31, 1999 (for the two years ended December 31, 1999 with
respect to the statements of changes in net assets) included in this Prospectus
which is part of this registration statement and have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing in the
registration statement, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Rodney E.
Rishel, Jr., FSA, MAAA, whose opinion is filed as an exhibit to the registration
statement.
Financial Statements
Our financial statements included herein should be considered only
as bearing upon our ability to meet our obligations under the policies.
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
To the Contractholders of Valley Forge Life Insurance Company Variable Universal
Life Separate Account and the Board of Directors of Valley Forge Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of the
subaccounts of Valley Forge Life Insurance Company Variable Life Separate
Account (the "Account") as of December 31, 1999, the statements of operations
for the year ended December 31, 1999, and changes in net assets for the two
years ended December 31, 1999. The subaccounts that collectively comprise the
Account are the Federated Prime Money Fund II, Federated Utility Fund II,
Federated High Income Bond Fund II, Fidelity Variable Insurance Products Fund
Equity-Income Portfolio, Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio, Fidelity Variable Insurance Products Fund II Index 500
Portfolio, Fidelity Variable Insurance Products Fund II Contrafund Portfolio,
The Alger American Fund Small Capitalization Portfolio, The Alger American
Growth Portfolio, The Alger American MidCap Growth Portfolio, MFS Emerging
Growth Series, MFS Research Series, MFS Growth with Income Series, MFS Limited
Maturity Series, MFS Total Return Series, SoGen Overseas Variable Fund, Van Eck
Worldwide Hard Assets, Van Eck Emerging Markets Fund, Janus Aspen Capital
Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Flexible Income Portfolio, Janus Aspen International
Growth Portfolio and Janus Aspen World Wide Growth Portfolio. These financial
statements are the responsibility of the Account'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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999. 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 each of the subaccounts that comprise the
Account as of December 31, 1999, the results of their operations for the year
ended December 31, 1999, and the changes in their net assets for the two years
ended December 31, 1999, are in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 2000
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ------- ------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market
value (see supplemental
cost information
below) $ 1,337,536 $ 123,711 $ 107,312 $ 628,527 $ 266,010 $ 1,819,650 $ 1,141,432
----------- ---------- --------- --------- ---------- ------------ -----------
TOTAL ASSETS 1,337,536 123,711 107,312 628,527 266,010 1,819,650 1,141,432
----------- ---------- --------- --------- ---------- ------------ -----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders (26,564) (867) -- (13,051) -- -- (601,696)
----------- ---------- --------- --------- ---------- ------------ -----------
TOTAL LIABILITIES (26,564) (867) -- (13,051) -- -- (601,696)
----------- ---------- --------- --------- ---------- ------------ -----------
NET ASSETS $ 1,310,972 $ 122,844 $ 107,312 $ 615,476 $ 266,010 $ 1,819,650 $ 539,736
=========== ========== ========= ========= ========== ============ ===========
SUPPLEMENTAL COST
INFORMATION:
Investments, at cost $ 1,310,972 $ 122,453 $ 109,593 $ 623,780 $ 247,427 $ 1,879,231 $ 1,080,717
=========== ========== ========= ========= ========== ============ ===========
<CAPTION>
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market
value (see supplemental
cost information
below) $ 85,808 $ 231,654 $ 118,851 $ 12,165 $ 217 $ 31,404 $ 94,996
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL ASSETS 85,808 231,654 118,851 12,165 217 31,404 94,996
---------- ------------- ------------ ---------- --------- --------- ----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders -- -- -- (23) (1) (14) --
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL LIABILITIES -- -- -- (23) (1) (14) --
---------- ------------- ------------ ---------- --------- --------- ----------
NET ASSETS $ 85,808 $ 231,654 $ 118,851 $ 12,142 $ 216 $ 31,390 $ 94,996
========== ============= ============ ========== ========= ========= ==========
SUPPLEMENTAL COST
INFORMATION:
Investments,
at cost $ 60,834 $ 192,395 $ 102,538 $ 11,102 $ 215 $ 26,521 $ 77,201
========== ============= ============ ========== ========= ========= ==========
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- --------- --------- --------- ------ ------ ------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
306,155 $ 1,359,820 $ 457,509 $ 915,394 $ 428,976 $ 502,242 $ 77,690 $ 341,613 $ 288,735 $ 23,391
- ------- ------------ --------- ----------- ---------- ----------- ---------- ----------- ---------- --------
306,155 1,359,820 457,509 915,394 428,976 502,242 77,690 341,613 288,735 23,391
- ------- ------------ --------- ----------- ---------- ----------- ---------- ----------- ---------- --------
(14,699) -- (3,400) (8) (2,698) (373) (4,181) -- -- (26)
- ------- ------------ --------- ----------- ---------- ----------- ---------- ----------- ---------- --------
(14,699) -- (3,400) (8) (2,698) (373) (4,181) -- -- (26)
- ------- ------------ --------- ----------- ---------- ----------- ---------- ----------- ---------- --------
291,456 $ 1,359,820 $ 454,109 $ 915,386 $ 426,278 $ 501,869 $ 73,509 $ 341,613 $ 288,735 $23,365
======= ============ ========== =========== ========== =========== =========== =========== =========== ========
253,752 $ 1,193,861 $ 387,900 $ 686,138 $ 348,548 $ 466,568 $ 77,882 $ 350,610 $ 247,934 $ 22,339
======= ============ ========== =========== ========== =========== =========== =========== =========== ========
</TABLE>
See accompanying Notes to Financial Statements.
3
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY
FOR THE YEAR FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
ENDED PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ------- ------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 34,277 $ 5,412 $ 6,010 $ 18,590 $ 13,097 $ 8,382 $ 16,984
--------- --------- --------- ---------- ---------- ---------- ----------
34,277 5,412 6,010 18,590 13,097 8,382 16,984
--------- --------- --------- ---------- ---------- ---------- ----------
Expenses:
Mortality and
expense risk
charges 6,667 803 750 4,465 1,936 9,965 6,231
Policy fees/Cost
of insurance 75,698 10,867 12,804 52,685 20,302 135,236 78,259
--------- --------- --------- ---------- ---------- ---------- ----------
82,365 11,670 13,554 57,150 22,238 145,201 84,490
--------- --------- --------- ---------- ---------- ---------- ----------
NET INVESTMENT
INCOME (LOSS) (48,088) (6,258) (7,544) (38,560) (9,141) (136,819) (67,506)
Investment gains and
(losses):
Net realized gains
(losses) - 750 (2,687) 4,507 6,698 69,785 142,245
Net unrealized gains
(losses) - (3,365) (2,743) (22,236) 11,758 (105,956) (584,391)
--------- --------- --------- ---------- ---------- ---------- ----------
NET REALIZED AND
UNREALIZED
INVESTMENT GAINS
(LOSSES) - (2,615) (5,430) (17,729) 18,456 (36,171) (442,146)
--------- --------- --------- ---------- ---------- ---------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $ (48,088) $ (8,873) $ (12,974) $ (56,289) $ 9,315 $ (172,990) $ (509,652)
========= ========= ========= ========== ========== ========== ==========
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
FOR THE YEAR ENDED MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- ------------ ---------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income - - - - - - -
-------- --------- -------- --------- --------- -------- ----------
- - - - - - -
-------- --------- -------- --------- --------- -------- ----------
Expenses:
Mortality and
expense risk
charges $ 167 $ 453 $ 133 $ 12 - $ 58 $ 157
Policy fees/Cost
of insurance 6,146 1,330 684 137 $ 38 293 651
-------- --------- -------- --------- --------- -------- ----------
6,313 1,783 817 149 38 351 808
-------- --------- -------- --------- --------- -------- ----------
NET INVESTMENT
INCOME (LOSS) (6,313) (1,783) (817) (149) (38) (351) (808)
Investment gains and
(losses):
Net realized gains
(losses) 6,510 23,381 (237) 11 - 11,007 11,697
Net unrealized gains
(losses) 25,767 39,259 16,313 1,040 1 4,869 17,795
-------- --------- -------- --------- --------- -------- ----------
NET REALIZED AND
UNREALIZED
INVESTMENT GAINS
(LOSSES) 32,277 62,640 16,076 1,051 1 15,876 29,492
-------- --------- -------- --------- --------- -------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $ 25,964 $ 60,857 $ 15,259 $ 902 $ (37) $ 15,525 $ 28,684
======== ========= ======== ========= ========= ======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
5
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- -------------- --------- --------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$16,693 $ 62,822 $ 38,874 - $ 2,935 $ 1,986 $ 4,218 $ 12,074 $ 3,304 $ 190
- ------- ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
16,693 62,822 38,874 - 2,935 1,986 4,218 12,074 3,304 190
- ------ ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
1,619 7,580 2,650 $ 4,133 3,363 3,016 586 2,243 2,004 154
21,221 90,363 30,100 58,872 36,824 39,310 8,706 26,801 31,183 2,422
- ------ ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
22,840 97,943 32,750 63,005 40,187 42,326 9,292 29,044 33,187 2,576
- ------ ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
(6,147) (35,121) 6,124 (63,005) (37,252) (40,340) (5,074) (16,970) (29,883) (2,386)
23,168 77,813 9,208 23,492 10,097 5,229 (210) 4,670 38,990 760
27,800 122,720 43,822 188,807 59,131 18,997 (3,124) (14,859) 42,033 1,839
- ------ ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
50,968 200,533 53,030 212,299 69,228 24,226 (3,334) (10,189) 81,023 2,599
- ------ ----------- ---------- ---------- -------- ---------- ----------- ---------- ----------- --------
$44,821 $ 165,412 $ 59,154 $ 149,294 $ 31,976 $ (16,114) $ (8,408) $ (27,159) $ 51,140 $ 213
======= =========== ========== ========== ======== ========== =========== ========== =========== ========
</TABLE>
See accompanying Notes to Financial Statements.
6
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
ENDED DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------- ------- ------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment
income (loss) $ (48,088) $ (6,258) $ (7,544) $ (38,560) $ (9,141) $ (136,819) $ (67,506)
Net realized and
unrealized investment
gains (losses) - (2,615) (5,430) (17,729) 18,456 (36,171) (442,146)
---------- --------- -------- --------- ---------- ----------- ----------
Change in net assets
resulting from
operations (48,088) (8,873) (12,974) (56,289) 9,315 (172,990) (509,652)
---------- --------- -------- --------- ---------- ----------- ----------
From capital
transactions:
Net premiums/deposits 1,215,907 85,733 78,714 410,539 148,962 1,212,597 672,068
Surrenders and
withdrawals (1,542) 19 (941) 1,122 (523) (9,452) (3,707)
Transfers in (out of)
subaccounts, net--
Note 1 (702,832) (3,776) (22,988) (39,350) 22,540 369,492 53,687
---------- --------- -------- --------- ---------- ----------- ----------
Change in net assets
resulting from
capital
transactions 511,533 81,976 54,785 372,311 170,979 1,572,637 722,048
---------- --------- -------- --------- ---------- ----------- ----------
Increase in net assets 463,445 73,103 41,811 316,022 180,294 1,399,647 212,396
Net assets at beginning
of period 847,527 49,741 65,501 299,454 85,716 420,003 327,340
---------- --------- -------- --------- ---------- ----------- ----------
NET ASSETS AT END OF
PERIOD $1,310,972 $ 122,844 $107,312 $ 615,476 $ 266,010 $ 1,819,650 $ 539,736
========== ========= ======== ========= ========== =========== ==========
NET ASSET VALUE PER
UNIT AT END OF PERIOD $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41 $ 29.15
========== ========= ======== ========= ========== =========== ==========
UNITS OUTSTANDING AT
END OF PERIOD 1,310,972 8,561 10,480 23,939 14,248 10,869 18,516
========== ========= ======== ========= ========== =========== ==========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY ASSET INDEX FIDELITY
MONEY UTILITY BOND INCOME MANAGER 500 CONTRAFUND
FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ --------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income
(loss) $ (14,476) $ (3,056) $ (5,532) $ (22,666) $ (6,180) $ (38,788) $ (22,765)
Net realized and
unrealized investment
gains (losses) - 3,330 192 11,559 6,583 46,453 46,063
---------- --------- -------- --------- ---------- ---------- ----------
Change in net assets
resulting from
operations (14,476) 274 (5,340) (11,107) 403 7,665 23,298
---------- --------- -------- --------- ---------- ---------- ----------
From capital
transactions:
Net premiums/deposits 1,100,864 36,000 58,181 263,891 61,909 327,244 246,088
Surrenders and
withdrawals (572) (83) (165) (2,423) (129) (6,058) (1,201)
Transfers in (out of)
subaccounts, net--
Note 1 (303,884) (229) 8,694 22,472 16,042 50,804 36,435
---------- --------- -------- --------- ---------- ---------- ----------
Change in net assets
resulting from
capital
transactions 796,408 35,688 66,710 283,940 77,822 371,990 281,322
---------- --------- -------- --------- ---------- ---------- ----------
Increase (decrease)
in net assets 781,932 35,962 61,370 272,833 78,225 379,655 304,620
Net assets at beginning
of period 65,595 13,779 4,131 26,621 7,491 40,348 22,720
NET ASSETS AT END
OF PERIOD $ 847,527 $ 49,741 $ 65,501 $ 299,454 $ 85,716 $ 420,003 $ 327,340
========== ========= ======== ========= ========== ========== ==========
NET ASSET VALUE PER
UNIT AT END OF PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44
========== ========= ======== ========= ========== ========== ==========
UNITS OUTSTANDING AT
END OF PERIOD 847,527 3,257 5,998 11,780 4,720 2,973 13,394
========== ========= ======== ========= ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE> 9
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
--------- --------- --------- ------ ------ ------ ------ ------ ---- ---- ----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ (6,147) $ (35,121) $ 6,124 $(63,005) $(37,252) $(40,340) $ (5,074) $(16,970) $(29,883) $(2,386) $(6,313)
50,968 200,533 53,030 212,299 69,228 24,226 (3,334) (10,189) 81,023 2,599 32,277
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
44,821 165,412 59,154 149,294 31,976 (16,114) (8,408) (27,159) 51,140 213 25,964
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
149,226 813,146 190,974 344,008 187,325 301,314 42,954 243,333 94,031 14,568 40,337
(1,485) (25,742) (972) (3,708) (1,274) (2,829) (315) (547) 2,448 (75) (1,098)
(32,320) 126,761 36,116 139,533 2,955 8,922 (14,192) (2,322) 6,797 (1,744) 1,766
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
115,421 914,165 226,118 479,833 189,006 307,407 28,447 240,464 103,276 12,749 41,005
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
160,242 1,079,577 285,272 629,127 220,982 291,293 20,039 213,305 154,416 12,962 66,969
$131,214 280,243 168,837 286,259 205,296 210,576 53,470 128,308 134,319 10,403 18,839
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
$291,456 $1,359,820 $454,109 $915,386 $426,278 $501,869 $ 73,509 $341,613 $288,735 $23,365 $85,808
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
$ 55.15 $ 64.38 $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81 $ 17.75 $ 14.18 $ 10.96 $ 14.26
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
5,285 21,122 14,090 24,127 18,264 23,551 7,493 19,245 20,362 2,132 6,017
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
$ (3,424) $ (6,097) $ (9,436) $(22,642) $(15,787) $(18,580) $ (4,763) $ (5,524) $(14,549) $ (417) $(3,614)
4,449 44,836 22,499 40,816 18,836 12,276 (499) 6,093 (3,210) (3,800) (3,708)
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
1,025 38,739 13,063 18,174 3,049 (6,304) (5,262) 569 (17,759) (4,217) (7,322)
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
88,005 171,948 119,140 214,349 173,364 141,269 47,751 97,181 135,934 9,690 20,390
(313) (1,636) (1,360) (734) (2,718) (2,367) (363) (194) (2,482) (156) (296)
26,949 37,058 26,519 27,749 11,059 51,081 (7) 28,785 5,437 (816) (690)
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
114,641 207,370 144,299 241,364 181,705 189,983 47,381 125,772 138,889 8,718 19,404
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
115,666 246,109 157,362 259,538 184,754 183,679 42,119 126,341 121,130 4,501 12,082
15,548 34,134 11,475 26,721 20,542 26,897 11,351 1,967 13,189 5,902 6,757
-------- ---------- -------- -------- -------- -------- -------- -------- -------- ------- -------
$131,214 $ 280,243 $168,837 $286,259 $205,296 $210,576 $ 53,470 $128,308 $134,319 $10,403 $18,839
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
2,984 5,266 5,848 13,333 10,777 10,471 5,263 7,081 13,339 1,131 2,646
======== ========== ======== ======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
<TABLE>
<CAPTION>
JANUS JANUS JANUS JANUS
ASPEN JANUS JANUS ASPEN ASPEN ASPEN
CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (1,783) $ (817) $ (149) $ (38) $ (351) $ (808)
Net realized and unrealized
investment gains (losses) 62,640 16,076 1,051 1 15,876 29,492
---------- ----------- --------- ---------- --------- -----------
Change in net assets resulting
from operations 60,857 15,259 902 (37) 15,525 28,684
---------- ----------- --------- ---------- --------- -----------
From capital transactions:
Net premiums/deposits 170,800 103,592 11,240 253 15,865 66,312
Surrenders and withdrawals - - - - - -
Transfers in (out of) subaccounts,
net--Note 1 (3) - - - - -
---------- ----------- --------- ---------- --------- -----------
Change in net assets resulting
from capital transactions 170,797 103,592 11,240 253 15,865 66,312
---------- ----------- --------- ---------- --------- -----------
Increase in net assets 231,654 118,851 12,142 216 31,390 94,996
Net assets at beginning of period - - - - - -
---------- ----------- --------- ---------- --------- -----------
NET ASSETS AT END OF PERIOD $ 231,654 $ 118,851 $ 12,142 $ 216 $ 31,390 $ 94,996
========== =========== ========= ========== ========= ===========
NET ASSET VALUE PER UNIT AT
END OF PERIOD $ 33.17 $ 33.65 $ 27.92 $ 11.42 $ 38.67 $ 47.75
========== =========== ========= ========== ========= ===========
UNITS OUTSTANDING AT END OF PERIOD 6,984 3,532 435 19 812 1,989
========== =========== ========= ========== ========= ===========
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION
Valley Forge Life Insurance Company Variable Life Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a Separate
Account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operations on February 24, 1997. 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 ("CNA"). Loews Corporation owns approximately 86%
of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the Capital
Select variable life policy ("Policy"). Under the terms of the Policy,
policyowners select where the net premium payments of the Policy are invested.
The policyowner may choose to invest in either the Variable Account, the fixed
account ("Fixed Account") or both the Variable Account and Fixed Account.
Policyholders who invest in the Variable Account are hereinafter referred to as
the contractholder.
The Variable Account currently offers 24 subaccounts each of which invests
in shares of a corresponding fund ("Fund"), in which the contractholders bear
all of the investment risk. Each Fund is either an open-end diversified
management investment company or a separate investment portfolio of such a
company and is managed by an investment advisor ("Investment Advisor") which is
registered with the Securities and Exchange Commission. The Investment Advisors
and subaccounts are identified here.
11
<PAGE> 12
NOTE 1.-(CONTINUED)
<TABLE>
<C> <C>
INVESTMENT ADVISOR: INVESTMENT ADVISOR:
FUND/SUBACCOUNT FUND/SUBACCOUNT
FEDERATED ADVISERS: MASSACHUSETTS FINANCIAL SERVICES COMPANY:
Federated Prime Money Fund II MFS Emerging Growth Series
Federated Utility Fund II MFS Research Series
Federated High Income Bond Fund II MFS Growth With Income Series
MFS Limited Maturity Series (closed to
FIDELITY MANAGEMENT & RESEARCH COMPANY: new investments)
Fidelity Variable Insurance Products MFS Total Return Series
Fund Equity-Income Portfolio
("Fidelity Equity-Income Portfolio") SOCIETE GENERALE ASSET MANAGEMENT
Fidelity Variable Insurance Products CORP.:
Fund II Asset Manager Portfolio SoGen Overseas Variable Fund
("Fidelity Asset Manager Portfolio")
Fidelity Variable Insurance Products VAN ECK ASSOCIATES CORPORATION:
Fund II Index 500 Portfolio Van Eck Worldwide Hard Assets Fund
("Fidelity Index 500 Portfolio") Van Eck Emerging Markets Fund
Fidelity Variable Insurance Products
Fund II Contrafund Portfolio JANUS CAPITAL CORPORATION--
("Fidelity Contrafund Portfolio") INSTITUTIONAL CLASS:
Janus Aspen Capital Appreciation Portfolio
FRED ALGER MANAGEMENT, INC.: Janus Aspen Growth Portfolio
The Alger American Small Capitalization Janus Aspen Balanced Portfolio
Portfolio Janus Aspen Flexible Income Portfolio
The Alger American Growth Portfolio Janus Aspen International Growth Portfolio
The Alger American MidCap Growth Portfolio Janus Aspen World Wide Growth Portfolio
</TABLE>
The Fixed Account is part of the general account of VFL and is an
investment option available to contractholders. The Fixed Account has 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.
The accompanying financial statements do not reflect amounts invested in the
Fixed Account.
The assets of the Variable Account are segregated from VFL's general
account and other separate accounts. The contractholder (before the maturity
date, while the contractholder is still living or the policy is in force), may
transfer all or part of any subaccount value to another subaccount(s) or to the
Fixed Account, or transfer all or part of amounts in the Fixed Account to any
subaccount(s). The MFS Limited Maturity Series subaccount is not available to
receive transfers from new participants as of May 1, 1999.
12
<PAGE> 13
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS--Investments consist of shares of the Funds and
are stated at fair value based on quoted market prices. Changes in the
difference between market value and cost are reflected as net unrealized gains
(losses) in the statement of operations.
INVESTMENT INCOME--Investment income consists of dividends declared by the
Funds which are recognized on the date of record.
REALIZED INVESTMENT GAINS AND LOSSES--Realized investment gains and losses
represent the difference between the proceeds from sales of shares of the Funds
held by the Variable Account and the cost of such shares, which are determined
using the first-in first-out cost method.
FEDERAL INCOME TAXES--Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles ("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.
In the opinion of Variable Account's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and
changes in net assets in the accompanying financial statements.
13
<PAGE> 14
NOTE 3. CHARGES AND DEDUCTIONS
Monthly deductions are made from each contractholder's account under the
terms of the Policy to compensate VFL for certain administration expenses. The
policy fee is $6 per month. In addition, in the first year of a policy another
$20 per month is deducted. Furthermore, in the event of an increase to the death
benefit of the Policy, an additional fee of $10 per month is deducted for the
twelve months subsequent to the death benefit increase. A deduction is also made
for the cost of insurance and any charges for supplemental riders. The cost of
insurance charge 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. All of the foregoing charges are deducted from the contractholder's
investment in the Fixed Account and the subaccounts of the Variable Account in
proportion to the contractholder's investments in such accounts.
VFL 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 equal to an annual rate of 0.90% of the net assets of the
Variable Account during the first 10 policy years and an annual rate of 0.45% of
the net assets of the Variable Account during policy years 11 and thereafter.
VFL deducts an amount equal to 3.5% from each premium payment (deposit)
made by the contractholder to cover federal tax liabilities and state and local
premium taxes. An additional deduction for sales charges is made from premium
payments (deposits). Such deduction is made under the terms of the Policy and
ranges from 2% to 4% of the premium payments (deposits). Net premiums after
these deductions are invested in the mutual funds.
VFL permits 12 transfers between and among the subaccounts (one of which
can be applied to the Fixed Account) per policy year without an assessment of a
fee. For each additional transfer, VFL charges $25 at the time each such
transfer is processed. The fee is deducted from the amount being transferred.
NOTE 4. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable life insurance policy will not be treated as life
insurance under Section 7702 of the Code for any period for which the
investments of the segregated asset account on which the policy is based are not
adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on the prospectuses of
each of the Funds that the Variable Account participates in, that the mutual
funds satisfy the diversification requirement of the regulations.
14
<PAGE> 1
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 Loew's
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company
changed its method of accounting for liabilities for insurance-related
assessments in 1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1999 1998
- ----------- ----------- -----------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost: $548,444
and $454,635) $ 530,512 $ 460,516
Equity securities available-for-sale (cost: $0 and $981) 51 2,218
Policy loans 93,575 74,150
Other invested assets 433 485
Short-term investments 24,714 81,418
----------- -----------
TOTAL INVESTMENTS 649,285 618,787
Cash 3,529 3,750
Receivables:
Reinsurance 2,414,553 2,119,897
Premium and other 82,852 76,690
Less allowance for doubtful accounts (12) (26)
Deferred acquisition costs 127,297 111,963
Accrued investment income 11,066 7,721
Receivables for securities sold 2,426 --
Federal income tax recoverable 4,316 --
Other 4,883 902
Separate Account business 209,183 73,745
----------- -----------
TOTAL ASSETS $ 3,509,378 $ 3,013,429
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $ 2,751,396 $ 2,438,305
Claims and claim expense 139,653 93,001
Policyholders' funds 43,466 42,746
Payables for securities purchased 2,421 370
Federal income taxes payable -- 6,468
Deferred income taxes 2,694 6,213
Due to affiliates 12,435 1,946
Commissions and other payables 95,976 86,815
Separate Account business 209,183 73,745
----------- -----------
TOTAL LIABILITIES 3,257,224 2,749,609
----------- -----------
Commitments and contingent liabilities
Stockholder's Equity
Common stock ($50 par value; Authorized--200,000 shares;
Issued--50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 191,464 187,683
Accumulated other comprehensive income (loss) (10,960) 4,487
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 252,154 263,820
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,509,378 $ 3,013,429
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums $ 310,719 $ 315,599 $ 332,172
Net investment income 39,148 35,539 29,913
Realized investment gains (losses) (19,081) 16,967 4,200
Other 4,545 7,959 6,872
--------- --------- ---------
335,331 376,064 373,157
--------- --------- ---------
Benefits and expenses:
Insurance claims and policyholders' benefits 291,547 301,900 307,207
Amortization of deferred acquisition costs 13,942 11,807 11,818
Other operating expenses 23,740 35,813 33,505
--------- --------- ---------
329,229 349,520 352,530
--------- --------- ---------
Income before income tax expense and
cumulative effect of change
in accounting principle 6,102 26,544 20,627
Income tax expense 2,087 9,091 7,297
--------- --------- ---------
Income before cumulative effect of change
in accounting principle 4,015 17,453 13,330
Cumulative effect of change in accounting
principle, net of tax-Note 12 234 -- --
--------- --------- ---------
NET INCOME $ 3,781 $ 17,453 $ 13,330
========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Comprehensive Total
Common Paid-in Income Retained Income Stockholder's
Stock Capital (Loss) Earnings (Loss) Equity
--------- ---------- ------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Balance, December 31, 1996 $ 2,500 $ 39,150 $ 156,900 $ 990 $ 199,540
Comprehensive income:
Net income -- -- $ 13,330 13,330 -- 13,330
Other comprehensive income -- -- 3,390 -- 3,390 3,390
---------
Total comprehensive income $ 16,720
=========
Balance, December 31, 1997 2,500 39,150 170,230 4,380 216,260
Capital Contribution from Assurance -- 30,000 -- -- 30,000
Comprehensive income:
Net income -- -- $ 17,453 17,453 -- 17,453
Other comprehensive income -- -- 107 -- 107 107
---------
Total comprehensive income $ 17,560
=========
Balance, December 31, 1998 2,500 69,150 187,683 4,487 263,820
Comprehensive income (loss):
Net income -- -- $ 3,781 3,781 -- 3,781
Other comprehensive loss -- -- (15,447) -- (15,447) (15,447)
---------
Total comprehensive loss $ (11,666)
=========
BALANCE, DECEMBER 31, 1999 $ 2,500 $ 69,150 $ 191,464 $ (10,960) $ 252,154
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31 1999 1998 1997
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,781 $ 17,453 $ 13,330
Adjustments to reconcile net income to net
cash flows from operating activities:
Deferred income tax provision 4,924 2,058 2,581
Realized investment losses (gains) 19,081 (16,967) (4,200)
Amortization of bond discount (2,999) (4,821) (2,438)
Changes in:
Receivables, net (300,832) (544,920) (269,787)
Deferred acquisition costs (13,866) (16,746) (20,765)
Accrued investment income (3,345) (2,476) (300)
Due to/from affiliates (10,489) 37,945 31,500
Federal income taxes payable and receivable (10,784) 493 2,151
Insurance reserves 380,939 541,560 221,252
Commissions and other payables and other 25,642 (18,804) 47,212
----------- ----------- -----------
Total adjustments 88,271 (22,678) 7,206
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 92,052 (5,225) 20,536
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (1,512,848) (744,431) (464,361)
Proceeds from fixed maturities:
Sales 1,339,905 741,277 278,459
Maturities, calls and redemptions 58,263 33,635 45,442
Purchases of equity securities -- (5) (1,334)
Proceeds from sale of equity securities 2,647 5 2,447
Change in short-term investments 59,455 (73,233) 39,301
Change in policy loans (19,424) (7,179) (6,704)
Change in other invested assets 205 (82) (580)
Other, net -- -- --
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (71,797) (50,013) (107,330)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited
to policyholder accounts 15,901 30,007 111,478
Return of policyholder account balances on investment contracts (36,377) (25,584) (24,878)
Capital contribution from Assurance -- 30,000 --
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (20,476) 34,423 86,600
----------- ----------- -----------
NET CASH FLOWS (221) (20,815) (194)
Cash at beginning of period 3,750 24,565 24,759
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,529 $ 3,750 $ 24,565
=========== =========== ===========
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 8,260 $ 6,651 $ 2,488
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
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 86% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health insurance and retirement needs of individuals and groups. Products
available in individual policy form include annuities as well as term and
universal life insurance. Products available in group policy form include life,
pension, accident and health insurance.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This ceded 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
1999.
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 9%, 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 to
be incurred 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 4.45% to 7.25% for the three
years ended December 31, 1999.
Claim and claim expense reserves- Claim reserves include provisions for
reported claims in the course of settlement and estimates of unreported losses
based upon past experience and estimates of future expenses to be incurred in
settlement of claims.
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Reinsurance- In addition to the Reinsurance 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 coinsurance, yearly renewable term and facultative programs. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability and future policy benefit reserves.
Deferred acquisition costs- Cost of acquiring life insurance business
are capitalized and amortized based on assumptions consistent with those used
for computing future policy benefit reserves. Acquisition costs on traditional
life business are amortized over the 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. To
the extent that unrealized gains or losses on available-for-sale securities
would result in an adjustment of deferred policy acquisition costs had those
gains or losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment to the unrealized gains or
losses included in stockholder's equity.
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 net 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 records its derivative securities at fair value at the reporting
date and changes in fair value are 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 and deferred
acquisition costs. 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 lending activities- VFL lends securities to unrelated
parties, primarily major brokerage firms. Borrowers of these securities must
deposit collateral with VFL equal to 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) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
Separate Account business- VFL writes certain variable 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 and are carried
at contract values.
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in
the following table:
NET INVESTMENT INCOME
Year Ended December 31 1999 1998 1997
- ---------------------- ------- ------- -------
(In thousands of dollars)
Fixed maturities--Taxable bonds $30,851 $27,150 $20,669
Equity securities 54 72 72
Policy loans 4,963 4,760 4,264
Short-term investments 2,969 3,803 4,885
Other 778 105 201
------- ------- -------
39,615 35,890 30,091
Investment expense 467 351 178
------- ------- -------
NET INVESTMENT INCOME $39,148 $35,539 $29,913
======= ======= =======
Net realized investment gains (losses) and unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
(In thousands of dollars)
Realized investment gains (losses):
Fixed maturities $(20,981) $ 16,907 $ 3,333
Equity securities 1,667 0 1,021
Other 233 60 (154)
-------- -------- --------
(19,081) 16,967 4,200
Income tax benefit (expense) 6,679 (5,938) (1,470)
-------- -------- --------
Net realized investment gains (losses) (12,402) 11,029 2,730
-------- -------- --------
Change in net unrealized investment gains (losses):
Fixed maturities (23,813) 441 5,806
Equity securities (1,186) (42) (607)
Adjustment to deferred policy acquisition costs
related to unrealized gains (losses) and other 1,235 (235) 20
-------- -------- --------
(23,764) 164 5,219
Deferred income tax (expense) benefit 8,317 (57) (1,829)
-------- -------- --------
Change in net unrealized investment gains (losses) (15,447) 107 3,390
-------- -------- --------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $(27,849) $ 11,136 $ 6,120
======== ======== ========
</TABLE>
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. - (CONTINUED)
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
---- ---- ----
(In thousands of dollars) FIXED EQUITY Fixed Equity Fixed Equity
MATURITIES SECURITIES Maturities Securities Maturities Securities
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 1,339,905 $ 2,647 $ 741,277 $ 5 $ 278,459 $ 2,447
============= ======== ========== ==== ========== ========
Gross realized gains $ 4,399 $ 1,667 $ 17,604 $ -- $ 4,793 $ 1,113
Gross realized losses (25,380) -- (697) -- (1,460) (92)
------------- -------- ---------- ---- ---------- --------
NET REALIZED GAINS (LOSSES)
ON SALES $ (20,981) $ 1,667 $ 16,907 $ -- $ 3,333 $ 1,021
============= ======== ========== ==== ========== ========
</TABLE>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
December 31 1999 1998
---- ----
GAINS LOSSES NET Gains Losses Net
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities $ 666 $ (18,598) $ (17,932) $ 6,926 $ (1,045) $ 5,881
Equity securities 51 -- 51 1,237 -- 1,237
Adjustment to deferred policy
acquisition costs related to
unrealized gains (losses)
and other 1,468 (448) 1,020 -- (215) (215)
---------- ---------- ---------- --------- --------- --------
$ 2,185 $ (19,046) (16,861) $ 8,163 $ (1,260) 6,903
========== ========== ========= =========
Deferred income tax benefit (expense) 5,901 (2,416)
---------- --------
NET UNREALIZED INVESTMENT
GAINS (LOSSES) $ (10,960) $ 4,487
========== ========
</TABLE>
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
(In thousands of dollars) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1999 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of government agencies $253,041 $ -- $ 6,988 $246,053
Asset-backed securities 107,275 50 4,200 103,125
Corporate securities 164,140 98 6,914 157,324
Other debt securities 23,988 518 496 24,010
-------- -------- -------- --------
Total fixed maturities 548,444 666 18,598 530,512
Equity securities -- 51 -- 51
-------- -------- -------- --------
TOTAL $548,444 $ 717 $ 18,598 $530,563
======== ======== ======== ========
December 31, 1998
U.S. Treasuries and obligations of government
agencies $223,743 $ 1,601 $ 563 $224,781
Asset-backed securities 109,207 1,163 180 110,190
Corporate securities 98,466 2,512 81 100,897
Other debt securities 23,219 1,650 221 24,648
-------- -------- -------- --------
Total fixed maturities 454,635 6,926 1,045 460,516
Equity securities 981 1,237 -- 2,218
-------- -------- -------- --------
Total $455,616 $ 8,163 $ 1,045 $462,734
======== ======== ======== ========
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
1999
AMORTIZED FAIR
December 31 COST VALUE
- ----------- ------------ ------------
<S> <C> <C>
(In thousands of dollars)
Due in one year or less $ 4,130 $ 4,115
Due after one year through five years 180,447 176,798
Due after five years through ten years 194,438 188,778
Due after ten years 62,154 57,697
Asset-backed securities not due at a single maturity date 107,275 103,124
------------ ------------
Total $ 548,444 $ 530,512
============ ============
</TABLE>
Actual maturities may differ from contractual maturities because
securities may be called or prepaid with or without call or prepayment
penalties.
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1999 and 1998. Except for
investments in securities of the U.S. Government and its Agencies, there are no
investments in a single issuer that when aggregated exceed 10% of stockholder's
equity at December 31, 1999.
Securities with carrying values of $2.7 million and $2.8 million were
deposited by VFL under requirements of regulatory authorities as of December 31,
1999 and 1998, respectively.
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. FINANCIAL INSTRUMENTS
In the normal course of business, VFL invests in various financial
assets, incurs various financial liabilities, and enters into agreements
involving derivative securities, including off-balance sheet financial
instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheets, 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.
All non-financial 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, 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>
1999 1998
---- ----
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 $ 530,512 $ 530,512 $ 460,516 $ 460,516
Equity securities 51 51 2,218 2,218
Policy loans 93,575 87,156 74,150 72,148
Other 433 433 485 485
Separate Account business:
Fixed maturities 12,999 12,999 247 247
Equity securities (primarily mutual funds) 175,772 175,772 55,577 55,577
Other 119 119 340 340
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 294,777 278,810 332,665 312,979
========== ========== ========== ===========
</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.
Valuation techniques to determine fair value of 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 Separate Account business liabilities approximates
their carrying value.
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
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.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of 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 unrealized fair value of the instruments and will vary based on
the credit worthiness 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 assets
(liabilities) in the general account and Separate Accounts at December 31, 1999
totaled $0.4 million and $0.1 million, respectively, and compares to $0.1
million and $0.5 million, respectively, at December 31, 1998. Net realized gains
(losses) on derivative financial instruments at December 31, 1999 totaled $0.4
million in the general account and ($0.1) million in the Separate Accounts. At
December 31, 1998, net realized losses on derivative financial instruments held
in the general account totaled $0.2 million and net realized gains on
derivatives in the Separate Accounts were $0.1 million.
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
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 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 income of $8.3
million for the year ended December 31, 1999 and statutory net losses of $8.1
million, and $1.0 million for the years ended December 31, 1998, and 1997
respectively. The statutory net losses for 1998 and 1997 were primarily due to
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the immediate expensing of acquisition costs which were substantial and related
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 $153.1 million, $147.1 million, and
$125.3 million at December 31, 1999, 1998, and 1997, 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, 1999, dividends of approximately $15.7 million were not subject to
prior Insurance Department approval.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's
equity, including net income, except those changes resulting from investments
by, and distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1999 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ (19,684) $ 6,889 $ (12,795)
Adjustment for (gains) losses included in net income (4,080) 1,428 (2,652)
------------- --------- -----------
Total Other Comprehensive Income (Losses) $ (23,764) $ 8,317 $ (15,447)
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1998 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the period $ 3,756 $ (1,314) $ 2,442
Adjustment for (gains) losses included in net income (3,592) 1,257 (2,335)
------------- --------- -----------
Total Other Comprehensive Income $ 164 $ (57) $ 107
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1997 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ 6,447 $ (2,256) $ 4,191
Adjustment for (gains) losses included in net income (1,228) 427 (801)
------------- --------- -----------
Total Other Comprehensive Income $ 5,219 $ (1,829) $ 3,390
============= ========= ===========
</TABLE>
NOTE 6. 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.
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees
age 21 or over that have completed at least one year of service. 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.
Casualty is included in the CNA Employees' Retirement Plan and VFL is allocated
a share of these expenses. The net pension cost allocated to VFL was $1.0
million, $1.1 million and $4.0 million for the years ended December 31, 1999,
1998 and 1997, respectively.
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. Net postretirement
benefit cost allocated to VFL was $0.3 million, $0.5 million and $2.1 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
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
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
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 $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. 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 no plans for such a distribution and as a result,
has not provided for such a tax.
Significant components of VFL's net deferred tax liabilities as of
December 31, 1999 and 1998 are shown in the table below:
December 31 1999 1998
- ----------- ---- ----
(In thousands of dollars)
Insurance reserves $ 20,715 $ 26,880
Deferred acquisition costs (45,457) (37,729)
Investment valuation 4,166 3,693
Net unrealized gains 5,901 (2,416)
Annuity deposits and other 9,349 1,009
Other, net 2,632 2,350
---------- -------------
NET DEFERRED TAX LIABILITIES $ (2,694) $ (6,213)
========== =============
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1999, gross deferred tax assets and liabilities
amounted to $44.3 million and $47.0 million, respectively. Gross deferred tax
assets and liabilities, at December 31, 1998, amounted to $35.5 million and
$41.7 million, respectively.
The components of income tax expense are as follows:
Year Ended December 31 1999 1998 1997
- ---------------------- ---------- --------- ----------
(In thousands of dollars)
Current tax expense (benefit) $ (2,837) $ 7,033 $ 4,716
Deferred tax expense 4,924 2,058 2,581
---------- --------- ----------
TOTAL INCOME TAX EXPENSE $ 2,087 $ 9,091 $ 7,297
========== ========= ==========
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- 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 1999 INCOME 1998 INCOME 1997 INCOME
- ---------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates $ 2,136 35.0 $ 9,290 35.0 $ 7,219 35.0
Other (49) (0.8) (199) (0.8) 78 0.4
-------- ------- ---------- -------- ---------- -------
INCOME TAX AT EFFECTIVE RATES $ 2,087 34.2 $ 9,091 34.2 $ 7,297 35.4
======= ======= ========= ======== ========== =======
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL.
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. 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.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
PREMIUMS ASSUMED/NET
-------- -----------
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- ---------------------- ------ ------- ----- --- -
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1999
Life $ 633,764 $ 109,964 $ 666,003 $ 77,725 141%
Accident and Health 6,539 232,994 6,539 232,994 100
------------- ----------- ----------- ---------- --------
Total premiums $ 640,303 $ 342,958 $ 672,542 $ 310,719 110%
============= =========== =========== ========== ========
1998
Life $ 687,644 $ 78,156 $ 690,541 $ 75,259 104%
Accident and Health 4,158 240,340 4,158 240,340 100
------------- ----------- ----------- ---------- --------
Total premiums $ 691,802 $ 318,496 $ 694,699 $ 315,599 101%
============= =========== =========== ========== ========
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%
============= =========== =========== ========== ========
</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 $395.2 million, $263.4 million and $116.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$263.4 million, $203.4 million and $77.8 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
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 millions of dollars)
December 31, 1999 $ 267,102 $ 42,629 $ 281,883 $ 27,848 153.1%
December 31, 1998 $ 224,615 $ 32,253 $ 230,734 $ 26,134 123.4
December 31, 1997 $ 166,308 $ 25,557 $ 168,353 $ 23,512 108.7
</TABLE>
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. RELATED PARTIES
As discussed in Note 1, VFL is party to a Reinsurance 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 companies. 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 are ten percent of the acquisition and underwriting expenses
of the combined pool. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$37.5 million, $47.6 million and $45.3 million for 1999, 1998 and 1997,
respectively. Expenses of VFL exclude $5.6 million, $9.2 million and $9.9
million of general and administrative expenses incurred by VFL and allocated to
CNAF for the years ended December 31, 1999, 1998 and 1997, respectively. At
December 31, 1999 VFL had a payable of $12.4 million to affiliated companies and
a $1.9 million payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables.
In 1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. 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 stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to
market and underwrite insurance products designed to satisfy the life, health
and retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its Separate
Account business, to Assurance which is then pooled with the business of
Assurance, excluding Assurance's participating contracts and separate account
business, and 10% of the combined pool is assumed by VFL.
The following presents premiums by product group for each of the years
in the three years ended December 31, 1999:
(In thousands of dollars) 1999 1998 1997
- ------------------------- ---- ---- ----
Life $ 77,725 $ 75,259 $ 79,176
Accident and Health 232,994 240,340 252,996
----------- ---------- -----------
Total $ 310,719 $ 315,599 $ 332,172
----------- ---------- -----------
Assurance provides health insurance benefits to postal and other
federal employees under the Federal Employees Health Benefit Plan (FEHBP).
Premiums under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion
for the years ended December 31, 1999, 1998 and 1997, respectively, and the
portion of these premiums assumed by VFL under the Reinsurance Pooling Agreement
totaled $209 million, $202 million and $212 million for the years ended December
31, 1999, 1998 and 1997, respectively.
<PAGE> 18
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, VFL adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $234 thousand ($360 thousand, pretax) as a cumulative effect of a
change in accounting principle. The pro forma effect of adoption on reported
results for prior periods is not significant.
APPENDIX A
ILLUSTRATIONS OF POLICY VALUES
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, cash surrender values and
death benefits under a policy covering an insured of a given age on the policy
date, would vary over time if the planned premiums were paid annually and the
return on the assets in each portfolio 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 premiums 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 you make and prevailing rates. These illustrations assume that the
premiums are allocated equally among the 34 investment options available under
the policy, and that no amounts are allocated to the fixed account options.
The illustrations reflect the fact that the net investment returns on the assets
held in the investment options is lower than the gross after tax return of the
selected underlying portfolios. The tables assume an average annual expense
ratio of 0.95% of the average daily net assets of the portfolio available. The
following information summarizes the expenses by portfolio: Alger American
Growth Portfolio (0.79%), Alger American MidCap Growth Portfolio (0.85%), Alger
American Small Capitalization Portfolio (0.90%), Alger American Leveraged AllCap
Portfolio (0.93%), Federated High Income Bond II (0.79%), Federated Prime Money
Fund II (0.73%), Federated Utility Fund II (0.94%), Fidelity VIP II Asset
Manager Portfolio (0.62%), Fidelity VIP II Contrafund Portfolio (0.65%),
Fidelity VIP Equity-Income Portfolio (0.56%), Fidelity VIP II Index 500
Portfolio (0.28%), MFS Emerging Growth Series (.84%), MFS Growth With Income
Series (0.88%), MFS Research Series (.86%), MFS Total Return Series (0.90%),
First Eagle SoGen Overseas Variable Funds (1.50%), Van Eck Worldwide Emerging
Markets Fund (1.34%), Van Eck Worldwide Hard Assets Fund (1.26%) Janus Aspen
Capital Appreciation Portfolio (0.69%), Janus Aspen Growth Portfolio (0.67%),
Janus Aspen Balanced Portfolio (0.67%), Janus Aspen Flexible Income Portfolio
(0.72%), Janus Aspen International Growth Portfolio (0.76%), Janus Aspen
Worldwide Growth Portfolio (0.70%), Alliance Premier Growth Portfolio (1.29%),
Alliance Growth and Income Portfolio (0.97%), American Century VP Income &
Growth Fund (0.70%), American Century VP Value Fund (1.00%), Templeton
Developing Markets Securities Fund (1.81%), Templeton Asset Strategy Fund
(1.03%), Lazard Retirement Equity Portfolio (1.25%), Lazard Retirement Small Cap
Portfolio (1.25%), Morgan Stanley International Magnum Portfolio (1.16%), and
Morgan Stanley Emerging Markets Equity Portfolio (1.79%).
In addition, the illustrations reflect a daily charge assessed against the
investment options for assuming certain mortality and expense risks (expense
charges), which are 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
portfolio expenses and the mortality and expense charges, the illustrated gross
annual investment rates of return of 0%, 6% and 12% would correspond to
approximate net annual rates of -1.85%, 4.15% and 10.15% , respectively during
Policy Years 1-10 and -1.40% , 4.60% and 10.60% during Policy Years 11 and
later.
The illustrations also reflect the deduction of the premium charge and monthly
deduction for the hypothetical insured. The surrender charge is reflected in the
cash surrender value column. Our current cost of insurance charges and the
guaranteed maximum cost of insurance charges that we have a 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 our Preferred Nonsmoker risk class. Upon request,
you 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, 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.
<TABLE>
<CAPTION>
Illustration of Policy Values
Valley Forge Life Insurance Company
Male
Preferred Non-Smoker
2,005 Annual Planned Premium
100,000 Face Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Policy Surrender Death Policy Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,105 1,213 0 100,000 1,305 0 100,000 1,398 0 100,000
2 4,316 2,620 1,020 100,000 2,888 1,288 100,000 3,169 1,569 100,000
3 6,638 3,978 2,378 100,000 4,515 2,915 100,000 5,097 3,497 100,000
4 9,075 5,287 3,687 100,000 6,185 4,585 100,000 7,199 5,599 100,000
5 11,634 6,545 4,945 100,000 7,900 6,300 100,000 9,491 7,891 100,000
6 14,321 7,752 6,152 100,000 9,660 8,060 100,000 11,993 10,393 100,000
7 17,143 8,903 7,623 100,000 11,462 10,182 100,000 14,722 13,442 100,000
8 20,105 9,993 8,873 100,000 13,303 12,183 100,000 17,700 16,580 100,000
9 23,216 11,020 10,060 100,000 15,184 14,224 100,000 20,952 19,992 100,000
10 26,483 11,977 11,177 100,000 17,098 16,298 100,000 24,503 23,703 100,000
11 29,912 12,949 12,309 100,000 19,160 18,520 100,000 28,536 27,896 100,000
12 33,513 13,846 13,366 100,000 21,268 20,788 100,000 32,973 32,493 100,000
13 37,294 14,666 14,346 100,000 23,424 23,104 100,000 37,865 37,545 100,000
14 41,265 15,405 15,245 100,000 25,631 25,471 100,000 43,269 43,109 100,000
15 45,433 16,054 16,054 100,000 27,885 27,885 100,000 49,250 49,250 100,000
16 49,810 16,605 16,605 100,000 30,185 30,185 100,000 55,884 55,884 100,000
17 54,406 17,050 17,050 100,000 32,532 32,532 100,000 63,259 63,259 100,000
18 59,232 17,374 17,374 100,000 34,922 34,922 100,000 71,481 71,481 100,000
19 64,299 17,561 17,561 100,000 37,352 37,352 100,000 80,674 80,674 100,036
20 69,620 17,594 17,594 100,000 39,819 39,819 100,000 90,884 90,884 110,879
21 75,206 17,455 17,455 100,000 42,322 42,322 100,000 102,127 102,127 122,552
22 81,072 17,131 17,131 100,000 44,867 44,867 100,000 114,485 114,485 136,238
23 87,231 16,602 16,602 100,000 47,459 47,459 100,000 128,069 128,069 151,121
24 93,698 15,848 15,848 100,000 50,103 50,103 100,000 142,998 142,998 167,308
25 100,488 14,843 14,843 100,000 52,808 52,808 100,000 159,405 159,405 184,910
26 107,618 13,544 13,544 100,000 55,576 55,576 100,000 177,434 177,434 204,049
27 115,105 11,847 11,847 100,000 58,387 58,387 100,000 197,303 197,303 222,952
28 122,966 9,784 9,784 100,000 61,296 61,296 100,000 219,255 219,255 243,373
29 131,219 7,218 7,218 100,000 64,287 64,287 100,000 243,528 243,528 265,445
30 139,886 4,049 4,049 100,000 67,379 67,379 100,000 270,421 270,421 289,351
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Male
Preferred Non-Smoker
2,005 Annual Planned Premium
100,000 Face Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 2,105 1,375 0 100,000 1,471 0 100,000 1,568 0 100,000
2 4,316 2,903 1,303 100,000 3,188 1,588 100,000 3,485 1,885 100,000
3 6,638 4,350 2,750 100,000 4,921 3,321 100,000 5,540 3,940 100,000
4 9,075 5,744 4,144 100,000 6,699 5,099 100,000 7,775 6,175 100,000
5 11,634 7,110 5,510 100,000 8,549 6,949 100,000 10,237 8,637 100,000
6 14,321 8,452 6,852 100,000 10,479 8,879 100,000 12,952 11,352 100,000
7 17,143 9,772 8,492 100,000 12,493 11,213 100,000 15,948 14,668 100,000
8 20,105 11,071 9,951 100,000 14,595 13,475 100,000 19,254 18,134 100,000
9 23,216 12,348 11,388 100,000 16,789 15,829 100,000 22,903 21,943 100,000
10 26,483 13,604 12,804 100,000 19,078 18,278 100,000 26,932 26,132 100,000
11 29,912 14,916 14,276 100,000 21,578 20,938 100,000 31,535 30,895 100,000
12 33,513 16,191 15,711 100,000 24,179 23,699 100,000 36,624 36,144 100,000
13 37,294 17,422 17,102 100,000 26,881 26,561 100,000 42,248 41,928 100,000
14 41,265 18,641 18,481 100,000 29,719 29,559 100,000 48,492 48,332 100,000
15 45,433 19,838 19,838 100,000 32,691 32,691 100,000 55,419 55,419 100,000
16 49,810 20,901 20,901 100,000 35,709 35,709 100,000 63,044 63,044 100,000
17 54,406 21,900 21,900 100,000 38,838 38,838 100,000 71,500 71,500 100,000
18 59,232 22,836 22,836 100,000 42,089 42,089 100,000 80,894 80,894 101,926
19 64,299 23,701 23,701 100,000 45,465 45,465 100,000 91,280 91,280 113,187
20 69,620 24,490 24,490 100,000 48,974 48,974 100,000 102,735 102,735 125,337
21 75,206 25,204 25,204 100,000 52,631 52,631 100,000 115,374 115,374 138,449
22 81,072 25,831 25,831 100,000 56,442 56,442 100,000 129,302 129,302 153,870
23 87,231 26,371 26,371 100,000 60,424 60,424 100,000 144,654 144,654 170,692
24 93,698 26,817 26,817 100,000 64,592 64,592 100,000 161,574 161,574 189,042
25 100,488 27,149 27,149 100,000 68,960 68,960 100,000 180,216 180,216 209,050
26 107,618 27,369 27,369 100,000 73,554 73,554 100,000 200,759 200,759 230,873
27 115,105 27,454 27,454 100,000 78,396 78,396 100,000 223,435 223,435 252,482
28 122,966 27,408 27,408 100,000 83,522 83,522 100,000 248,489 248,489 275,823
29 131,219 27,219 27,219 100,000 88,970 88,970 100,000 276,192 276,192 301,049
30 139,886 26,850 26,850 100,000 94,776 94,776 101,410 306,847 306,847 328,326
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Male
Preferred Non-Smoker
4,623 Annual Planned Premium
100,000 Face Amount
Increasing Death Benefit Option
Using GUARANTEED Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 4,854 3,687 2,087 103,687 3,930 2,330 103,930 4,174 2,574 104,174
2 9,950 7,517 5,917 107,517 8,242 6,642 108,242 8,997 7,397 108,997
3 15,301 11,247 9,647 111,247 12,703 11,103 112,703 14,279 12,679 114,279
4 20,920 14,878 13,278 114,878 17,317 15,717 117,317 20,064 18,464 120,064
5 26,820 18,407 16,807 118,407 22,088 20,488 122,088 26,400 24,800 126,400
6 33,015 21,834 20,234 121,834 27,018 25,418 127,018 33,340 31,740 133,340
7 39,519 25,155 23,875 125,155 32,109 30,829 132,109 40,939 39,659 140,939
8 46,349 28,364 27,244 128,364 37,359 36,239 137,359 49,255 48,135 149,255
9 53,520 31,457 30,497 131,457 42,769 41,809 142,769 58,356 57,396 158,356
10 61,050 34,429 33,629 134,429 48,337 47,537 148,337 68,312 67,512 168,312
11 68,956 37,474 36,834 137,474 54,326 53,686 154,326 79,558 78,918 179,558
12 77,258 40,396 39,916 140,396 60,508 60,028 160,508 91,912 91,432 191,912
13 85,974 43,192 42,872 143,192 66,887 66,567 166,887 105,485 105,165 205,485
14 95,127 45,858 45,698 145,858 73,465 73,305 173,465 120,400 120,240 220,400
15 104,737 48,382 48,382 148,382 80,239 80,239 180,239 136,786 136,786 236,786
16 114,828 50,756 50,756 150,756 87,206 87,206 187,206 154,787 154,787 254,787
17 125,423 52,968 52,968 152,968 94,361 94,361 194,361 174,562 174,562 274,562
18 136,548 55,004 55,004 155,004 101,694 101,694 201,694 196,278 196,278 296,278
19 148,229 56,844 56,844 156,844 109,194 109,194 209,194 220,120 220,120 320,120
20 160,494 58,469 58,469 158,469 116,844 116,844 216,844 246,292 246,292 346,292
21 173,372 59,864 59,864 159,864 124,633 124,633 224,633 275,020 275,020 375,020
22 186,895 61,016 61,016 161,016 132,549 132,549 232,549 306,558 306,558 406,558
23 201,093 61,908 61,908 161,908 140,580 140,580 240,580 341,185 341,185 441,185
24 216,002 62,528 62,528 162,528 148,712 148,712 248,712 379,211 379,211 479,211
25 231,655 62,854 62,854 162,854 156,927 156,927 256,927 420,973 420,973 520,973
26 248,092 62,855 62,855 162,855 165,190 165,190 265,190 466,829 466,829 566,829
27 265,350 62,434 62,434 162,434 173,400 173,400 273,400 517,108 517,108 617,108
28 283,472 61,658 61,658 161,658 181,618 181,618 281,618 572,346 572,346 672,346
29 302,499 60,411 60,411 160,411 189,720 189,720 289,720 632,944 632,944 732,944
30 322,478 58,641 58,641 158,641 197,639 197,639 297,639 699,411 699,411 799,411
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Male
Preferred Non-Smoker
4,623 Annual Planned Premium
100,000 Face Amount
Increasing Death Benefit Option
Using CURRENT Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 4,854 3,851 2,251 103,851 4,098 2,498 104,098 4,345 2,745 104,345
2 9,950 7,806 6,206 107,806 8,544 6,944 108,544 9,312 7,712 109,312
3 15,301 11,629 10,029 111,629 13,112 11,512 113,112 14,716 13,116 114,716
4 20,920 15,349 13,749 115,349 17,834 16,234 117,834 20,628 19,028 120,628
5 26,820 18,994 17,394 118,994 22,742 21,142 122,742 27,126 25,526 127,126
6 33,015 22,568 20,968 122,568 27,848 26,248 127,848 34,275 32,675 134,275
7 39,519 26,074 24,794 126,074 33,162 31,882 133,162 42,140 40,860 142,140
8 46,349 29,514 28,394 129,514 38,693 37,573 138,693 50,794 49,674 150,794
9 53,520 32,889 31,929 132,889 44,448 43,488 144,448 60,315 59,355 160,315
10 61,050 36,199 35,399 136,199 50,437 49,637 150,437 70,791 69,991 170,791
11 68,956 39,631 38,991 139,631 56,934 56,294 156,934 82,699 82,059 182,699
12 77,258 42,988 42,508 142,988 63,700 63,220 163,700 95,835 95,355 195,835
13 85,974 46,259 45,939 146,259 70,736 70,416 170,736 110,315 109,995 210,315
14 95,127 49,485 49,325 149,485 78,094 77,934 178,094 126,324 126,164 226,324
15 104,737 52,653 52,653 152,653 85,776 85,776 185,776 144,008 144,008 244,008
16 114,828 55,623 55,623 155,623 93,650 93,650 193,650 163,394 163,394 263,394
17 125,423 58,478 58,478 158,478 101,811 101,811 201,811 184,750 184,750 284,750
18 136,548 61,223 61,223 161,223 110,271 110,271 210,271 208,283 208,283 308,283
19 148,229 63,843 63,843 163,843 119,031 119,031 219,031 234,209 234,209 334,209
20 160,494 66,331 66,331 166,331 128,093 128,093 228,093 262,770 262,770 362,770
21 173,372 68,691 68,691 168,691 137,474 137,474 237,474 294,246 294,246 394,246
22 186,895 70,903 70,903 170,903 147,165 147,165 247,165 328,921 328,921 428,921
23 201,093 72,968 72,968 172,968 157,181 157,181 257,181 367,135 367,135 467,135
24 216,002 74,877 74,877 174,877 167,525 167,525 267,525 409,248 409,248 509,248
25 231,655 76,602 76,602 176,602 178,181 178,181 278,181 455,640 455,640 555,640
26 248,092 78,147 78,147 178,147 189,165 189,165 289,165 506,766 506,766 606,766
27 265,350 79,483 79,483 179,483 200,459 200,459 300,459 563,092 563,092 663,092
28 283,472 80,618 80,618 180,618 212,084 212,084 312,084 625,174 625,174 725,174
29 302,499 81,541 81,541 181,541 224,039 224,039 324,039 693,605 693,605 793,605
30 322,478 82,206 82,206 182,206 236,292 236,292 336,292 769,007 769,007 869,007
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Female Issue Age 45
Preferred Non-Smoker
1,706 Annual Planned Premium
100,000 Face Amount
Level Death Benefit Option
Using GUARANTEED Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 1,791 975 0 100,000 1,051 0 100,000 1,129 0 100,000
2 3,672 2,153 853 100,000 2,376 1,076 100,000 2,608 1,308 100,000
3 5,647 3,292 1,992 100,000 3,738 2,438 100,000 4,221 2,921 100,000
4 7,721 4,391 3,091 100,000 5,138 3,838 100,000 5,980 4,680 100,000
5 9,899 5,451 4,151 100,000 6,578 5,278 100,000 7,900 6,600 100,000
6 12,185 6,468 5,168 100,000 8,056 6,756 100,000 9,996 8,696 100,000
7 14,586 7,442 6,402 100,000 9,573 8,533 100,000 12,286 11,246 100,000
8 17,106 8,372 7,462 100,000 11,129 10,219 100,000 14,788 13,878 100,000
9 19,753 9,251 8,471 100,000 12,721 11,941 100,000 17,521 16,741 100,000
10 22,532 10,082 9,432 100,000 14,350 13,700 100,000 20,512 19,862 100,000
11 25,450 10,935 10,415 100,000 16,111 15,591 100,000 23,911 23,391 100,000
12 28,514 11,741 11,351 100,000 17,926 17,536 100,000 27,658 27,268 100,000
13 31,731 12,501 12,241 100,000 19,799 19,539 100,000 31,795 31,535 100,000
14 35,109 13,218 13,088 100,000 21,737 21,607 100,000 36,373 36,243 100,000
15 38,656 13,891 13,891 100,000 23,742 23,742 100,000 41,444 41,444 100,000
16 42,380 14,513 14,513 100,000 25,814 25,814 100,000 47,066 47,066 100,000
17 46,291 15,077 15,077 100,000 27,952 27,952 100,000 53,302 53,302 100,000
18 50,397 15,570 15,570 100,000 30,150 30,150 100,000 60,227 60,227 100,000
19 54,708 15,976 15,976 100,000 32,400 32,400 100,000 67,924 67,924 100,000
20 59,235 16,280 16,280 100,000 34,698 34,698 100,000 76,496 76,496 100,000
21 63,988 16,475 16,475 100,000 37,046 37,046 100,000 86,062 86,062 103,274
22 68,979 16,553 16,553 100,000 39,446 39,446 100,000 96,636 96,636 114,997
23 74,219 16,513 16,513 100,000 41,907 41,907 100,000 108,288 108,288 127,779
24 79,722 16,353 16,353 100,000 44,442 44,442 100,000 121,128 121,128 141,719
25 85,499 16,065 16,065 100,000 47,055 47,055 100,000 135,278 135,278 156,922
26 91,565 15,627 15,627 100,000 49,748 49,748 100,000 150,870 150,870 173,501
27 97,935 15,006 15,006 100,000 52,520 52,520 100,000 168,087 168,087 189,939
28 104,623 14,156 14,156 100,000 55,365 55,365 100,000 187,108 187,108 207,690
29 111,646 13,020 13,020 100,000 58,277 58,277 100,000 208,137 208,137 226,869
30 119,020 11,535 11,535 100,000 61,259 61,259 100,000 231,412 231,412 247,611
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Female Issue Age 45
Preferred Non-Smoker
1,706 Annual Planned Premium
100,000 Face Amount
Level Death Benefit Option
Using CURRENT Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 1,791 1,145 0 100,000 1,227 0 100,000 1,309 9 100,000
2 3,672 2,476 1,176 100,000 2,717 1,417 100,000 2,969 1,669 100,000
3 5,647 3,760 2,460 100,000 4,246 2,946 100,000 4,773 3,473 100,000
4 7,721 5,002 3,702 100,000 5,820 4,520 100,000 6,741 5,441 100,000
5 9,899 6,211 4,911 100,000 7,449 6,149 100,000 8,898 7,598 100,000
6 12,185 7,390 6,090 100,000 9,138 7,838 100,000 11,266 9,966 100,000
7 14,586 8,535 7,495 100,000 10,885 9,845 100,000 13,863 12,823 100,000
8 17,106 9,653 8,743 100,000 12,700 11,790 100,000 16,720 15,810 100,000
9 19,753 10,746 9,966 100,000 14,587 13,807 100,000 19,865 19,085 100,000
10 22,532 11,814 11,164 100,000 16,549 15,899 100,000 23,328 22,678 100,000
11 25,450 12,936 12,416 100,000 18,695 18,175 100,000 27,288 26,768 100,000
12 28,514 14,040 13,650 100,000 20,941 20,551 100,000 31,674 31,284 100,000
13 31,731 15,128 14,868 100,000 23,293 23,033 100,000 36,534 36,274 100,000
14 35,109 16,186 16,056 100,000 25,743 25,613 100,000 41,908 41,778 100,000
15 38,656 17,233 17,233 100,000 28,314 28,314 100,000 47,868 47,868 100,000
16 42,380 18,246 18,246 100,000 30,991 30,991 100,000 54,465 54,465 100,000
17 46,291 19,223 19,223 100,000 33,779 33,779 100,000 61,769 61,769 100,000
18 50,397 20,160 20,160 100,000 36,680 36,680 100,000 69,859 69,859 100,000
19 54,708 21,058 21,058 100,000 39,703 39,703 100,000 78,831 78,831 100,000
20 59,235 21,917 21,917 100,000 42,855 42,855 100,000 88,773 88,773 108,303
21 63,988 22,730 22,730 100,000 46,140 46,140 100,000 99,753 99,753 119,704
22 68,979 23,499 23,499 100,000 49,568 49,568 100,000 111,875 111,875 133,131
23 74,219 24,215 24,215 100,000 53,143 53,143 100,000 125,254 125,254 147,800
24 79,722 24,881 24,881 100,000 56,880 56,880 100,000 140,023 140,023 163,827
25 85,499 25,493 25,493 100,000 60,787 60,787 100,000 156,326 156,326 181,338
26 91,565 26,039 26,039 100,000 64,874 64,874 100,000 174,318 174,318 200,465
27 97,935 26,522 26,522 100,000 69,158 69,158 100,000 194,196 194,196 219,441
28 104,623 26,925 26,925 100,000 73,650 73,650 100,000 216,161 216,161 239,939
29 111,646 27,245 27,245 100,000 78,370 78,370 100,000 240,443 240,443 262,083
30 119,020 27,460 27,460 100,000 83,337 83,337 100,000 267,297 267,297 286,008
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Female Issue Age 45
Preferred Non-Smoker
3,705 Annual Planned Premium
100,000 Face Amount
Increasing Death Benefit Option
Using GUARANTEED Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 3,891 2,864 1,564 102,864 3,057 1,757 103,057 3,249 1,949 103,249
2 7,976 5,894 4,594 105,894 6,465 5,165 106,465 7,060 5,760 107,060
3 12,265 8,845 7,545 108,845 9,993 8,693 109,993 11,235 9,935 111,235
4 16,769 11,718 10,418 111,718 13,642 12,342 113,642 15,809 14,509 115,809
5 21,498 14,514 13,214 114,514 17,418 16,118 117,418 20,820 19,520 120,820
6 26,463 17,229 15,929 117,229 21,321 20,021 121,321 26,310 25,010 126,310
7 31,677 19,864 18,824 119,864 25,354 24,314 125,354 32,324 31,284 132,324
8 37,151 22,415 21,505 122,415 29,519 28,609 129,519 38,913 38,003 138,913
9 42,899 24,879 24,099 124,879 33,815 33,035 133,815 46,127 45,347 146,127
10 48,935 27,255 26,605 127,255 38,247 37,597 138,247 54,029 53,379 154,029
11 55,272 29,701 29,181 129,701 43,026 42,506 143,026 62,967 62,447 162,967
12 61,926 32,068 31,678 132,068 47,977 47,587 147,977 72,804 72,414 172,804
13 68,913 34,356 34,096 134,356 53,109 52,849 153,109 83,637 83,377 183,637
14 76,249 36,568 36,438 136,568 58,433 58,303 158,433 95,571 95,441 195,571
15 83,952 38,703 38,703 138,703 63,954 63,954 163,954 108,721 108,721 208,721
16 92,041 40,754 40,754 140,754 69,673 69,673 169,673 123,208 123,208 223,208
17 100,533 42,712 42,712 142,712 75,589 75,589 175,589 139,163 139,163 239,163
18 109,450 44,562 44,562 144,562 81,694 81,694 181,694 156,724 156,724 256,724
19 118,813 46,284 46,284 146,284 87,975 87,975 187,975 176,039 176,039 276,039
20 128,645 47,862 47,862 147,862 94,420 94,420 194,420 197,274 197,274 297,274
21 138,967 49,287 49,287 149,287 101,028 101,028 201,028 220,624 220,624 320,624
22 149,806 50,552 50,552 150,552 107,796 107,796 207,796 246,301 246,301 346,301
23 161,187 51,657 51,657 151,657 114,729 114,729 214,729 274,551 274,551 374,551
24 173,137 52,604 52,604 152,604 121,834 121,834 221,834 305,645 305,645 405,645
25 185,684 53,384 53,384 153,384 129,109 129,109 229,109 339,877 339,877 439,877
26 198,859 53,977 53,977 153,977 136,536 136,536 236,536 377,553 377,553 477,553
27 212,693 54,350 54,350 154,350 144,088 144,088 244,088 419,003 419,003 519,003
28 227,218 54,457 54,457 154,457 151,719 151,719 251,719 464,575 464,575 564,575
29 242,469 54,243 54,243 154,243 159,373 159,373 259,373 514,647 514,647 614,647
30 258,483 53,656 53,656 153,656 166,994 166,994 266,994 569,639 569,639 669,639
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
Illustration of Policy Values
Valley Forge Life Insurance Company
Female Issue Age 45
Preferred Non-Smoker
3,705 Annual Planned Premium
100,000 Face Amount
Increasing Death Benefit Option
Using CURRENT Cost of Insurance
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums Hypothetical 0% Hypothetical 6% Hypothetical 12%
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
At 5%
Cash Cash Cash
End of Per Cash Surrender Death Cash Surrender Death Cash Surrender Death
Policy Year Value Value Benefit Value Value Benefit Value Value Benefit
Year
1 3,891 3,037 1,737 103,037 3,234 1,934 103,234 3,430 2,130 103,430
2 7,976 6,222 4,922 106,222 6,810 5,510 106,810 7,421 6,121 107,421
3 12,265 9,324 8,024 109,324 10,508 9,208 110,508 11,787 10,487 111,787
4 16,769 12,347 11,047 112,347 14,335 13,035 114,335 16,569 15,269 116,569
5 21,498 15,301 14,001 115,301 18,305 17,005 118,305 21,818 20,518 121,818
6 26,463 18,189 16,889 118,189 22,427 21,127 122,427 27,581 26,281 127,581
7 31,677 21,007 19,967 121,007 26,700 25,660 126,700 33,906 32,866 133,906
8 37,151 23,764 22,854 123,764 31,140 30,230 131,140 40,858 39,948 140,858
9 42,899 26,462 25,682 126,462 35,753 34,973 135,753 48,499 47,719 148,499
10 48,935 29,102 28,452 129,102 40,547 39,897 140,547 56,900 56,250 156,900
11 55,272 31,848 31,328 131,848 45,756 45,236 145,756 66,457 65,937 166,457
12 61,926 34,549 34,159 134,549 51,197 50,807 151,197 77,016 76,626 177,016
13 68,913 37,209 36,949 137,209 56,883 56,623 156,883 88,685 88,425 188,685
14 76,249 39,809 39,679 139,809 62,806 62,676 162,806 101,562 101,432 201,562
15 83,952 42,373 42,373 142,373 69,001 69,001 169,001 115,797 115,797 215,797
16 92,041 44,875 44,875 144,875 75,452 75,452 175,452 131,506 131,506 231,506
17 100,533 47,310 47,310 147,310 82,165 82,165 182,165 148,840 148,840 248,840
18 109,450 49,672 49,672 149,672 89,146 89,146 189,146 167,961 167,961 267,961
19 118,813 51,966 51,966 151,966 96,409 96,409 196,409 189,061 189,061 289,061
20 128,645 54,187 54,187 154,187 103,964 103,964 203,964 212,346 212,346 312,346
21 138,967 56,328 56,328 156,328 111,813 111,813 211,813 238,034 238,034 338,034
22 149,806 58,390 58,390 158,390 119,972 119,972 219,972 266,383 266,383 366,383
23 161,187 60,363 60,363 160,363 128,441 128,441 228,441 297,658 297,658 397,658
24 173,137 62,248 62,248 162,248 137,237 137,237 237,237 332,170 332,170 432,170
25 185,684 64,040 64,040 164,040 146,366 146,366 246,366 370,254 370,254 470,254
26 198,859 65,722 65,722 165,722 155,827 155,827 255,827 412,267 412,267 512,267
27 212,693 67,299 67,299 167,299 165,636 165,636 265,636 458,629 458,629 558,629
28 227,218 68,748 68,748 168,748 175,785 175,785 275,785 509,771 509,771 609,771
29 242,469 70,064 70,064 170,064 186,284 186,284 286,284 566,193 566,193 666,193
30 258,483 71,216 71,216 171,216 197,114 197,114 297,114 628,419 628,419 728,419
- ------------------------------------------------------------------------------------------------------------------------------------
* 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 the 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 you, prevailing rates and rates of inflation. The death benefit
and cash 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 us or the funds that these hypothetical rates of
return can be achieved for any one year or sustained over any period of years.
</TABLE>
APPENDIX B
EXAMPLE OF ADDITIONAL INSURANCE RIDER (AIR)
Definitions
Excess Calculation under Death Benefit Option 1
- -----------------------------------------------
Cash Value * Applicable Percentage less Specified Amount.
Excess Calculation under Death Benefit Option 2
- -----------------------------------------------
Cash Value * Applicable Percentage less Specified Amount plus Cash Value
General
For purposes of administrative processing, excess is subtracted first from the
AIR rider specified amount and then from the base policy specified amount, to
the extent necessary.
Examples
(A) Example without Excess
Insured's Age = 57
Death Benefit = Option 2
Base Policy Specified Amount = $100,000
Additional Insured Specified Amount = $50,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.42) = $106,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
(1) $106,500 - cash value * applicable percentage
(3) $175,000 - base policy specified amount + cash value
(1) less (3) - $68,500 (No Excess)
Therefore, the Additional Insurance Death Benefit = $50,000
(B) Example with Excess - Death Benefit Option 1
Insured's Age = 58
Death Benefit Option: 1
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $25,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.38) = $103,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (2), where:
(1) $103,500 - cash value * applicable percentage
(2) $100,000 - base policy specified amount
(1) less (2) $3,500 (Amount of Excess)
Therefore, the Additional Insurance Death Benefit = $25,000 - $3,500 = $21,500
(C) Example with Excess - Death Benefit Option 2
Insured's Age = 70
Death Benefit Option : 2
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $75,000
Cash Value = $1,000,000
Cash Value * Applicable Percentage (1.15) = $1,150,000
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
(1) $1,150,000 - cash value * applicable percentage
(3) $1,100,000 - base policy specified amount + cash value
(1) less (3) $50,000 (Amount of Excess)
Therefore, the Additional Insurance Death Benefit = $75,000 - $50,000 = $25,000
APPENDIX C
RATES OF RETURN
From time to time, we may report different types of historical performance
for the investment options available under the policy. We may report the average
annual total returns of the funds over various time periods. Such returns will
reflect the operating expenses (including management fees) of the funds, but not
deductions at the Variable Account or policy level for the expense charge and
other policy expenses, which if included, would reduce performance.
At the request of a purchaser, Valley Forge Life Insurance Company will
accompany the returns of the funds with at least one of the following: (i)
returns, for the same periods as shown for the funds, which include deductions
under the Variable Account for the expense charge in addition to the deductions
of fund expenses, but does not include other charges under the policy; or (ii)
an illustration of cash values and cash surrender values as of the performance
reporting date for a hypothetical insured of given age, gender, risk
classification, Premium level and initial specified amount. The illustration
will be based either on actual historic fund performance or on a hypothetical
investment return between 0% and 12% as requested by the purchaser. The cash
surrender value figures will assume all fund charges, the expense charge, and
all other policy charges are deducted. The cash value figures will assume all
charges except the surrender charges are deducted.
We also may distribute sales literature comparing the percentage change in
the net asset values of the funds or in the Accumulation Unit Values for any of
the investment options to established market indices, such as the Standard &
Poor's 500 Composite Stock Price Index and the Dow Jones Industrial Average. We
also may make comparisons to the percentage change in values of other mutual
funds with investment objectives similar to those of the investment options
being compared.
The chart below shows the Effective Annual Rates of Return of the funds
based on the actual investment performance (after deduction of investment
arrangement fees and direct operating expenses of the funds). These rates do not
reflect the expense charge assessed. The rates do not reflect deductions from
premiums or Monthly Deductions assessed against the cash value of the policy,
nor do they reflect the policy's surrender charges. Therefore, these rates are
illustrative of how actual investment performance will affect the benefits under
the policy. These rates of return shown are not indicative of future
performance. These rates of return may be considered, however, in assessing the
competence and performance of the investment advisers.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
10
Portfolio Years/Since
Investment Option Inception Date 1 Year 5 Years Inception
- ----------------- -------------- ------ - ----- ---------
FEDERATED INSURANCE SERIES
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Federated High Income Bond Fund II 03/01/1994 2.31 10.48 8.22
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Federated Prime Money Fund II 11/21/1994 4.63 4.89 4.88
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Federated Utility Fund II 2/10/1994 1.69 15.25 12.15
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
The Alger American Fund
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alger American Growth Portfolio 1/9/1989 33.74 30.94 23.05
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alger American Mid-Cap Growth Portfolio 5/3/1993 31.85 26.14 24.72
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alger American Small Capitalization Portfolio 9/21/1988 43.42 22.64 20.86
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alger American Leveraged AllCap Portfolio 01/25/1995 78.06 NA 46.44
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
First Eagle SoGen Variable Funds, Inc.
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
First Eagle SoGen Overseas Variable Fund 2/3/1997 42.15 NA 13.56
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Van Eck Worldwide Insurance Trust
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Van Eck Worldwide Emerging Markets Fund 12/27/1995 100.28 NA 9.92
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Van Eck Worldwide Hard Assets Fund 9/1/1989 21.00 1.49 3.06
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Variable Insurance Products Fund (VIP) & Variable Insurance
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Fidelity VIP II Asset Manager Portfolio 9/6/1989 11.09 15.63 13.14
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Fidelity VIP II Contrafund Portfolio 1/3/1995 24.25 NA 27.73
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Fidelity VIP Equity -Income Portfolio 10/9/1986 6.33 18.61 14.49
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Fidelity VIP II Index 500 Portfolio 8/27/1992 20.52 28.16 21.07
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
MFS Variable Insurance Trust
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
MFS Emerging Growth Series 7/24/1995 76.71 NA 36.44
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
MFS Growth With Income Series 10/9/1995 6.69 NA 21.12
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
MFS Research Series 7/26/1995 24.05 NA 22.86
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
MFS Total Return Series 1/3/1995 3.08 NA 15.42
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series, Institutional Shares
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series Capital Appreciation Portfolio 5/2/1997 67.00 NA 57.18
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series Balanced Portfolio 9/13/1993 26.76 24.68 20.62
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series Growth Portfolio 9/13/1993 43.98 29.89 24.28
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series Flexible Income Portfolio 9/13/1993 1.60 10.88 8.50
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series International Growth Portfolio 5/2/1994 82.27 33.25 28.19
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Janus Aspen Series Worldwide Growth Portfolio 9/13/1993 64.45 33.60 29.71
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alliance Variable Products Series Fund, Class B Shares
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alliance Premier Growth Portfolio 06/26/1992 32.32 36.03 26.31
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Alliance Growth and Income Portfolio 01/14/1991 11.37 23.91 15.48
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
American Century Variable Portfolios, Inc.
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
American Century VP Income & Growth Fund 10/30/1997 18.02 NA 16.96
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
American Century VP Value Fund 05/01/1996 -0.85 NA 11.10
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Franklin Templeton Variable Insurance Products trust, class 2
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Templeton Developing Markets Securities Fund 03/04/1996 53.27 NA -5.45
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Templeton Asset Strategy Fund 05/01/1997 22.54 16.92 13.01
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Lazard Retirement Series
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Lazard Retirement Equity Portfolio 3/18/1998 8.16 NA 10.68
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Lazard Retirement Small Cap Portfolio 11/04/1997 5.13 NA 0.13
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
The Universal Institutional funds, Inc.
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Morgan Stanley International Magnum Portfolio 01/02/1997 25.19 NA 13.57
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
Morgan Stanley Emerging Markets Equity Portfolio 10/01/1996 95.68 NA 12.31
- ----------------------------------------------------------------- ---------------- ---------- ---------- -------------
</TABLE>
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange 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 confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Valley Forge Life Insurance
Company ("Company") hereby represents that the fees and charges deducted under
the Policy described in the Prospectus, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by the Company.
INDEMNIFICATION
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.
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, 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.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet
The Prospectus consisting of 81 pages.
Undertakings to file reports.
The signatures.
The following exhibits.
1.A. Copies of all exhibits required by paragraph A of instructions for Exhibits
in Form N-8B-2.
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. Flexible Premium Variable Insurance Policy (the "Policy")
(a) Form of Waiver of Monthly Deduction Rider #
(b) Form of Right to Convert Rider #
(c) Form of Accelerated Benefit Rider #
(d) Form of Total Disability Waiver of Premium Rider #
(e) Form of Accidental Death Benefit Rider #
(f) Form of Additional Insurance Rider #
(g) Form of Automatic Transfer Rider #
(h) Form of Dollar Cost Averaging Rider #
(i) Form of Term Insurance on Children Rider #
(j) Form of Other Insured Term Insurance Rider #
(k) Form of Dollar Cost Averaging Rider I
(l) Form of Dollar Cost Averaging Rider II
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 Federated Insurance
Management Series and the Company*
(h) Form of participation agreement between Janus Aspen Series and
the Company****
(i) Form of participation agreement among the Company, CNA Investor
Services, Inc., Lazard Asset Management and Lazard Retirement
Series, Inc. ##
(j) Form of participation agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and the
Company. ##
(k) Form of participation agreement among the Company, CNA Investor
Services, Inc., Alliance Capital Management L.P. and Alliance
Fund Distributors, Inc. ##
(l) Form of participation agreement between the Company and American
Century Investment Management, Inc. ##
(m) Form of participation agreement between the Company and Morgan
Stanley Dean Witter Universal Funds, Inc. ##
9. Not applicable
10. Form of Policy Application
11. Description of issuance, transfer and redemption procedures***
B. Not applicable
C. Not applicable
2. Opinion and Consent of Counsel
3. Not applicable
4. Not applicable
5. Not Applicable
6. Consent of Actuary
7. Consent of Independent Auditors
* Incorporated by reference to the Form N-4 Registration Statement filed
electronically with the Securities and Exchange Commission on September 4,
1996 (File No.333-1087).
** Incorporated by reference to the N-4 Registration Statement filed
electronically 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
filed electronically on Form S-6 on September 4, 1996 (File No.
333-01949).
****Incorporated by reference to the registrant's Post-effective Amendment No.6
filed on Form S-6 on September 2, 1999 (File No. 333-01949).
# Incorporated by reference to the registrant's initial registration filed
electronically on Form S-6 on January 13, 2000 (File No. 333-94575).
## Incorporated by reference to the registrant's Post-Effective Amendment No.
7 filed electronically on April 26, 2000 (File No. 333- 01949).
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized in the in the City of Chicago, State of Illinois, on this 8th
day of May, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
Attest: /s/G. STEPHEN WASTEK By:/s/ DAVID STONE
------------------------------ ------------------------------
David Stone
Pursuant to the requirements of the Securities Act of 1933, this
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/BERNARD L. HENGESBAUGH 5/8/00
- -------------------------- Chairman of the Board, ---------
Bernard L. Hengesbaugh Chief Executive Officer Date
and Director
/s/ ROBERT V. DEUTSCH 5/8/00
- ---------------------- Chief Financial Officer ---------
Robert V. Deutsch and Director Date
/s/ THOMAS PONTARELLI 5/8/00
- ---------------------- Director and Senior ---------
Thomas Pontarelli Vice President Date
/s/JONATHAN D. KANTOR 5/8/00
- ---------------------- Senior Vice President, Secretary ---------
Jonathan D. Kantor General Counsel, Director Date
/s/DONALD P. LOFE, JR. 5/8/00
- ---------------------- Group Vice President, Director ---------
Donald P. Lofe, Jr. Date
/s/JOHN M. SQUAROK 5/8/00
- ---------------------- Group Vice President, Director ---------
John M. Squarok Date
</TABLE>
INDEX TO EXHIBITS
EX-99.A.3.b. Form of Underwriting/Distribution Agreement Between the Company
and CNA Investor Services, Inc.
EX-99.A.3.c. Schedule of Sales Commissions
EX-99.A.5.k. Form of Dollar Cost Averaging Rider I
EX-99.A.5.l. Form of Dollar Cost Averaging Rider II
EX-99.A.10. Form of Policy Application
EX-99.C.2. Opinion and Consent of Counsel
EX-99.C.6. Consent of Actuary
EX-99.C.7. Consent of Independent Auditors
BROKER-DEALER SALES AGREEMENT
Agreement dated as of _____________, 20__, by and among the Valley Forge Life
Insurance Company ("Insurer"), a Pennsylvania life insurance company, CNA
Investor Services Inc. ("Distributor"), an Illinois corporation, and
___________________________________ ("Broker-Dealer"), a(n) _____________
corporation.
RECITALS:
A. Pursuant to an agreement with Distributor (the "Distribution
Agreement"), the Insurer has appointed Distributor as the principal underwriter
of the class or classes of variable insurance contracts identified in the
Compensation Schedule 1 to this Agreement at the time that this Agreement is
executed, and such other class or classes of variable insurance products that
may be added to Schedule 1 ("Schedule") from time to time in accordance with
Section 11 of this Agreement (each, a "Class of Contracts"; all such classes,
the "Contracts"). Each Class of Contracts will be issued by Insurer through one
or more separate accounts of Insurer ("Separate Accounts"). Pursuant to the
Distribution Agreement, Insurer has authorized Distributor to enter into
separate written agreements with broker-dealers. Collectively, the Insurer,
Distributor, and Broker-Dealer are known as the Parties.
B. Broker-Dealer is engaged in the business of selling various investment
products, including variable insurance products.
C. The Parties to this Sales Agreement ("Agreement") desire that
Broker-Dealer be authorized to solicit applications for the sale of the
Contracts, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual promises
and covenants hereinafter set forth, the Parties agree as follows:
1. DEFINITIONS
(a) Registration Statement - With respect to each class of Contracts, the
most recent effective registration statement(s) filed with the SEC or the most
recent effective post-effective amendment(s) thereto, including financial
statements included therein and all exhibits thereto.
(b) Prospectus - With respect to each Class of Contracts, the prospectus
for such class of Contracts included within the Registration Statement for such
Class of Contracts; provided, however, that, if the most recently filed
prospectus filed pursuant to Rule 497 under the 1933 Act subsequent to the date
on which the Registration Statement became effective differs from the prospectus
on file at the time the Registration Statement became effective, the term
"Prospectus" shall refer to the most recently filed prospectus filed under Rule
497 from and after the date on which it shall have been filed.
(c) 1933 Act - The Securities Act of 1933, as amended.
--------
(d) 1934 Act - The Securities Exchange Act of 1934, as amended.
--------
(e) 1940 Act - The Investment Company Act of 1940, as amended.
(f) Agent - An individual associated with Selling Broker-Dealer who is
appointed by Insurer as an agent for the purpose of soliciting applications.
(g) Premium - A payment made under a Contract to purchase benefits under
such Contract.
(h) Service Center - The Insurer's service center identified in the
Producers Guide.
(i) Producers Guide - The manual and other written rules, regulations and
procedures provided by insurer to insurance agents appointed to sell the
Contracts, as revised from time to time.
(j) SEC - The Securities and Exchange Commission.
(k) NASD - The National Association of Securities Dealers, Inc.
2. AUTHORIZATION OF BROKER DEALER
(a) Pursuant to the authority granted to it in the Distribution Agreement,
Distributor hereby authorizes Broker-Dealer under the securities laws, and
Insurer hereby authorizes Broker-Dealer under the insurance laws, in a
non-exclusive capacity, to sell the Contracts. Broker-Dealer accepts such
authorization and shall use Broker-Dealer's best efforts to find purchasers for
the Contracts in each case acceptable to Insurer. Distributor and Insurer
acknowledge that Broker-Dealer is an independent contractor in the performance
of its duties and obligations under this Agreement. Accordingly, Broker-Dealer
is not obliged or expected to give full time and energies to the performance of
its obligations hereunder, nor is Broker-Dealer obliged or expected to represent
Distributor or Insurer exclusively. Nothing herein contained shall constitute
Broker-Dealer, or any agents or representatives thereof as employees of
Distributor or Insurer in connection with the solicitation of applications and
Premiums for the Contracts.
(b) Broker-Dealer acknowledges that no territory is exclusively assigned
hereunder, and that Insurer and Distributor may in their sole discretion
establish or appoint one or more agencies in any jurisdiction in which
Broker-Dealer transacts business.
(c) Broker-Dealer is vested under this Agreement with power and authority
to select and recommend individuals associated with Broker-Dealer for
appointment as agents of the Insurer ("Agents"), and only individuals so
recommended by the Broker-Dealer shall become Agents, provided that the
conditions of Section 3 are satisfied, and provided further that Insurer
reserves the right to refuse to appoint any proposed agent or, once appointed,
to terminate the same at any time with or without cause. Initial and renewal
state appointment fees for Broker-Dealer and appointees of Broker-Dealer as
Agents of Insurer will be paid by Insurer in accordance with its then-applicable
requirements.
(d) Broker-Dealer shall not expend or contract for the expenditure of the
funds of Distributor or Insurer, except as Distributor and Insurer may otherwise
agree. Broker-Dealer shall pay all expenses incurred in the performance of this
Agreement, unless otherwise specifically provided for in this Agreement or
unless Distributor and Insurer shall have agreed in advance in writing to share
the cost of any such expenses. Broker-Dealer shall not possess or exercise any
authority on behalf of Insurer or Distributor other than that expressly
conferred on the Broker-Dealer by this Agreement. In particular, and without
limiting the foregoing, Broker-Dealer shall not have any authority, nor shall
grant such authority to any Agent, on behalf of Insurer: to make, alter or
discharge any Contract or other insurance policy or annuity entered into
pursuant to a Contract; to waive any Contract forfeiture provision; to extend
the time of paying any Premiums; or to receive any monies or Premiums from
applicants for or purchasers of the Contracts (except for the sole purpose of
forwarding monies or Premiums to Insurer).
(e) Broker-Dealer acknowledges that Insurer has the right in its sole
discretion to reject any applications or Premiums received by it and to return
or refund to an applicant such applicant's Premium.
3. LICENSING AND REGISTRATION OF BROKER-DEALER, AND AGENTS
(a) Broker-Dealer represents and warrant its status as a broker-dealer
registered with the SEC under the 1934 Act, and as a member of the NASD.
Broker-Dealer must, at all times when performing its functions and fulfilling
their obligations under this Agreement, be duly registered as a broker-dealer
under the 1934 Act and in each state or other jurisdiction in which
Broker-Dealer intends to perform its functions and fulfill its obligations
hereunder, and be a member in good standing of the NASD.
(b) Broker-Dealer represents and warrants its status as a licensed life
insurance agent, where required, to solicit applications or receive commissions
or percentages of commissions. Broker-Dealer must, at all times when performing
its functions and fulfilling its obligations under this Agreement, be duly
licensed to sell the Contracts in each state or other jurisdiction in which
Broker-Dealer intends to perform its functions and fulfill its obligations
hereunder. Alternately, in the case of insurance agent licenses, Broker-Dealer
agrees it is associated with a licensed insurance agent in accordance with the
terms and conditions of the SEC No. Action Letter, First of America Brokerage
Services, Inc. (avail. Sept. 28, 1995), [or other similar No Action Letter
obtained by Broker-Dealer.], is a member in good standing of the NASD, has
obtained any other approvals, licenses, authorizations orders, or consent which
are necessary to enter into a selling agreement and to perform its duties
thereunder. Agencies so designated for the purposes of this paragraph shall be
provided to Distributor under separate cover or under paragraph 18 of this
Agreement.
(c) Broker-Dealer shall ensure that no individual shall offer or sell the
Contracts on its behalf in any state or other jurisdiction in which the
Contracts may lawfully be sold unless (i) such individual is an associated
person of Broker-Dealer (as that term is defined in Section 3(a)(18) of the 1934
Act) and duly registered with the NASD and any applicable state securities
regulatory authority as a registered person of Broker-Dealer qualified to sell
the Contracts in such state or jurisdiction, (ii) duly licensed, registered or
otherwise qualified to offer and sell the Contracts to be offered and sold by
such individual under the insurance laws of such state or jurisdiction, and
(iii) duly appointed by Insurer with respect to such Contracts and such state or
jurisdiction. Broker-Dealer shall be solely responsible for background
investigations of the Agents to determine their qualifications. All matters
concerning the licensing of any individuals recommended for appointment by
Broker-Dealer under any applicable state insurance law shall be a matter
directly between Broker-Dealer and such individual, and Broker-Dealer shall
furnish Insurer with proof of proper licensing of such individual or other
proof, reasonably acceptable to Insurer, of satisfaction by such individual of
licensing requirements prior to Insurer appointing any such individual as an
Agent of Insurer. Broker Dealer shall notify Insurer and Distributor immediately
upon termination (for any reason) of an Agent's association with Broker-Dealer.
(d) Without limiting the foregoing, Broker-Dealer represents that it is in
compliance with the terms and conditions of letters issued by the Staff of the
SEC with respect to the non-registration of an insurance agency associated with
a registered broker-dealer.
(e) Broker-Dealer shall notify Insurer immediately in writing if
Broker-Dealer fails to comply with any such terms and conditions in this Section
3.
4. BROKER-DEALER AND INSURANCE AGENT COMPLIANCE
(a) Broker-Dealer shall be responsible for securities training, supervision
and control of the Agents in connection with their solicitation activities with
respect to the Contracts and shall supervise Agents' compliance with applicable
federal and state securities law and NASD requirements in connection with such
solicitation activities.
(b) Broker-Dealer hereby represents and warrants that it is duly in
compliance with all applicable federal and state securities laws and
regulations, and all applicable insurance laws and regulations. Broker-Dealer
shall carry out its obligations under this Agreement in continued compliance
with such laws and regulations. Further, Broker-Dealer shall comply, and shall
ensure that Agents comply, with the rules and procedures set forth in the
Producer Guide, and the rules set forth below, and Broker-Dealer shall be
responsible for such compliance.
(i) Broker-Dealer and Agents shall not offer or attempt to offer the
Contracts, nor solicit applications for the Contracts, nor deliver Contracts, in
any state or jurisdiction in which the Contracts have not been approved for
sale. For purposes of determining where the Contracts may be offered and
applications solicited, Broker-Dealer will rely on written notification, as
revised from time to time, received from Insurer pursuant to this Agreement.
(ii) Broker-Dealer and Agents shall not solicit applications for the
Contracts without delivering the Prospectus for the Contracts, and, where
required by state insurance law, the then-currently effective Statement of
Additional Information for the Contracts, and the then-currently effective
Prospectus(es) for the Fund(s).
(iii) Broker-Dealer and Agents shall not recommend the purchase of a
Contract to an applicant unless each has reasonable grounds to believe that such
purchase is suitable for the applicant in accordance with, among other things,
applicable regulations of any state insurance regulatory authority, the SEC, and
the NASD. While not limited to the following, a determination of suitability
shall be based on information supplied by the applicant after a reasonable
inquiry concerning the applicant's insurance and investment objectives,
financial situation, needs, and shall entail a review by Broker-Dealer of all
applications for suitability and completeness and correctness as to form on an
internal record maintained by Broker-Dealer.
(iv) Broker-Dealer and all Agents shall accept initial Premiums in the form
of a check or money order only if made payable to the Insurer and signed by the
applicant for the Contract. Broker-Dealer or Agent shall not accept cash for
Premiums.
(v) Broker-Dealer shall ensure that all checks and money orders and
applications for the Contracts received by Broker-Dealer or an Agent shall be
remitted promptly, and in any event not later than five business days after
receipt, to the Service Center. In the event that any other Premiums are sent to
an Agent or Broker-Dealer, rather than to the Service Center, Broker-Dealer or
Agent shall promptly (and in any event, not later than five business days) remit
such Premiums to the Service Center. Broker-Dealer acknowledges that if any
Premium is held at any time by either of them, such Premium shall be held on
behalf of Insurer, and Broker-Dealer shall segregate such Premium from their own
funds and promptly (and in any event, not later than five business days) remit
such Premium to the Insurer. All such Premiums, whether by check, money order or
wire, shall at all times be the property of Insurer.
(vi) Upon issuance of a Contract by Insurer and delivery of such Contract
to Broker-Dealer, Broker-Dealer shall promptly deliver such Contract to its
purchaser. For purposes of this provision, "promptly" shall be deemed to mean
not later than ten calendar days. Broker-Dealer shall return promptly to Insurer
all receipts for delivered Contracts, all undelivered Contracts and all receipts
for cancellation, in accordance with the instructions set forth in the Producers
Guide. Insurer will assume that a Contract will be delivered by Broker-Dealer to
the purchaser of such Contract within ten calendar days for purposes of
determining when to transfer Premiums initially allocated to the Money Market
Account available under such Contract to the particular investment options
specified by such purchaser. As a result, if a purchaser exercises the right to
examine (hereinafter "free look") provisions under a Contract, Broker-Dealer
shall indemnify Insurer for any loss incurred by Insurer that results from
Broker-Dealer's failure to deliver such Contract to its purchaser within the
contemplated ten calendar day period.
(vii) Broker-Dealer and the Agents in connection with the offer or sale of
the Contracts, shall not give any information or make any representations or
statements, written or oral, concerning the Contracts, separate accounts, other
than, or inconsistent with, information or representations contained in the
Prospectuses, statements of additional information, and Registration Statements
for the Contracts, or a Fund, or in reports or proxy statements therefor, or in
promotional, sales or advertising material or other information supplied and
approved in writing by Distributor and Insurer.
(c) Broker-Dealer understands acknowledges, and represents that Contracts
and Premiums thereunder shall not be solicited, offered, or sold in connection
with any so-called "market timing" program, plan, arrangement, or service.
Should Distributor or Insurer determine at its sole discretion that
Broker-Dealer is soliciting, offering, selling, or has solicited, offered, or
sold, Contracts subject to any so-called "market timing" program, plan,
arrangement, or service, Distributor or Insurer may take such action which is
necessary, at its sole discretion, to halt such solicitations, offers, or sales.
(d) Broker-Dealer shall promptly furnish to Insurer or its authorized agent
any reports and information that Insurer may reasonably request for the purpose
of meeting Insurer's reporting and recordkeeping requirements under the
insurance laws of any state or under any applicable federal and state securities
laws, rules or regulations.
(e) Broker-Dealer shall secure and maintain a fidelity bond (including
coverage for larceny and embezzlement), issued by a reputable bonding company
acceptable to the Insurer, covering all of its directors, officers, agents, and
employees who have access to funds of Insurer or Distributor. This bond shall be
maintained at Broker-Dealer's expense in at least the amount prescribed under
the NASD Rules of Fair Practice. Broker-Dealer shall provide Distributor with a
copy of said bond before executing this Agreement. In the alternative,
Broker-Dealer may instead secure and maintain errors & omissions insurance
("E&O") in a form acceptable to the Insurer and Distributor covering
Broker-Dealer and Agents. Broker-Dealer hereby assigns any proceeds received
from a fidelity bonding company or under the E&O policy to Insurer or
Distributor as their interest may appear, to the extent of Insurer's or
Distributor's loss due to activities covered by the bond, policy or other
liability coverage. If there is any deficiency amount, whether due to a
deductible or otherwise, Broker-Dealer shall promptly pay such amounts on
demand. Broker-Dealer hereby indemnifies and holds harmless Insurer and
Distributor from any such deficiency and from the costs of collection thereof,
including reasonable attorneys' fees. Insurer's written approval of the bond or
the E&O policy shall not be unreasonably withheld.
5. SALES MATERIALS
(a) During the term of this Agreement, Distributor and Insurer will provide
Broker-Dealer without charge, with as many copies of Prospectuses (and any
supplements thereto), current Fund prospectus(es) (and any supplements thereto),
and applications for the Contracts, as Broker-Dealer may reasonably request.
Upon termination of this Agreement, Broker-Dealer will promptly return to
Distributor any Prospectuses, applications, Fund prospectuses, and other
materials and supplies furnished by Distributor or Insurer to Broker-Dealer or
to the Agents.
(b) During the term of this Agreement, Distributor will be responsible for
providing and approving all promotional, sales and advertising material to be
used by Broker-Dealer in the course of their solicitation activities hereunder.
Distributor will file such materials or will cause such materials to be filed
with the SEC, the NASD, state insurance departments, and/or with any state
securities regulatory authorities, as appropriate. Broker-Dealer shall not use
or implement, nor shall they allow any Agent to use or implement, any
promotional, sales or advertising material relating to the Contracts or
otherwise advertise the Contracts without the prior written approval of either
Distributor or Insurer.
6. COMMISSIONS AND EXPENSES
(a) During the term of this Agreement, Insurer shall pay to Broker-Dealer
as compensation for Contracts for which it is the Broker-of-Record, the
commissions and fees set forth in the Schedule to this Agreement, and such
Schedule may be amended or modified at the exclusive discretion of the insurer,
upon thirty (30) days prior notice. Any amendment to Schedule will be applicable
to any Contract for which an application or Premium is received by the Service
Center on or after the effective date of such amendment or which is in effect
after the effective date of such amendment. Compensation with respect to any
Contract shall be paid to Broker-Dealer only for so long as Broker-Dealer is the
Broker-of-Record for such Contract.
(b) Broker-Dealer recognizes that all compensation payable to Broker-Dealer
hereunder will be disbursed by or on behalf of Insurer after Premiums are
received and accepted by Insurer and that no compensation of any kind other than
that described in this Agreement is payable to Broker-Dealer for the performance
of its obligations hereunder.
(c) Refund of Compensation. No compensation shall be payable, and
Broker-Dealer agrees to reimburse Distributor for any compensation paid to
Broker-Dealer or its representatives under each of the following conditions: (i)
if Insurer, in its sole discretion, determines not to issue the Contact applied
for; (ii) if Insurer refunds the Premiums upon the applicant's surrender or
withdrawal pursuant to any "free-look" privilege; (iii) if Insurer refunds the
Premiums paid by applicant as a result of a complaint by applicant, recognizing
that Insurer has sole discretion to refund Premiums; or (iv) if Insurer
determines that any person signing an application who is required to be licensed
or any other person or entity receiving compensation for soliciting purchase of
the Contracts is not duly licensed to sell the Contracts in the jurisdiction of
such sale or attempted sale.
(d) Compensation of Broker-Dealers and Agents. Broker-Dealer agrees that in
the event the Broker-Dealer ceases to be validly licensed or registered,
Broker-Dealer shall not receive any compensation based on any Contract or on
premiums or purchase payments thereafter received by Insurer from such former
broker-dealer or Agent's customers.
(e) Indebtedness and Right of Setoff. Nothing contained herein shall be
construed as giving Broker-Dealer or any Agent the right to incur any
indebtedness on behalf of Insurer or Distributor. Broker-Dealer hereby
authorizes Insurer and Distributor to set off liabilities of Broker-Dealer to
Insurer and Distributor against any and all amounts otherwise payable to
Broker-Dealer. Broker-Dealer represents that no commissions or other
compensation will be paid for services rendered in soliciting the purchase of
the contracts by any person or entity not duly registered or licensed by the
required authorities and appointed by Insurer to sell the Contract in the state
in which such solicitation occurred; provided however, that this provision shall
not prohibit the payment of compensation of the surviving spouse or other
beneficiary of a person entitled to receive such compensation pursuant to a bona
fide contract calling for such payment.
7. INTERESTS IN AGREEMENT. Agents shall have no interest in this Agreement or
right to any commissions to be paid to Broker-Dealer. Broker-Dealer shall be
solely responsible for the payment of any commission or consideration of any
kind to Agents. Broker-Dealer shall be solely responsible under applicable tax
laws for the reporting of compensation paid to Agents. The Broker-Dealer shall
have no right to withhold or deduct any commission from any Premiums in respect
of the Contracts which it may collect, subject to Schedule to this Agreement.
Broker-Dealer shall have no interest in any compensation paid by Insurer to
Distributor now or hereafter, in connection with the sale of any Contracts
hereunder.
8. TERM AND EXCLUSIVITY OF AGREEMENT. This Agreement may not be assigned except
by written mutual consent of the Parties and shall continue for an indefinite
term, subject to the termination by any party by ten-days' advance written
notice to the other parties, except that in the event Distributor or
Broker-Dealer ceases to be a registered broker-dealer or a member of the NASD,
this Agreement shall immediately terminate.
9. COMPLAINTS AND INVESTIGATIONS
(a) Distributor, Insurer and Broker-Dealer each shall cooperate fully in
any securities or insurance regulatory investigation or proceeding or judicial
proceeding arising in connection with the Contracts marketed under this
Agreement ("Customer Complaint"). Broker-Dealer will be notified promptly of any
customer complaint or notice of any regulatory investigation or proceeding or
judicial proceeding received by Distributor or Insurer with respect to
Broker-Dealer or any Agent; and Broker-Dealer will promptly notify Distributor
and the Insurer of any written customer complaint or notice of any regulatory
investigation or proceeding or judicial proceeding received by Broker-Dealer in
connection with this Agreement or any Contract.
(b) In the case of a Customer Complaint, Distributor, Insurer,
Broker-Dealer will cooperate in investigating such complaint and any response by
Broker-Dealer or Agent to such Customer Complaint will be sent to Distributor
for approval not less than five business days prior to its being sent to the
customer or regulatory authority, except that if a more prompt response is
required, the proposed response shall be communicated by telephone or facsimile.
10. MODIFICATION OF AGREEMENT. This Agreement supersedes all prior agreements,
either oral or written, between the parties relating to the Contracts and,
except for any amendment of the Schedule pursuant to the terms of Section 6
hereof, may not be modified in any way unless by written agreement signed by all
of the Parties.
11. INDEMNIFICATION
(a) Broker-Dealer shall indemnify and hold harmless Distributor and Insurer
and each person who controls or is associated with Distributor or Insurer within
the meaning of such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon:
(i) violation(s) by the Broker-Dealer or an Agent of federal securities law
or regulation(s), insurance law or regulation(s), or any rule or requirement of
the NASD;
(ii) any unauthorized use of promotional, sales or advertising material,
any oral or written misrepresentations, or any unlawful sales practices
concerning the Contracts, by Broker-Dealer or an Agent;
(iii) claims by the Agents or other agents or representatives of
Broker-Dealer for commissions or other compensation or remuneration of any type;
(iv) any failure on the part of Broker-Dealer or an Agent to submit
Premiums or applications to Insurer, or to submit the correct amount of a
Premium, on a timely basis and in accordance with this Agreement the Producers
Guide, or applicable law;
(v) any failure on the part of Broker-Dealer, or an Agent to deliver
Contracts to purchasers thereof on a timely basis and in accordance with the
Producers Guide; or
(vi) a breach by Broker-Dealer of any provision of this Agreement.
(vii) claims by customers for losses associated with or caused by so-called
"Market Timing" trades.
This indemnification will be in addition to any liability which Broker-Dealer
may otherwise have.
(b) Distributor and Insurer, jointly and severally, shall indemnify and
hold harmless Broker-Dealer and each person who controls or is associated with
the Broker-Dealer within the meaning of such terms under the federal securities
laws, and any officer, director, employee or agent of the foregoing, against any
and all losses, claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they or any of them may become subject under any
statute or regulation, NASD rule or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are based
upon any breach by Distributor or Insurer of any provision of this Agreement.
This indemnification will be in addition to any liability which Distributor and
Insurer, jointly and severally, may otherwise have.
(c) The indemnification provisions contained in this Section 11 shall
remain operative in full force and effect, regardless of any termination of this
Agreement. A successor by law of Distributor or Insurer, as the case may be,
shall be entitled to the benefits of the indemnification provisions contained in
this Section 11. After receipt by a party entitled to indemnification
("indemnified party") under this Section 11 of notice of the commencement of any
action, if a claim in respect thereof is to be made against any person obligated
to provide indemnification under this Section 11 ("indemnifying party"), such
indemnified party will notify the indemnifying party in writing of the
commencement thereof as soon as practicable thereafter, provided that the
omission so to notify the indemnifying party will not relieve it from any
liability under this Section 11, except to the extent that the omission results
in a failure of actual notice to the indemnifying party and such indemnifying
party is damaged solely as a result of the failure to give such notice. The
indemnifying party, upon the request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in such
proceeding and shall pay the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the indemnifying party
and the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent, but if such proceeding is settled with such consent or if
final judgment is entered in such proceeding for the plaintiff, the indemnifying
party shall indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment
12. RIGHTS, REMEDIES, & OBLIGATIONS CUMULATIVE. The rights, remedies and
obligations contained in this Agreement are cumulative and are in addition to
any and all rights, remedies and obligations, at law or in equity, which the
Parties hereto are entitled to under state and federal laws. Failure of a party
to insist upon strict compliance with any of the conditions of this Agreement
shall not be construed as a waiver of any of the conditions, but the same shall
remain in full force and effect. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a continuing
waver.
13. NOTICES. All notices hereunder are to be made in writing and shall be given:
If to Insurer and/or Distributor:
Kevin M. Hogan, Asst. Vice President
Valley Forge Life Insurance Company
CNA Plaza, 34S
Chicago, IL 60685
Kevin M. Hogan, President
CNA Investor Services, Inc.
CNA Plaza, 34S
Chicago, IL 60685
if to Broker-Dealer, to:
or such other address as such party may hereafter specify in writing. Each such
notice to a party shall be either hand delivered or transmitted by registered or
certified United States mail with return receipt requested, or by overnight mail
by a nationally recognized courier, and shall be effective upon delivery.
14. INTERPRETATION, JURISDICTION, ETC. This Agreement shall be construed and its
provisions interpreted under and in accordance with the laws of the State of
Illinois.
15. HEADINGS. The headings in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
16. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
17. SEVERABILITY. This is a severable Agreement. In the event that any provision
of this Agreement would require a party to take action prohibited by applicable
federal or state law or prohibit a party from taking action required by
applicable federal or state law, then it is the intention of the parties hereto
that such provision shall be enforced to the extent permitted under the law,
and, in any event, that all other provisions of this Agreement shall remain
valid and duly enforceable as if the provision at issue had never been a part
hereof.
18. AGENCIES. Broker-Dealer hereby designates the following insurance agencies
as associated with broker-dealer in conformity with the requirements of
Paragraph 3(b):
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Insurer: THE VALLEY FORGE LIFE INSURANCE COMPANY
By: Name:
Title:
Distributor: CNA INVESTOR SERVICES, INC.
By: Name:
Title:
Broker-Dealer:
By: Name:
Title:
U:\WINWORD\REED\AGREEMNT\GENBKDLR.DOC
10-7-98
<TABLE>
<CAPTION>
CAPITAL SELECT VARIABLE SERIES
Retail Broker-Dealer
Schedule of Compensation
Valley Forge Life Insurance Company Standard
CAPITAL SELECT VARIABLE SERIES
Retail Broker-Dealer
Schedule of Compensation
SCHEDULE 1
Subject to all of the terms and conditions of the Broker-Dealer Sales Agreement entered into between the Valley Forge Life
Insurance Company, CNA Investor Services, Inc., and Broker-Dealer, this Schedule is attached and made a part thereto. This
Schedule replaces any previously issued compensation schedule relating to the Capital Select Variable Annuity, Capital Select Plus
Variable Annuity or Capital Select Variable Universal Life Contracts. It is acknowledged that the insurer reserves the right to
reject any applications submitted and to cancel or rescind any contract issued, returning where applicable the consideration or
any part thereof. In the event of such rejection, cancellation, or rescission, any commissions paid on the consideration returned
shall forthwith be paid by the Broker-Dealer to the insurer or withheld from commission payments, or both.
Commission:
1. Commissions will be paid directly to the registered representative's
broker-dealer.
2. The registered representative for whom the commission is intended must be
appropriately licensed and appointed.
Commission:
Capital Select Variable Annuity; Policy form numbers V100-1128A; V100-1129A;
P4-119013-A; P4-119014-A
OPTION A
----------------------------------------------------------------------------------------------------------------------
Issue Age up to age 74 75-79 80+
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Year Commission 6.00% 5.50% 5.00
----------------------------------------------------------------------------------------------------------------------
2-5 Year Trail Commission 0 0 0
----------------------------------------------------------------------------------------------------------------------
6+ Year Trail Commission .50% .50% .50%
OPTION B
----------------------------------------------------------------------------------------------------------------------
Issue Age up to age 74 75-79 80+
----------------------------------------------------------------------------------------------------------------------
1st Year Commission 5.00% 4.50% 4.00
----------------------------------------------------------------------------------------------------------------------
2-5 Year Trail Commission .25% .25% .25%
----------------------------------------------------------------------------------------------------------------------
6+ Year Trail Commission .75% .75% .75%
OPTION C
----------------------------------------------------------------------------------------------------------------------
Issue Age up to age 74 75-79 80+
----------------------------------------------------------------------------------------------------------------------
1st Year Commission 3.00% 2.50% 2.00
----------------------------------------------------------------------------------------------------------------------
2-5 Year Trail Commission .60% .60% .60%
----------------------------------------------------------------------------------------------------------------------
6+ Year Trail Commission 1.10% 1.10% 1.10%
Trail commissions are paid quarterly for this product.
At the time of sale, the registered representative must indicate on the application which commission option is preferred. The
registered representative should indicate on the application whether Option A, B or C is preferred. If no Option is chosen,
Commission will be paid under Option A.
Chargebacks:
Commission Chargebacks will be taken on Surrenders only. The chargeback rates for the Capital Select Variable Annuity product are:
1st 6 months 100.00%
Months 7 through 12 50.00%
Over 12 months 0.00%
Commission:
Capital Select Plus Variable Annuity; Policy form number VA-101 Series (Effective 3/1/2000)
OPTION A
----------------------------------------------------------------------------------------------------------------------
Issue Age up to age 74 75 +
----------------------------------------------------------------------------------------------------------------------
1st Year Commission* 5.00% 3.00%
----------------------------------------------------------------------------------------------------------------------
2-7 Year Trail Commission 0 0
----------------------------------------------------------------------------------------------------------------------
8+ Year Trail Commission .50% .50%
OPTION B
----------------------------------------------------------------------------------------------------------------------
Issue Age up to age 74 75 +
----------------------------------------------------------------------------------------------------------------------
1st Year Commission* 3.00% 1.00
----------------------------------------------------------------------------------------------------------------------
2-7 Year Trail Commission .25% .25%
----------------------------------------------------------------------------------------------------------------------
8+ Year Trail Commission .75% .75%
Trail commissions are paid quarterly for this product.
At the time of sale, the registered representative must indicate on the application which commission option is preferred. The
registered representative should indicate on the application whether Option A or B is preferred. If no Option is chosen,
Commission will be paid under Option A.
*Policyholder bonus is not subject to first year commissions.
Chargebacks:
Commission Chargebacks will be taken on Surrenders only. The chargeback rates for the Capital Select Plus product are:
1st 6 months 100.00%
Months 7 through 12 50.00%
Over 12 months 0.00%
Commission:
Capital Select Variable Universal Life; Policy form numbers V100-1132-A; V100-1133-A
(Effective 4/1/2000)
----------------------------------------------------------------------------------------------------------------------
All Contract Years Contract Years 2+
Contract Year 1 Contract Years2+ Excess of Target Trail Commissions
% of Target Premium % of Target Premium Premium Paid Quarterly
----------------------------------------------------------------------------------------------------------------------
Commission 90% 0% 0% .30%
Term Conversion Credits:
Premium credits resulting from a CNA term policy conversion are not subject to first year commissions.
</TABLE>
VULR-113 (4/00)
Valley Forge Life Insurance Company
A Stock Company
Executive Office: Home Office:
CNA Plaza 401 Penn St.
Chicago, Illinois 60685 Reading, Pennsylvania 19601
DOLLAR COST AVERAGING RIDER I
This rider forms a part of the policy to which it is attached.
If you request dollar cost averaging, we will open a dollar cost averaging
account for you under this policy. All premiums applied to this option will be
allocated to the dollar cost averaging account. No transfers may be made into
this account.
Before the Insured's age 95, you may choose to have us transfer a fixed dollar
amount on a monthly or quarterly basis from the money market account to any of
the subaccounts or any available one year guaranteed interest rate fixed
account. The transfers will begin when you request but no sooner than seven
business days following receipt of your written notice provided the transfers do
not begin until 30 days after the policy date. Transfers will terminate at the
end of the period you designate or within seven business days of your written
request to terminate these transfers.
To be eligible for dollar cost averaging the following conditions must be met:
1. The value of the dollar cost averaging account must be at least $1,000; and
2. The minimum transfer amount must be at least $100.
You may have only one dollar cost averaging account in operation at one time.
Transfers under the dollar cost averaging are made as of the same day every
calendar month. This day may not be later than the 28th of the month. If this
calendar day is not a business day, transfers are made as of the next business
day. There is no additional charge for this option and these transfers do not
count toward the 12 free transfers each policy year.
We reserve the right to discontinue this option at any point in time or change
its features. If this option is discontinued or changed, we will notify you at
least 30 days before such discontinuation or change. Discontinuation will not
affect an option then being exercised.
If this option is terminated, all money remaining in the dollar cost averaging
account will be transferred to the money market subaccount.
This rider terminates when the policy terminates unless we receive written
request to terminate it earlier.
Signed for the Company at its Executive Offices in Chicago, Illinois on the
policy effective date, unless a different date is shown on a supplemental policy
schedule.
Chief Executive Officer Group Vice President
VULR-115 (4/00)
Valley Forge Life Insurance Company
A Stock Company
Executive Office: Home Office:
CNA Plaza 401 Penn St.
Chicago, Illinois 60685 Reading, Pennsylvania 19601
DOLLAR COST AVERAGING RIDER II
This rider forms a part of the policy to which it is attached.
If you request dollar cost averaging, we will open a dollar cost averaging
account for you under this policy. All premiums applied to this option will be
allocated to the dollar cost averaging account. No transfers may be made into
this account.
Before the Insured's age 95, you may choose to have us transfer a fixed dollar
amount on a monthly or quarterly basis from the dollar cost averaging account to
any of the subaccounts or any one year guaranteed interest rate fixed account
for a 6 or 12 month period. The transfers will begin when you request but no
sooner than seven business days following receipt of your written notice
provided the transfers do not begin until 30 days after the policy date.
Transfers will terminate at the end of the 6 or 12 month period you designate or
within seven business days of your written request to terminate these transfers.
The interest rate earned on this account will be the interest rate earned in a
one year guaranteed interest rate fixed account, plus any additional interest,
which we may declare from time to time.
To be eligible for dollar cost averaging the value of the dollar cost averaging
account must be at least $5,000.
You may have only one dollar cost averaging account in operation at one time.
Transfers under the dollar cost averaging are made as of the same day every
calendar month. This day may not be later than the 28th of the month. If this
calendar day is not a business day, transfers are made as of the next business
day. There is no additional charge for this option and these transfers do not
count toward the 12 free transfers each policy year.
We reserve the right to discontinue this option at any point in time or change
its features. If this option is discontinued or changed, we will notify you at
least 30 days before such discontinuation or change. Discontinuation will not
affect an option then being exercised.
If this option is terminated, all money remaining in the dollar cost averaging
account will be transferred to the money market subaccount.
This rider terminates when the policy terminates unless we receive written
request to terminate it earlier.
Signed for the Company at its Executive Offices in Chicago, Illinois on the
policy effective date.
Chief Executive Officer Group Vice President
<TABLE>
<CAPTION>
<S> <C> <C>
APPLICATION
Application to: (Check One)
Continental Assurance Company, CNA Plaza, Chicago, IL 60685
Valley Forge Life Insurance Company, 401 Penn Street, Reading , PA 19601
Executive Office, CNA Plaza, Chicago, Il 60685
(Please type or print all information)
- -------------------------------------------------------------------------------------------------------------------
1. PROPOSED INSURED 1 (First, Middle, Last) Male Female Age
Birth Date: Mo. Day Yr. Birth Place: State & Country
Driver's License# and State ______________ Bus. Phone:
- -------------------------------------------------------------------------------------------------------------------
2. PROPOSED INSURED 2 (First, Middle, Last) __Male __Female Age
Birth Date: Mo. Day Yr. Birth Place: State & Country
Height ____ Weight now _____ Weight 1 yr ago
Cause of any lost weight ____________________________________________
Driver's License # and State
(Specified) Amount $ Or Units
- -------------------------------------------------------------------------------------------------------------------
3. CHILDREN PROPOSED FOR INSURANCE Height Weight Child Units Age
Birth Date: Mo. Day Yr. Birth Place: State & Country
- -------------------------------------------------------------------------------------------------------------------
4. If proposed Insured is under age 15, name of Proposed Payor
Relationship
- -------------------------------------------------------------------------------------------------------------------
5. Residence Address of Proposed Insured(s) City County State Zip Code
- -------------------------------------------------------------------------------------------------------------------
6. Plan of Insurance Face/Specified Amount Premium Mode
Amount remitted with this application $
First Premium (may not be less than minimum premium for the mode selected)
Planned Periodic Premium $ Target Premium $
Maturity Date (if less than policy expiry):
Rider/Amount Rider/Amount Rider/Amount
- -------------------------------------------------------------------------------------------------------------------
7a. Occupation of Proposed Insured(s) or Payor if Proposed Insured is under age 15. List duties.
- -------------------------------------------------------------------------------------------------------------------
7b. Employer's name and address of Proposed Insured(s) (Applies to Payor if Proposed Insured
is under age 15.)
- -------------------------------------------------------------------------------------------------------------------
8. List all life insurance amounts in force on all person(s) proposed for insurance (if none, so
state).
Name of person and Year Amount of Personal Amount of Business Amount of Insurance
company Issued Insurance Insurance Accidental
Death Benefit
- -------------------------------------------------------------------------------------------------------------------
9. Will the policy applied for replace or change any insurance or annuity currently in force with
this or any other company on your life or the life of any person proposed for insurance? No Yes
Have you or any person proposed for insurance replaced a life insurance policy in the past three
years? No Yes Replaced two or more times in the last five years? No Yes If yes, give
name and reason.
Is any application for life or health insurance pending in this or any company? No Yes If yes,
give name.
Name Company Policy number issue year Face Amount Acc Death Benefit Amt
- -------------------------------------------------------------------------------------------------------------------
10. Send premium notice to Proposed Insured 1 Residence Business Address Other
(Name, Address, Zip Code)
- -------------------------------------------------------------------------------------------------------------------
11. Name of owner, if other than Proposed Insured 1, or applicant (include contingent owner, if
any.)
Owner's Social Sec. No. or Tax No.
- -------------------------------------------------------------------------------------------------------------------
12. Beneficiary designation (The beneficiary under any spouse and children's insurance will be
as stated in those riders, unless otherwise designated. Print full name(s) and relationships to
Proposed Insured 1.
Contingent Beneficiary
- -------------------------------------------------------------------------------------------------------------------
13. Has any person proposed for insurance:
Yes No
A. In the last 3 years flown or plans to fly, as a pilot, student pilot or
crew?
B. Traveled or resided or plans to travel or reside outside the USA?
C. Ever been convicted of a felony?
D. Had 2 or more moving violations in the past 3 years, been convicted of
driving while intoxicated, or ever had license suspended or revoked?
E. In the last 3 years, engaged in, or intends to engage in, sky or scuba
diving, hang-gliding, rock climbing, or any form of motorized racing?
F. Received advice or treatment from a member of the medical profession for
the use of alcohol or drugs, or been convicted of using, selling, or
possessing any narcotics, stimulants, sedative or hallucinogenic drug in
the past 10 years?
G. Ever been advised by a physician to quit using tobacco for health reasons?
H. Ever been declined for insurance, had a policy rated, modified in any way
or denied reissue, reinstatement or renewal of a policy?
Details of YES answers (include item #, proposed insured, dates, duration, attending physicians,
and questionnaires for A & E)
- -------------------------------------------------------------------------------------------------------------------
14. Special Features requested, such as policy date, risk classification, issue instructions.
- -------------------------------------------------------------------------------------------------------------------
15. PROPOSED INSURED 1 Tobacco Use? Never Present Former
Check type: smokeless cigar cigarette pipe
Mo./Yr quit # Years as a smoker #Packs per day
- -------------------------------------------------------------------------------------------------------------------
16. PROPOSED INSURED 2 Tobacco Use? Never Present Former
Check type: smokeless cigar cigarette pipe
Mo./Yr quit # Years as a smoker #Packs per day
- -------------------------------------------------------------------------------------------------------------------
17. PROPOSED INSURED 1
a. Height Weight Current 1 Yr ago Cause of any weight loss
Mo/Yr of last exam Results
Sigmoidoscopy
Prostate Exam
Mammogram
Breast Exam
b. Annual Income $
Estimated Net Worth $
Ever filed bankruptcy? Yes No
Date discharged:
Explain:
c. EXERCISE Activities - aerobics/muscle strengthening/toning
Mo/Yr started Times/wk Duration
d. REGULAR PHYSICIAN (First, Middle, Last) :
Date of last visit:
Physician Phone #:
Address: City State Zip Code
Reason for/result of last visit:
- -------------------------------------------------------------------------------------------------------------------
18. In the past 10 years, has any person proposed for insurance been treated for or had:
Yes No
A. Any disease or disorder of eyes, ears, nose or throat?
B. Dizziness, fainting, convulsions, head injury, headaches, speech defect,
paralysis or stroke, tremor, muscle weakness, depression, other mental or
nervous disorder?
C. Shortness of breath, persistent hoarseness or cough, blood spitting,
bronchitis, pleurisy, asthma, emphysema, tuberculosis or chronic
respiratory disorder?
D. Chest pain, palpitations, high blood pressure, rheumatic fever, heart
murmur, varicose veins, phlebitis, or other heart or blood vessel disorder?
E. Hepatitis, ulcer, hernia, colitis, diverticulitis, recurrent indigestion,
or other disorder of the stomach, intestines, liver, gall bladder,
pancreas, or spleen?
F. Sugar, albumin, blood or pus in urine, sexually transmitted or venereal
disease, stone or other kidney, bladder, prostrate or reproductive organ
disorder?
G. Allergies, anemia, bleeding tendency or other disorders of the blood?
H. Neuralgia, neuritis, sciatica, rheumatism, arthritis, gout, or disorder of
the muscles or bones including the spine, back and joints.
I. Disorder of the skin or lymph glands cyst, tumor or cancer?
J. Persistent fever, night sweats, chills, and/or diarrhea?
K. Diabetes, thyroid or other endocrine disorder?
L. Diagnosis or treatment for AIDS by a member of the medical profession?
M. Any mental or physical disorder not listed; had or been advised to have any
checkup, consultation, illness, injury, hospitalization, treatment or
surgery including an EKG, x-ray or other diagnostic test not already
listed.
N. Is any person proposed for insurance receiving treatment or taking any
medication?
Details of YES answers (include item #, proposed insured, dates, duration, medication, name and
address of physicians)
- -------------------------------------------------------------------------------------------------------------------
19. FAMILY HISTORY
Age if living or At death Cancer history heart disease or circulatory disorder
Father Yes No Yes No , since age
Mother Yes No Yes No, since age
Siblings Yes No Yes No, since age
Siblings Yes No Yes No, since age
Siblings Yes No Yes No, since age
- -------------------------------------------------------------------------------------------------------------------
20. FUND SELECTION
ALLOCATIONS: On issued contracts, your Net Purchase Payment will be allocated as
indicated below. Selections must total 100%. Minimum initial allocation to any single
subaccount is 1%. No fractional percentages. These percentages will apply in future years but
may be changed at any time by the owner. (If no allocation is indicated, Federated Prime Money
Fund II will be automatically selected.)
FEDERATED INSURANCE SERIES
% Federated High Income Bond Fund II
% Federated Prime Money Fund II
% Federated Utility Fund II
THE ALGER AMERICAN FUND
% Alger American Growth Portfolio
% Alger American Mid-Cap Growth Portfolio
% Alger American Small Capitalization Portfolio
% Alger American Leveraged All Cap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC.
% First Eagle SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE TRUST
% Van Eck Worldwide Emerging Markets Fund
% Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
% Fidelity VIP II Asset Manager Portfolio
% Fidelity VIP II Contrafund Portfolio
% Fidelity VIP Equity-Income Portfolio
% Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
% MFS Emerging Growth Series
% MFS Growth With Income Series
% MFS Research Series
% MFS Total Return Series
JANUS ASPEN SERIES, INSTITUTIONAL SHARES
% Janus Aspen Series Capital Appreciation Portfolio
% Janus Aspen Series Growth Portfolio
% Janus Aspen Series Balanced Portfolio
% Janus Aspen Series Flexible Income Portfolio
% Janus Aspen Series International Growth Portfolio
% Janus Aspen Series Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
% Alliance Premier Growth Portfolio
% Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
% American Century VP Income & Growth Fund
% American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, Class 2 Shares
% Templeton Developing Markets Securities Fund
% Templeton Asset Strategy Fund
LAZARD RETIREMENT SERIES
% Lazard Retirement Equity Portfolio
% Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
% Morgan Stanley International Magnum Portfolio
% Morgan Stanley Emerging Markets Equity Portfolio
GUARANTEED INTEREST OPTION
% 1 Year
OTHER
%
%
%
%
%
- -------------------------------------------------------------------------------------------------------------------
21. SUITABILITY
A. Do you understand that the death benefit and surrender value may increase or decrease
depending on the investment experience of the variable subaccounts? Yes No
B. Your primary investment objective is?
Guaranteed Interest
Preservation of Capital
Income
Growth
Aggressive Growth
C. Do you believe that this policy will meet your insurance needs and financial objectives?
Yes No
D. Have you received a copy of the current prospectus? Yes No
- -------------------------------------------------------------------------------------------------------------------
22. CONDITIONAL RECEIPT Questions related to conditional receipt for all persons proposed
for insurance.
Yes No In the past 90 days has any person proposed for insurance been admitted to a hospital
or other medical facility, been advised to be admitted, contemplated surgery, or had
surgery performed or recommended?
Yes No In the past two years, has any person proposed for insurance been treated by a member
of the medical profession for heart disease, stroke, cancer or AIDS, or had such
treatment recommended?
If either question in this section is answered "Yes" or left blank, a premium payment cannot be
accepted with this application and any conditional receipt is void.
- -------------------------------------------------------------------------------------------------------------------
The Proposed Insured(s) and the Applicant, if other than the Proposed Insured(s), agrees that (1)
all statements and answers in this application are complete, true and correctly recorded to the best
of my (our) knowledge and belief; (2) if this application is accepted by the company, the policy
applied for and this application will constitute the entire insurance contract; (3) if no premium
has been given to the agent with this application, insurance will not take effect until the
application is approved and accepted by the Company at CNA Plaza, Chicago, Illinois, 60685
and the policy is delivered while the health of each person proposed for insurance and other
conditions remain as described in this application and at least the Minimum Premium for the
Quarterly Mode has been paid in full. The acceptance of the policy by the Proposed Insured(s)
will ratify any corrections and notations, including amendments of amount, risk classification,
age at issue, plan of insurance or benefits. However, in those states where written consent is
required, any such amendment will be made only with the written consent of the Proposed
Insured(s) and the Applicant, if other than the Proposed Insured(s).
The Proposed Insured(s) acknowledge having received and read the Notice to the Proposed
Insured(s) and the Medical Information Bureau Notice. If a premium has been given to the agent
with this application, the Proposed Insured(s) acknowledges having read and understood the
conditions of the Conditional Premium receipt.
Under the penalties of perjury, I/We certify that the social security number(s) provided below
is/are true, correct and complete.
Signed at (City) (State) this Day of 20
(Applicant if other than Proposed Insured) (Signature of Proposed Insured 1) SS#
(Official capacity if signed on behalf (Signature of proposed Insured 2) SS#
of a corporation, trust, etc.)
I certify to the best of my knowledge the answers to the questions in all parts of this application
are true and correct. I further certify that to the best of my knowledge this policy will will not
replace or change any existing life insurance or annuity policy now in force.
AGENT/REGISTERED REP (witness) AGENT #
LSO/LSA or MGA Name
Agent/Registered Rep Name Agent Code Percent
Broker/Dealer Name Address
Agent/Registered Rep Name Agent Code Percent
Broker/Dealer Name Address
Mail to: CNA Insurance Companies, P.O. Box 305153, Nashville, TN 37230-5153
LV206-363-A APP206363-C
</TABLE>
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
May 8, 2000
Board of Directors
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
RE: Opinion of Counsel - Valley Forge Life Insurance
Company Variable Life Separate Account
------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of Pre-Effective Amendment No. 1 to a Registration Statement on Form
S-6 for the Individual Flexible Premium Life Insurance Policy to be issued by
Valley Forge Life Insurance Company and its separate account, Valley Forge Life
Insurance Company Variable Life Separate Account.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Valley Forge Life Insurance Company Variable Life Separate Account is a
Unit Investment Trust as that term is defined in Section 4(2) of the Investment
Company Act of 1940 (the "Act"), and is currently registered with the Securities
and Exchange Commission, pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premiums paid by an Owner pursuant to a Policy
issued in accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable law, such an Owner will have a
legally-issued, fully paid, non-assessable contractual interest under such
Policy.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/LYNN KORMAN STONE
-------------------------
Lynn Korman Stone
ACTUARIAL OPINION AND CONSENT
This opinion is furnished in connection with Pre-Effective No. 1 to the
registration of the Individual Variable Flexible Premium Life Insurance policy
of the Valley Forge Life Insurance Company Variable Life Separate Account, file
number 333-94575.
I am familiar with the terms of the Registration Statement and the accompanying
exhibits. The prospectus included in Registration Statement describes the policy
issued by Valley Forge Life Insurance Company. In my professional opinion:
1. The charges on the policy are reasonable in relation to industry norms and
in relation to the expenses expected to be incurred by Valley Forge Life
Insurance Company in connection with this policy.
2. The illustrations of accumulated premium, death benefits, account values,
and cash surrender values that appear in the prospectus are consistent with
the provisions of the policy and are based on the assumptions stated in the
accompanying text.
3. The illustrations show values on both a current basis and a guaranteed
basis.
4. The specific ages, sex, rate class, and the premium amounts used in these
illustrations are representative of the typical purchases that Valley Forge
Life Insurance Company expects will purchase the product. These
characteristics have not been selected so as to make the relationship
between premiums and benefits look more favorable in these specific
instances than it would for prospective purchases with different
characteristics.
I hereby consent to the use of this opinion as an Exhibit to the registration.
/S/ ROD RISHEL
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Rodney E. Rishel, Jr., FSA, MAAA
Assistant Vice President & Product Actuary
Investment Products Business Unit
Valley Forge Life Insurance Company
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Pre-Effective Amendment No. 1 to Registration
Statement No. 333-94575 on Form S-6 of Valley Forge Life Insurance Company
Variable Life Separate Account of our report on the financial statements of
Valley Forge Life Insurance Company, dated February 23, 2000, and our report on
the financial statements of the Valley Forge Life Insurance Company Variable
Life Separate Account, dated February 24, 2000, appearing in the Registration
Statement and to the reference to us under the heading "Experts" in the
Registration Statement.
/s/DELOITTE & TOUCHE LLP
Chicago, Illinois
May 8, 2000
