Registration No. 333-01949
811-07569
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 7
TO REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
(Exact name of trust)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Complete address of depositor's principal executive offices)
Jonathan D. Kantor
Senior Vice President, General
Counsel and Secretary
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
(Name and complete address of agent for services)
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant of paragraph (b).
/X/ On May 1, 2000 pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(1).
/ / On (date) pursuant to paragraph (a)(1) of Rule 485.
PURSUANT TO RULE 24f-2 of the Investment Company Act of 1940, the Registrant has
elected to register an indefinite amount of the securities being offered.
Pursuant to rule 24f-(b)(2), the Registrant did not file a Rule 24f-2 notice
because it did not sell any securities pursuant to such declaration during the
most recent fiscal year.
Securities Being Offered: Individual Flexible Premium Variable Life Insurance
Policies.
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
VALLEY FORGE LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
- - ----------- ---------------------
1 Cover Page
2 Cover Page
3 Not Applicable
4 Sale of the Policies
5 The Variable Account
6 The Variable Account
7 Not Applicable
8 Not Applicable
9 Legal Matters
10 Summary and Diagram of the Policy; The Policy;
Withdrawal Privilege; Surrender Privilege; Transfers
of Policy Values; Premium Payments; Net Premium
Allocations; Voting Privileges; Modification of the
Policy
11 The Funds
12 The Funds
13 Charges and Deductions
14 Purchasing a Policy
15 Premium Payments; Net Premium Allocations
16 Net Premium Allocations; Variable Policy Value;
The Funds
17 Withdrawal Privileged; Surrender Privilege
18 The Variable Account
19 Reports to Owners
20 Other Policy Benefits and Provisions
21 Policy Loans
22 Not Applicable
23 Not Applicable
24 Not Applicable
25 VFL; Other Information About the Policies and
VFL
26 Charges and Deductions
27 VFL; Other Information About the Policies and
VFL
28 VFL Directors and Executive Officers
29 VFL
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Variable Account
36 Not Applicable
37 Not Applicable
38 Sale of the Policies
39 Sale of the Policies
40 Sale of the Policies
41 Sale of the Policies
42 Not Applicable
43 Not Applicable
44 Variable Policy Value
45 Not Applicable
46 Variable Policy Value
47 The Variable Account; The Funds
48 VFL
49 Not Applicable
50 Not Applicable
51 The Policy; Other Policy Benefits and Provisions
52 The Variable Account
53 Tax Considerations
54 Not Applicable
55 Illustrations of Policy Values, Surrender Values,
Death Benefits and Accumulated Premium Payments
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE
SEPARATE ACCOUNT
------------------------
This prospectus describes an individual flexible premium variable and fixed
life insurance policy offered by Valley Forge Life Insurance Company to you, the
Owner. The policy is designed to provide insurance protection on the life of the
insured named in the policy, and at the same time provide you with the
flexibility to vary the amount and timing of premium payments and, within
certain limits, to change the amount of death benefits payable under the Policy.
This flexibility permits you to provide for changing insurance needs with a
single insurance policy.
You may, within limits, allocate net premium payments and policy value to
one or more subaccounts of the Valley Forge Life Insurance Company Variable Life
Separate Account, which is a variable account, or to our VFL general account,
which is a fixed account. When we discuss policy values in this prospectus, we
are generally referring only to the values allocated to the variable account.
The assets of each subaccount of the variable account are invested in a
corresponding investment fund.
The prospectuses for the funds describe the investment objectives and risks
of investing in the subaccount corresponding to each investment fund. You bear
the entire investment risk for the value of your policy allocated to a
subaccount. Consequently, except as to policy value allocated to the fixed
account, the policy has no guaranteed minimum policy value.
It may not be advantageous to replace existing insurance with this policy.
Within certain limits, you may return the policy, or convert it to a policy that
provides benefits that do not vary with the investment results of the variable
account by exercising a special transfer right.
THIS PROSPECTUS CONTAINS INFORMATION YOU NEED BEFORE YOU PURCHASE A POLICY.
IF YOU DECIDE TO BUY THIS POLICY, YOU SHOULD KEEP THIS PROSPECTUS FOR YOUR
RECORDS. YOU SHOULD ALSO REVIEW THE PROSPECTUSES FOR EACH OF THE FUNDS, TO HELP
YOU DECIDE IN WHICH MUTUAL FUNDS YOU WANT TO INVEST.
You may also obtain this prospectus from the Securities and Exchange
Commission's website (http://www.sec.gov.com).
Please note, this policy is not:
- approved by any government organization;
- Federally insured; or
- a bank deposit or obligation.
May 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 6
You may choose to invest in the following funds:
- - -- Federated High Income Bond Fund II
- - -- Federated Prime Money Fund II
- - -- Federated Utility Fund II
- - -- Asset Manager Portfolio in the Variable Insurance Products Fund II
- - -- Contrafund Portfolio in the Variable Insurance Products Fund II
- - -- Index 500 Portfolio in the Variable Insurance Products Fund II
- - -- Equity-Income Portfolio in the Variable Insurance Products Fund
- - -- Alger American Growth Portfolio
- - -- Alger American MidCap Growth Portfolio
- - -- Alger American Small Capitalization Portfolio
- - - Alger American Leveraged AllCap Portfolio
- - -- MFS Emerging Growth Series
- - -- MFS Growth With Income Series
- - -- MFS Research Series
- - -- MFS Total Return Series
- - - MFS Limited Maturity Series (shares are no longer available)
- - -- First Eagle SoGen Overseas Variable Funds (formerly, SoGen Overseas
Variable Funds)
- - -- Van Eck Worldwide Emerging Markets Fund
- - -- Van Eck Worldwide Hard Assets Funds
- - - Janus Aspen Capital Appreciation Portfolio
- - - Janus Aspen Growth Portfolio
- - - Janus Aspen Balanced Portfolio
- - - Janus Aspen Flexible Income Portfolio
- - - Janus Aspen International Growth Portfolio
- - - Janus Aspen Worldwide Growth Portfolio
- - - Alliance Premier Growth Portfolio
- - - Alliance Growth and Income Portfolio
- - - American Century VP Income & Growth Fund
- - - American Century VP Value Fund
- - - Templeton Developing Markets Securities Fund (formerly,
Templeton Developing Markets Fund)
- - - Templeton Asset Strategy Fund (formerly, Templeton Asset
Allocation Fund)
- - - Lazard Retirement Equity Portfolio
- - - Lazard Retirement Small Cap Portfolio
- - - Morgan Stanley International Magnum Portfolio
- - - Morgan Stanley Emerging Markets Equity Portfolio
TABLE OF CONTENTS
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PAGE
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SUMMARY AND DIAGRAM OF THE POLICY...........................
FUND EXPENSES...............................................
Fee Table Annual Fund Expenses............................
GENERAL INFORMATION ABOUT VFL, THE VARIABLE ACCOUNT AND THE
FUNDS.....................................................
VFL.......................................................
The Variable Account......................................
The Funds.................................................
THE POLICY..................................................
Purchasing a Policy.......................................
Cancellation Privilege....................................
Premium Payments..........................................
Net Premium Allocations...................................
Policy Lapse and Reinstatement............................
Variable Policy Value.....................................
Fixed Policy Value........................................
Transfers of Policy Values................................
Surrender Privilege.......................................
Withdrawal Privilege......................................
Policy Loans..............................................
Maturity Benefits.........................................
Death Benefit Proceeds....................................
Settlement Options........................................
Telephone Transaction Privileges..........................
THE FIXED ACCOUNT...........................................
The Fixed Account.........................................
Interest Credited on Fixed Policy Value...................
CHARGES AND DEDUCTIONS......................................
Sales Charges.............................................
Premium Tax Charge........................................
Federal Tax Charge........................................
Surrender Charge..........................................
Other Taxes...............................................
Monthly Deduction.........................................
Daily Mortality and Expense Risk Charge...................
Transfer Processing Fee...................................
Fund Expenses.............................................
OTHER POLICY BENEFITS AND PROVISIONS........................
Ownership.................................................
VFL's Right to Contest the Policy.........................
Suicide Exclusion.........................................
Misstatement of Age or Sex................................
Modification of the Policy................................
Suspension or Delay in Payments...........................
Reports to Owners.........................................
Supplemental Benefits and/or Riders.......................
</TABLE>
i
<TABLE>
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PAGE
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FEDERAL INCOME TAX CONSIDERATIONS...........................
Introduction..............................................
Tax Status of the Policies................................
Tax Treatment of Policy Benefits..........................
Tax Treatment of Settlement Options.......................
Special Rules for Pension and
Profit-Sharing Plans...................................
Business Uses of the Policy...............................
Possible Tax Law Changes..................................
VFL's Taxes...............................................
OTHER INFORMATION ABOUT THE POLICIES AND VFL................
Sale of the Policies......................................
Voting Privileges.........................................
Directors and Executive Officers..........................
Company Holidays..........................................
State Regulation..........................................
Additional Information....................................
Experts...................................................
Legal Matters.............................................
GLOSSARY....................................................
FINANCIAL STATEMENTS........................................
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES, DEATH
BENEFITS AND ACCUMULATED PREMIUM PAYMENTS
Appendix....................................................
</TABLE>
------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, THE PROSPECTUS OF THE FUNDS, OR THE STATEMENT OF ADDITIONAL
INFORMATION OF THE FUNDS.
ii
<PAGE> 9
SUMMARY AND DIAGRAM OF THE POLICY
You should read the following summary of prospectus information and diagram
of the policy together with the detailed information appearing elsewhere in this
prospectus. Unless otherwise indicated, the description of the policy in this
prospectus assumes that the insured is alive, the policy is in force and there
are no outstanding loans under the policy.
OVERVIEW OF THE POLICY. The policy is similar in many ways to a
fixed-benefit life insurance policy. As with a fixed-benefit life insurance
policy, you (the "Owner") make premium payments in return for insurance coverage
on the person insured. Also, as in many fixed-benefit life insurance policies,
this policy provides for (1) the accumulation of net premiums; and (2) a
surrender value, which we pay to you if you surrender the policy during the
insured's lifetime. Finally, as with many fixed-benefit life insurance policies,
your surrender value during the early years of the policy is likely to be
substantially lower than the total amount of premium payments you made.
However, this policy differs from a fixed-benefit life insurance policy in
several important respects. First, unlike a fixed-benefit life insurance policy,
under this policy, we may increase or decrease the death benefit, and increase
or decrease the policy value to reflect the investment performance of any
subaccounts to which you allocate your policy value. Also, unless you allocate
the entire policy value to the fixed account, we do not guarantee a minimum
surrender value. If the policy value is insufficient to pay charges due, then,
after a grace period, the policy will lapse without value. However, we guarantee
that the policy will remain in force during the first five years as long as you
meet certain requirements related to the minimum monthly premium payments. If
your policy lapses while loans are outstanding, you may become subject to income
tax and a 10% penalty tax.
PURPOSE OF THE POLICY. We designed this policy to provide you with
lifetime insurance benefits and long-term investment benefits. You should
evaluate the policy in conjunction with other insurance coverage that you may
have, as well as your need for insurance, and the policy's long-term investment
potential. It may not be advantageous for you to replace your existing insurance
coverage with this policy. In particular, you should carefully consider
replacement if you are basing your decision to replace your existing coverage
solely on a comparison of policy illustrations.
POLICY BENEFITS. You may choose from two death benefit options under this
policy:
(1) a level death benefit; or
(2) a death benefit that may increase or decrease.
We guarantee that the death benefit proceeds will never be less than a
specified amount (less any outstanding Loan Amount and past due charges) as long
as you make sufficient premiums payments to keep the policy in force. The policy
provides for a surrender value that you may obtain by surrendering the policy.
The policy also permits you to take out loans and to withdraw amounts, within
limits.
ILLUSTRATIONS. We based the illustrations used in this prospectus in
connection with the purchase of a policy on hypothetical rates of return. We do
not guarantee these rates of return. They are illustrative only and you should
not consider them to be a representation of past or future performance. Actual
rates of return may be higher or lower than those reflected in policy
illustrations, and therefore, your actual policy values will be different from
those illustrated.
TAX CONSIDERATIONS. We intend for the policy to satisfy the definition of
a life insurance contract under federal tax law. However, a policy may be a
"modified endowment contract" under federal tax law depending upon the amount of
premium payments you make in relation to the death benefit provided under the
policy. We will monitor your policy and will attempt to notify you on a
2
<PAGE> 10
timely basis if your policy is in jeopardy of becoming a modified endowment
contract. For further discussion of the tax status of a Policy and the tax
consequences of being treated as a life insurance contract or a modified
endowment contract, see "TAX CONSIDERATIONS, found later in this prospectus."
CANCELLATION PRIVILEGE AND SPECIAL TRANSFER RIGHT. For a limited time
after the policy is issued, you may cancel the policy and receive a refund. In
certain states, until the end of this cancellation period, we will allocate your
net premium payments to the subaccount investing in the Prime Money Market Fund.
At any time within 24 months after the date that coverage begins under the
policy, you may transfer the entire policy value held in the variable account to
the Fixed Account (1) without payment of any transfer fee; and (2) without the
transfer counting as one of the 12 transfers per year that may be made without
incurring a transfer fee.
OWNER INQUIRIES. If you have any questions, you may write or call VFL's
Service Center at P.O. Box 305139, Nashville, Tennessee 37230-5139, or
1-800-262-1755.
DIAGRAMS. We summarized the most important features of the policy, such as
charges and deductions, policy value benefits, death benefits, and calculation
of policy values in the diagrams on the following pages. We defined the
capitalized terms, used in the diagrams, in the Glossary section of this
prospectus.
CNA Payment Charts
CNA POLICY CHARTS
FUND EXPENSES
The value of the net assets of each Subaccount includes the investment
advisory fees and other expenses incurred by the corresponding Fund in which the
Subaccount invests. See the prospectus for the Funds.
FEE TABLE ANNUAL FUND EXPENSES
(as a percentage of Fund average net assets)
<TABLE>
<CAPTION>
Management 12b-1 Other Expenses Total Annual
Fees Fees (after waivers Expenses (after
---------- ----- and/or waivers and/or
reimbursements reimbursements
with respect with respect
to certain to certain
Funds) Funds)
------------- ---------------
Federated Insurance Series (See Note 1)
<S> <C> <C> <C>
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), Initial Class (See Note 5)
Fidelity VIP II Asset Manager Portfolio 0.53% 0.09% 0.62%
Fidelity VIP II Contrafund 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income 0.48% 0.08% 0.56%
Fidelity VIP 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%
MFS Limited Maturity Series (See Note 7) 0.55% 0.45% 1.00%
Janus Aspen Series, Institutional Shares (See Note 8)
Janus Aspen Capital Appreciation Portfolio 0.65% 0.04% 0.69%
Janus Aspen Growth Portfolio 0.65% 0.02% 0.67%
Janus Aspen Balanced Portfolio 0.65% 0.02% 0.67%
Janus Aspen Flexible Income Portfolio 0.65% 0.07% 0.72%
Janus Aspen International Growth Portfolio 0.65% 0.11% 0.76%
Janus Aspen 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 9)
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 10)
Templeton Developing Markets Securities
Fund (see Note 11) 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund (see Note 11) 0.60% 0.25% 0.18% 1.03%
Lazard Retirement Series (See Note 12)
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 13)
Morgan Stanley International Magnum Portfolio 0.29% - 0.87% 1.16%
Morgan Stanley Emerging Markets Equity Portfolio 0.42% - 1.37% 1.79%
</TABLE>
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. MFS has contractually agreed, subject to reimbursement, to bear expenses
for the Series such the Series other expenses do not exceed 0.45% (after
taking into account the expense offset arrangement described above under
footnote 6) of the average daily net assets of the Series during the
current fiscal year. Absent such reimbursement, for the year ended December
31, 1999, other expenses were 1.93% and total annual expenses were 2.48%.
8. 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.
9. 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.
10. 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.
11. 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%.
12. 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.
13. 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.
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the
costs and expenses that he or she will bear directly or indirectly. The table
reflects the anticipated expenses of the Variable Account and reflect the actual
expenses for each Fund for the year ended December 31, 1999. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
GENERAL INFORMATION ABOUT VFL,
THE VARIABLE ACCOUNT AND THE FUNDS
VFL
VFL is a life insurance company organized under the laws of the
Commonwealth of Pennsylvania in 1956 and is authorized to transact business in
the District of Columbia, Puerto Rico, Guam and all states except New York.
VFL's home office is located at 401 Penn St., Reading, Pennsylvania 19601, and
its executive office is located at CNA Plaza, Chicago, Illinois 60685. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a life
insurance company which, as of December 31, 1999, had consolidated assets of
approximately $14 billion. Subject to a coinsurance pooling agreement (a type of
reinsurance arrangement) with Assurance, VFL assumes all insurance risks under
the Policies, and VFL's assets, which as of December 31, 1999 exceeded $3.5
billion, support the benefits under the Policies. See "Other Information About
The Policies And VFL," for more detail regarding VFL.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of VFL established
under Pennsylvania law on October 18, 1995. VFL owns the assets of the Variable
Account. These assets are held separately from VFL's general account and its
other accounts. That portion of the Variable Account's assets that is equal to
the reserves and other Policy liabilities of the Variable Account is not
chargeable with liabilities arising out of any other business VFL may conduct.
If the assets exceed the required reserves and other Policy liabilities, VFL may
transfer the excess to VFL's general account. The Variable Account's assets will
at all times equal or exceed the sum of the Subaccount Values of all policies
funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or VFL. The Variable Account also is governed by the laws
of Pennsylvania, VFL's state of domicile, and may also be governed by laws of
other states in which VFL does business.
The Variable Account has 35 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of VFL.
Where permitted by applicable law, VFL may make the following changes to
the Variable Account:
1. Any changes required by the 1940 Act or other applicable law
or regulation;
2. Combine separate accounts, including the Variable Account;
3. Add new subaccounts to or remove existing subaccounts from the
Variable Account or combine Subaccounts;
4. Make Subaccounts (including new subaccounts) available to such
classes of Policies as VFL may determine;
5. Add new Funds or remove existing Funds;
6. Substitute new Funds for any existing Fund if shares of the
Fund are no longer available for investment or if VFL determines that
investment in a Fund is no longer appropriate in light of the purposes
of the Variable Account;
7. Deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. Operate the Variable Account as a management investment
company under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. You will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is
either an open-end diversified management investment company or a separate
investment portfolio of such a company and is managed by a registered investment
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
Certain Funds may have investment objectives and policies similar to other
funds that are managed by the same investment adviser or manager. The investment
results of the Funds, however, may be higher or lower than those of such other
funds. We do not guarantee or make any representation that the investment
results of the Funds will be comparable to any other Fund, even those with the
same investment adviser or manager.
A Fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a Fund with a small asset base.
A Fund may not experience similar performance as its assets grow.
FEDERATED INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Federated Insurance Series ("IS"). IS
issues 12 "series" or classes of shares, each of which represents an interest
in a Fund of IS. Three of these series of shares are available as investment
options under the Contracts. The investment objectives of these Funds are set
forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Investment Management Company.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
ASSET MANAGER PORTFOLIO. This Fund seeks high total return with
reduced risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
CONTRAFUND PORTFOLIO. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or out-of-favor.
EQUITY-INCOME PORTFOLIO. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital appreciation.
INDEX 500 PORTFOLIO. This Fund seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the Standard & Poor's 500 Composite Index
of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth, Alger American
Small Capitalization and Alger American Leveraged AllCap Subaccounts each invest
in shares of corresponding Funds (i.e., investment portfolios) of The Alger
American Fund ("AAF"). AAF issues six "series" or classes of shares, each of
which represents an interest in a Fund of AAF. Four of these series of shares
are available as investment options under the Policies. The investment
objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the Portfolio invests
primarily in equity securities of companies having a market capitalization
within the range of companies in the S&P MidCap 400 Index.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing primarily in the equity
securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell 2000 Growth Index or the S&P Small Cap 600 Index.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the portfolio invests
in the equity securities of companies of any size which demonstrate
promising growth potential. The portfolio can leverage, that is, borrow
money, up to one-third of its total assets to buy additional securities.
By borrowing money, the portfolio has the potential to increase its
returns if the increase in the value of the securities purchased exceeds
the cost of borrowing, including interest paid on the money borrowed.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity, MFS
Research and MFS Total Return Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of MFS Variable Insurance Trust ("MFSVIT").
MFSVIT issues 16 "series" or classes of shares, each of which represents an
interest in a Fund of MFSVIT. Five of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term
growth of capital by investing primarily in common stocks of companies
that are early in their life cycle but which have the potential to become
major enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFS LIMITED MATURITY SERIES. This Fund seeks as high a level of
current income as is believed to be consistent with prudent investment
risk. Its secondary objective is to protect shareholders' capital.
Shares of this Fund are no longer available.
MFSVIT is advised by Massachusetts Financial Services Company.
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Funds, Inc.)
The First Eagle SoGen Overseas Variable subaccount invests in shares of a
corresponding Fund (i.e., investment portfolio) of First Eagle SoGen Variable
Funds, Inc. ("FESG"). FESG issues one "series" or class of shares, which
represents an interest in a Fund of FESG. This series of shares is available as
an investment option under the Policies. The investment objective of this Fund
is set forth below.
FIRST EAGLE SOGEN OVERSEAS VARIABLE FUND (formerly, SoGen Overseas
Variable Fund). This Fund seeks long-term growth of capital by investing
primarily in securities of small and medium size non-U.S. companies.
FESG is advised by Arnhold and S. Bleichroeder Advisers, Inc. (prior to
December 31, 1999, Societe Generale Asset Management Corp. was the adviser).
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues five "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Policies. The
investment objectives of these Funds are set forth below.
WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
JANUS ASPEN SERIES, Institutional Shares
The Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen
Balanced, Janus Aspen Flexible Income, Janus Aspen International Growth and
Janus Aspen Worldwide Growth Subaccounts each invest in shares of corresponding
Funds (i.e., "investment portfolios") of Janus Aspen Series ("JAS"). JAS issues
multiple portfolios, each of which offers two or more classes of shares. Six of
these portfolios are available as investment options under the Contract. The
investment objectives of these Funds are set forth below.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO. This Fund seeks long-term
growth of capital by investing primarily in common stocks selected for
their growth potential.
JANUS ASPEN GROWTH PORTFOLIO. This Fund seeks long-term growth of
capital in a manner consistent with the preservation of capital by
investing primarily in common stocks selected for their growth potential.
JANUS ASPEN BALANCED PORTFOLIO. This Fund seeks long-term capital
growth, consistent with preservation of capital and balanced by current
income by normally investing 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its assets in securities
selected primarily for their income potential.
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO. This Fund seeks to obtain
maximum total return, consistent with preservation of capital by investing
primarily in a wide variety of income-producing securities such as
corporate bonds and notes, government securities and preferred stock.
JANUS ASPEN INTERNATIONAL GROWTH PORTFOLIO. This Fund seeks long-term
growth of capital by normally investing at least 65% of its total assets in
securities of issuers from at least five different countries, excluding the
United States.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO. This Fund seeks long-term
growth of capital in a manner consistent with the preservation of capital
by investing primarily in common stocks of companies of any size throughout
the world.
JAS is advised by Janus Capital Corporation.
ALLIANCE VARIABLE PRODUCTS SERIES FUND
The Alliance Premier Growth and Alliance Growth and Income Subaccounts
each invest in shares of a corresponding Fund of Alliance Variable Products
Series Fund ("AVP"). AVP has multiple Funds. Two of these Funds are
available as investment options under the Contract. The investment objectives
of these Funds are set forth below.
ALLIANCE PREMIER GROWTH PORTFOLIO. This Fund seeks long term growth
of capital by pursuing aggressive investment policies.
ALLIANCE GROWTH AND INCOME PORTFOLIO. This Fund seeks appreciation
through investments primarily in dividend paying common stocks.
AVP is advised by Alliance Capital Management L.P.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The American Century VP Income & Growth and American Century VP
Value Subaccounts each invest in shares of Funds of American Century
Variable Portfolios, Inc. ("ACVP"). ACVP consists of multiple Funds.
Two of the Funds are available as investment options under the Contract. The
investment objectives of these Funds are set forth below.
AMERICAN CENTURY VP INCOME & GROWTH FUND. This Fund seeks
dividend growth, current income and capital appreciation by
investing in common stocks.
AMERICAN CENTURY VP VALUE FUND. This Fund seeks long-term
capital growth by investing primarily in common stocks. Income is
a secondary objective.
ACVP is advised by American Century Investment Management, Inc.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
The Templeton Developing Markets Securities and the Templeton Asset
Strategy Subaccounts each invest in Class 2 shares of Funds of Franklin
Templeton Variable Insurance Products Trust ("FTVIPT"). Effective May 1,
2000, the funds of Templeton Variable Products Series Fund were merged
into similar funds of Franklin Templeton Variable Insurance Products
Trust. FTVIPT consists of multiple Funds. Two of the Funds are available
as investment options under the Contract. The investment objectives of
the Funds are set forth below.
TEMPLETON DEVELOPING MARKETS SECURITIES FUND (formerly, Templeton
Developing Markets Fund). This Fund seeks long-term capital
appreciation. The Fund invests, under normal market conditions, at
least 65% of its total assets in emerging markets equity securities.
TEMPLETON ASSET STRATEGY FUND (formerly, Templeton Asset
Allocation Fund). This Fund seeks high total return. The Fund
invests in equity securities of companies in any nation, debt
securities of companies and governments of any nation, and in money
market instruments.
The Templeton Developing Markets Securities Fund is advised by Templeton
Asset Management Inc. and the Templeton Asset Strategy Fund is advised by
Templeton Investment Counsel, Inc.
LAZARD RETIREMENT SERIES
The Lazard Retirement Equity and Lazard Retirement Small Cap
Subaccounts each invest in shares of a corresponding Fund of Lazard
Retirement Series ("LRS"). LRS is comprised of multiple Funds, two of which
are available as investment options under the Contract. The investment
objectives of the Funds are set forth below.
LAZARD RETIREMENT EQUITY PORTFOLIO. This Fund seeks long-term
capital appreciation.
LAZARD RETIREMENT SMALL CAP PORTFOLIO. This Fund seeks long-term
capital appreciation.
LRS is advised by Lazard Asset Management
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
The Morgan Stanley International Magnum and the Morgan Stanley
Emerging Markets Equity Subaccounts each invest in a corresponding Fund
of The Universal Institutional Funds, Inc. ("Universal Funds"). Universal
Funds consists of multiple Funds, two of which are available as investment
options under the Contract. The investment objectives of the Funds are set
forth below.
MORGAN STANLEY INTERNATIONAL MAGNUM PORTFOLIO. This Fund seeks long
term capital appreciation by investing primarily in equity securities
of non-U.S. issuers domiciled in EAFE countries.
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO. This Fund seeks
long term capital appreciation by investing primarily in equity
securities of issuers in emerging market countries.
Universal Funds is advised by Morgan Stanley Asset Management, Inc.
No one can assure that any fund will achieve its stated objectives and policies.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund that accompanies this prospectus and the
current Statement of Additional Information for the Funds. The Funds' prospectus
should be read carefully before any decision is made concerning the allocation
of premium payments or transfers among the Subaccounts.
Not all of the Funds described in the prospectuses for the Funds are
available with the Contract. Moreover, VFL cannot guarantee that each Fund will
always be available for its variable annuity contracts, but in the event that a
Fund is not available, VFL will take reasonable steps to secure the availability
of a comparable fund. Shares of each Fund are purchased and redeemed at net
asset value, without a sales charge.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser will pay VFL a
servicing fee based upon an annual percentage of the average aggregate net
assets invested by VFL on behalf of the Variable Account. These agreements
reflect administrative services provided to the Funds by VFL. Payments of such
amounts by an adviser will not increase the fees paid by the Funds or their
shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with VFL or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Policy Values are allocated to the Variable Account, and of owners of
other policies whose policy values are allocated to one or more other separate
accounts investing in any one of the Funds. Shares of some of the Funds may also
be sold to certain pension and retirement plans qualifying under Section 401 of
the Code. As a result, there is a possibility that a material conflict may arise
between the interests of Owners or owners of other policies (including policies
issued by other companies), and such retirement plans or participants in such
retirement plans. In the event of any such material conflicts, VFL will consider
what action may be appropriate, including removing the Fund from the Variable
Account or replacing the Fund with another Fund. There are certain risks
associated with mixed and shared funding and with the sale of shares to
qualified pension and retirement plans, as disclosed in each Fund's prospectus.
THE POLICY
PURCHASING A POLICY
To purchase a Policy, a prospective Owner must submit a completed
application and the Minimum Initial Premium Payment through a licensed agent of
VFL who is also a registered representative of broker-dealer having a selling
agreement with CNA Investor Services, Inc. ("CNA/ISI"), the principal
underwriter of the Policies. VFL requires satisfactory evidence of the Insured's
insurability, which may include a medical examination of the Insured. Generally,
VFL issues Policies covering Insureds up to age 75 if evidence of insurability
satisfies VFL's underwriting criteria. Acceptance of an application is subject
to VFL's underwriting criteria, and VFL reserves the right to reject an
application for any reason.
Insurance coverage under a Policy begins on the later of the Policy
Effective Date or the date that VFL receives the Minimum Initial Premium
Payment. Generally VFL establishes the Policy Effective Date (shown on the
Policy) after it completes the underwriting process and accepts the application.
Where the Minimum Initial Premium Payment is received by VFL after the Policy
Effective Date, coverage under the Policy is conditioned upon the Insured's
state of health being the same as that described in the application.
With VFL's prior approval, in order to obtain a lower Issue Age, an Owner
may "backdate" a Policy by electing a Policy Effective Date up to six months
prior to the date of the original application. A lower Issue Age for the Insured
generally results in slightly more favorable cost of insurance rates. Charges
for the monthly deduction for the backdated period are deducted as of the Policy
Effective Date.
Insurance coverage under the Policy terminates upon the first to occur of
the following events: (1) the Insured dies, (2) the Owner surrenders the Policy,
(3) the Policy reaches the Maturity Date, or (4) the Policy Lapses.
CANCELLATION PRIVILEGE
An Owner may cancel a Policy for a refund during the Cancellation Period by
returning it to the Service Center or to the sales representative who sold it
along with a Written Notice requesting cancellation. The Cancellation Period is
determined by the law of the state in which the Owner resides or in which the
application is signed and is shown on the Policy. In most states it expires at
the latest of (1) 10 days after the Owner first receives the Policy, (2) 45 days
after the Owner signs the application, or (3) 10 days after VFL mails or
delivers a notice of the Owner's withdrawal rights. Return of the Policy by mail
is effective upon receipt at the Service Center. When cancelled, the Policy is
treated as if it had never been issued. Within seven calendar days after
receiving the returned Policy, VFL will refund an amount equal to the sum of (1)
the difference between premium payments made (including any fees and charges
deducted) and the amounts allocated to the Fixed Account and to the Subaccounts,
(2) Fixed Policy Value determined as of the date the returned Policy is
received, and (3) Variable Policy Value determined as of the date the returned
Policy is received. This amount may be more or less than the aggregate premium
payments made under the Policy. In states where required, VFL will instead
refund premium payments.
PREMIUM PAYMENTS
MINIMUM INITIAL PREMIUM PAYMENT. The Minimum Initial Premium Payment
required depends on a number of factors, including the sex, Issue Age, and risk
class of the proposed Insured, the initial Specified Amount requested by the
applicant, any supplemental benefits and/or riders requested by the applicant,
and the Planned Periodic Premium Payments that the applicant selects. Owners
should consult their sales representative for information about the Minimum
Initial Premium Payment required for the coverage that they seek.
PLANNED PERIODIC PREMIUM PAYMENTS. Owners may establish a schedule of
monthly (bank draft or pre-authorized payment only), quarterly, semi-annual or
annual Planned Periodic Premium Payments. Subject to VFL's approval, Owners may
change the amount or frequency of Planned Periodic Premium Payments by Written
Notice. VFL will send Owners reminder notices for Planned Periodic Premium
Payments. VFL also may arrange with Owners to have Planned Periodic Premium
Payments made under a pre-authorized payment arrangement. Owners are not
required to pay Planned Periodic Premium Payments.
UNPLANNED PREMIUM PAYMENTS. Subject to the limitations described below,
Owners generally may make additional premium payments at any time before the
Maturity Date while the Insured is alive and the Policy is in force. Unless the
Owner specifies otherwise in the application or by subsequent Written Notice,
VFL considers all unplanned premium payments first as repayments of any
outstanding Loan Amounts under the Policy.
PREMIUM PAYMENT LIMITATIONS. Unless otherwise approved by VFL, all premium
payments must be made payable to "Valley Forge Life Insurance Company" at the
Service Center. No premium payments are accepted after a Policy's Maturity Date.
Premium payments must be at least $50 (unless paid pursuant to a
pre-authorized payment arrangement) and must be remitted to the Service Center.
VFL reserves the right to reject any premium payment in the event that it
determines that acceptance of such payment would cause a Policy to fail to
qualify as a life insurance contract under the Code or applicable regulations or
rulings thereunder. VFL will promptly return any premium payment that it rejects
for this reason. VFL will monitor Policies and will attempt to notify the Owner
on a timely basis if his or her Policy is in jeopardy of becoming a modified
endowment contract under the Code. (See "Tax Considerations.")
PREMIUM PAYMENTS UPON INCREASE IN SPECIFIED AMOUNT. Depending on the
Policy Value at the time of an increase in the Specified Amount and the amount
of the increase requested, an additional premium payment may be necessary or a
change in the amount of Planned Periodic Premium Payments may be advisable. (See
"Death Benefit Proceeds.")
REJECTION OF PREMIUM PAYMENTS FOR TAX PURPOSES. VFL reserves the right to
reject any premium payment in the event that it determines that acceptance of
such payment would cause a Policy to fail to qualify as a life insurance
contract under the Code or applicable regulations or rulings thereunder. VFL
will promptly return any premium payment that it rejects for this reason.
NET PREMIUM ALLOCATIONS
Net Premium Payments are allocated among and between the Subaccounts and
the Fixed Account as of the date that they are received at the Service Center
according to the Owner's allocation instructions in the application or in a
subsequent Written Notice. Allocation instructions must be in whole percentages
and the minimum amount that VFL can allocate to any Subaccount or the Fixed
Account is 1% of any Net Premium Payment. VFL reserves the right to establish
additional limitations on premium payment allocations.
For Policies issued in states where, upon cancellation during the
Cancellation Period, VFL refunds premium payments, VFL allocates Net Premium
Payments it receives during the Cancellation Period (including that related to
the Minimum Initial Premium Payment) that are to be allocated to any Subaccount,
to the Money Market Subaccount for a period equal to the number of days in the
Cancellation Period. At the end of this period, the Money Market Subaccount
Value will be reallocated to each other Subaccount selected by the Owner based
on the proportion that the Owner's allocation percentage bears to the Variable
Policy Value.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike a conventional life insurance policy, failure to make Planned
Periodic Premium Payments does not necessarily cause a Policy to Lapse.
Conversely, making all Planned Periodic Premium Payments does not necessarily
prevent a Policy from Lapsing. Rather, except when the Lapse Prevention
Guarantee is in effect, whether a Policy Lapses depends on whether its Surrender
Value is sufficient to cover the monthly deduction on each Monthly Anniversary
Day. Surrender Value could become insufficient to cover the monthly deduction if
investment experience has been sufficiently unfavorable that it has resulted in
a decrease in Policy Value or the Policy Value has decreased because the Owner
did not make sufficient Net Premium Payments to offset prior monthly deductions.
If the Surrender Value on a Monthly Anniversary Day is insufficient to
cover the monthly deduction due on that Day, VFL will mail to the Owner and to
any assignee of record at their last known address(es), a notice stating that
the Policy will only remain in force for 61 days from the date that the notice
was mailed. This 61 day period is called the Grace Period. If the Owner does not
make sufficient premium payments to cover the monthly deduction(s) through the
end of the Grace Period by the end of the Grace Period, then the Policy will
terminate without value and all coverage under the Policy will terminate. The
notice mailed to the Owner and to any assignee of record will indicate how much
in additional premium payments the Owner must make before the end of the Grace
Period to keep the Policy in force. Coverage under the Policy continues during
the Grace Period and VFL will deduct unpaid monthly deductions when computing
Death Benefit Proceeds if the Insured dies during the Grace Period.
REINSTATEMENT. If the Policy Lapses, the Owner may reinstate it at any
time within five years of Lapse but before the Maturity Date. A Policy that has
been surrendered cannot be reinstated. To reinstate a Policy, the Owner must
submit to the Service Center:
1. evidence of insurability satisfactory to VFL;
2. premium payments in an amount sufficient to result (along with
any loan repayments) in a positive Surrender Value; and
3. premium payments in an amount sufficient that the resulting
Net Premium Payments equal or exceed the amount of the next two
monthly deductions.
Upon reinstatement of the Policy, VFL will reinstate any remaining Loan
Amount. The Policy Value of a reinstated Policy is the amount provided by the
Net Premium Payments submitted with the application for reinstatement. The
effective date of a reinstated Policy is the Monthly Anniversary Date that falls
on or next follows the later of the date that the application for reinstatement
is approved or the above-listed items are received at the Service Center.
LAPSE PREVENTION GUARANTEE. VFL guarantees that a Policy will not Lapse
for a period of up to the first five Policy Years, regardless of the
Surrender Value, if, throughout that period, (a) exceeds (b) where:
(a) is the aggregate premium payments made less the amount of any
withdrawals (including applicable surrender charges) less any Loan Amount,
and
(b) is the Minimum Monthly Premium Payment multiplied by the number of
complete months since the Policy Effective Date, including the current
month.
If the Policy's Specified Amount is increased while the Lapse Prevention
Guarantee is in effect, VFL will recalculate the Minimum Monthly Premium
Payment, which will generally increase following an increase in Specified
Amount. VFL will notify Owners of any increase in the Minimum Monthly Premium
Payment and will amend the Policy to reflect the change.
VARIABLE POLICY VALUE
The Variable Policy Value is the sum of all Subaccount Values and therefore
reflects the investment experience of the Subaccounts to which it is allocated.
There is no guaranteed minimum Variable Policy Value.
SUBACCOUNT VALUE. The Subaccount Value of any Subaccount as of the Policy
Effective Date is equal to the amount of the initial Net Purchase Payment
allocated to that Subaccount. On subsequent Valuation Days prior to the Maturity
Date, the Subaccount Value is equal to that part of any Net Purchase Payment
allocated to the Subaccount and any Policy Value transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses, realized or
unrealized, and decreased by withdrawals (including any applicable surrender
charges) and any Policy Value transferred out of that Subaccount.
UNITS. For each Subaccount, Net Premium Payment(s) allocated to a
Subaccount or amounts of Policy Value transferred to a Subaccount are converted
into Units. The number of Units credited to a Policy is determined by dividing
the dollar amount directed to each Subaccount by the value of the Unit for that
Subaccount for the Valuation Day as of which the Net Premium Payment(s) or
transferred amount is invested in the Subaccount. Therefore, Net Premium
Payments allocated to or amounts transferred to a Subaccount under a Policy
increase the number of Units of that Subaccount credited to the Policy.
Certain events reduce the number of Units of a Subaccount credited to a
Policy. Withdrawals or transfers of Subaccount Value from a Subaccount result in
the cancellation of the appropriate number of Units of that Subaccount as do:
surrender of the Policy; payment of the Death Benefit Proceeds; and the
deduction of the monthly deduction. Units are cancelled as of the end of the
Valuation Period in which VFL receives Written Notice regarding the event.
UNIT VALUE. For each Subaccount there exist two types of Units: A Units
and B Units. A Units represent Subaccount Value during the first ten Policy
Years under any Policy, while B Units represent Subaccount Value during Policy
Years 11 and later. On the tenth Policy Anniversary, all A Units of any
Subaccount under a Policy are automatically exchanged for B Units on an
equivalent dollar value basis.
A Units and B Units both represent a fractional undivided interest in a
Subaccount. They differ only in their value as a result of the fact that the
mortality and expense risk charge deducted from each Subaccount is larger for
Policies in the first ten Policy Years than the charge deducted for Policies
in Policy Years 11 and later. This difference in charges is reflected in a
different Net Investment Factor (described below) for A Units and B Units for
each Valuation Period.
The A Unit and B Unit values for each Subaccount were arbitrarily set
initially at $10 when that Subaccount began operations. Thereafter, the Unit
Value at the end of every Valuation Day is the Unit Value at the end of the
previous Valuation Day multiplied by the Net Investment Factor for that type of
Unit (either A or B), as described below. The Subaccount Value for a Policy is
determined on any Valuation Day by multiplying the number of Units of the
appropriate type (either A or B) attributable to the Policy in that Subaccount
by the value for that type of Unit for that Subaccount on that day.
NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of either A Units or B Units of a Subaccount
from one Valuation Period to the next. The Net Investment Factor for any
Subaccount for any Valuation Period is determined by dividing 1 by 2 and
subtracting 3 from the result, where:
1. is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current Valuation Period;
plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the Subaccount, if the
"ex-dividend" date occurs during the current Valuation Period; plus or
minus
c. a per share charge or credit for any taxes reserved for, which
is determined by VFL to have resulted from the operations of the
Subaccount.
2. is the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the last prior Valuation Period.
3. is a daily factor representing the mortality and expense risk charge for
the type of Unit deducted from the Subaccount adjusted for the number of days in
the Valuation Period.
FIXED POLICY VALUE
The Fixed Policy Value on any Valuation Day is equal to:
1. aggregate Net Premium Payments allocated to the Fixed Account; plus
2. Policy Value transferred to the Fixed Account; plus
3. interest credited to the Fixed Account; less
4. any withdrawals (including any applicable surrender charges
deducted) or transfers (including any applicable transfer charge deducted)
from the Fixed Account; less
5. any surrender charges deducted in the event of a decrease in
Specified Amount; less
6. the portion of monthly deductions made from Fixed Policy Value.
See "The Fixed Account," for a discussion of how interest is credited to
the Fixed Account.
TRANSFERS OF POLICY VALUES
GENERAL. Before the Maturity Date while the Insured is still living and
the Policy is in force, the Owner may, by Written Notice, transfer all or part
any Subaccount Value to another Subaccount(s) (subject to its availability) or
to the Fixed Account, or transfer all or part of Fixed Policy Value to any
Subaccount(s), (subject to its availability) subject to the following
restrictions and the additional restrictions for transfers from the Fixed
Account shown below:
1. the minimum transfer amount is $500 (or, the entire Subaccount
Value or Fixed Policy Value, if less); and
2. a transfer request that would reduce any Subaccount Value or the
Fixed Policy Value below $500 is treated as a transfer request for the
entire Subaccount Value or Fixed Policy Value.
The first 12 transfers during each Contract Year are free. VFL assesses a
transfer processing fee of $25 for each transfer in excess of 12 during a
Contract Year. (See "Charges and Deductions.")
RESTRICTIONS ON TRANSFERS OF FROM THE FIXED ACCOUNT. An Owner may transfer
all or part of the Fixed Policy Value to a Subaccount. Only one transfer may be
made each Policy Year from the Fixed Account to one or more Subaccounts and this
transfer must be at least 12 calendar months after the most recent transfer from
the Fixed Account. An unused transfer option does not carry over to the next
year. The maximum transfer amount is 25% of the Fixed Policy on the date of the
transfer, unless the balance after the transfer is less than $500.
SPECIAL TRANSFER PRIVILEGE. During the first 24 Policy Months following
the date that coverage begins under the Policy, Owners may make one transfer of
the entire Variable Policy Value to the Fixed Account without imposition of the
transfer processing fee or the transfer counting as one of the 12 free transfers
for a Policy Year. Likewise, during the first 24 Policy Months following the
effective date of any Specified Amount increase, Owners may make one transfer of
that portion of the Variable Policy Value attributable to the increase to the
Fixed Account without imposition of the transfer processing fee or the transfer
counting as one of the 12 free transfers for a Policy Year.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Maturity Date while the Insured is still living and
the Policy is in force by Written Notice, an Owner may systematically transfer
(on a monthly, quarterly, semi-annual or annual basis) specified dollar amounts
from the Money Market Subaccount to other Subaccounts. This is known as the
"dollar-cost averaging" method of investment. The fixed-dollar amount purchases
more Units of a Subaccount when their value is lower and fewer Units when their
value is higher. Over time, the cost per Unit averages out to be less than if
all purchases of Units had been made at the highest value and greater than if
all purchases had been made at the lowest value. The dollar-cost averaging
method of investment reduces the risk of making purchases only when the price of
Units is high. It does not assure a profit or protect against a loss in
declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Maturity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Policy Year. VFL
reserves the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason or to change its features.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested by Written Notice at any time thereafter prior to the Maturity Date
while the Insured is still living and the Policy is in force, an Owner may
instruct VFL to automatically transfer (on a quarterly, semi-annual or annual
basis) Variable Policy Value between and among specified Subaccounts in order to
achieve a particular percentage allocation of Variable Policy Value among such
Subaccounts ("automatic Subaccount Value rebalancing"). Such percentage
allocations must be in whole numbers. Once elected, automatic Subaccount Value
rebalancing begins on the first Valuation Day of the next calendar quarter or
other period (or, if later, the next calendar quarter or other period after the
expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time at least
seven calendar days before the first Valuation Day in a new period. Owners may
specify allocations between and among as many Subaccounts as are available at
the time automatic Subaccount Value rebalancing is elected. Once automatic
Subaccount Value rebalancing has been elected, any subsequent allocation
instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to or termination of automatic
Subaccount Value rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one of the 12 transfers available
without a transfer processing fee during any Policy Year. If automatic
Subaccount Value rebalancing is elected at the same time as the dollar-cost
averaging facility or when the dollar-cost averaging facility is being utilized,
automatic Subaccount rebalancing will be postponed until the first Valuation Day
in the calendar quarter or other period following the termination of dollar-cost
averaging facility. VFL reserves the right to discontinue offering the automatic
Subaccount Value rebalancing facility at any time and for any reason or to
change its features.
SURRENDER PRIVILEGE
At any time while the Insured is still living and the Policy is in force
prior to the Maturity Date, the Owner may, by Written Notice, surrender it for
its Surrender Value. A surrender is effective as of the date on which a Written
Notice requesting surrender is received at the Service Center. If the Owner
surrenders the Policy during the first 14 Policy Years, or the first 14 Policy
Years following an increase in Specified Amount, VFL will deduct a surrender
charge. (See "Surrender Charge.") Once the Policy is surrendered, all coverage
and other benefits under it cease and it cannot be reinstated.
WITHDRAWAL PRIVILEGE
After the first Policy Year, while the Insured is still living and the
Policy is in force prior to the Maturity Date, an Owner may, by Written Request,
withdraw any part of the Surrender Value of the Policy, subject to certain
conditions. A withdrawal is effective as of the date on which a Written Notice
requesting withdrawal is received at the Service Center. As of that date, Policy
Value is reduced by the amount of the withdrawal plus any applicable surrender
charge. The minimum amount that may be withdrawn is $500. If the Owner has
selected Death Benefit Option 1, VFL will reduce the Specified Amount by the
amount of the withdrawal plus any applicable surrender charge deduction. (See
"Death Benefit Proceeds.")
Unless otherwise indicated in the Written Request for Withdrawal, amounts
withdrawn and surrender charges deducted in connection with the withdrawals are
taken from Subaccount Values and Fixed Policy Value based on the proportion that
each Subaccount Value and the Fixed Policy Value bear to Policy Value. If the
Owner requests a decrease in Specified Amount or requests a change in the Death
Benefit Option as of the same date as a withdrawal request, then the withdrawal
is effected after the decrease in Specified Amount or change in Death Benefit
Option.
Notwithstanding the foregoing, VFL reserves the right to reject a
withdrawal request if the request would cause the Specified Amount to be reduced
below the minimum Specified Amount shown in the Policy. Likewise, VFL reserves
the right to deny a withdrawal request if the request would cause the Policy to
fail to qualify as a life insurance contract under the Code or regulations or
rulings thereunder, as interpreted by VFL.
POLICY LOANS
GENERAL. At any time prior to the Maturity Date while the Insured is still
living and the Policy is in force, the Owner may, by Written Notice, borrow
money from VFL using the Policy as the sole security for the loan provided that
(a) a written loan agreement is signed by the Owner, and (b) the Owner makes a
satisfactory assignment of the Policy to VFL. In taking a loan, an Owner must
borrow at least $500. The maximum amount that an Owner may borrow is 90% of the
Surrender Value of the Policy as of the date of the loan.
INTEREST. VFL charges interest on amounts borrowed by Owners. The interest
rate charged is 8% and is an effective annual rate compounded annually on the
Policy Anniversary. Interest is charged in arrears from the date of the loan and
is due from Owners on each Policy Anniversary for the prior Policy Year. If the
Owner does not pay such interest when due, the amount of the interest is added
to the outstanding Loan Amount. Thus, unpaid interest is charged interest during
the ensuing Policy Year. For Policies in the 11th Policy Year or later, VFL
charges a preferred 6% effective annual interest rate on amounts borrowed up to
an amount equal to Policy Value less aggregate premium payments made to date.
VFL credits Loan Account Value with interest at an effective annual rate of
6%. On each Policy Anniversary, interest earned on Loan Account Value since the
preceding Anniversary is transferred to the Subaccounts and the Fixed Account.
Unless the Owner specifies otherwise, such transfers are allocated in the same
manner as transfers of collateral to the Loan Account.
LOAN COLLATERAL. When VFL makes a loan to Owners, it transfers an amount
of Cash Value sufficient to secure the loan out of the Subaccounts and the Fixed
Account and into the Loan Account. Owners may specify how this transferred Cash
Value is allocated from among the Subaccount Values and the Fixed Policy Value.
If an Owner does not specify the allocation, VFL makes the allocation based on
the proportion that each Subaccount Value and the Fixed Policy Value bear to the
Cash Value as of the date that the transfer is made. If unpaid interest is due
from an Owner on a Policy Anniversary it is added to the Loan Amount. Cash Value
in the amount of the interest also is transferred to the Loan Account as of that
Anniversary. The Cash Value transferred in connection with unpaid interest is
allocated on the same basis as other Cash Value transferred by VFL to the Loan
Account.
Loan Account Value is recalculated when interest is added to the Loan
Amount, a loan repayment is made, and a new loan is made under Policy.
NON-PAYMENT OF POLICY LOANS. If Loan Account Value exceeds Cash Value,
then the Owner must make either a loan repayment or a premium payment sufficient
to raise the Cash Value or lower the Loan Account Value so that Cash Value
exceeds the Loan Account Value. VFL will send the Owner and any assignee of
record a notice indicating the amount that must be paid. If payment is not
received at the Service Center within 30 days of the notice being mailed, the
Grace Period will begin. (See "Policy Lapse and Reinstatement.") If the Grace
Period expires without the payment being made, then the Policy Lapses.
LOAN REPAYMENT. The Owner may repay a loan or repay any part of a loan at
any time while the Insured is still living and the Policy is in force prior to
the Maturity Date. Upon repayment of any part of a loan, Loan Account Value in
an amount equal to the payment is transferred to the Subaccounts and the Fixed
Account as of the date that the payment is received at the Service Center.
Unless the Owner specifies otherwise, the amount transferred is allocated among
or between the Subaccounts and the Fixed Account in accordance with the Owner's
allocation instructions for Net Premium Payments in effect at that time.
EFFECT OF POLICY LOAN. A loan, whether or not repaid, has a permanent
effect on the Death Benefit and Policy values because the investment results of
the Subaccounts and current interest rates credited on Fixed Policy Value do not
apply to Policy Value in the Loan Account. The larger the loan and the longer
the loan is outstanding, the greater will be the effect of Policy Value being
held as collateral in the Loan Account. Depending on the investment results of
the Subaccounts or credited interest rates for the Fixed Account while the loan
is outstanding, the effect could be favorable or unfavorable. Policy loans also
may increase the potential for lapse if investment results of the Subaccounts to
which Surrender Value is allocated is unfavorable. If Loan Account Value exceeds
Cash Value, then the Owner must make either a loan repayment or a premium
payment sufficient to raise the Cash Value or lower the Loan Account Value so
that Cash Value exceeds the Loan Account Value. VFL will send the Owner and any
assignee of record a notice indicating the amount that must be paid. If payment
is not received at the Service Center within 30 days of the notice being mailed,
the Grace Period will begin. If the Grace Period expires without the payment
being made, the Policy Lapses. If a Policy lapses with loans outstanding,
certain amounts may be subject to income tax and a 10% penalty tax. See "Tax
Considerations," for a discussion of the tax treatment of Policy loans. In
addition, if a Policy is a "modified endowment contract," loans may be currently
taxable and subject to a 10% penalty tax.
MATURITY BENEFITS
VFL will pay the Surrender Value, if any, to the Owner on the Maturity
Date. In some states, the Maturity Date is the Policy Anniversary nearest the
Insured's 95th birthday. In other states, the Owner may elect to extend the
Policy beyond the Policy Anniversary nearest the Insured's 95th birthday, in
which case the death benefit would be the greater of Cash Value or 101% of the
Policy Value. The tax consequences associated with extending the maturity date
beyond age 100 are unclear. A tax advisor should be consulted on the issue.
DEATH BENEFIT PROCEEDS
Upon receipt of Due Proof of Death of the Insured at the Service Center
while the Policy is in force before the Maturity Date, VFL will pay the Death
Benefit Proceeds to the Beneficiary (or Beneficiaries) or the Contingent
Beneficiary (or Contingent Beneficiaries). VFL pays the Death Benefit Proceeds
in a lump sum unless the Beneficiary (or Contingent Beneficiary) elects to
receive the Proceeds under a Settlement Option. (See "Settlement Options.")
Under certain circumstances, payment of the Death Benefit Proceeds may be
delayed. (See "Suspension or Delay in Payments.")
CALCULATION OF DEATH BENEFIT PROCEEDS. The Death Benefit Proceeds are
determined as of the date of the Insured's death and are equal to:
1. the Death Benefit under the Death Benefit Option selected by the
Owner; plus
2. any death benefit under any rider to the Policy; less
3. any Loan Amount; and less
4. any unpaid monthly deductions if the Insured dies during the Grace
Period.
Under certain circumstances, the amount of the Death Benefit Proceeds may
be further adjusted. (See "VFL's Right to Contest the Policy" and "Misstatement
of Age or Sex.")
If part or all of the Death Benefit is paid in one sum, VFL will pay
interest on this sum as required by applicable state law from the date of
receipt of due proof of the Insured's death to the date of payment.
DEATH BENEFIT OPTIONS. The Owner may select one of two Death Benefit
Options.
1. Death Benefit Option 1 is the greater of:
(a) the Specified Amount on the date of the Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
2. Death Benefit Option 2 is the greater of:
(a) the Specified Amount plus the Policy Value on the date of the
Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
The specified percentage is 250% if the Insured dies at Attained Age 40 or
less, and decreases with each year of Attained Age thereafter so that the
percentage is 100% if the Insured dies at an Attained Age of 95. A table showing
these percentages for Attained Ages 0 to 94 and examples of Death Benefit
calculations for both Death Benefit Options are found in the Appendix.
Under Death Benefit Option 1, the Death Benefit remains level at the
Specified Amount unless the Policy Value multiplied by the specified percentage
exceeds that Specified Amount, in which event the Death Benefit will vary as the
Policy Value varies. Owners who are satisfied with the amount of their insurance
coverage under the Policy and who prefer to have favorable investment
performance and additional Net Premium Payments reflected in higher Policy
Value, rather than increased Death Benefits, generally should select Option 1.
Under Death Benefit Option 2, the Death Benefit always varies as the Policy
Value varies (although it is never less than the Specified Amount). Owners who
prefer to have favorable investment performance and additional Net Premium
Payments reflected in increased Death Benefits generally should select Option 2.
CHANGING THE DEATH BENEFIT OPTION. After the first Policy Anniversary
while the Insured is still living and the Policy is in force prior to the
Maturity Date, the Owner may request a change in the Death Benefit Option. A
Death Benefit Option change becomes effective on the Monthly Anniversary Day on
or next following the date that VFL accepts a request for the change. VFL may
require satisfactory evidence of insurability before permitting a change in the
Death Benefit Option. After a change in Death Benefit Option, VFL will send the
Owner a supplemental policy specifications page showing the new Death Benefit
and Specified Amount. Changing the Death Benefit Option could have federal tax
consequences. (See "TAX CONSIDERATIONS.")
INCREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary, while
the Insured is living and the Policy is in force prior to the Maturity Date, the
Owner may submit a supplemental application for an increase in Specified Amount.
VFL requires evidence of insurability before agreeing to an increase in
Specified Amount and may, depending upon the circumstances, also require
additional premium payments or the repayment of part or all of any Loan Amount
under the Policy. The Insured's Attained Age at the time of the increase may not
exceed 75. The amount of any requested increase in Specified Amount must be at
least $25,000 and not more than the amount that would increase the total
Specified Amount above the maximum specified amount for which VFL would issue a
new Policy.
An increase in Specified Amount causes an increase in the Minimum Monthly
Premium Payment. Each increase in Specified Amount has a Target Premium Payment
and a Guideline Annual Premium Payment associated with it.
Any increase in Specified Amount is effective as of the date that VFL
approves it. Each increase in Specified Amount creates an increment of Specified
Amount to which a portion of Policy Value is thereafter attributed for the
purpose of computing sales surrender charges, the Net Amount at Risk and the
monthly cost of insurance charge and for the purpose of exercising the Special
Transfer Privilege. An additional monthly cost of insurance charge is deducted
for each additional increment in Specified Amount. This additional cost of
insurance charge is deducted from Policy Value attributable to the increase in
Specified Amount. Each increase in Specified Amount also results in additional
surrender charges. After an increase in Specified Amount, VFL will send the
Owner a supplemental policy specifications page showing the effective date of
the increase, the monthly cost of insurance charge for the increase, additional
sales surrender charges arising as a result of the increase and any changes to
premium payment information from the previous or original policy specifications
page.
The cancellation privilege applies to any increase in Specified Amount
except that when no additional premium payments are required for an increase,
only the monthly deduction(s) for the increase made before the cancellation is
refunded if the increase is cancelled. (See "Cancellation Privilege.")
Increasing the Specified Amount could have federal tax consequences. (See "Tax
Considerations.")
DECREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary while the
Insured is still living and the Policy is in force prior to the Maturity Date,
the Owner may by Written Notice request a decrease of Specified Amount. The
amount of any requested decrease in Specified Amount must be at least $25,000
and not be more than the amount that would decrease the total Specified Amount
below $100,000. Specified Amount may not be decreased when, to do so, would
cause Surrender Value to fall below zero. Any decrease becomes effective on the
Monthly Anniversary Day on or next following the date that VFL accepts the
request for the decrease. The decrease is first applied to reduce prior
increases in Specified Amount in the reverse order in which they occurred. After
all prior increases in Specified Amount have been eliminated, a decrease is
applied to reduce the initial Specified Amount.
A decrease of Specified Amount may result in the imposition of a surrender
charge. In this event, the charge is deducted from Policy Value as of the
effective date of the decrease. (See "Charges and Deductions.") A decrease in
Specified Amount causes a decrease in the Minimum Monthly Premium Payment and in
the Target Premium Payment and Guideline Annual Premium Payment associated with
the increment of Specified Amount being decreased. After a decrease in Specified
Amount, VFL will send the Owner a supplemental policy specifications page
showing the effective date of the decrease, the monthly cost of insurance charge
after the decrease, surrender charges deducted as a result of the decrease, and
any changes to premium payment information from the previous or original
specifications page.
VFL reserves the right to deny a request for a decrease in Specified Amount
for 12 months following the most recent increase in Specified Amount and to
limit decreases in Specified Amount to one per Policy Year.
If a decrease in the Specified Amount would result in total premiums paid
exceeding the premium limitations prescribed under current tax law to qualify
the Policy as a life insurance contract, VFL will contact the Owner and inquire
whether he or she wants to receive the excess above the premium limitations or
to forego the decrease. VFL reserves the right to decline a requested decrease
in the Specified Amount if compliance with the guideline premium limitations
under current tax law would require payment of excess premium to the Owner in an
amount that would exceed the Surrender Value under the Policy. Decreasing the
Specified Amount could have federal tax consequences. (See "Tax
Considerations.")
SETTLEMENT OPTIONS
SELECTING A SETTLEMENT OPTION. VFL pays Owners or Beneficiaries (or
Contingent Beneficiaries), as appropriate, the amount of any surrender,
withdrawal, or Death Benefit Proceeds in a lump sum unless the Owner has, by
Written Notice, selected one of the Settlement Options described below. If the
amount being paid by VFL is less than $5,000, however, payment is only made in a
lump sum. In addition, if the Owner or Beneficiary (or Contingent Beneficiary)
receiving payment is an executor, administrator, trustee, or not a natural
person, payment is made in a lump sum unless VFL specifically consents to
payment under one of the Settlement Options.
Owners may select a Settlement Option for payment of the Death Benefit
Proceeds in lieu of a lump sum, at any time while the Insured is still living
and the Policy is in force prior to the Maturity Date. If no election is made by
the Owner before the Insured's death, then, upon the Insured's death, the
Beneficiary (or Contingent Beneficiary) may elect a Settlement Option before the
Death Benefit Proceeds are paid. The Owner also may elect to receive the
Surrender Value of a Policy or the amount of a withdrawal in the form of a
Settlement Option at any time before the payment of the Surrender Value or
withdrawal. For purposes of describing the Settlement Options, the term "Payee"
means Owner or Beneficiary (or Contingent Beneficiary), as appropriate.
FREQUENCY OF PAYMENTS. If Settlement Option 1, 2, or 3 is selected,
payments will be made every 1 year, 6 months, 3 months, or every month. The
Payee must specify the payment frequency when selecting a settlement option. If
settlement option 4, 5, or 6 is selected, payments will be made monthly. If
payment under any option would be less than $50, VFL will adjust the frequency
of payments so that each payment is at least $50.
FIRST PAYMENT. Depending on the payment frequency selected, the first
payment under Settlement Option 1 is made as of 1 year, 6 months, 3 months, or 1
month from the date of the Insured's death. Depending on the payment frequency
selected and subject to VFL's right to suspend or delay payments (see
"Suspension or Delay in Payments"), the first payment under Settlement Option 1
is made as of 1 year, 6 months, 3 months, or 1 month from the effective date of
any surrender or withdrawal. The first payment under any other Settlement Option
is made, subject to VFL's right to suspend or delay payments, as of the date of
the Insured's death or the effective date of any surrender or withdrawal.
BETTERMENT OF RATES. If, under Settlement Options 4, 5, or 6, VFL's
regular annuity purchase rates on the date of the Insured's death or the
effective date of any surrender or withdrawal are more favorable than those upon
which Options 4, 5, or 6 are based, VFL shall compute payments using the regular
annuity rates. VFL will furnish information about the regular annuity rates upon
request.
DEATH OF PAYEE. Unless instructed otherwise at the time that the
Settlement Option is selected, at the death of the Payee VFL pays the amounts
below in a lump sum to the Payee's estate:
1. Under Settlement Option 1, the amount left on deposit with VFL to
accumulate interest.
2. Under Settlement Option 2, 3, or 5, the commuted value of the
amount payable at the Payee's death as provided under the Option selected.
The commuted value is based on interest at the rate that would have been
used to compute the first of the remaining Payments under that option.
OPTION 1: INTEREST PAYMENTS. VFL holds the Death Benefit Proceeds (or the
Surrender Value or the amount of a withdrawal) as principal and pays interest to
the Payee. The interest rate is 3% per year compounded annually. VFL pays
interest every 1 year, 6 months, 3 months, or 1 month, as specified at the time
this option is selected. At the death of the Payee, the value of the remaining
payments are paid as stated above.
OPTION 2: PAYMENTS OF A SPECIFIED AMOUNT. VFL pays the Death Benefit
Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments every 1 year, 6 months, 3 months, or 1 month. The amount and
frequency of the payments is specified at the time this option is selected.
After each payment, interest is added to the remaining amount applied under
this option that has not yet been paid. The interest rate is 3% per year
compounded annually. Payments are made to the Payee until the amount applied
under this option, including interest, is exhausted. The total of the payments
made each year must be at least 5% of the amount applied under this option. If
the Payee dies before the amount applied is exhausted, VFL pays the value of
the remaining payments as stated above.
OPTION 3: INSTALLMENTS FOR A SPECIFIED PERIOD. VFL pays the Death Benefit
Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments for the number of years specified when the option is selected. Payments
are made every 1 year, 6 months, 3 months, or 1 month, as specified when the
option is selected. The amount of each payment for each $1,000 applied under
this option is shown in Policy. These amounts are calculated at an interest rate
of 3% per year compounded annually. If the Payee dies before the expiration of
the specified number of years, VFL pays the value of the remaining payments as
stated above.
OPTION 4: LIFE ANNUITY. VFL makes monthly payments to the Payee for as
long as he or she lives. The amount of each payment for each $1,000 applied
under this option is shown in the Policy.
OPTION 5: LIFE ANNUITY WITH PERIOD CERTAIN. VFL makes monthly payments to
the Payee for as long as the Payee lives. At the time this option is selected, a
period certain of 5, 10, 15, or 20 years must also be selected. If the Payee
dies before the specified period certain ends, the payments to the Payee's
estate will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected. The amount of
each payment for each period certain available is shown in the Policy. The
amounts shown are for each $1,000 applied under this option. If at any age the
amount of the payments is the same for two or more periods certain, payment will
be made as if the longest period certain was selected.
OPTION 6: JOINT LIFE AND SURVIVORSHIP ANNUITY. VFL makes monthly payments
to two Payees while both are living. After the death of either Payee, payments
continue to the other Payee for as long as the other Payee lives. The amount of
each payment for each $1,000 applied under this option is shown in the Policy.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by VFL, an Owner
may make transfers or change allocation instructions by telephoning the Service
Center. A telephone authorization form received by VFL at the Service Center is
valid until it is rescinded or revoked by Written Notice or until a subsequently
dated form signed by the Owner is received at the Service Center. VFL will send
Owners a written confirmation of all transfers and allocation instructions made
pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If VFL follows these procedures, it is not
liable for any losses due to unauthorized or fraudulent transactions. VFL
reserves the right to suspend telephone transaction privileges at any time for
any reason.
THE FIXED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 nor has the
Fixed Account been registered as an investment company under the Investment
Company Act of 1940. Accordingly, neither the Fixed Account nor any interests
therein are subject to the provisions of these Acts and, as a result, the staff
of the Securities and Exchange Commission has not reviewed the disclosure in
this Prospectus relating to the Fixed Account. The disclosure regarding the
Fixed Account may, however, be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
THE FIXED ACCOUNT
The Fixed Account consists of assets owned by VFL with respect to the
Policies, other than those in the Variable Account. It is part of VFL's General
Account assets. VFL's general account assets are used to support its insurance
and annuity obligations other than those supported by separate accounts, and are
subject to the claims of VFL's general creditors. Subject to applicable law, VFL
has sole discretion over the investment of the assets of the Fixed Account. The
Loan Account is part of the Fixed Account. Guarantees of Net Premiums allocated
to the Fixed Account, and interest credited thereto, are supported by VFL. The
Fixed Policy Value is calculated daily. (See "Fixed Policy Value.")
INTEREST CREDITED ON FIXED POLICY VALUE
VFL guarantees that it will credit interest on Fixed Policy Value at an
effective annual rate of not less than 4.0%. In its discretion, VFL will credit
interest at rates higher than 4.0%. VFL may vary the way in which it credits
interest on Fixed Policy Value from time to time. The following is a description
of VFL's current method for crediting interest on Fixed Policy Value.
"FULL-YEAR" RATES. Before the beginning of each calendar year, VFL
publishes an effective annual rate at which it will credit Fixed Policy Value
under the Policies for that year. Fixed Policy Values at the beginning of the
calendar year under all Policies are credited with that rate of interest for the
entire calendar year.
"NEW-MONEY" RATES. VFL credits Net Premium Payments allocated to and
Policy Value transferred to the Fixed Account during a calendar year with
interest at an effective annual rate in effect on the date that the Net Premium
Payment is received at the Service Center or the date that as of which the
transfer is made. These amounts are credited with interest at this rate until
the end of the calendar year. VFL publishes this "new money" rate from time to
time during a calendar year and may change the "new money" rate at its
discretion throughout any calendar year.
For purposes of crediting interest, Policy Value deducted, transferred, or
withdrawn from the Fixed Account, is accounted for on a "first-in, first-out"
basis.
CHARGES AND DEDUCTIONS
SALES CHARGES
VFL deducts a sales charge from certain premium payments. In Policy Years 1
through 10, the sales charge deducted is 4% of premium payments received up to a
Target Premium Payment for the initial Specified Amount. In Policy Year 11 and
each Policy Year thereafter, the sales charge deducted is 2% of premium payments
received up to a Target Premium Payment for the initial Specified Amount. Absent
an increase in Specified Amount, no sales charge is deducted in any Policy Year
from premium payments in excess of a Target Premium Payment for the initial
Specified Amount.
If the Owner increases the Specified Amount, a Target Premium Payment is
established for the increase. Therefore, there is a Target Premium Payment for
each increment of Specified Amount. VFL deducts the sales charge from premium
payments attributable to the increase. For purposes of computing and deducting
sales charges, all Premium Payments made after an increase in Specified Amount
are apportioned to each increment of Specified Amount on the basis of the
relative Guideline Annual Premium Payments for each such increment. For the
first ten 12-month periods following an increase in Specified Amount, the charge
is 4% of premium payments made in each such 12-month period attributable to the
increase up to a Target Premium Payment for the increase. For subsequent
12-month periods, the sales charge is 2% of premium payments made during the
12-month period attributable to the increase in Specified Amount up to a Target
Premium Payment for the increase.
PREMIUM TAX CHARGE
A 2.25% charge for state and local premium taxes is also deducted from each
premium payment. The state and local premium tax charge reimburses VFL for
premium taxes associated with the Policies. VFL expects to pay an average state
and local premium tax rate of approximately 2.25% of premium payments for all
states. This tax can range generally from 2% to 16% of premium payments and
generally varies by the applicant's state of residence.
FEDERAL TAX CHARGE
VFL also deducts a charge for federal taxes from each premium payment. This
charge is 1.25% of all premium payments and compensates VFL for its federal
income tax liability resulting from Section 848 of the Code. The amount of this
charge, which may be increased or decreased, is reasonable in relation to VFL's
increased federal tax burden under Section 848 resulting from the receipt of
premium payments under the Policies.
SURRENDER CHARGE
GENERAL. If the Owner surrenders the Policy, makes a withdrawal, decreases
the Specified Amount or if the Policy lapses, VFL may deduct a surrender charge.
The purpose of the surrender charge is to reimburse VFL for some of the expenses
incurred in the distribution of the Policies. The surrender charge consists of
two parts, a sales surrender charge (i.e., a contingent deferred sales charge)
and an administration surrender charge. The total surrender charge declines over
time as follows:
100% of the total Surrender Charge in Policy Years 1 through 6
80% of the total Surrender Charge in Policy Year 7
70% of the total Surrender Charge in Policy Year 8
60% of the total Surrender Charge in Policy Year 9
50% of the total Surrender Charge in Policy Year 10
40% of the total Surrender Charge in Policy Year 11
30% of the total Surrender Charge in Policy Year 12
20% of the total Surrender Charge in Policy Year 13
10% of the total Surrender Charge in Policy Year 14
No Charge in Policy Years 15 and later
DEDUCTION OF THE SURRENDER CHARGE. If assessed upon the surrender of the
Policy, the surrender charge reduces the amount otherwise paid to the Owner. If
assessed upon Lapse of the Policy, the amount of the charge is not restored to
Policy Value in the event that the Policy is reinstated. If assessed upon a
decrease in Specified Amount, the charge is deducted from the remaining Policy
Value and reduces the amount of any remaining applicable surrender charge. If
assessed on a withdrawal, the surrender charge is deducted from the remaining
Policy Value and reduces the amount of any remaining applicable surrender
charge. Unless otherwise indicated in the request for a decrease or a
withdrawal, surrender charges deducted in connection with decreases in Specified
Amount or withdrawals are taken from Subaccount Values and Fixed Policy Value
based on the proportion that each Subaccount Value and the Fixed Policy Value
bear to the Policy Value before the deduction.
If taken upon a decrease in Specified Amount, the surrender charge is the
pro-rata portion of the total surrender charge based on the ratio that the
Specified Amount decrease bears to the total Specified Amount before the
decrease. If assessed upon a withdrawal, the surrender charge is the pro-rata
portion of the total surrender charge based on the ratio that the withdrawn
amount bears to the total Surrender Value before the withdrawal.
SALES SURRENDER CHARGE FOR DECREASING INITIAL SPECIFIED AMOUNT. If an
Owner elects to decrease the Specified Amount selected on the Policy Effective
Date, then a sales surrender charge will be assessed. The sales surrender charge
shall equal the sum of the premium payments as set forth below, up to a maximum
of 100% of the Target Premium Payment for the initial Specified Amount:
34% of the premium payments made in the first Policy Year; plus
33% of the premium payments made in any of the Policy Years 2 through
6
However, VFL will limit the sales surrender charge, calculated above, so
that the charge calculated for Policy Years 1 and 2 is never more than the sum
of:
26% of the first Guideline Annual Premium payment for the initial
Specified Amount; plus
6% of the second Guideline Annual Premium payment for the initial
Specified Amount; plus
5% of all additional Premium Payments attributable to the initial
Specified Amount.
ADMINISTRATION SURRENDER CHARGE. The Administration Surrender Charge is
$2.00 per $1,000 of initial Specified Amount for Policies on Insureds age 25 or
less on the Policy Effective Date, and $5.00 per $1,000 of initial Specified
Amount for Policies on Insureds age 35 or older on the Policy Effective Date.
For Insureds of other ages, the Administration Surrender Charge is the following
per $1,000 of Specified Amount: age 26 - $2.30, age 27 - $2.60, age 28 - $2.90,
age 29 - $3.20, age 30 - $3.50, age 31 - $3.80, age 32 - $4.10, age 33 - $4.40,
age 34 - $4.70.
SALES SURRENDER CHARGE IN CONNECTION WITH INCREASES IN SPECIFIED
AMOUNT. The surrender charge is computed and assessed separately for the
initial Specified Amount and for each increase in Specified Amount. Only the
sales charge component of the surrender charge, however, is assessed for an
increase in Specified Amount. For purposes of computing and assessing the sales
surrender charge attributable to an increase in Specified Amount, all premium
payments made after an increase in Specified Amount are apportioned to each
increment of Specified Amount on the basis of the relative Guideline Annual
Premium Payments for each such increment. Likewise, Policy Value is apportioned
to each increment of Specified Amount on the basis of the relative Guideline
Annual Premium Payments for each such increment. The sales surrender charge for
an increase in Specified Amount is as follows: In the first 12 months following
the increase, the sales surrender charge is 34% of premium payments received up
to a Target Premium Payment for the increase in Specified Amount, and, in each
of the five subsequent 12-month periods following the increase, the charge is
33% of premium payments received up to a Target Premium Payment for the increase
in Specified Amount in each such 12-month period until the total sales surrender
charge for the increase equals 100% of a single Target Premium Payment for the
increase in Specified Amount. Notwithstanding the foregoing, during the first 24
months following an increase in Specified Amount, the sales surrender charge for
the increase is never more than the sum of: (1) 26% of the first Guideline
Annual Premium Payment for the increase in Specified Amount, (2) 6% of the
second Guideline Annual Premium Payment for the increase in Specified Amount,
and (3) 5% of all additional Premium Payments attributable to the increase in
Specified Amount. In addition, the sales surrender charge for an increase in
Specified Amount declines over the 7th through the 15th 12-month period
following the increase in the same manner as the surrender charge in connection
with the initial Specified Amount.
OTHER TAXES
Currently a charge for federal income taxes is not deducted from the
Variable Account of the Policy Value. VFL reserves the right in the future to
make a charge to the Variable Account or the Policy Value for any federal, state
or local income taxes that VFL incurs that it determines to be properly
attributable to the Variable Account of the Policies. VFL will notify Owners
promptly of any such charge.
MONTHLY DEDUCTION
The monthly deduction is a charge made by VFL as of the Policy Effective
Date and every Monthly Anniversary Day thereafter by reducing Subaccount Values
(i.e., liquidating Units) and Fixed Policy Value in the proportion that each
Subaccount Value and Fixed Policy Value bears to Policy Value. The monthly
deduction consists of (1) the monthly cost of insurance charge, (2) the monthly
policy fee, (3) the monthly first-year issue fee (when applicable), (4) the
monthly Specified Amount increase fee (when applicable), and (5) the cost of any
riders (when applicable).
MONTHLY COST OF INSURANCE CHARGE. The monthly cost of insurance charge is
computed at the beginning of each Policy month by subtracting 2 from 1 and
multiplying the result by 3, where:
1. is the Death Benefit on the first day of the Policy month divided
by 1 plus the monthly equivalent of 4.0%;
2. is the Policy Value before deduction of the monthly policy fee, the
monthly first-year issue fee (when applicable), the monthly Specified
Amount increase fee (when applicable), and the cost of any riders (when
applicable); and
3. is the cost of insurance rate as described below.
The monthly cost of insurance charge is computed separately for the initial
Specified Amount and for each increment of Specified Amount resulting from
increases in Specified Amount. For the purpose of computing the Net Amount at
Risk (the result of subtracting 2 from 1 above), Policy Value is apportioned to
each increment of Specified Amount on the basis of the relative Guideline Annual
Premium Payments for each such increment. Where the Death Benefit is a percent
of Policy Value the monthly cost of insurance charge is computed separately, and
Policy Value is apportioned to, an increment of Death Benefit corresponding to
each increment of Specified Amount.
The monthly cost of insurance rate for a Policy is based on the sex,
Attained Age, Issue Age, risk class, and number of years that the Policy or
increment of Specified Amount has been in force. The Issue Age of the Insured
will usually be different for each increase in Specified Amount. VFL reviews
monthly cost of insurance rates on an ongoing basis (at least once every 5
years) based on its expectations as to future mortality experience, investment
earnings, persistency, taxes and other expenses. Any changes in cost of
insurance rates are made on a uniform basis for Insureds of the same class as
defined by sex, Attained Age, Issue Age, risk class, and Policy duration. VFL
guarantees that the cost of insurance rates used to calculate the monthly cost
of insurance charge will not exceed the maximum cost of insurance rates set
forth in the Policies.
VFL places each Insured in a risk class when a Policy is first
underwritten. This risk class applies to the initial Specified Amount. When an
Owner requests an increase in Specified Amount, VFL conducts additional
underwriting before approving the increase to determine whether a different risk
class should apply to the increase. If the risk class for the increase would
have a lower cost of insurance rate than the class for the initial Specified
Amount (or a previous increase), the risk class for the increase is applied to
the initial Specified Amount (or any previous increases in Specified Amount). If
the risk class for the increase would have a higher cost of insurance rate than
the class for the initial Specified Amount (or a previous increase), then the
risk class for the increase only applies to the increase in Specified Amount.
In connection with the cost of insurance rates guaranteed in the Policy,
VFL places Insureds into standard smoker and standard nonsmoker risk classes.
The guaranteed rates for standard classes are based on the 1980 Commissioners'
Standard Ordinary Mortality Tables, Male or Female, Smoker or Nonsmoker
Mortality Rates ("1980 CSO Tables"). The guaranteed rates for substandard
classes are based on multiples of or additions to the 1980 CSO Tables. In
connection with current cost of insurance rates, VFL places Insureds into the
following risk classes: standard smoker, standard nonsmoker, preferred smoker,
preferred nonsmoker and preferred plus nonsmoker.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker class are less than or equal to rates for an Insured of the same age
and sex in the same smoker class. Cost of insurance rates (whether guaranteed or
current) for an Insured in a nonsmoker or smoker standard class are generally
lower than guaranteed rates for an Insured of the same age and sex and smoking
status in a substandard class.
MONTHLY POLICY FEE, MONTHLY FIRST-YEAR ISSUE FEE, AND MONTHLY SPECIFIED
AMOUNT INCREASE FEE. These charges compensate VFL for administration expenses
associated with the Policies and the Variable Account. These expenses relate to
premium payment billing and collection, recordkeeping, processing death benefit
claims, Policy loans, Policy changes, reporting and overhead costs, processing
applications and establishing Policy records. The monthly policy fee is $6.00
per month. The monthly first-year issue fee is $20.00 per month during the first
Policy Year, and the monthly Specified Amount increase fee is $10.00 per month
for the first 12 months after an increase in Specified Amount.
SUPPLEMENTAL BENEFIT AND/OR RIDER CHARGES. See "Supplemental Benefits
and/or Riders."
DAILY MORTALITY AND EXPENSE RISK CHARGE
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 at the rate of 0.002477% (approximately equivalent to an
effective annual rate of 0.90%) of the net assets of the Variable Account during
the first 10 Policy Years and .001236% (approximately equivalent to an effective
annual rate of 0.45%) of the net assets of the Variable Account during Policy
Years 11 and thereafter. During the first 10 Policy Years, approximately .35% of
this annual charge is for the assumption of mortality risk and .55% is for the
assumption of expense risk. During Policy Years 11 and thereafter, approximately
.35% of this annual charge is for the assumption of mortality risk and .10% is
for the assumption of expense risk.
The mortality risk that VFL assumes is the risk that Insureds, as a group,
will live for a shorter period of time than VFL estimated when it established
the guaranteed costs of insurance rates in the Policy. Because of these
guarantees, each Owner is assured that the morbidity of a particular Insured
will not have an adverse effect on the Death Benefit Proceeds that a Beneficiary
would receive. The expense risk that VFL assumes is the risk that the monthly
Policy fee, monthly first-year issue fee, and monthly Specified Amount increase
fee (and the transfer processing fee, imposed) may be insufficient to cover the
actual expenses of administering the Policies.
TRANSFER PROCESSING FEE
The first 12 transfers during each Policy Year are free. VFL assesses a
Transfer Processing Fee of $25 for each transfer in excess of 12 during a Policy
Year. For the purposes of assessing the Transfer Processing Fee, each Written
Notice of transfer is considered to be one transfer, regardless of the number of
Subaccounts affected by the transfer. The Transfer Processing Fee is deducted
from the amount being transferred.
FUND EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory (management) fees and other expenses incurred by the corresponding
Fund in which the Subaccount invests. See the prospectus for the Funds. For a
summary of investment advisory fees and other expenses as a percentage of
Fund average net assets, see "Fee Table Annual Fund Expenses" on page __.
OTHER POLICY BENEFITS AND PROVISIONS
OWNERSHIP
GENERAL. The Policy belongs to the Owner. An Owner may exercise all of the
rights and options described in the Policy. The Insured is the Owner unless the
application specifies a different person as Owner.
CHANGING THE OWNER. The Owner may change the Owner by Written Notice at
any time while the Insured is alive and the Policy is in force prior to the
Maturity Date. A change of Ownership is effective as of the date that the
Written Notice is signed; however, VFL is not liable for payments it makes
before it receives a Written Notice of a change in Ownership. A change in Owner
may have significant tax consequences. (See "TAX CONSIDERATIONS.")
CONTINGENT OWNER. If the Owner is not the Insured, he or she may name a
Contingent Owner in the application or by subsequent Written Notice. The
Contingent Owner becomes the Owner in the event that the Owner dies before the
Insured. If no Contingent Owner survives the Owner, then upon the death of the
last surviving Owner, that Owner's estate becomes the Owner.
ASSIGNMENT. By Written Notice the Owner may assign his or her rights under
this Policy. VFL is not bound by the assignment unless it receives a duplicate
of the original assignment at the Service Center. VFL is not responsible for the
validity or sufficiency of any assignment and is not liable for any payment it
makes before receipt of the duplicate original assignment. An assignment does
not change or revoke the Beneficiary designation in effect at the time that the
assignment is made. If an assignment is absolute, the Owner's rights and
privileges under the Policy, including any right to change the Beneficiary, pass
to the assignee. If an assignment is collateral, the collateral assignee has
priority over the interest of any revocable Beneficiary or revocable payee under
any optional method of settlement selected by the Owner. Any claim under any
assignment is subject to proof of interest and the extent of the assignment. An
assignment is subject to any Loan Amount.
SELECTING THE BENEFICIARY. The Owner designates the Beneficiary in the
application. Any Beneficiary designation is revocable unless otherwise stated in
the designation. Owners may designate Contingent Beneficiaries. Where more than
one Beneficiary or more than one Contingent Beneficiary is designated, each
Beneficiary or Contingent Beneficiary, as appropriate, shares in any Death
Benefit Proceeds equally unless the Beneficiary designation states otherwise.
CHANGING THE BENEFICIARY. The Owner may change the Beneficiary by Written
Notice at any time while the Insured is alive and the Policy is in force before
the Maturity Date. If, however, the Owner previously irrevocably named a
Beneficiary, that Beneficiary's written consent must be provided to VFL before a
new Beneficiary is designated. Any change of Beneficiary is effective as of the
date Written Notice is signed by the Owner but VFL is not liable for any
payments it makes under the Policy prior to the time it receives Written Notice
of any Beneficiary change.
VFL'S RIGHT TO CONTEST THE POLICY
VFL has the right to contest the validity of the Policy or to resist a
claim under it on the basis of any material misrepresentation of a fact stated
in the application or any supplemental application. VFL also has the right to
contest the validity of any increase of Specified Amount or other change to the
Policy on the basis of any material misrepresentation of a fact stated in the
application (or supplemental application) for such increase in coverage or
change. In issuing this Policy, VFL relies on all statements made by or for the
Insured in the application or in a supplemental application. In the absence of
fraud, VFL considers statements made in the application(s) to be representations
and not warranties.
In the absence of fraud, VFL cannot bring any legal action to contest the
validity of the Policy after it has been in force during the lifetime of the
Insured for two years from the Policy Effective Date, or if reinstated, for two
years from the date of reinstatement. Likewise, VFL cannot contest any increase
in coverage effective after the Policy Effective Date, or any reinstatement
thereof, after such increase or reinstatement has been in force during the
lifetime of the Insured for two years from its effective date.
SUICIDE EXCLUSION
If the Insured commits suicide, while sane or insane, within two years of
the Policy Effective Date, VFL's liability is limited to an amount equal to the
Policy Value less any Loan Amount. VFL will pay this amount to the Beneficiary
in one sum.
If the Insured commits suicide, while sane or insane, within two years from
the effective date of any increase in Specified Amount, VFL's liability with
respect to that increase is limited to an amount equal to the cost of insurance
attributable to the increase from the effective date of the increase to the date
of death.
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Insured has been stated incorrectly in the
application or any supplemental application, VFL will adjust the Death Benefit
and any benefits provided by rider or endorsement it pays under this Policy to
the amount that would have been payable at the correct age and sex based on the
most recent deduction for cost of insurance and the cost of any benefits
provided by rider or endorsement. If the age of the Insured has been overstated
or understated, VFL will recalculate the Policy Value using the cost of
insurance (and the cost of benefits provided by rider or endorsement) based on
the Insured's correct age and sex.
MODIFICATION OF THE POLICY
Only an officer of VFL may modify this Policy or waive any of VFL's rights
or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind VFL by making any promise not contained in this
Policy.
Upon notice to the Owner, VFL may modify the Policy to:
1. conform the Policy or the operations of VFL or of the Variable
Account to the requirements of any law (or regulation issued by a
government agent) to which the Policy, VFL or the Variable Account is
subject);
2. assure continued qualification of the Policy as a life insurance
contract under the Code; or
3. reflect a change (permitted by the Policy) in the operation of the
Variable Account.
In the event of any such modification, VFL will make appropriate
endorsements to the Policy. If any provision of the Policy conflicts with the
laws of a jurisdiction that govern the Policy, the Policy provides that such
provision be deemed to be amended to conform with such laws.
SUSPENSION OR DELAY IN PAYMENTS
VFL usually pays the amounts of any surrender, withdrawals, Death Benefit
Proceeds, or settlement options within seven business days after receipt of all
applicable Written Notices and/or Due Proofs of Death. However, VFL can postpone
such payments if:
1. the New York Stock Exchange is closed, other than customary weekend
and holiday closing, or trading on the exchange is restricted as determined
by the SEC; or
2. the SEC permits, by an order, the postponement for the protection
of Owners; or
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Variable Account or the determination of
their value not reasonably practicable.
If a recent check or draft has been submitted, VFL has the right to defer
payment of surrenders, withdrawals, Death Benefit Proceeds, or payments under a
settlement option until such check or draft has been honored.
VFL has the right to defer payment of any surrender, withdrawal, or
transfer of Fixed Policy Value for up to six months from the date of receipt of
your Written Notice.
REPORTS TO OWNERS
At least annually, or more often as required by law, VFL will mail to
Owners at their last known address a report showing the following items as of
the end of the report period:
1. the period covered by the report;
2. the current Policy Value, Cash Value and Surrender Value;
3. the current Variable Policy Value (including each Subaccount
Value), Fixed Policy Value and Loan Account Value;
4. the current Loan Amount;
5. any premium payments, withdrawals, or surrenders made, Death
Benefit Proceeds paid and charges deducted since the last report;
6. current Net Premium Payment allocations; and
7. any other information required by law.
Owners may request additional copies of reports from VFL, but VFL reserves
the right to charge a fee for such additional copies. In addition, VFL will send
written confirmations of premium payments and other financial transactions
requested by Owners. Owners will also be sent copies of the annual and
semi-annual report to shareholders for each Fund in which they are indirectly
invested.
SUPPLEMENTAL BENEFITS AND/OR RIDERS
The following supplemental benefits and/or riders may be available and may
be added to a Policy. The supplemental benefits and/or riders may not be
available in all states. Monthly charges for these benefits and/or riders are
deducted from Policy Value as part of the monthly deduction. The supplemental
benefits and/or riders available with the Policies provide fixed benefits that
do not vary with the investment experience of the Variable Account.
CHILDREN'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of a covered child. This rider has no cash value.
SPOUSE'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of the Insured's spouse. This rider has no cash value.
DISABILITY BENEFIT RIDER. This rider provides for the waiver of the monthly
deduction under the Policy during the total disability of the Owner.
LONG TERM CARE MONTHLY BENEFIT RIDER. This rider provides a monthly
benefit payable while the Insured is confined in a long term care facility for
up to a stated maximum benefit period. This rider has no cash value.
ADDITIONAL TERM LIFE INSURANCE RIDER. This rider provides an additional
death benefit payable upon the death of the Insured. This rider has no cash
value.
OTHER INSURED TERM LIFE INSURANCE RIDER. This rider provides a death
benefit payable upon the death of an Other Insured Person named in the Policy.
This rider has no cash value.
IMMINENT DEATH RIDER. This rider provides for the accelerated payment of a
portion of the death benefit upon evidence of the Insured's imminent death
(within six months). This rider has no cash value.
Additional rules and limits apply to these supplemental benefits and/or
riders.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon VFL's understanding of the
present federal income tax laws. No representation is made as to the likelihood
of continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under federal tax law, a Policy must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements should be applied is limited. Nevertheless, VFL believes that
Policies issued on a standard premium class basis should satisfy the applicable
requirements. There is less guidance, however, with respect to Policies issued
on a substandard basis, and it is not clear whether such Policies will in all
cases satisfy the applicable requirements, particularly if the Owner pays the
full amount of premiums permitted under the Policy. If it is subsequently
determined that a Policy does not satisfy the applicable requirements, we may
take appropriate steps to bring the Policy into compliance with such
requirements and we reserve the right to restrict Policy transactions in order
to do so.
In certain circumstances, owners of variable life insurance contracts have
been considered for federal income tax purposes to be the owners of the assets
of the separate account supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the separate account assets. There is little guidance in this area, and some
features of the Policies, such as the flexibility of an Owner to allocate
premium payments and Policy Value and the narrow investment objective of certain
Funds, have not been explicitly addressed in published rulings. While VFL
believes that the Policies do not give Owners investment control over Separate
Account assets, VFL reserves the right to modify the Policies as necessary to
prevent an Owner from being treated as the owner of the Separate Account assets
supporting the Policy.
In addition, the Internal Revenue Code requires that the investments of the
Separate Accounts be adequately diversified in order for the Policies to be
treated as life insurance contracts for federal income tax purposes. It is
intended that the Separate Accounts, through the Funds, will satisfy these
diversification requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. VFL believes that the death benefit under a Policy should be
excludible from the gross income of the Beneficiary.
Federal, state and local transfer, estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or beneficiary. A tax advisor should be consulted on
these consequences.
Generally, the Owner will not be deemed to be in constructive receipt of
the Policy's Policy Value until there is a distribution. When distributions from
a Policy occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a Modified Endowment
Contract.
Modified Endowment Contracts. Under the Internal Revenue Code, certain
life insurance contracts are classified as a Modified Endowment Contracts, with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
Modified Endowment Contract. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy years or seven years following a material change to the Policy. Certain
changes in a Policy after it is issued could also cause it to be classified as a
Modified Endowment Contract. A current or prospective Owner should consult with
a competent advisor to determine whether a Policy transaction will cause the
Policy to be classified as a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment Contracts.
Policies classified as Modified Endowment Contracts are subject to the following
tax rules:
- All distributions other than death benefits from a Modified
Endowment Contract, including distributions upon surrender and
withdrawals, are treated first as distributions of gain taxable as
ordinary income and as tax-free recovery of the Owner's investment
in the Policy only after all gain has been distributed.
- Loans taken from or secured by a Policy classified as a Modified
Endowment Contract are treated as distributions and taxed in same
manner as surrenders and withdrawals.
- A 10 percent additional income tax is imposed on the amount subject
to tax except where the distribution or loan is made when the Owner
has attained age 59 1/2 or is disabled, or where the distribution is
part of a series of substantially equal periodic payments for the
life (or life expectancy) of the Owner or the joint lives (or joint
life expectancies) of the Owner and the Owner's Beneficiary or
designated Beneficiary.
Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts. Distributions other than death benefits from a Policy that
is not classified as a Modified Endowment Contract are generally treated first
as a recovery of the Owner's investment in the Policy and only after the
recovery of all investment in the Policy as taxable income. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance contract for federal income tax purposes if Policy
benefits are reduced during the first 15 Policy years may be treated in whole or
in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a Modified Endowment Contract
are generally not treated as distributions. However, the tax consequences
associated with Policy loans after the later of the 10th Policy Anniversary or
Attained Age 65 is less clear and a tax advisor should be consulted about such
loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
Investment in the Policy. The Owner's investment in the Policy is
generally the aggregate premium payments. When a distribution is taken from the
Policy, the Owner's investment in the Policy is reduced by the amount of the
distribution that is tax-free.
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 (or joint life expectancy in the
case of a joint and survivor option) 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.
Policy Loans. In general, interest on a Policy loan will not be
deductible. Before taking out a Policy loan, an Owner should consult a tax
advisor as to the tax consequences.
Multiple Policies. All Modified Endowment Contracts that are issued by VFL
(or its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount that
would be included in the Owner's income when a taxable distribution occurs.
SPECIAL RULES FOR PENSION AND PROFIT-SHARING PLANS
If a Policy is purchased by a pension or profit-sharing plan, or similar
deferred compensation arrangement, the federal, state and estate tax
consequences could differ. A competent tax advisor should be consulted in
connection with such a purchase.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited. The current cost of
insurance for the net amount at risk is treated as a current fringe benefit, and
must be included annually in the plan participant's gross income. VFL reports
this cost to the participant annually. If the plan participant dies while
covered by the plan and the Policy proceeds are paid to the participant's
beneficiary, then the excess of the death benefit over the Policy's Policy Value
is not taxable. However, the cash value will generally be taxable to the extent
it exceeds the participant's cost basis in the Policy. Policies owned under
these types of plans may be subject to restrictions under the Employee
Retirement Income Security Act of 1974 (ERISA). You should consult a qualified
advisor regarding ERISA.
Department of Labor regulations impose requirements for participant loans
under retirement plans covered by ERISA. Plan loans must also satisfy tax
requirements to be treated as nontaxable. Plan loan requirements and provisions
may differ from Policy loan provisions. Failure of plan loans to comply with the
requirements and provisions of the Department of Labor regulations and of tax
law may result in adverse tax consequences and/or adverse consequences under
ERISA. Plan fiduciaries and participants should consult a qualified advisor
before requesting a loan under a Policy held in connection with a retirement
plan.
BUSINESS USES OF THE POLICY
Businesses can use the Policy in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, tax exempt and nonexempt welfare benefit
plans, retiree medical benefit plans and others. The tax consequences of such
plans may vary depending on the particular facts and circumstances. If an Owner
is purchasing the Policy for any arrangement the value of which depends in part
on its tax consequences, he or she should consult a qualified tax advisor. In
recent years, moreover, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a new
Policy or a change in an existing Policy should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. Consult a tax advisor with respect to legislative
developments and their effect on the Policy.
VFL'S TAXES
Under current federal income tax law, VFL is not taxed on the Separate
Account's operations. Thus, currently VFL does not deduct charges from the
Separate Account for its federal income taxes. VFL reserves the right to charge
the Separate Account for any future federal income taxes that it may incur.
Under current laws in several states, VFL may incur state and local taxes
(in addition to premium taxes). These taxes are not now significant and we are
not currently charging for them. If they increase, VFL may deduct charges for
such taxes.
OTHER INFORMATION ABOUT THE POLICIES AND VFL
SALE OF THE POLICIES
CNA Investor Services, Inc. ("CNA/ISI"), which is located at CNA Plaza,
Chicago, Illinois 60685, is principal underwriter and distributor of the
Policies as well as of other policies issued through other separate accounts of
VFL or affiliates of VFL. CNA/ISI is an affiliate of VFL, is registered with the
SEC as a broker-dealer, and is a member of the National Association of
Securities Dealers, Inc. ("NASD"). VFL pays CNA/ISI for acting as principal
underwriter under a distribution agreement. The Policies are offered on a
continuous basis and VFL does not anticipate discontinuing the offer.
Applications for Policies are solicited by agents who are licensed by
applicable state insurance authorities to sell VFL insurance contracts and who
are registered representatives of a broker-dealer having a selling agreement
with CNA/ISI or with CNA/ISI directly. Such broker-dealers generally receive
commissions based on a percent of premium payments made (up to a maximum of
100%) plus a percent of Policy Values (up to a maximum of 1.00% a year). The
writing agent receives a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions. Total commissions may be as high as 130% of target
premium which would be split between wholesale and retail broker dealer.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, VFL votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or VFL otherwise determines that it is
allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner has the right to instruct is calculated
separately for each Subaccount, and may include fractional votes. While the
Insured is still living and the Policy is in force prior to the Maturity Date,
an Owner holds a voting interest in each Subaccount to which Variable Policy
Value is allocated. For each Owner, the number of votes attributable to a
Subaccount is determined by dividing the Owner's Subaccount Value by the Net
Asset Value Per Share of the Fund in which that Subaccount invests.
After the Maturity Date, the Payee under a Settlement Option has a voting
interest in each Subaccount from which variable Settlement Payments are made.
For each such Payee, the number of votes attributable to a Subaccount is
determined by dividing the liability for future variable Settlement Payments to
be paid from that Subaccount by the Net Asset Value Per Share of the Fund in
which that Subaccount invests. This liability for future payments is calculated
on the basis of the mortality assumptions, the selected Benchmark Rate of Return
and the Settlement Unit value of that Subaccount on the date that the number of
votes is determined. As Variable Settlement Payments are made to the Payee, the
liability for future payments decreases as does the number of votes.
The number of votes available to an Owner or Payee is determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions are solicited by written communication prior
to such meeting in accordance with procedures established for the Fund. Each
Owner or Payee having a voting interest in a Subaccount will receive proxy
materials and reports relating to any meeting of shareholders of the Fund
in which that Subaccount invests.
Fund shares as to which no timely instructions are received and shares held
by VFL in a Subaccount as to which no Owner or Payee has a beneficial interest
are voted in proportion to the voting instructions that are received with
respect to all Policies participating in that Subaccount. Voting instructions to
abstain on any item to be voted upon will be applied to reduce the total number
of votes eligible to be cast on a matter. Under the 1940 Act, certain actions
affecting the Variable Account may require Owner approval. In that case, an
Owner will be entitled to vote in proportion to his or her Variable Policy
Value.
VFL may, if required by state insurance regulators, disregard Owner and
Payee voting instructions if such instructions would require Fund shares to be
voted so as to cause a change in sub-classification or investment objectives of
a Fund, or to approve or disapprove an investment management agreement or an
investment advisory agreement. In addition, VFL may under certain circumstances
disregard voting instructions that would require changes in an investment
management agreement, investment manager, an investment advisory agreement or an
investment adviser of a Fund, provided that VFL reasonably disapproves of such
changes in accordance with applicable regulations under the 1940 Act. If VFL
ever disregards voting instructions, Owners and Payees will be advised of that
action and of the reasons for such action in the next semiannual report for the
appropriate Fund.
43
<PAGE> 51
DIRECTORS AND EXECUTIVE OFFICERS
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 VFL. Executive officers serve at the discretion of the Board of
Directors.
COMPANY HOLIDAYS
VFL is closed on the following days: New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
STATE REGULATION
VFL is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines the financial
condition and operations of VFL. VFL is also subject to the insurance laws and
regulations of all jurisdictions where it does business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
VFL is required to submit annual statements of operations, including
financial statements, to the insurance departments of the various jurisdictions
where it does business to determine solvency and compliance with applicable
insurance laws and regulations.
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
EXPERTS
The 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 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 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.
GLOSSARY
ATTAINED AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date, plus the number of complete Policy Years since the Policy
Effective Date.
BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds are paid
upon the death of the Insured. The Owner may designate primary, contingent, and
irrevocable Beneficiaries.
CANCELLATION PERIOD -- The period shown in the Policy during which the
Owner may cancel the Policy for a refund by returning it to VFL.
CASH VALUE -- Policy Value minus any applicable Surrender Charge.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds
are paid upon the death of the Insured if the primary Beneficiary (or
Beneficiaries) is not living.
DEATH BENEFIT -- The amount payable to the Beneficiary under a Death
Benefit Option before adjustments if the Insured dies while the Policy is in
force before the Maturity Date.
DEATH BENEFIT OPTION -- One of two options that an Owner may select for the
computation of the Death Benefit Proceeds.
DEATH BENEFIT PROCEEDS -- The total amount payable to the Beneficiary if
the Insured dies while the Policy is in force before the Maturity Date.
DUE PROOF OF DEATH -- Proof of death satisfactory to VFL. Due Proof of
Death may consist of the following: (a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or (c) any
other proof satisfactory to VFL.
FIXED ACCOUNT -- Part of VFL's General Account to which Policy Value may be
transferred or Net Premium Payments may be allocated under a Policy.
FIXED POLICY VALUE -- The Policy Value in the Fixed Account.
FUND -- Any open-end management investment company or investment portfolio
thereof, or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT -- The assets of VFL other than those allocated to the
Variable Account or any other separate account of VFL.
GRACE PERIOD -- A 61-day period during which an Owner may make premium
payments to cover the overdue (and other specified) monthly deductions and
thereby prevent the Policy from Lapsing.
GUIDELINE ANNUAL PREMIUM -- The "guideline annual premium" as defined in
applicable regulations under the Investment Company Act of 1940, as amended.
INITIAL SPECIFIED AMOUNT -- The Specified Amount on the Policy Effective
Date.
INSURED -- The person whose life is insured by the Policy.
ISSUE AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date.
LAPSE -- Termination of the Policy at the expiration of the Grace Period
while the Insured is still living before the Maturity Date.
LOAN ACCOUNT -- A portion of VFL's General Account to which Variable Policy
Value or Fixed Policy Value is transferred to provide collateral for any loan
taken under the Policy.
LOAN ACCOUNT VALUE -- The Policy Value in the Loan Account.
LOAN AMOUNT -- At any time other than a Policy Anniversary, the Loan
Account Value plus any interest charges accrued on the Loan Account Value up to
that time. On a Policy Anniversary, the Loan Amount equals the Loan Account
Value.
MATURITY DATE -- The date shown in the Policy on which the Owner is paid
the Surrender Value, if any, provided the Insured is still living while the
Policy is in force. It is the Policy Anniversary nearest the Insured's 95th
birthday.
MINIMUM INITIAL PREMIUM PAYMENT -- The amount shown in the Policy that the
Owner must pay before coverage becomes effective under the Policy.
MINIMUM MONTHLY PREMIUM PAYMENT -- The minimum amount of monthly premium
payments (or the equivalent) that an Owner must make in order for the Lapse
Prevention Guarantee to remain in effect.
MONTHLY ANNIVERSARY DAY -- The same day as the Policy Effective Date for
each succeeding month.
NET AMOUNT AT RISK -- As of any Monthly Anniversary Day, the Death Benefit
under the Policy (discounted for the upcoming month) less the Policy Value
(before the deduction of the monthly policy fee, monthly first-year issue fee
and the cost of additional benefits provided by rider).
NET ASSET VALUE PER SHARE -- The value per share of any Fund on any
Valuation Day. The method of computing the Net Asset Value is described in the
prospectuses for the Funds.
NET PREMIUM PAYMENT -- Any premium payment less any premium tax charge,
deferred acquisition cost tax charge, and sales charge deducted from the premium
payment.
OWNER -- The person or persons who owns (or own) the Policy and who is
(are) entitled to exercise all rights and privileges provided in the Policy. The
maximum number of joint Owners is two. References in this prospectus to an
action by the "Owner" mean, in the case of joint Owners, both Owners acting
jointly.
OTHER INSURED PERSON -- The person named in the Policy upon whose death a
death benefit is payable.
PLANNED PERIODIC PREMIUM PAYMENT -- The premium payment selected by the
Owner as a level amount that he or she (or they) plans to pay on a monthly,
quarterly, semi-annual or annual basis over the life of the Policy.
POLICY ANNIVERSARY -- The same date in each Policy Year as the Policy
Effective Date.
POLICY EFFECTIVE DATE -- The date shown in the Policy from which Policy
Years and various other periods described in this prospectus are measured. The
Policy Effective Date is never the 29th, 30th or 31st of a month.
POLICY VALUE -- The sum of the Variable Policy Value, the Fixed Policy
Value, and the Loan Account Value.
POLICY YEAR -- A twelve-month period beginning on the Policy Effective Date
or on a Policy Anniversary.
SERVICE CENTER -- The offices of VFL's administrative department, at PO Box
305139, Nashville, Tennessee 37230-5139 (1-800-262-1755).
SETTLEMENT OPTION -- The manner in which an Owner or Beneficiary (or
Contingent Beneficiary) elects to receive the amount of any surrender or
withdrawal or the Death Benefit Proceeds.
SETTLEMENT PAYMENT -- Payments made by VFL under a Settlement Option.
SPECIFIED AMOUNT -- A dollar amount selected by the Owner and shown in the
Policy that is used to determine the Death Benefit.
SUBACCOUNT -- A subdivision of the Variable Account, the assets of which
are invested in a corresponding Fund.
SUBACCOUNT VALUE -- The Policy Value in a Subaccount.
SURRENDER VALUE -- The Cash Value minus any Loan Amount.
TARGET PREMIUM PAYMENT -- An amount of premium payments, computed
separately for each increment of Specified Amount under a Policy, used to
compute sales charges and sales surrender charges.
UNIT -- A unit of measurement used to calculate Variable Policy Value.
VALUATION DAY -- For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in this
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD -- The period that starts at the close of regular trading
on the New York Stock Exchange on any valuation day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT -- Valley Forge Life Insurance Company Variable Life
Separate Account.
VARIABLE POLICY VALUE -- The sum of all Subaccount Values.
VFL -- Valley Forge Life Insurance Company.
WRITTEN NOTICE -- A written notice or request in a form satisfactory to VFL
that is signed by the Owner and received at the Service Center.
<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.
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUM PAYMENTS
The following tables have been prepared to illustrate hypothetically how
certain values under a Policy change with investment performance over an
extended period of time. The tables illustrate how Policy Values, Surrender
Values and Death Benefits under a Policy covering an Insured of a given age on
the Policy Effective Date, would vary over time if the Planned Periodic Premium
Payments were paid annually and the return on the assets in each fund were an
assumed uniform gross annual rate of 0%, 6% and 12%. The values would be
different from those shown if the returns averaged 0%, 6% or 12% but fluctuated
over and under those averages throughout the years shown. The tables also show
Planned Periodic Premium Payments accumulated at 5% interest compounded
annually. THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF
RETURN. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return illustrated and will depend on a
number of factors including the investment allocations made by an Owner and
prevailing rates. These illustrations assume that the Net Premiums are allocated
equally among the 18 Subaccounts available under the Policy, and that no amounts
are allocated to the Fixed Account.
The illustrations reflect the fact that the net investment returns on the
assets held in the Subaccounts is lower than the gross after tax return of the
selected Funds. The tables assume an average annual expense ratio of .95% of
the average daily net assets of the Funds available.
In addition, the illustrations reflect the daily charge to the Variable
Account for assuming mortality and expense risk, which is equivalent to an
effective annual charge of 0.90% during Policy Years 1-10 and 0.45% during
Policy Years 11 and later. After deduction of Fund expenses and the mortality
and expense risk charge, the illustrated gross annual investment rates of return
of 0%, 6% and 12% would correspond to approximate net annual rates of -1.85%,
4.07% and 10.07% , respectively during Policy Years 1-10 and -1.40% , 4.52% and
10.52% during Policy Years 11 and later.
The illustrations also reflect the deduction of the Sales Charges, Premium
Tax Charge, Federal Tax Charge and Monthly Deduction for the hypothetically
insured. The Surrender charge is reflected in the Surrender Value column. VFL's
current cost of insurance charges and the guaranteed maximum cost of insurance
charges that VFL has the contractual right to charge, are reflected in separate
illustrations on each of the following pages. All the illustrations reflect the
fact that no charges for federal or state income taxes are currently made
against the Variable Account and assumes no Loan Amount or partial
withdrawals/surrenders or charges for supplemental and/or rider benefits.
The illustrations are based on VFL's Preferred Nonsmoker risk class. Upon
request, Owner(s) will be furnished with a comparable illustration based on the
proposed Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables. Because the Death Benefit values vary depending on the Death Benefit
Option in effect, level and increasing death benefit options are illustrated
separately.
The illustrations show contract values that would result based upon the
hypothetical investment rates of return if premiums are paid as indicated and
all net premiums are allocated to subaccounts.
<TABLE>
<CAPTION>
PAGE 1
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,105 1,224 350 100,000 1,317 443 100,000 1,410 536 100,000
2 4,316 2,641 1,500 100,000 2,912 1,770 100,000 3,195 2,053 100,000
3 6,638 4,009 2,409 100,000 4,550 2,950 100,000 5,137 3,537 100,000
4 9,075 5,327 3,727 100,000 6,233 4,633 100,000 7,254 5,654 100,000
5 11,634 6,594 4,994 100,000 7,959 6,359 100,000 9,562 7,962 100,000
6 14,321 7,809 6,209 100,000 9,730 8,130 100,000 12,080 10,480 100,000
7 17,143 8,967 7,687 100,000 11,543 10,263 100,000 14,826 13,546 100,000
8 20,105 10,064 8,944 100,000 13,396 12,276 100,000 17,822 16,702 100,000
9 23,216 11,097 10,137 100,000 15,287 14,327 100,000 21,092 20,132 100,000
10 26,483 12,060 11,260 100,000 17,213 16,413 100,000 24,664 23,864 100,000
11 29,912 13,032 12,392 100,000 19,280 18,640 100,000 28,711 28,071 100,000
12 33,513 13,929 13,449 100,000 21,392 20,912 100,000 33,163 32,683 100,000
13 37,294 14,749 14,429 100,000 23,553 23,233 100,000 38,069 37,749 100,000
14 41,265 15,487 15,327 100,000 25,763 25,603 100,000 43,488 43,328 100,000
15 45,433 16,135 16,135 100,000 28,020 28,020 100,000 49,484 49,484 100,000
16 49,810 16,685 16,685 100,000 30,323 30,323 100,000 56,132 56,132 100,000
17 54,406 17,128 17,128 100,000 32,672 32,672 100,000 63,521 63,521 100,000
18 59,232 17,450 17,450 100,000 35,063 35,063 100,000 71,755 71,755 100,000
19 64,299 17,636 17,636 100,000 37,494 37,494 100,000 80,960 80,960 100,390
20 69,620 17,668 17,668 100,000 39,960 39,960 100,000 91,172 91,172 111,230
21 75,206 17,529 17,529 100,000 42,464 42,464 100,000 102,414 102,414 122,896
22 81,072 17,204 17,204 100,000 45,007 45,007 100,000 114,766 114,766 136,572
23 87,231 16,675 16,675 100,000 47,597 47,597 100,000 128,338 128,338 151,439
24 93,698 15,921 15,921 100,000 50,238 50,238 100,000 143,250 143,250 167,602
25 100,488 14,916 14,916 100,000 52,939 52,939 100,000 159,631 159,631 185,172
26 107,618 13,619 13,619 100,000 55,703 55,703 100,000 177,625 177,625 204,268
27 115,105 11,924 11,924 100,000 58,509 58,509 100,000 197,448 197,448 223,116
28 122,966 9,865 9,865 100,000 61,411 61,411 100,000 219,341 219,341 243,469
29 131,219 7,304 7,304 100,000 64,395 64,395 100,000 243,542 243,542 265,460
30 139,886 4,142 4,142 100,000 67,477 67,477 100,000 270,345 270,345 289,269
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 2
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,105 1,388 514 100,000 1,485 611 100,000 1,583 709 100,000
2 4,316 2,931 1,789 100,000 3,218 2,076 100,000 3,518 2,376 100,000
3 6,638 4,393 2,793 100,000 4,969 3,369 100,000 5,593 3,993 100,000
4 9,075 5,803 4,203 100,000 6,768 5,168 100,000 7,854 6,254 100,000
5 11,634 7,187 5,587 100,000 8,641 7,041 100,000 10,346 8,746 100,000
6 14,321 8,548 6,948 100,000 10,597 8,997 100,000 13,096 11,496 100,000
7 17,143 9,888 8,608 100,000 12,640 11,360 100,000 16,133 14,853 100,000
8 20,105 11,207 10,087 100,000 14,773 13,653 100,000 19,488 18,368 100,000
9 23,216 12,505 11,545 100,000 17,002 16,042 100,000 23,194 22,234 100,000
10 26,483 13,783 12,983 100,000 19,331 18,531 100,000 27,289 26,489 100,000
11 29,912 15,113 14,473 100,000 21,868 21,228 100,000 31,964 31,324 100,000
12 33,513 16,407 15,927 100,000 24,511 24,031 100,000 37,137 36,657 100,000
13 37,294 17,658 17,338 100,000 27,260 26,940 100,000 42,859 42,539 100,000
14 41,265 18,898 18,738 100,000 30,149 29,989 100,000 49,217 49,057 100,000
15 45,433 20,117 20,117 100,000 33,178 33,178 100,000 56,276 56,276 100,000
16 49,810 21,204 21,204 100,000 36,259 36,259 100,000 64,057 64,057 100,000
17 54,406 22,227 22,227 100,000 39,457 39,457 100,000 72,693 72,693 100,000
18 59,232 23,188 23,188 100,000 42,785 42,785 100,000 82,293 82,293 103,689
19 64,299 24,080 24,080 100,000 46,245 46,245 100,000 92,906 92,906 115,203
20 69,620 24,895 24,895 100,000 49,847 49,847 100,000 104,620 104,620 127,637
21 75,206 25,638 25,638 100,000 53,606 53,606 100,000 117,555 117,555 141,066
22 81,072 26,294 26,294 100,000 57,529 57,529 100,000 131,822 131,822 156,868
23 87,231 26,864 26,864 100,000 61,634 61,634 100,000 147,560 147,560 174,121
24 93,698 27,342 27,342 100,000 65,940 65,940 100,000 164,919 164,919 192,955
25 100,488 27,706 27,706 100,000 70,458 70,458 100,000 184,060 184,060 213,510
26 107,618 27,960 27,960 100,000 75,220 75,220 100,000 205,171 205,171 235,947
27 115,105 28,080 28,080 100,000 80,247 80,247 100,000 228,493 228,493 258,197
28 122,966 28,071 28,071 100,000 85,579 85,579 100,000 254,281 254,281 282,252
29 131,219 27,920 27,920 100,000 91,256 91,256 100,000 282,818 282,818 308,272
30 139,886 27,591 27,591 100,000 97,279 97,279 104,088 314,420 314,420 336,430
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 3
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,854 3,697 2,823 103,697 3,941 3,067 103,941 4,186 3,312 104,186
2 9,950 7,535 6,298 107,535 8,262 7,025 108,262 9,019 7,782 109,019
3 15,301 11,272 9,672 111,272 12,732 11,132 112,732 14,311 12,711 114,311
4 20,920 14,908 13,308 114,908 17,353 15,753 117,353 20,106 18,506 120,106
5 26,820 18,441 16,841 118,441 22,129 20,529 122,129 26,450 24,850 126,450
6 33,015 21,870 20,270 121,870 27,063 25,463 127,063 33,396 31,796 133,396
7 39,519 25,192 23,912 125,192 32,156 30,876 132,156 40,998 39,718 140,998
8 46,349 28,400 27,280 128,400 37,406 36,286 137,406 49,316 48,196 149,316
9 53,520 31,492 30,532 131,492 42,814 41,854 142,814 58,415 57,455 158,415
10 61,050 34,460 33,660 134,460 48,377 47,577 148,377 68,365 67,565 168,365
11 68,956 37,495 36,855 137,495 54,354 53,714 154,354 79,595 78,955 179,595
12 77,258 40,406 39,926 140,406 60,520 60,040 160,520 91,926 91,446 191,926
13 85,974 43,191 42,871 143,191 66,880 66,560 166,880 105,469 105,149 205,469
14 95,127 45,843 45,683 145,843 73,436 73,276 173,436 120,345 120,185 220,345
15 104,737 48,354 48,354 148,354 80,184 80,184 180,184 136,682 136,682 236,682
16 114,828 50,714 50,714 150,714 87,120 87,120 187,120 154,623 154,623 254,623
17 125,423 52,911 52,911 152,911 94,241 94,241 194,241 174,323 174,323 274,323
18 136,548 54,930 54,930 154,930 101,537 101,537 201,537 195,949 195,949 295,949
19 148,229 56,754 56,754 156,754 108,993 108,993 208,993 219,684 219,684 319,684
20 160,494 58,363 58,363 158,363 116,596 116,596 216,596 245,726 245,726 345,726
21 173,372 59,740 59,740 159,740 124,331 124,331 224,331 274,301 274,301 374,301
22 186,895 60,874 60,874 160,874 132,188 132,188 232,188 305,658 305,658 405,658
23 201,093 61,749 61,749 161,749 140,155 140,155 240,155 340,073 340,073 440,073
24 216,002 62,351 62,351 162,351 148,217 148,217 248,217 377,851 377,851 477,851
25 231,655 62,659 62,659 162,659 156,355 156,355 256,355 419,323 419,323 519,323
26 248,092 62,643 62,643 162,643 164,535 164,535 264,535 464,842 464,842 564,842
27 265,350 62,205 62,205 162,205 172,654 172,654 272,654 514,729 514,729 614,729
28 283,472 61,412 61,412 161,412 180,773 180,773 280,773 569,515 569,515 669,515
29 302,499 60,150 60,150 160,150 188,769 188,769 288,769 629,590 629,590 729,590
30 322,478 58,364 58,364 158,364 196,575 196,575 296,575 695,455 695,455 795,455
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 4
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,854 3,867 2,993 103,867 4,114 3,240 104,114 4,362 3,488 104,362
2 9,950 7,841 6,604 107,841 8,581 7,344 108,581 9,352 8,115 109,352
3 15,301 11,685 10,085 111,685 13,174 11,574 113,174 14,784 13,184 114,784
4 20,920 15,430 13,830 115,430 17,926 16,326 117,926 20,733 19,133 120,733
5 26,820 19,102 17,502 119,102 22,871 21,271 122,871 27,278 25,678 127,278
6 33,015 22,707 21,107 122,707 28,019 26,419 128,019 34,483 32,883 134,483
7 39,519 26,247 24,967 126,247 33,381 32,101 133,381 42,417 41,137 142,417
8 46,349 29,723 28,603 129,723 38,967 37,847 138,967 51,154 50,034 151,154
9 53,520 33,135 32,175 133,135 44,784 43,824 144,784 60,774 59,814 160,774
10 61,050 36,487 35,687 136,487 50,844 50,044 150,844 71,367 70,567 171,367
11 68,956 39,957 39,317 139,957 57,415 56,775 157,415 83,410 82,770 183,410
12 77,258 43,354 42,874 143,354 64,264 63,784 164,264 96,706 96,226 196,706
13 85,974 46,669 46,349 146,669 71,393 71,073 171,393 111,376 111,056 211,376
14 95,127 49,941 49,781 149,941 78,856 78,696 178,856 127,606 127,446 227,606
15 104,737 53,157 53,157 153,157 86,653 86,653 186,653 145,550 145,550 245,550
16 114,828 56,176 56,176 156,176 94,655 94,655 194,655 165,240 165,240 265,240
17 125,423 59,084 59,084 159,084 102,956 102,956 202,956 186,948 186,948 286,948
18 136,548 61,883 61,883 161,883 111,571 111,571 211,571 210,891 210,891 310,891
19 148,229 64,558 64,558 164,558 120,500 120,500 220,500 237,291 237,291 337,291
20 160,494 67,104 67,104 167,104 129,747 129,747 229,747 266,400 266,400 366,400
21 173,372 69,523 69,523 169,523 139,330 139,330 239,330 298,509 298,509 398,509
22 186,895 71,794 71,794 171,794 149,240 149,240 249,240 333,912 333,912 433,912
23 201,093 73,921 73,921 173,921 159,495 159,495 259,495 372,961 372,961 472,961
24 216,002 75,892 75,892 175,892 170,098 170,098 270,098 416,033 416,033 516,033
25 231,655 77,679 77,679 177,679 181,033 181,033 281,033 463,524 463,524 563,524
26 248,092 79,289 79,289 179,289 192,320 192,320 292,320 515,908 515,908 615,908
27 265,350 80,688 80,688 180,688 203,940 203,940 303,940 573,671 573,671 673,671
28 283,472 81,888 81,888 181,888 215,917 215,917 315,917 637,393 637,393 737,393
29 302,499 82,875 82,875 182,875 228,250 228,250 328,250 707,695 707,695 807,695
30 322,478 83,605 83,605 183,605 240,909 240,909 340,909 785,228 785,228 885,228
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 5
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,791 984 212 100,000 1,061 289 100,000 1,139 367 100,000
2 3,672 2,171 1,135 100,000 2,395 1,359 100,000 2,630 1,594 100,000
3 5,647 3,318 2,018 100,000 3,767 2,467 100,000 4,255 2,955 100,000
4 7,721 4,425 3,125 100,000 5,177 3,877 100,000 6,026 4,726 100,000
5 9,899 5,492 4,192 100,000 6,627 5,327 100,000 7,959 6,659 100,000
6 12,185 6,515 5,215 100,000 8,114 6,814 100,000 10,069 8,769 100,000
7 14,586 7,496 6,456 100,000 9,641 8,601 100,000 12,372 11,332 100,000
8 17,106 8,431 7,521 100,000 11,206 10,296 100,000 14,889 13,979 100,000
9 19,753 9,316 8,536 100,000 12,807 12,027 100,000 17,638 16,858 100,000
10 22,532 10,151 9,501 100,000 14,445 13,795 100,000 20,645 19,995 100,000
11 25,450 11,004 10,484 100,000 16,210 15,690 100,000 24,055 23,535 100,000
12 28,514 11,809 11,419 100,000 18,029 17,639 100,000 27,813 27,423 100,000
13 31,731 12,569 12,309 100,000 19,904 19,644 100,000 31,962 31,702 100,000
14 35,109 13,285 13,155 100,000 21,845 21,715 100,000 36,552 36,422 100,000
15 38,656 13,956 13,956 100,000 23,852 23,852 100,000 41,634 41,634 100,000
16 42,380 14,577 14,577 100,000 25,925 25,925 100,000 47,266 47,266 100,000
17 46,291 15,139 15,139 100,000 28,064 28,064 100,000 53,512 53,512 100,000
18 50,397 15,631 15,631 100,000 30,261 30,261 100,000 60,444 60,444 100,000
19 54,708 16,035 16,035 100,000 32,511 32,511 100,000 68,147 68,147 100,000
20 59,235 16,337 16,337 100,000 34,807 34,807 100,000 76,724 76,724 100,000
21 63,988 16,529 16,529 100,000 37,152 37,152 100,000 86,290 86,290 103,548
22 68,979 16,606 16,606 100,000 39,548 39,548 100,000 96,859 96,859 115,262
23 74,219 16,564 16,564 100,000 42,005 42,005 100,000 108,499 108,499 128,029
24 79,722 16,402 16,402 100,000 44,534 44,534 100,000 121,323 121,323 141,947
25 85,499 16,112 16,112 100,000 47,140 47,140 100,000 135,449 135,449 157,121
26 91,565 15,672 15,672 100,000 49,825 49,825 100,000 151,010 151,010 173,662
27 97,935 15,051 15,051 100,000 52,587 52,587 100,000 168,187 168,187 190,051
28 104,623 14,200 14,200 100,000 55,420 55,420 100,000 187,155 187,155 207,742
29 111,646 13,063 13,063 100,000 58,320 58,320 100,000 208,119 208,119 226,850
30 119,020 11,580 11,580 100,000 61,286 61,286 100,000 231,314 231,314 247,506
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 6
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,791 1,157 385 100,000 1,239 467 100,000 1,321 549 100,000
2 3,672 2,499 1,463 100,000 2,742 1,706 100,000 2,996 1,960 100,000
3 5,647 3,796 2,496 100,000 4,287 2,987 100,000 4,818 3,518 100,000
4 7,721 5,052 3,752 100,000 5,878 4,578 100,000 6,807 5,507 100,000
5 9,899 6,276 4,976 100,000 7,526 6,226 100,000 8,989 7,689 100,000
6 12,185 7,471 6,171 100,000 9,237 7,937 100,000 11,387 10,087 100,000
7 14,586 8,632 7,592 100,000 11,008 9,968 100,000 14,019 12,979 100,000
8 17,106 9,768 8,858 100,000 12,850 11,940 100,000 16,917 16,007 100,000
9 19,753 10,879 10,099 100,000 14,767 13,987 100,000 20,110 19,330 100,000
10 22,532 11,965 11,315 100,000 16,762 16,112 100,000 23,628 22,978 100,000
11 25,450 13,103 12,583 100,000 18,940 18,420 100,000 27,650 27,130 100,000
12 28,514 14,223 13,833 100,000 21,221 20,831 100,000 32,106 31,716 100,000
13 31,731 15,328 15,068 100,000 23,613 23,353 100,000 37,049 36,789 100,000
14 35,109 16,404 16,274 100,000 26,106 25,976 100,000 42,520 42,390 100,000
15 38,656 17,469 17,469 100,000 28,724 28,724 100,000 48,592 48,592 100,000
16 42,380 18,502 18,502 100,000 31,455 31,455 100,000 55,317 55,317 100,000
17 46,291 19,499 19,499 100,000 34,300 34,300 100,000 62,771 62,771 100,000
18 50,397 20,456 20,456 100,000 37,265 37,265 100,000 71,036 71,036 100,000
19 54,708 21,377 21,377 100,000 40,357 40,357 100,000 80,208 80,208 100,000
20 59,235 22,258 22,258 100,000 43,586 43,586 100,000 90,374 90,374 110,256
21 63,988 23,094 23,094 100,000 46,953 46,953 100,000 101,609 101,609 121,931
22 68,979 23,887 23,887 100,000 50,472 50,472 100,000 114,022 114,022 135,686
23 74,219 24,628 24,628 100,000 54,147 54,147 100,000 127,734 127,734 150,726
24 79,722 25,319 25,319 100,000 57,992 57,992 100,000 142,883 142,883 167,173
25 85,499 25,958 25,958 100,000 62,019 62,019 100,000 159,618 159,618 185,156
26 91,565 26,530 26,530 100,000 66,235 66,235 100,000 178,102 178,102 204,817
27 97,935 27,041 27,041 100,000 70,661 70,661 100,000 198,541 198,541 224,351
28 104,623 27,472 27,472 100,000 75,309 75,309 100,000 221,144 221,144 245,469
29 111,646 27,822 27,822 100,000 80,200 80,200 100,000 246,151 246,151 268,305
30 119,020 28,068 28,068 100,000 85,356 85,356 100,000 273,828 273,828 292,996
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 7
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,891 2,873 2,101 102,873 3,066 2,294 103,066 3,259 2,487 103,259
2 7,976 5,909 4,873 105,909 6,483 5,447 106,483 7,079 6,043 107,079
3 12,265 8,867 7,567 108,867 10,017 8,717 110,017 11,263 9,963 111,263
4 16,769 11,744 10,444 111,744 13,673 12,373 113,673 15,844 14,544 115,844
5 21,498 14,543 13,243 114,543 17,454 16,154 117,454 20,863 19,563 120,863
6 26,463 17,261 15,961 117,261 21,360 20,060 121,360 26,358 25,058 126,358
7 31,677 19,896 18,856 119,896 25,395 24,355 125,395 32,377 31,337 132,377
8 37,151 22,448 21,538 122,448 29,561 28,651 129,561 38,967 38,057 138,967
9 42,899 24,910 24,130 124,910 33,856 33,076 133,856 46,181 45,401 146,181
10 48,935 27,285 26,635 127,285 38,286 37,636 138,286 54,080 53,430 154,080
11 55,272 29,723 29,203 129,723 43,054 42,534 143,054 63,006 62,486 163,006
12 61,926 32,081 31,691 132,081 47,994 47,604 147,994 72,827 72,437 172,827
13 68,913 34,360 34,100 134,360 53,112 52,852 153,112 83,637 83,377 183,637
14 76,249 36,562 36,432 136,562 58,418 58,288 158,418 95,542 95,412 195,542
15 83,952 38,686 38,686 138,686 63,919 63,919 163,919 108,655 108,655 208,655
16 92,041 40,726 40,726 140,726 69,615 69,615 169,615 123,096 123,096 223,096
17 100,533 42,671 42,671 142,671 75,504 75,504 175,504 138,994 138,994 238,994
18 109,450 44,508 44,508 144,508 81,579 81,579 181,579 156,486 156,486 256,486
19 118,813 46,217 46,217 146,217 87,826 87,826 187,826 175,717 175,717 275,717
20 128,645 47,781 47,781 147,781 94,234 94,234 194,234 196,853 196,853 296,853
21 138,967 49,192 49,192 149,192 100,800 100,800 200,800 220,083 220,083 320,083
22 149,806 50,443 50,443 150,443 107,521 107,521 207,521 245,619 245,619 345,619
23 161,187 51,533 51,533 151,533 114,403 114,403 214,403 273,703 273,703 373,703
24 173,137 52,465 52,465 152,465 121,451 121,451 221,451 304,603 304,603 404,603
25 185,684 53,230 53,230 153,230 128,663 128,663 228,663 338,606 338,606 438,606
26 198,859 53,808 53,808 153,808 136,023 136,023 236,023 376,016 376,016 476,016
27 212,693 54,166 54,166 154,166 143,501 143,501 243,501 417,157 417,157 517,157
28 227,218 54,257 54,257 154,257 151,052 151,052 251,052 462,372 462,372 562,372
29 242,469 54,028 54,028 154,028 158,620 158,620 258,620 512,030 512,030 612,030
30 258,483 53,428 53,428 153,428 166,147 166,147 266,147 566,544 566,544 666,544
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PAGE 8
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%
Per Policy Surrender Death Policy Surrender Death Policy Surrender Death
End of Policy YeaYear Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,891 3,050 2,278 103,050 3,247 2,475 103,247 3,444 2,672 103,444
2 7,976 6,251 5,215 106,251 6,840 5,804 106,840 7,454 6,418 107,454
3 12,265 9,370 8,070 109,370 10,559 9,259 110,559 11,844 10,544 111,844
4 16,769 12,413 11,113 112,413 14,411 13,111 114,411 16,656 15,356 116,656
5 21,498 15,390 14,090 115,390 18,411 17,111 118,411 21,942 20,642 121,942
6 26,463 18,303 17,003 118,303 22,566 21,266 122,566 27,752 26,452 127,752
7 31,677 21,148 20,108 121,148 26,879 25,839 126,879 34,133 33,093 134,133
8 37,151 23,934 23,024 123,934 31,364 30,454 131,364 41,152 40,242 141,152
9 42,899 26,663 25,883 126,663 36,028 35,248 136,028 48,873 48,093 148,873
10 48,935 29,336 28,686 129,336 40,878 40,228 140,878 57,368 56,718 157,368
11 55,272 32,113 31,593 132,113 46,147 45,627 146,147 67,036 66,516 167,036
12 61,926 34,847 34,457 134,847 51,656 51,266 151,656 77,724 77,334 177,724
13 68,913 37,542 37,282 137,542 57,417 57,157 157,417 89,546 89,286 189,546
14 76,249 40,179 40,049 140,179 63,425 63,295 163,425 102,602 102,472 202,602
15 83,952 42,782 42,782 142,782 69,713 69,713 169,713 117,048 117,048 217,048
16 92,041 45,324 45,324 145,324 76,266 76,266 176,266 133,002 133,002 233,002
17 100,533 47,801 47,801 147,801 83,094 83,094 183,094 150,621 150,621 250,621
18 109,450 50,208 50,208 150,208 90,200 90,200 190,200 170,074 170,074 270,074
19 118,813 52,547 52,547 152,547 97,601 97,601 197,601 191,558 191,558 291,558
20 128,645 54,815 54,815 154,815 105,305 105,305 205,305 215,286 215,286 315,286
21 138,967 57,004 57,004 157,004 113,318 113,318 213,318 241,486 241,486 341,486
22 149,806 59,115 59,115 159,115 121,656 121,656 221,656 270,424 270,424 370,424
23 161,187 61,138 61,138 161,138 130,319 130,319 230,319 302,376 302,376 402,376
24 173,137 63,075 63,075 163,075 139,325 139,325 239,325 337,665 337,665 437,665
25 185,684 64,920 64,920 164,920 148,683 148,683 248,683 376,640 376,640 476,640
26 198,859 66,656 66,656 166,656 158,391 158,391 258,391 419,673 419,673 519,673
27 212,693 68,287 68,287 168,287 168,468 168,468 268,468 467,200 467,200 567,200
28 227,218 69,791 69,791 169,791 178,905 178,905 278,905 519,674 519,674 619,674
29 242,469 71,162 71,162 171,162 189,715 189,715 289,715 577,615 577,615 677,615
30 258,483 72,371 72,371 172,371 200,880 200,880 300,880 641,572 641,572 741,572
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
APPENDIX
EXAMPLES OF DEATH BENEFIT COMPUTATIONS
UNDER OPTIONS 1 AND 2
EXAMPLES OF OPTION 1. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 1, a Policy with a $100,000 Specified Amount will generally
pay $100,000 in Death Benefits. However, because the Death Benefit must be equal
to or be greater than 250% of the Policy Value, any time that the Policy Value
exceeds $40,000, the Death Benefit will exceed the $100,000 Specified Amount.
Each additional dollar of Policy Value above $40,000 will increase the Death
Benefit by $2.50. A Policy with a $100,000 Specified Amount and a Policy Value
of $60,000 will provide Death Benefit of $150,000 ($60,000 X 250%); a Policy
Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X 250%); a
Policy Value of $100,000 will provide a Death Benefit of $250,000 ($100,000 X
250%).
Similarly, as long as Policy Value exceeds $40,000, each dollar taken out
of Policy Value will reduce the Death Benefit by $2.50. If, for example, the
Policy Value is reduced from $50,000 to $40,000 because of partial surrenders,
charges, or negative investment performance, the Death Benefit will be reduced
from $125,000 to $100,000. If at any time, however, the Policy Value multiplied
by the applicable percentage is less than the Specified Amount, the Death
Benefit will equal the current Specified Amount of the Policy.
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than between 0 and 40), the Policy Value
percentage would be 185%. The Death Benefit would not exceed the $100,000
Specified Amount unless the Policy Value exceeded approximately $54,054 (rather
than $40,000), and each dollar then added to or taken from the Policy Value
would change the Death Benefit by $1.85 (rather than $2.50).
EXAMPLES OF OPTION 2. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 2, a Policy with a Specified Amount of $100,000 will
generally provide a Death Benefit of $100,000 plus Policy Value. Thus, for
example, a Policy with a Policy Value of $10,000 will have a Death Benefit of
$110,000 ($100,000 + $10,000); a Policy Value of $20,000 will provide a Death
Benefit of $120,000 ($110,000 + $20,000). The Death Benefit, however, must be at
least 250% of the Policy Value. As a result, if the Policy Value exceeds
$66,667, the Death Benefit will be greater than the Specified Amount plus Policy
Value. Each additional dollar of Policy Value above $66,667 will increase the
Death Benefit by $2.50. A Policy with a Specified Amount of $100,000 and a
Policy Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X
250%); a Policy Value of $120,000 will provide a Death Benefit of $300,000
($120,000 X 250%).
Similarly, any time Policy Value exceeds $66,667, each dollar taken out of
Policy Value will reduce the Death Benefit by $2.50. If, for example, the Policy
Value is reduced from $80,000 to $70,000 because of partial surrenders, charges,
or negative investment performance, the Death Benefit will be reduced from
$200,000 to $175,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Specified
A-1
Amount plus the Policy Value, then the Death Benefit will be the current
Specified Amount plus the Policy Value.
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than under 40), the Policy Value percentage would
be 185%. The amount of the Death Benefit would be the sum of the Policy Value
plus $100,000 unless the Policy Value exceeded $117,647 (rather than $66,667),
and each dollar then added to or taken from the Policy Value would change the
Death Benefit by $1.85 (rather than $2.50).
TABLE OF POLICY VALUE PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- - -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243% 51 178% 61 128% 71 113%
42 236% 52 171% 62 126% 72 111%
43 229% 53 164% 63 124% 73 109%
44 222% 54 157% 64 122% 74 107%
45 215% 55 150% 65 120% 75-90 105%
46 209% 56 146% 66 119% 91 104%
47 203% 57 142% 67 118% 92 103%
48 197% 58 138% 68 117% 93 102%
49 191% 59 134% 69 116% 94 101%
</TABLE>
A-2
Part II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission (the "Commission") such supplementary and
periodic information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The registrant has no officers, directors or employees. The depositor and
the registrant do not indemnify the officers, directors of employees of the
depositor. CNA Financial Corporation, ("CNAFC") a parent of the depositor,
indemnifies the depositor's officers, directors and employees in their capacity
as such. Most of the depositor's officers, directors and employees are also
officers, directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of CNAFC) by reason of the fact that he is or was a director,
officer, employee or agent of CNAFC, or was serving at the request of CNAFC as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of CNAFC, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of CNAFC to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of CNAFC, or was serving at the
request of CNAFC as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of CNAFC. No indemnification is made, however, in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to CNAFC
unless and only to the extent that a court determines that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper.
To the extent that any person referred to above is successful on the merits
or otherwise in defense of any action, suit or proceeding referred to above, or
in defense of any claim, issue or matter, therein, CNAFC will indemnify such
person against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith. CNAFC may advance to such a person,
expenses incurred in defending a civil or criminal action, suit or proceeding as
authorized by CNAFC's board of directors upon receipt of an undertaking by (or
on behalf of) such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific case upon
a determination that such indemnification or advancement of expenses is proper
in the circumstances because he has met the applicable standard of conduct. Such
determination must be made by a majority vote of a quorum of CNAFC's board of
directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
Section 26(e)(2)(A) Representation
Valley Forge Life Insurance Company hereby represents that the fees and
charges deducted under the Policy, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by Valley Forge Life Insurance Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 81 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Section 26(e)(2)(A)
The signatures.
Written consents.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolution of the Board of Directors of Valley Forge
Life Insurance Company (the "Company") establishing
Valley Forge Life Insurance Company Variable Life
Separate Account (the "Variable Account")***
(2) Copy of Agreement for Lockbox Services*
(3) (a) Not Applicable
(b) Form of underwriting/distribution agreement
between the Company and CNA Investor
Services, Inc.****
(c) Schedule of Sales Commissions****
(4) Not applicable
(5) (a) Specimen Individual Flexible Premium
Variable and Fixed Life Insurance Policy
(the "Policy")**
(b) Form of Waiver of Monthly Deduction Rider**
(c) Form of Term Insurance on Spouse Rider**
(d) Form of Term Insurance on Children Rider**
(6) (a) Amended and restated Articles of Incorporation of the
Company***
(b) By-laws of the Company***
(7) Not applicable
(8) (a) Form of participation agreement between The Alger American
Fund and the Company*
(b) Form of participation agreement between Variable Insurance
Products Fund and the Company*
(c) Form of participation agreement between Variable Insurance
Products Fund II and the Company*
(d) Form of participation agreement between MFS Variable
Insurance Trust and the Company*
(e) Form of participation agreement between SoGen Variable
Funds, Inc. and the Company*
(f) Form of participation agreement between Van Eck Worldwide
Insurance Trust and the Company*
(g) Form of participation agreement between Insurance
Management Series and the Company*
(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) Policy Application****
(11) Description of issuance, transfer and redemption procedures****
B. Not applicable
C. Not applicable
2. Opinion and Consent
3. Not applicable
4. Not applicable
5. Financial Data Schedule (Not Applicable)
6. Opinion and consent as to actuarial matters pertaining to the
securities being registered
7. (a) Independent Auditors' Consent
- --------------------------------------------------------------------------------
* Incorporated by reference to the Form N-4 Registration Statement filed with
the Securities and Exchange Commission on September 4, 1996 (File No.
333-1087).
** Incorporated herein by reference to the registrant's initial filing of Form
S-6 on March 25, 1996 (File No. 333-01949).
*** Incorporated by reference to the N-4 Registration Statement filed with the
Securities and Exchange Commission on February 20, 1996 (File No. 333-1087)
**** Incorporated by reference to the registrant's Pre-effective Amendment No.1
filing on Form S-6 on September 4, 1996 (File No. 333-01949).
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act of 1933,
and has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on this 19th day of April, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
BY: VALLEY FORGE LIFE INSURANCE COMPANY,
for its separate account
Attest: /s/G. STEPHEN WASTEK By: /s/DAVID L. STONE
---------------------- -------------------------
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - -------------------------- ------------------------ --------------------
<S> <C> <C>
/s/BERNARD L. HENGESBAUGH Chief Executive Officer, 4-19-00
- - ---------------------------- Chairman of the Board, ___________
Bernard L. Hengesbaugh Director
/s/JONATHAN D. KANTOR Senior Vice President, Secretary, 4-19-00
- - ---------------------------- General Counsel, ___________
Jonathan D. Kantor Director
/s/ROBERT V. DEUTSCH Chief Financial Officer 4-19-00
- - ------------------------- and Director _________
Robert V. Deutsch
Senior Vice President,
/s/THOMAS PONTARELLI 4-19-00
- --------------------------- Director _____________
Thomas Pontarelli
/s/DONALD P. LOFE, JR. Group Vice President, 4-18-00
- --------------------------- Director _________
Donald P. Lofe, Jr.
/s/JOHN M. SQUAROK Group Vice President, 4-17-00
- --------------------------- Director _________
John M. Squarok
</TABLE>
INDEX TO EXHIBITS
EX-99.A.8.(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.
EX-99.C.2. Opinion and Consent
EX-99.C.6. Actuarial Opinion and Consent
EX-99.C.7.a Independent Auditors' Consent
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 16 day of June, 1999, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and CONTINENTAL ASSURANCE COMPANY, a life
insurance company organized under the laws of the State of Illinois (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H :
---------------------
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the " 1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
--------------------
1.1 The Trust shall make shares of its Portfolios available to the Accounts
at the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Portfolio of the
Trust shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting purchase
and redemption orders resulting from investment in and payments under the
Contracts. Receipt by the Company shall constitute receipt by the Trust provided
that i) such orders are received by the Company in good order prior to the time
the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 10:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company agrees
that Trust shares will be used only for the purposes of funding the Contracts
and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
--------------------------
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 (a) The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
(b) If the Company elects to include any materials provided by the Trust,
specifically prospectuses, SAIs, shareholder reports and proxy materials, on its
web site or in any other computer or electronic format, the Company assumes sole
responsibility for maintaining such materials in the form provided by the Trust
and for promptly replacing such materials with all updates provided by the
Trust.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation (" Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The Company
shall furnish, or shall cause to be furnished, to the Trust or its designee,
each piece of sales literature or other promotional material in which the Trust
or its investment adviser is named, at least fifteen Business Days prior to its
use. No such material shall be used if the Trust or its designee reasonably
objects to such use within fifteen Business Days after receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.7 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
Representations and Warranties
------------------------------
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Illinois and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that it will take
reasonable steps to ensure that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4 Each party to this Agreement represents and warrants that it has taken,
or will take, appropriate measures to adjust its computer systems so that its
operations and services provided under this agreement will not be materially
affected upon January 1, 2000. If the operations and services are materially
affected by a party's failure to implement any Year 2000 required adjustments,
such party shall indemnify and hold harmless the other parties to this Agreement
from and against all claims, demands, actions, losses, damages, liabilities,
costs, charges, reasonable counsel fees and expenses incurred as a result of
such failure, in accordance with Section 2. No party shall be liable for any
indirect, special or consequential losses, even if the party has notice of the
possibility of such losses.
3.5 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Delaware.
3.6 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.7 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
ARTICLE IV
Potential Conflicts
-------------------
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 6e-3, as adopted, to the extent such
rules are applicable.
ARTICLE V
Indemnification
---------------
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust;
or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI
Termination
-----------
6.1 This Agreement may be terminated by either party for any reason by
ninety (90) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
-------
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
Continental Assurance Company
Variable Life Insurance Products - 34 South
CNA Plaza
Chicago, IL 60611
Attention: Kevin Hogan
ARTICLE VIII
Miscellaneous
-------------
8.1 The captions 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.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 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.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: /s/ BONNIE HOWE
Name: Bonnie M. Howe
Title: Assistant Vice President
CONTINENTAL ASSURANCE COMPANY
By: /s/ KEVIN M. HOGAN
Name: Kevin M. Hogan
Title: Vice President
Schedule A
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Continental Assurance Company CNA Capital Select VA
Variable Annuity Separate Account
January 30, 1996
Continental Assurance Company CNA Capital Select VUL
Variable Life Separate Account
January 30, 1996
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ___ day of ___________, 1999,
by and among __Valley Forge Life Insurance Co.__ ("Insurer"), a life insurance
company organized under the laws of the State of __Pennsylvania__, __CNA
Investor Services, Inc. an __Illinois__ corporation ("Contract Distributor"),
LAZARD ASSET MANAGEMENT ("LAM"), a division of Lazard Freres & Co. LLC, a New
York limited liability company ("LF & Co."), and LAZARD RETIREMENT SERIES, INC.
("Fund"), a Maryland corporation (collectively, the "Parties").
ARTICLE I.
DEFINITIONS
The following terms used in this Agreement shall have the meanings set out
below:
1.1. "Act" shall mean the Investment Company Act of 1940, as amended.
1.2. "Board" shall mean the Fund's Board of Directors having the responsibility
for management and control of Fund.
1.3. "Business Day" shall mean any day for which Fund calculates net asset value
per share as described in a Portfolio Prospectus.
1.4. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5. "Commission" shall mean the Securities and Exchange Commission.
1.6. "Contract" shall mean a variable annuity or variable life insurance
contract that uses a Portfolio or Fund as an underlying investment medium
and that is named on Schedule 1 hereto, as the Parties may amend in writing
from time to time by mutual agreement ("Schedule 1").
1.7. "Contract Prospectus" shall mean the prospectus and, if applicable,
statement of additional information, as currently in effect with the
Commission, with respect to the Contracts, including any supplements or
amendments thereto. All references to "Contract Prospectuses" shall be
deemed to also include all offering documents and other materials relating
to any Contract that is not registered under the Securities Act of 1933, as
amended ("1933 Act").
1.8. "Contractholder" shall mean any person that is a party to a Contract with a
Participating Company. Individuals who participate under a group Contract
are "Participants."
1.9. "Disinterested Board Members" shall mean those members of the Board that
are not deemed to be "interested persons" of Fund, as defined by the Act.
1.10. "General Account" shall mean the general account of Insurer.
1.11."Participating Company" shall mean any insurance company, including
Insurer, that offers variable annuity and/or variable life insurance
contracts to the public and that has entered into an agreement with Fund
for the purpose of making Fund shares available to serve as the underlying
investment medium for Contracts.
1.12. "Portfolio" shall mean each series of Fund named on Schedule 1.
1.13."Portfolio Prospectus" shall mean the prospectus and statement of
additional information, as currently in effect with the Commission, with
respect to the Portfolios, including any supplements or amendments thereto.
1.14."Separate Account" shall mean a separate account duly established by
Insurer in accordance with the laws of the State of __Illinois__ and named
on Schedule 1.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
2.1. Insurer represents and warrants that:
(a) it is an insurance company duly organized and in good standing under
__Pennsylvania__ law;
(b) it has legally and validly established and shall maintain each
Separate Account pursuant to the insurance laws and regulations of the
State of __Illinois__;
(c) it has registered and shall maintain the registration of each Separate
Account as a unit investment trust under the Act, to the extent
required by the Act, to serve as a segregated investment account for
the Contracts;
(d) each Separate Account is and at all times shall be eligible to invest
in shares of Fund without such investment disqualifying Fund as an
investment medium for insurance company separate accounts supporting
variable annuity contracts and/or variable life insurance contracts;
(e) each Separate Account is and at all times shall be a "segregated asset
account," and interests in each Separate Account that are offered to
the public shall be issued exclusively through the purchase of a
Contract that is and at all times shall be a "variable contract"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. Insurer agrees to notify Fund and LAM
immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in
the future;
(f) the Contracts are and at all times shall be treated as life insurance,
endowment or annuity contracts under applicable provisions of the
Code, and it shall notify Fund immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or
that they might not be so treated in the future.
2.2 Insurer and Distributor represent and warrant that (a) units of interest in
each Separate Account available through the purchase of Contracts are
registered under the 1933 Act, to the extent required thereby; (b) the
Contracts shall be issued in compliance in all material respects with all
applicable federal and state laws; and (c) the sale of the Contracts shall
comply in all material respects with state insurance law requirements.
Insurer agrees to inform Fund promptly of any investment restrictions
imposed by state insurance law and applicable to Fund.
2.3 Distributor represents and warrants that it is and at all times shall be:
(a) registered with the Commission as a broker-dealer, (b) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD");
and (c) an __Illinois__ corporation duly organized, validly existing, and
in good standing under the laws of the State of, __Illinois__ with full
power, authority, and legal right to execute, deliver, and perform its
duties and comply with its obligations under this Agreement. Distributor is
a limited purpose Broker-Dealer and does not oversee the licensing of sales
practices of registered representatives.
2.4 Fund represents and warrants that:
(a) it is and shall remain registered with the Commission as an open-end,
management investment company under the Act to the extent required
thereby;
(b) its shares are registered under the 1933 Act to the extent required
thereby;
(c) it possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for it to operate and
offer its shares as an underlying investment medium for the Contracts;
(d) each Portfolio is qualified as a regulated investment company under
Subchapter M of the Code, it shall make every effort to maintain such
qualification, and it shall notify Insurer immediately upon having a
reasonable basis for believing that any Portfolio invested in by the
Separate Account has ceased to so qualify or that it might not so
qualify in the future;
(e) each Portfolio's assets shall be managed and invested in a manner that
complies with the requirements of Section 817(h) of the Code and the
regulations thereunder, to the extent applicable; and in the event of
breach of this provision by the Fund it will take all reasonable steps
to: (a) notify the Company of such breach and (b) adequately diversify
the Fund so as to achieve compliance within the grace period afforded
by Regulation 817-5. The Fund shall provide the Company information
reasonably requested in relation Section 817(h) diversification
requirements, including quarterly reports and annual certifications.
And
(f) all of its directors, officers, employees, investment advisers, and
other individuals/entities who deal with the money and/or securities
of Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of Fund in an amount
not less than that required by Rule 17g-1 under the Act. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
2.5 LAM represents and warrants that LF & Co., the principal underwriter of
each Portfolio's shares, that it is and at all times shall be: (a)
registered with the Commission as a broker-dealer, (b) a member in good
standing of the NASD; and (c) a New York limited liability company duly
organized, validly existing, and in good standing under the laws of the
State of New York, with full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement. LAM further represents and warrants that it shall sell the
shares of the Portfolios to Insurer in compliance in all material respects
with all applicable federal and state securities laws.
ARTICLE III.
FUND SHARES
3.2. Fund agrees to make the shares of each Portfolio available for purchase by
Insurer and each Separate Account at net asset value and without sales
charge, subject to the terms and conditions of this Agreement. Fund may
refuse to sell the shares of any Portfolio to any person, or suspend or
terminate the offering of the shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary and
in the best interests of the shareholders of such Portfolio.
3.3. Fund agrees that it shall sell shares of the Portfolios only to persons
eligible to invest in the Portfolios in accordance with Section 817(h) of
the Code and the regulations thereunder, to the extent such Section and
regulations are applicable.
3.4. Except as noted in this Article III, Fund and Insurer agree that orders and
related payments to purchase and redeem Portfolio shares shall be processed
in the manner set out in Schedule 2 hereto, as the Parties may amend in
writing from time to time by mutual agreement.
3.11.Fund shall confirm each purchase or redemption order made by Insurer.
Transfer of Portfolio shares shall be by book entry only. No share
certificates shall be issued to Insurer. Shares ordered from Fund shall be
recorded in an appropriate title for Insurer, on behalf of each Separate or
General Account.
3.13.Fund shall promptly notify Insurer of the amount of dividend and capital
gain, if any, per share of each Portfolio to which Insurer is entitled.
Insurer hereby elects to reinvest all dividends and capital gains of any
Portfolio in additional shares of that Portfolio at the applicable net
asset value, until Insurer otherwise notifies Fund in writing. Insurer
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash.
ARTICLE IV.
STATEMENTS AND REPORTS
4.1. Fund shall provide Insurer with monthly statements of account by the
fifteenth (15th) Business Day of the following month.
4.2 At least annually, Fund or its designee shall provide Insurer, free of
charge, with as many Portfolio Prospectuses as Insurer may reasonably
request for distribution by Insurer to existing Contractholders and
Participants that have invested in that Portfolio. Fund or its designee
shall provide Insurer, at Insurer's expense, with as many Portfolio
Prospectuses as Insurer may reasonably request for distribution by Insurer
to prospective purchasers of Contracts. The Fund shall bear the cost of
printing the Portfolio Prospectuses. If the Portfolio Prospectuses are
printed by the Insurer in one document with the prospectus for the
Contracts and the prospectuses for other funds, then the expenses of such
printing will be apportioned between the Insurer and the Fund in proportion
to the number of pages of the Contract's prospectus, other fund
prospectuses and the Portfolio prospectuses. This expense will be subject
to an annual maximum. That maximum will be calculated by means of a similar
proportion based upon the total dollars invested in the Portfolios as
compared to the total dollars invested in all portfolios offered in the
Contract. The form of the Fund's prospectus and/or statement of additional
information provided to the Company shall be the final form of prospectus
and statement of additional information as filed with the Securities and
Exchange Commission which form shall include only those Portfolios of the
Fund identified in Schedule 1. If requested by the Insurer in lieu of a
printed copy of the prospectuses, fund or its designee shall provide such
documentation in "camera ready" copy, or , at the request of insurer as a
diskette in the form sent to the financial printer and other assistance as
is reasonably necessary in order for the Parties once a year (or more
frequently if the Portfolio Prospectuses are supplemented or updated) to
have the Contract Prospectuses and the Portfolio Prospectuses printed
together in one document.
4.3 Fund shall provide Insurer with copies of each Portfolio's proxy materials,
notices, periodic reports and other printed materials (which the Portfolio
customarily provides to its shareholders) in quantities as Insurer may
reasonably request for distribution by Insurer to each Contractholder and
Participant that has invested in that Portfolio.
4.4 Fund shall provide to Insurer at least one complete copy of all
registration statements, Portfolio Prospectuses, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of
the above, that relate to Fund or its shares, contemporaneously with the
filing of such document with the Commission or other regulatory
authorities.
4.5 Insurer shall provide to Fund at least one copy of all registration
statements, Contract Prospectuses, reports, proxy statements, sales
literature which utilizes LAM's name, company or fund information or
statistics, applications for exemptions, requests for no-action letters,
and all amendments to any of the above, that relate to the Contracts or a
Separate Account, contemporaneously with the filing of such document with
the Commission or the NASD.
ARTICLE V.
EXPENSES
5.1. Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
ARTICLE VI.
EXEMPTIVE RELIEF
6.1. Insurer acknowledges that it has reviewed a copy of Fund's mixed and shared
funding exemptive order ("Order") and, in particular, has reviewed the
conditions to the relief set forth in the related notice ("Notice"). As
required by the conditions set forth in the Notice, Insurer shall report
any potential or existing conflicts promptly to the Board. In addition,
Insurer shall be responsible for assisting the Board in carrying out its
responsibilities under the Order by providing the Board with all
information necessary for the Board to consider any issues raised,
including, without limitation, information whenever Contract voting
instructions are disregarded. Insurer, at least annually, shall submit to
the Board such reports, materials, or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed upon
it by the Order. Insurer agrees to carry out such responsibilities with a
view to the interests of existing Contractholders.
6.2. If a majority of the Board, or a majority of Disinterested Board Members,
determines that a material irreconcilable conflict exists with regard to
Contractholder investments in Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that Insurer is a
Participating Insurance Company for whom the conflict is relevant, Insurer
shall at its sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the Disinterested Board
Members), take such action as is necessary to remedy or eliminate the
irreconcilable material conflict. Such necessary action may include, but
shall not be limited to:
(a) Withdrawing the assets allocable to some or all Separate Accounts from
Fund or any Portfolio and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote of all affected
Contractholders and, as appropriate, segregating the assets of any
appropriate group (i.e. variable annuity or variable life insurance
contract owners) that votes in favor of such segregation; and/or
(b) Establishing a new registered management investment company.
6.3. If a material irreconcilable conflict arises as a result of a decision by
Insurer to disregard Contractholder voting instructions and that decision
represents a minority position or would preclude a majority vote by all
Contractholders having an interest in Fund, Insurer may be required, at the
Board's election, to withdraw the investments of its Separate Accounts in
Fund.
6.4. For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether any proposed action adequately remedies any
material irreconcilable conflict. In no event shall Fund or LAM or any
other investment adviser of Fund be required to bear the expense of
establishing a new funding medium for any Contract. Insurer shall not be
required by this Article to establish a new funding medium for any Contract
if an offer to do so has been declined by vote of a majority of the
Contractholders materially and adversely affected by the material
irreconcilable conflict.
6.5. No action by Insurer taken or omitted, and no action by the Separate
Account or Fund taken or omitted as a result of any act or failure to act
by Insurer pursuant to this Article VI shall relieve Insurer of its
obligations under or otherwise affect the operation of Article V.
ARTICLE VII.
VOTING OF FUND SHARES
7.1. Insurer shall provide pass-through voting privileges to all Contractholders
or Participants as long as the Commission continues to interpret the Act as
requiring pass-through voting privileges for Contractholders or
Participants. Accordingly, Insurer, where applicable, shall vote shares of
a Portfolio held in each Separate Account in a manner consistent with
voting instructions timely received from its Contractholders or
Participants. Insurer shall be responsible for assuring that the Separate
Account calculates voting privileges in a manner consistent with other
Participating Companies. Insurer shall vote shares for which it has not
received timely voting instructions, as well as shares it owns, in the same
proportion as it votes those shares for which it has received voting
instructions.
7.2. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the Act are amended,
or if Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules thereunder with respect to mixed and shared funding
on terms and conditions materially different from any exemptions granted in
the Order, then Fund, and/or the Participating Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules
are applicable.
ARTICLE VIII.
MARKETING
8.1. Fund or LF & Co. shall periodically or upon request furnish Insurer with
Portfolio Prospectuses and sales literature or other promotional materials
for each Portfolio, in quantities as Insurer may reasonably request for
distribution to prospective purchasers of Contract. Expenses for the
printing and distribution of such documents shall be borne by Insurer.
8.2. Insurer shall designate certain persons or entities that shall have the
requisite licenses to solicit applications for the sale of Contracts.
Insurer shall make reasonable efforts to market the Contracts and shall
comply with all applicable federal and state laws in connection therewith.
8.3. Insurer shall furnish, or shall cause to be furnished, to Fund, each piece
of sales literature or other promotional material in which Fund, LAM, LF &
Co., Fund's administrator is named, at least five (5) Business Days prior
to its use. No such material shall be used if the Fund or its designee
reasonably objects to such use within fifteen business days of the receipt
of such material.
8.4. Insurer shall not give any information or make any representations or
statements on behalf of Fund, LAM, LF & Co., or concerning Fund or any
Portfolio in connection with the sale of the Contracts other than the
information or representations contained in the registration statement or a
Portfolio Prospectus, as the same may be amended or supplemented from time
to time, or in reports or proxy statements for each Portfolio, or in sales
literature or other promotional material approved by Fund.
8.5. Fund shall furnish, or shall cause to be furnished, to Insurer, each piece
of the Fund's sales literature or other promotional material in which
Insurer or a Separate Account is named, at least five (5) Business Days
prior to its use. No such material shall be used if the Insurer reasonably
objects to such use within fifteen business days after receipt of such
material.
8.6. Fund shall not, in connection with the sale of Portfolio shares, give any
information or make any representations on behalf of Insurer or concerning
Insurer, a Separate Account, or the Contracts other than the information or
representations contained in a registration statement for the Contracts or
the Contract Prospectus, as the same may be amended or supplemented from
time to time, or in published reports for each Separate Account that are in
the public domain or approved by Insurer for distribution to
Contractholders or Participants, or in sales literature or other
promotional material approved by Insurer.
8.7. For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards, motion
pictures or other public media), sales literature (such as any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, or reprints or excerpts of any other
advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, prospectuses, statements of
additional information, shareholder reports and proxy materials, and any
other material constituting sales literature or advertising under the rules
of the National Association of Securities Dealers, Inc. ("NASD"), the Act
or the 1933 Act.
ARTICLE IX.
INDEMNIFICATION
9.1. Insurer and Distributor each agree to indemnify and hold harmless Fund,
LAM, any sub-investment adviser of a Portfolio, and their affiliates, and
each of their respective directors, trustees, general members, officers,
employees, agents and each person, if any, who controls or is associated
with any of the foregoing entities or persons within the meaning of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section), 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) (collectively,
"Losses") for which the Indemnified Parties may become subject, under the
1933 Act or otherwise, insofar as such Losses (or actions in respect to
thereof):
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact (collectively "materially untrue
statement") contained in any registration statement, Contract
Prospectus, Contract, or sales literature or other promotional
material relating to a Separate Account or the Contracts
(collectively, "Account documents"), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading (collectively "material omission");
(b) arise out of or are based upon any materially untrue statement or
material omission made in any registration statement, Portfolio
Prospectus, or sales literature or other promotional material relating
to Fund or a Portfolio (collectively, "Portfolio documents"), provided
such statement or omission was made in reliance upon and in conformity
with information provided in writing to Fund by or on behalf of
Insurer specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Portfolio document
on which Insurer or Distributor have reasonably relied) or wrongful
conduct of Insurer, Distributor, their respective agents, and persons
under their respective control, with respect to the sale and
distribution of Contracts or Portfolio shares;
(d) arise out of any material breach of any representation and/or warranty
made by Insurer or Distributor in this Agreement, or arise out of or
result from any other material breach of this Agreement by Insurer or
Distributor; or
(e) arise out of Insurer's incorrect calculation and/or untimely reporting
of net purchase or redemption orders.
Insurer and Distributor shall reimburse any Indemnified Party in
connection with investigating or defending any Loss (or actions in
respect to thereof); provided, however, that with respect to clause
(a) above neither Insurer nor Distributor shall be liable in any such
case to the extent that any Loss arises out of or is based upon any
materially untrue statement or material omission made in any Account
documents, which statement or omission was made in reliance upon and
in conformity with written information furnished to Insurer by or on
behalf of Fund specifically for use therein. This indemnity agreement
shall be in addition to any liability that Insurer or Distributor may
otherwise have.
9.2. Fund and LAM each agree to indemnify and hold harmless Insurer and
Distributor and each of their respective directors, officers, employees,
agents and each person, if any, who controls Insurer or Distributor
(collectively, "Indemnified Parties" for purposes of this Section) within
the meaning of the 1933 Act against any Losses to which they or any
Indemnified Party may become subject, under the 1933 Act or otherwise,
insofar as such Losses (or actions in respect thereof):
(a) arise out of or are based upon any materially untrue statement or any
material omission made in any Portfolio document;
(b) arise out of or are based upon any materially untrue statement or any
material omission made in any Account document, provided such
statement or omission was made in reliance upon and in conformity with
information provided in writing to Insurer by or on behalf of Fund
specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Account document
on which Fund or LAM have reasonably relied) or wrongful conduct of
Fund, LAM, their respective agents, and persons under their respective
control, with respect to the sale of Portfolio Shares; or
(d) arise out of any material breach of any representation and/or warranty
made by Fund or LAM in this Agreement, or arise out of or result from
any other material breach of this Agreement by Fund or LAM.
Fund and LAM shall reimburse any legal or other expenses reasonably
incurred by any Indemnified Party in connection with investigating or
defending any such Loss; provided, however, that with respect to
clause (a) above neither Fund nor LAM shall be liable in any such case
to the extent that any such Loss arises out of or is based upon an
materially untrue statement or material omission made in any Portfolio
document, which statement or omission was made in reliance upon and in
conformity with written information furnished to Fund by or on behalf
of Insurer specifically for use therein. This indemnity agreement
shall be in addition to any liability that Fund or LAM may otherwise
have.
9.3. Fund and LAM shall indemnify and hold Insurer harmless against any Loss
that Insurer may incur, suffer or be required to pay due to Fund's
incorrect calculation of the daily net asset value, dividend rate or
capital gain distribution rate of a Portfolio or incorrect or untimely
reporting of the same; provided, however, that Fund shall have no
obligation to indemnify and hold harmless Insurer if the incorrect
calculation or incorrect or untimely reporting was the result of incorrect
or untimely information furnished by or on behalf of Insurer or otherwise
as a result of or relating to Insurer's breach of this Agreement. In no
event shall Fund be liable for any consequential, incidental, special or
indirect damages resulting to Insurer hereunder.
9.4 Notwithstanding anything herein to the contrary, in no event shall Fund or
LAM be liable to any individual or entity, including without limitation,
Insurer, or any Participating Insurance Company or any Contractholder, with
respect to any Losses that arise out of or result from:
(a) a breach of any representation, warranty, and/or covenant made by
Insurer hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties
and covenants;
(b) the failure by Insurer or any Participating Insurance Company to
maintain its separate account (which invests in any Portfolio) as a
legally and validly established segregated asset account under
applicable state law and as a duly registered unit investment trust
under the provisions of the Act (unless exempt therefrom); or
(c) the failure by Insurer or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under
applicable provisions of the Code.
9.5 Further, neither Fund nor LAM shall have any liability for any failure or
alleged failure to comply with the diversification requirements of Section
817(h) of the Code or the regulations thereunder if Insurer fails to comply
with any of the following clauses, and such failure could be shown to have
materially contributed to the liability:
(a) In the event the Internal Revenue Service ("IRS") asserts in writing
in connection with any governmental audit or review of Insurer or, to
Insurer's knowledge, of any Contractholder, that any Portfolio has
failed or allegedly failed to comply with the diversification
requirements of Section 817(h) of the Code or the regulations
thereunder or Insurer otherwise becomes aware of any facts that could
give rise to any claim against Fund or its affiliates as a result of
such a failure or alleged failure,
(i) Insurer shall promptly notify Fund of such assertion or potential
claim;
(ii) Insurer shall consult with Fund as to how to minimize any
liability that may arise as a result of such failure or alleged
failure;
(iii)Insurer shall use its best efforts to minimize any liability of
Fund or its affiliates resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury
Regulations Section 1.817-5(a)(2), to the Commissioner of the IRS
that such failure was inadvertent;
(iv) Insurer shall permit Fund, its affiliates and their legal and
accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceeding or
contests (including judicial appeals thereof) with the IRS, any
Contractholder or any other claimant regarding any claims that
could give rise to liability to Fund or its affiliates as a
result of such a failure or alleged failure;
(v) Insurer shall not with respect to any claim of the IRS or any
Contractholder that would give rise to a claim against Fund or
its affiliates compromise or settle any claim, accept any
adjustment on audit, or forego any allowable judicial appeals,
without the express written consent of Fund or its affiliates,
which shall not be unreasonably withheld, provided that Insurer
shall not be required to appeal any adverse judicial decision
unless Fund or its affiliates shall have provided an opinion of
independent counsel to the effect that a reasonable basis exists
for taking such appeal.
9.6 Promptly after receipt by an indemnified party under this Article of notice
of the commencement of any action, such indemnified party shall, if a claim
in respect thereof is to be made against the indemnifying party under this
Article, notify the indemnifying party of the commencement thereof. The
failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability under this Article IX, 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. In case any such action is
brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such indemnified party, and
to the extent that the indemnifying party has given notice to such effect
to the indemnified party and is performing its obligations under this
Article, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof, other than reasonable costs of investigation.
Notwithstanding the foregoing, 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 (a) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (b) 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.
A successor by law of any Party to this Agreement shall be entitled to the
benefits of the indemnification contained in this Article IX, which shall
survive any termination of this Agreement.
ARTICLE X.
COMMENCEMENT AND TERMINATION
10.1.This Agreement shall be effective as of the date hereof and shall continue
in force until terminated in accordance with the provisions herein.
10.2.This Agreement shall terminate without penalty as to one or more
Portfolios:
(a) At the option of Insurer, Distributor, Fund, or LAM at any time from
the date hereof upon 120 days' notice, unless a shorter time is agreed
to by the Parties;
(b) At the option of Insurer if it determines that shares of any Portfolio
are not reasonably available to meet the requirements of the
Contracts. Insurer shall furnish prompt notice of election to
terminate and termination shall be effective ten days after receipt of
notice unless Fund makes available a sufficient number of shares to
meet the requirements of the Contracts within such ten day period;
(c) At the option of Insurer or Fund, upon the institution of formal
proceedings against the other or their respective affiliates by the
Commission, the NASD or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in the
Insurer's or Fund's reasonable judgment, materially impair the other's
ability to meet and perform its obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by Insurer
or Fund, as the case may be, with termination to be effective upon
receipt of notice;
(d) At the option of Insurer or Fund, if either shall determine, in its
sole judgment reasonably exercised in good faith, that the other has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity is likely to
have a material adverse impact upon the business and operation of the
Insurer, Fund or LAM, as the case may be. Insurer or Fund shall notify
the other in writing of any such determination and its intent to
terminate this Agreement, which termination shall be effective on the
sixtieth (60th) day following the giving of such notice, provided the
determination of Insurer or Fund, as the case may be, continues to
apply on that date.
(e) Upon termination of the Investment Management Agreement between Fund,
on behalf of its Portfolios, and LAM or its successors unless Insurer
specifically approves the selection of a new investment adviser for
the Portfolios. Fund shall promptly furnish notice of such termination
to Insurer;
(f) In the event Portfolio shares are not registered, issued or sold in
accordance with applicable federal law, or such law precludes the use
of such shares as the underlying investment medium of Contracts issued
or to be issued by Insurer. Termination shall be effective immediately
upon such occurrence without notice;
(g) At the option of Fund upon a determination by the Board in good faith
that it is no longer advisable and in the best interests of
shareholders for Fund to continue to operate pursuant to this
Agreement. Termination shall be effective upon notice by Fund to
Insurer of such termination;
(h) At the option of Fund if the Contracts cease to qualify as annuity
contracts or life insurance policies, as applicable, under the Code,
or if Fund reasonably believes that the Contracts may fail to so
qualify. Termination shall be effective immediately upon such
occurrence or reasonable belief without notice;
(i) At the option of any Party, upon another's breach of any material
provision this Agreement, which breach has not been cured to the
satisfaction of the non-breaching Parties within ten days after
written notice of such breach is delivered to the breaching Party;
(j) At the option of Fund, if the Contracts are not registered, issued or
sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon such occurrence
without notice;
(k) Upon assignment of this Agreement, unless made with the written
consent of the non-assigning Parties.
Any such termination pursuant to this Article X shall not affect the
operation of Articles V or IX of this Agreement. The Parties agree that any
termination pursuant to Article VI shall be governed by that Article.
10.3.Notwithstanding any termination of this Agreement pursuant to Section 10.2
hereof, Fund and LAM may, at the option of Fund, continue to make available
additional Portfolio shares for so long as Fund desires pursuant to the
terms and conditions of this Agreement as provided below, for all Contracts
in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if Fund so elects to make additional Portfolio shares
available, the owners of the Existing Contracts or Insurer, whichever shall
have legal authority to do so, shall be permitted to reallocate investments
among the Portfolios, redeem investments in the Portfolios and/or invest in
the Portfolios upon the making of additional purchase payments under the
Existing Contracts. In the event of a termination of this Agreement
pursuant to Section 10.2 hereof, Fund, as promptly as is practicable under
the circumstances, shall notify Insurer whether Fund shall continue to make
Portfolio shares available after such termination. If Portfolio shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect and thereafter either Fund or Insurer
may terminate the Agreement, as so continued pursuant to this Section 10.3,
upon prior written notice to the other Parties, such notice to be for a
period that is reasonable under the circumstances but, if given by Fund,
need not be for more than six months.
10.1.In the event of any termination of this Agreement pursuant to Section 10.2
hereof, the Parties agree to cooperate and give reasonable assistance to
one another in taking all necessary and appropriate steps for the purpose
of ensuring that a Separate Account owns no shares of a Portfolio beyond
six months from the date of termination. Such steps may include, without
limitation, substituting other mutual fund shares for those of the affected
Portfolio.
ARTICLE XI.
AMENDMENTS
11.1.Any changes in the terms of this Agreement shall be made by agreement in
writing by the Parties hereto.
ARTICLE XII.
NOTICE
12.1.Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate Parties at the following
addresses:
Insurer: Valley Forge Life Insurance Company
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
Distributor: CNA Investor Services
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: Ron Chapon
Fund: Lazard Retirement Series, Inc.
30 Rockefeller Plaza
New York, New York 10112
Attention: Steven Swain
LAM: Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Attention: William Butterly
with copies to: Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Attn: Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the addresses as
evidenced by the return receipt.
ARTICLE XIII.
MISCELLANEOUS
13.1.This Agreement has been executed on behalf of the Parties by the
undersigned duly authorized officers in their capacities as officers of
Insurer, Distributor, LAM, and Fund.
13.1.If any provision of this Agreement is held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of this Agreement will
not be affected thereby.
13.1.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, that the Parties are entitled to under
federal and state laws.
13.1.This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
ARTICLE XIV.
LAW
14.1.This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
Valley Forge Life Insurance Company
By:___________________________________
Attest:_____________________
CNA Investor Services
By:____________________________________
Attest:_____________________
LAZARD RETIREMENT SERIES, INC.
By:____________________________________
Attest:_____________________
LAZARD ASSET MANAGEMENT,
a division of Lazard Freres & Co., LLC
By:____________________________________
Attest:______________________
SCHEDULE 1
Portfolios
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
Separate Accounts and Contracts
1. Valley Forge Life Insurance Company Variable Annuity Separate Acct.
Established October 15, 1995.
a) Contracts: CNA Capital Select Variable Annuity
CNA Capital Select Plus Variable Annuity
2. Valley Forge Life Insurance Company Variable Life Separate Acct.
Established October 15, 1995
a) Contracts: CNA Capital Select Variable Universal Life
SCHEDULE 2
PORTFOLIO SHARE ORDER PROCESSING
TIMELY PRICING AND ORDERS
1. Each Business Day, Fund shall use its best efforts to make each Portfolio's
closing net asset value per share ("NAV") on that Day available to Insurer
by 6:30 p.m. New York time.
2. At the end of each Business Day, Insurer shall use the information
described above to calculate each Separate Account's unit values for that
Day. Using this unit value, Insurer shall process that Day's Contract and
Separate Account transactions to determine the net dollar amount of each
Portfolio's shares to be purchased or redeemed.
3. Insurer shall transmit net purchase or redemption orders to Fund or its
designee by 9:30 a.m. New York time on the Business Day next following
Insurer's receipt of the information relating to such orders in accordance
with paragraph 1 above; provided, however, that Fund shall provide
additional time to Insurer in the event Fund is unable to meet the 6:30
p.m. deadline stated above. Such additional time shall be equal to the
additional time that Fund takes to make the net asset values available to
Insurer. For informational purposes, Insurer shall separately describe the
amount of shares of each Portfolio that is being purchased, redeemed, or
exchanged from one Portfolio to the other. In addition, Insurer shall use
its best efforts to notify Fund in advance of any unusually large purchase
or redemption orders.
TIMELY PAYMENTS
4. Insurer shall pay for any net purchase order by wiring Federal Funds to
Fund or its designated custodial account by 4:00pm New York time on the
same Business Day it transmits the order to Fund pursuant to paragraph 3
above.
5. Fund shall pay for any net redemption order by wiring the redemption
proceeds to Insurer, except as provided below, within two (2) Business Days
or, upon notice to Insurer, such longer period as permitted by the Act or
the rules, orders or regulations thereunder. In the case of any net
redemption order valued at or greater than $1 million, Fund shall wire such
amount to Insurer within seven days of the order. In the case of any net
redemption order requesting the application of proceeds from the redemption
of one Portfolio's shares to the purchase of another Portfolio's shares,
Fund shall so apply such proceeds the same Business Day that Insurer
transmits such order to Fund.
APPLICABLE PRICE
6. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Contract transactions at that Portfolio's NAV next
determined after Fund or its designated agent receives the order. For this
purpose, Fund hereby appoints Insurer as its agent for the limited purpose
of receiving orders for the purchase and redemption of shares of each
Portfolio for each Separate Account; provided that Fund receives both the
notice of the order in accordance with paragraph 3 above and any related
purchase payments in accordance with paragraph 4 above.
7. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Insurer's General Account, or that do not relate to Contract
transactions, at that Portfolio's NAV next determined after Fund (not
Insurer) receives the order and any related purchase payments in accordance
with paragraph 4 above.
8. Fund shall execute purchase and redemption orders for a Portfolio Shares
that relate to Contracts funded by registered and unregistered Separate
Accounts in the same manner, but only to the extent that Insurer represents
and warrants that it is legally or contractually obligated to treat such
orders in the same manner. Each order for Portfolio shares placed by
Insurer that is attributable, in whole or in part, to Contracts funded by
an unregistered Separate Account, shall be deemed to constitute such
representation and warranty by Insurer unless the order specifically states
to the contrary. Otherwise, Fund shall treat orders attributable to
unregistered Separate Account Contracts in the same manner as orders for
Insurer's General Account. For these purposes, a registered Separate
Account is one that is registered under the Act; an unregistered Separate
Account is one that is not.
9. Fund shall execute purchase or redemption orders for a Portfolio's shares
that do not satisfy the conditions specified in paragraphs 3 and 4 above,
as applicable, at the Portfolio's NAV next determined after such conditions
have been satisfied and in accordance with paragraphs 6 or 7, whichever
applies.
10. If Fund does not receive payment in Federal Funds for any net purchase
order in accordance with paragraph 4 above, Insurer shall promptly, upon
Fund's request, reimburse Fund for any charges, costs, fees, interest or
other expenses incurred by Fund in connection with any advances to, or
borrowings or overdrafts by, Fund, or any similar expenses incurred by
Fund, as a result of portfolio transactions effected by Fund based upon
such purchase request.
11. If Fund provides Insurer with materially incorrect net asset value per
share information through no fault of Insurer, Insurer, on behalf of the
Separate Account, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct net asset value per
share in accordance with Fund's current policies for correcting pricing
errors. Any material error in the calculation of net asset value per share,
dividend or capital gain information shall be reported promptly upon
discovery to Insurer.
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. AND
VALLEY FORGE LIFE INSURANCE COMPANY
THIS AGREEMENT made as of January 1, 2000 among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and Valley Forge Life Insurance Company, a life insurance
company organized as a corporation under Pennsylvania law (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth in Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule A, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November
16, 1993 (File No. 812-8546), granting Participating Insurance Companies and
their separate accounts exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule A attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule A (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act") and any applicable state
securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to separate accounts such as each Account at
net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1 For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2 The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio. Without limiting the foregoing, the Trustees have determined
that there is a significant risk that the Trust and its shareholders may be
adversely affected by investors whose purchase and redemption activity follows a
market timing pattern, and have authorized the Trust, the Underwriter and the
Trust's transfer agent to adopt procedures and take other action (including
without limitation rejecting specific purchase orders) as they deem necessary to
reduce, discourage or eliminate market timing activity. The Company agrees to
cooperate with the Trust to assist the Trust in implementing the Trust's
restrictions on Market Timers.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by
the Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Portfolio Shares purchased from the Trust will be recorded in the
appropriate title for each Account or the appropriate subaccount of each
Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice
to the Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the
Contracts shall be invested in the Trust, in such other Funds advised by an
Adviser or its affiliates as may be mutually agreed to in writing by the parties
hereto, or in the Company's general account, provided that such amounts may also
be invested in an investment company other than the Trust if: (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies of
the Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule B to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
OBLIGATIONS OF THE PARTIES; FEES AND EXPENSES
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i)
solicit voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make
any representations or statements on behalf of the Trust or concerning the
Trust, the Underwriter or an Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust, Trust-sponsored
proxy statements, or in sales literature or other promotional material approved
by the Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.8 The Trust shall use reasonable efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from disclosure documents for the Contracts
(as such disclosure documents may be amended or supplemented from time to time),
or in materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal process
or regulatory authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for Contract owners, the Company
will provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation
to the Company under this Agreement except as provided on Schedule C, if
attached. Nevertheless, the Underwriter or an affiliate may make payments (other
than pursuant to a Rule 12b-1 Plan) to the Company or its affiliates or to the
Contracts' underwriter in amounts agreed to by the Underwriter or an affiliate
in writing and such payments may be made out of fees otherwise payable to the
Underwriter or its affiliates, profits of the Underwriter or its affiliates, or
other resources available to the Underwriter or its affiliates.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each Contract, (1)
the Contract will be registered under the 1933 Act, or (2) if the Contract is
exempt from registration under Section 3(a)(2) of the 1933 Act or under Section
4(2) and Regulation D of the 1933 Act, the Company will make every effort to
maintain such exemption and will notify the Trust and the Adviser immediately
upon having a reasonable basis for believing that such exemption no longer
applies or might not apply in the future. The Company further represents and
warrants that the Contracts will be sold by broker-dealers, or their registered
representatives, who are registered with the SEC under the 1934 Act and who are
members in good standing of the NASD; the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws;
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements. CNA Investor Services, Inc., the distributor
of the products, is a limited purpose broker-dealer and not directly responsible
for suitability or compliance issues related to the products or registered
representative. However, the Company represents that CNA Investor Services, Inc.
has selling agreements only with broker-dealers that perform appropriate
supervision of their registered representatives to ensure that appropriate
suitability determinations are made with respect to the sale of products.
For any unregistered Accounts which are exempt from registration under
the `40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended;
(b) Trust shares are and will continue to be the only investment
securities held by the corresponding Account sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to
the voting of all proxies with respect to Trust shares and
vote such proxies only in accordance with such instructions
or vote such shares held by it in the same proportion as the
vote of all other holders of such shares; and
(2) refrain from substituting shares of another security for
such shares unless the SEC has approved such substitution in
the manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as
a "regulated investment company" under Subchapter M of the Code, that it will
make every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act, the Trustees, including a majority who are not "interested
persons" of the Trust under the 1940 Act ( "disinterested Trustees" ), will
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more classes of shares
(each, a "Class") to make payments to finance its distribution expenses,
including service fees, pursuant to a Plan adopted under Rule 12b-1 under the
1940 Act ("Rule 12b-1"), although it may determine to discontinue such practice
in the future. To the extent that any Class of the Trust finances its
distribution expenses pursuant to a Plan adopted under Rule 12b-1, the Trust
undertakes to comply with any then current SEC and SEC staff interpretations
concerning Rule 12b-1 or any successor provisions.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawing the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the Contracts.
In the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE V.
INDEMNIFICATION
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless
the Underwriter, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Article V) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the
Company, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or
defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such
Losses are related to the sale or acquisition of Trust Shares
or the Contracts and
(i) arise out of or are based upon any
untrue statements or alleged untrue statements of any
material fact contained in a disclosure document for
the Contracts or in the Contracts themselves or in
sales literature generated or approved by the Company
on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes
of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from
written information furnished to the Company by or on
behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(ii) arise out of or result from statements
or representations (other than statements or
representations contained in and accurately derived
from Trust Documents as defined in Section 5.2
(a)(i)) or wrongful conduct of the Company or persons
under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue
statement or alleged untrue statement of a material
fact contained in Trust Documents as defined in
Section 5.2(a)(i) or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading if such statement or omission
was made in reliance upon and accurately derived from
written information furnished to the Trust by or on
behalf of the Company; or
(iv) arise out of or result from any failure
by the Company to provide the services or furnish the
materials required under the terms of this Agreement;
or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Company in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Company.
(b) The Company shall not be liable under this
indemnification provision with respect to any Losses to which
an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this
Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such
action. Unless the Indeminfied Party releases the Company from
any further obligations under this Section 5.1, the Company
also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After
notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in
connection with the defense thereof other than reasonable
costs of investigation.
(c) The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the
Trust shares or the Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses") to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such Losses are related
to the sale or acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Trust (or any amendment or supplement to any
of the foregoing) (collectively, the "Trust Documents") or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission of such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
the Underwriter or Trust by or on behalf of the Company for
use in the Registration Statement or prospectus for the Trust
or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the disclosure documents or sales literature for
the Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Trust, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Trust shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a disclosure
document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification representation specified in Section 3.7 of this
Agreement and the diversification requirements specified in
Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach
of any representation and/or warranty made by the Underwriter
in this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
5.2(b) and 5.2(c) hereof.
(b) The Underwriter shall not be liable under this
indemnification provision with respect to any Losses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
(c) The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Underwriter of any such
claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the
defense thereof. Unless the Indemified Party releases the Underwriter
from any further obligations under this Section 5.2, the Underwriter
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the expenses of any
additional counsel retained by it, and the Underwriter will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issuance or sale of
the Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 5.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Section 5.3(b) and
5.3(c) hereof. It is understood and expressly stipulated that neither
the holders of shares of the Trust nor any Trustee, officer, agent or
employee of the Trust shall be personally liable hereunder, nor shall
any resort be had to other private property for the satisfaction of any
claim or obligation hereunder, but the Trust only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement or to the Company, the
Trust, the Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Trust of any such claim shall not relieve the Trust from
any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party
releases the Trust from any further obligations under this Section 5.3,
the Trust also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Trust to such party of the Trust's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Trust will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company and the Underwriter agree promptly to notify
the Trust of the commencement of any litigation or proceedings against
it or any of its respective officers or directors in connection with
this Agreement, the issuance or sale of the Contracts, with respect to
the operation of either the Account, or the sale or acquisition of
share of the Trust.
ARTICLE VI.
TERMINATION
6.1 This Agreement may be terminated by any party in its entirety or
with respect to one, some or all Portfolios for any reason by ninety (90) days
advance written notice delivered to the other parties, and shall terminate
immediately in the event of its assignment, as that term is used in the 1940
Act.
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter upon written notice to the Company if:
(a) the Company notifies the Trust or the Underwriter that
the exemption from registration under Section 3(c) of the 1940 Act no
longer applies, or might not apply in the future, to the unregistered
Accounts, or that the exemption from registration under Section 4(2) or
Regulation D promulgated under the 1933 Act no longer applies or might
not apply in the future, to interests under the unregistered Contracts;
or
(b) either one or both the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the
written notice specified in Section 1.10 hereof and at the same time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however, that
any termination under this Section 6.2(c) shall be effective forty-five
(45) days after the notice specified in section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under
Article IV (Potential Conflicts) above, the Trust shall, at the option of the
Company, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and
V (Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of it s intention to do so.
ARTICLE VII.
NOTICES.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
Templeton Variable Products Series Fund
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO:
Franklin Resources
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Karen L. Skidmore, Associate General
Counsel
If to the Underwriter:
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Deborah R. Gatzek, Senior Vice President
and Assistant Secretary
If to the Company:
Valley Forge Life Insurance Company
CNA Plaza
333 S. Wabash, 43 South
Chicago, IL 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE VIII.
MISCELLANEOUS
8.1 The captions 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.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC on behalf of the
Trust granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and
addresses of the Contract owners and all information reasonably identified as
confidential in writing by any other party hereto, and, except as permitted by
this Agreement or as required by legal process or regulatory authorities, shall
not disclose, disseminate, or utilize such names and addresses and other
confidential information until such time as they may come into the public
domain, without the express written consent of the affected party. Without
limiting the foregoing, no party hereto shall disclose any information that such
party has been advised is proprietary, except such information that such party
is required to disclose by any appropriate governmental authority (including,
without limitation, the SEC, the NASD, and state securities and insurance
regulators).
8.8 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.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly
authorized officers to execute this Participation Agreement as of the date and
year first above written.
The Company:
Valley Forge Life Insurance Company
By its authorized officer
By: S/David L. Stone
---------------------
Name: David L. Stone
Title: Vice President
The Trust:
Templeton Variable Products Series Fund
By its authorized officer
By: S/Karen L. Skidmore
-----------------------
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By: S/Philip J. Kearns
-------------------------
Name: Philip J. Kearns
Title: Vice President
<TABLE>
<CAPTION>
SCHEDULE A
CONTRACTS ISSUED BY VALLEY FORGE LIFE
INSURANCE COMPANY
Contract 1 Contract 2 Contract 3
<S> <C> <C> <C>
CONTRACT/PRODUCT CNA Capital Select VA CNA Capital Select VUL
Name and Type
REGISTERED (Y/N) Yes Yes
SEC REGISTRATION NUMBER--1933 333-01087 333-01949
Act
REPRESENTATIVE V100-1128-A V100-1132-A
Form Numbers
SEPARATE ACCOUNT Valley Forge Life Insurance Valley Forge Life Insurance
Name/Date Company Variable Annuity Company Variable Life Separate
Established Separate Account / October 15, 1995 Account / October 15, 1995
SEC REGISTRATION
Number-1940
Act
TEMPLETON TVP--Templeton Developing TVP--Templeton Developing
Variable Markets Fund-Class 2-Templeton Markets Fund-Class 2-Templeton
Products Series Asset Management, Ltd. Asset Management, Ltd.
Fund ("TVP") -
Portfolios and VP-Templeton Asset Allocation TVP-Templeton Asset Allocation
Classes - Adviser T Fund-Class 2-Templeton Fund-Class 2-Templeton
Investment Counsel, Inc. Investment Counsel, Inc.
</TABLE>
SCHEDULE B
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
FIDELITY
MFS
FEDERATED
FRED ALGER
JANUS
SOGEN
VAN ECK
SCHEDULE C
RULE 12B-1 PLANS
COMPENSATION SCHEDULE
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
Portfolio Name Maximum Annual Payment Rate
- -------------- ---------------------------
Templeton Developing Markets Fund 0.25%
Templeton Asset Allocation Fund 0.25%
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio
shares (Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under
the 1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must
be approved annually by a vote of the Trustees, including the Trustees who are
not interested persons of the Trust and who have no financial interest in the
Plans or any related agreement ("Disinterested Trustees"). Each Plan may be
terminated at any time by the vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares as provided in the Plan, on
sixty (60) days' written notice, without payment of any penalty. The Plans may
also be terminated by any act that terminates the Underwriting Agreement between
the underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule C relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule C, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
PARTICIPATION AGREEMENT
AMONG
VALLEY FORGE LIFE INSURANCE COMPANY,
CNA INVESTOR SERVICES, INC.,
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
DECEMBER 1, 1999
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of December, 1999
("Agreement"), by and among Valley Forge Life Insurance Company, a Pennsylvania
life insurance company ("Insurer") (on behalf of itself and its "Separate
Account," defined below); CNA Investor Services, Inc., an Illinois corporation
("Contracts Distributor"), the principal underwriter with respect to the
Contracts referred to below; Alliance Capital Management L.P., a Delaware
limited partnership ("Adviser"), the investment adviser of the Fund referred to
below; and Alliance Fund Distributors, Inc., a Delaware corporation
(Distributor"), the Fund's principal underwriter (collectively, the "Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desires that Class B shares of the Fund's Growth and
Income and Premiere Growth Portfolios (the "Portfolios"; reference herein to the
"Fund" includes reference to each Portfolio to the extent the context requires)
be made available by Distributor to serve as underlying investment media for
variable life and annuity contracts (the "Contracts"), to be offered through
Contracts Distributor and other registered broker-dealer firms as agreed to by
Insurer and Contracts Distributor; and
WHEREAS the Contracts provide for the allocation of net amounts received by
Insurer to separate series (the "Divisions"; reference herein to the "Separate
Account" includes reference to each Division to the extent the context requires)
of the Separate Account for investment in Class B shares of corresponding
Portfolios of the Fund that are made available through the Separate Account to
act as underlying investment media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make Class B shares of the
Portfolios available to Insurer for this purpose at net asset value and with no
sales charges, all subject to the following provisions:
Section 1. Additional Portfolios
The Fund has and may, from time to time, add additional Portfolios, which
will become subject to this Agreement, if, upon the written consent of each of
the Parties hereto, they are made available as investment media for the
Contracts.
Section 2. Processing Transactions
2.1 Timely Pricing and Orders.
The Adviser or its designated agent will provide closing net asset value,
dividend and capital gain information for each Portfolio to Insurer at the close
of trading on each day (a "Business Day") on which (a) the New York Stock
Exchange is open for regular trading, (b) the Fund calculates the Portfolio's
net asset value and (c) Insurer is open for business. The Fund or its designated
agent will use its best efforts to provide this information by 6:00 p.m.,
Eastern time. Insurer will use these data to calculate unit values, which in
turn will be used to process transactions that receive that same Business Day's
Separate Account Division's unit values. Such Separate Account processing will
be done the same evening, and corresponding orders with respect to Fund shares
will be placed the morning of the following Business Day. Insurer will use its
best efforts to place such orders with the Fund by 10:00 a.m., Eastern time.
2.2 Timely Payments.
Insurer will transmit orders for purchases and redemptions of Fund shares
to Distributor, and will wire payment for net purchases to a custodial account
designated by the Fund on the day the order for Fund shares is placed, to the
extent practicable. Payment for net redemptions will be wired by the Fund to an
account designated by Insurer on the same day as the order is placed, to the
extent practicable, and in any event be made within six calendar days after the
date the order is placed in order to enable Insurer to pay redemption proceeds
within the time specified in Section 22(e) of the Investment Company Act of
1940, as amended (the "1940 Act").
2.3 Redemption in Kind.
The Fund reserves the right to pay any portion of a redemption in kind of
portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
2.4 Applicable Price.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
Section 3. Costs and Expenses
3.1 General.
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
3.2 Registration.
The Fund will bear the cost of its registering as a management investment
company under the 1940 Act and registering its shares under the Securities Act
of 1933, as amended (the "1933 Act"), and keeping such registrations current and
effective; including, without limitation, the preparation of and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Fund and its shares and
payment of all applicable registration or filing fees with respect to any of the
foregoing. Insurer will bear the cost of registering the Separate Account as a
unit investment trust under the 1940 Act and registering units of interest under
the Contracts under the 1933 Act and keeping such registrations current and
effective; including, without limitation, the preparation and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Separate Account and
its units of interest and payment of all applicable registration or filing fees
with respect to any of the foregoing.
3.3 Other (Non-Sales-Related) Expenses.
The Fund will bear the costs of preparing, filing with the SEC and setting
for printing the Fund's prospectus, statement of additional information and any
amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity and delivering to existing
Participants the documents as to which it bears the cost of preparation as set
forth above in this Section 3.3, it being understood that reasonable cost
allocations will be made in cases where any such Fund and insurer documents are
printed or mailed on a combined or coordinated basis. If requested by Insurer,
the Fund will provide annual Prospectus text to Insurer on diskette for printing
and binding with the Separate Account Prospectus.
3.4 Other Sales-Related Expenses.
Expenses of distributing the Portfolio's shares and the Contracts will be
paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
3.5 Parties to Cooperate.
The Adviser, Insurer, Contracts Distributor, and Distributor each agrees to
cooperate with the others, as applicable, in arranging to print, mail and/or
deliver combined or coordinated prospectuses or other materials of the Fund and
Separate Account.
Section 4. Legal Compliance
4.1 Tax Laws
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
(b) Insurer represents that it believes, in good faith, that the Contracts
will be treated as annuity and life insurance contracts under applicable
provisions of the Code and that it will make every effort to maintain such
treatment. Insurer will notify the Fund and Distributor immediately upon having
a reasonable basis for believing that any of the Contacts have ceased to be so
treated of that they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
(d) Insurer represents that it believes, in good faith, that the Separate
Account is a "segregated asset account" and that interests in the Separate
Account are offered exclusively through the purchase of or transfer into a
"variable account," within the meaning of such terms under Section 817(h) of the
Code and the regulations thereunder. Insurer will make every effort to continue
to meet such definitional requirements, and it will notify the Fund and
Distributor immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with Subchapter
M of the Code and will use its best efforts to manage to be in compliance with
Section 817(h) of the Code and regulations thereunder. The Fund has adopted and
will maintain procedures for ensuring that the Fund is managed in compliance
with Subchapter M and Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of Fund, or
any of its Portfolios, to be in compliance with Subchapter M of the Code or
Section 817(h) of the Code and regulations thereunder, they represent and agree
that they will immediately notify Insurer of such in writing.
4.2 Insurance and Certain Other Laws.
(a) The Adviser will use its best efforts to cause the Fund to comply with
any applicable state insurance laws or regulations, to the extent specifically
requested in writing by Insurer. If it cannot comply, it will so notify Insurer
in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of Pennsylvania and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains the
Separate Account as a segregated asset account under Illinois State Law, and
(iii) the Contracts comply in all material respects with all other applicable
federal and state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that Contracts
Distributor is a business corporation duly organized, validly existing, and in
good standing under the laws of the State of Illinois and has full corporate
power, authority and legal right to execute, deliver, and perform its duties and
comply with its obligations under this Agreement.
(d) Distributor represents and warrants that it is a business corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Maryland and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
(f) Adviser represents and warrants that it is a limited partnership duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
4.3 Securities Laws.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with applicable state law, (ii) the Separate
Account is and will remain registered under the 1940 Act to the extent required
by the 1940 Act, (iii) the Separate Account does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (iv)
the Separate Account's 1933 Act registration statement relating to the
Contracts, together with any amendments thereto, will, at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder, and (v) the Separate Account Prospectus will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund shares
sold pursuant to this Agreement will be registered under the 1933 Act to the
extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
(c) The Fund will register and qualify its shares for sales in accordance
with the laws of any state or other jurisdiction only if and to the extent
reasonably deemed advisable by the Fund, Insurer or any other life insurance
company utilizing the Fund.
(d) Distributor and Contracts Distributor each represents and warrants that
it is registered as a broker-dealer with the SEC under the Securities Exchange
Act of 1934, as amended, and is a member in good standing of the National
Association of Securities Dealers Inc. (the "NASD").
4.4. Notice of Certain Proceedings and Other Circumstances.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares , or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund of
(i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or Separate Account Prospectus, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. Insurer and Contracts Distributor will make every reasonable effort
to prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting thereof at
the earliest possible time.
4.5 Insurer to Provide Documents.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 Fund to Provide Documents.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
Section 5. Mixed and Shared Funding
5.1 General.
The Fund has obtained an order exempting it from certain provisions of the
1940 Act and rules thereunder so that the Fund is available for investment by
certain other entities, including, without limitation, separate accounts funding
variable life insurance policies and separate accounts of insurance companies
unaffiliated with Insurer ("Mixed and Shared Funding Order"). The Parties
recognize that the SEC has imposed terms and conditions for such orders that are
substantially identical to many of the provisions of this Section 5.
5.2 Disinterested Directors.
The Fund agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of Adviser or Distributor within the meaning of Section 2(a)(19) of the
1940 Act.
5.3 Monitoring for Material Irreconcilable Conflicts.
The Fund agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being managed;
(e) a difference in voting instructions given by variable annuity contract and
variable life insurance contract participants or by participants of
different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to disregard the
voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 Conflict Remedies.
(a) It is agreed that if it is determined by a majority of the members of the
Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life
insurance companies utilizing the Fund will, at their own expense and to
the extent reasonably practicable (as determined by a majority of the
Disinterested Directors), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps may include,
but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such assets in
a different investment medium, including another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected participants and, as
appropriate, segregating the assets of any particular group (e.g.,
annuity contract owners or participants, life insurance contract
owners or all contract owners and participants of one or more life
insurance companies utilizing the Fund) that votes in favor of such
segregation, or offering to the affected contract owners or
participants the option of making such a change; and
(ii) establishing a new registered investment company of the type defined
as a "Management Company" in section 4(3) of the 1940 Act or a new
separate account that is operated as a Management Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer
may be required, at the Fund's election, to withdraw the Separate Account's
investment in the Fund. No charge or penalty will be imposed as a result of
such withdrawal. Any such withdrawal must take place within six months
after the Fund gives notice to Insurer that this provision is being
implemented, and until such withdrawal Distributor and the Fund shall
continue to accept and implement orders by Insurer for the purchase and
redemption of shares of the Fund.
(c) If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board
of Directors informs Insurer that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal
Distributor and Fund shall continue to accept and implement orders by
Insurer for the purchase and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving any
material irreconcilable conflict will be carried out at its expense and
with a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event, however, will the Fund or
Distributor be required to establish a new funding medium for any
Contracts. Insurer will not be required by the terms hereof to establish a
new funding medium for any Contracts if an offer to do so has been declined
by vote of a majority of Participants materially adversely affected by the
material irreconcilable conflict.
5.5 Notice to Insurer.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 Information Requested by Board of Directors.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 Compliance with SEC Rules.
If, at any time during which the Fund is serving an investment medium for
variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2
are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to
mixed and shared funding, the Parties agree that they will comply with the terms
and conditions thereof and that the terms of this Section 5 shall be deemed
modified if and only to the extent required in order also to comply with the
terms and conditions of such exemptive relief that is afforded by any of said
rules that are applicable.
Section 6. Termination
6.1 Events of Termination.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
(a) at the option of Insurer or Distributor upon 120 days written notice to the
other Parties, or
(b) at the option of the Fund upon (i) at least ninety days advance written
notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon finding that a continuation of this Contract
is contrary to the best interests of the Fund, or (y) a majority vote of
the shares of the affected Portfolio in the corresponding Division of the
Separate Account (pursuant to the procedures set forth in Section 11 of
this Agreement for voting Trust shares in accordance with Participant
instructions).
(c) at the option of the Fund upon institution of formal proceedings against
Insurer or Contracts Distributor by the NAD, the SEC, any state insurance
regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation
of the Separate Account, or the purchase of the Fund shares, if, in each
case, the Fund reasonably determines that such proceedings, or the facts on
which such proceedings would be based, have a material likelihood of
imposing material adverse consequences on the Portfolio to be terminated;
or
(d) at the option of Insurer upon institution of formal proceedings against the
Fund, Adviser, or Distributor by the NASD, the SEC, or any state insurance
regulator or any other regulatory body regarding the Fund's, Adviser's or
Distributor's obligations under this Agreement or related to the operation
or management of the Fund or the purchase of Fund shares, if, in each case,
Insurer reasonably determines that such proceedings, or the facts on which
such proceedings would be based, have a material likelihood of imposing
material adverse consequences on Insurer, Contracts Distributor or the
Division corresponding to the Portfolio to be terminated; or
(e) at the option of any Party in the event that (i) the Portfolio's shares are
not registered and, in all material respects, issued and sold in accordance
with any applicable state and federal law or (ii) such law precludes the
use of such shares as an underlying investment medium of the Contracts
issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a RIC under
Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with Section
817(h) of the Code or with successor or similar provisions; or
(i) at the option of Insurer if Insurer reasonably believes that any change in
a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 Funds to Remain Available.
Except (i) as necessary to implement Participant-initiated transactions,
(ii) as required by state insurance laws or regulations, (iii) as required
pursuant to Section 5 of this Agreement, or (iv) with respect to any Portfolio
as to which this Agreement has terminated, Insurer shall not (x) redeem Fund
shares attributable to the Contracts, or (y) prevent Participants from
allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 90 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
6.3 Survival or Warranties and Indemnifications.
All warranties and indemnifications will survive the termination of this
Agreement.
6.4 Continuance of Agreement for Certain Purposes.
Notwithstanding any termination of this Agreement, the Distributor shall
continue to make available shares of the Portfolios pursuant to the terms and
conditions of this Agreement, for all Contracts in effect on the effective date
or termination of this Agreement (the "Existing Contracts"), except as otherwise
provided under Section 5 of this Agreement. Specifically, and without
limitation, the Distributor shall facilitate the sale and purchase of shares of
the Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
Section 7. Parties to Cooperate Respecting Termination
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
Section 8. Assignment
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
Section 9. Class B Distribution Payments
From time to time during the term of this Agreement the Distributor may
make payments to the Contracts Distributor pursuant to a distribution plan
adopted by the Fund with respect to the Class B shares of the Portfolios
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan) in
consideration of the Contracts Distributor's furnishing distribution services
relating to the Class B shares of the Portfolios and providing administrative,
accounting and other services, including personal service and/or the maintenance
of Participant accounts, with respect to such shares. The Distributor has no
obligation to make any such payments, and the Contracts Distributor waives any
such payment, until the Distributor receives monies therefor from the Fund. Any
such payments made pursuant to this Section 9 shall by subject to the following
terms and conditions:
(a) Any such payments shall be in such amounts as the Distributor may from
time to time advise the Contacts Distributor in writing but in any event not in
excess of the amounts permitted by the Rule 12b-1 Plan. Such payments may
include a service fee in the amount of .25 of 1% per annum of the average daily
net assets of the Fund attributable to the Class B shares of a Portfolio held by
clients of the Contracts Distributor. Any such service fee shall be paid solely
for personal service and/or the maintenance of Participant accounts.
(b) The provisions of this Section 9 relate to a plan adopted by the Fund
pursuant to Rule 12b-1. In accordance with Rule 12b-1, any person authorized to
direct the disposition of monies paid or payable by the Fund pursuant to this
Section 9 shall provide the Fund's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made.
(c) The provisions of this Section 9 shall remain in effect for not more
than a year and thereafter for successive annual periods only so long as such
continuance is specifically approved at least annually in conformity with Rule
12b-1 and the 1940 Act. The provisions of this Section 9 shall automatically
terminate in the event of the assignment (as defined by the 1940 Act) of this
Agreement, in the event the Rule 12b-1 Plan terminates or is not continued or in
the event this Agreement terminates or ceases to remain in effect. In addition,
the provisions of this Section 9 may be terminated at any time, without penalty,
by either the Distributor or the Contracts Distributor with respect to any
Portfolio on not more than 60 days' nor less than 30 days' written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Section 10. Notices
Notices and communications required or permitted by Section 2 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers at the Party receiving such
notices or communications may subsequently direct in writing:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
CNA Investor's Services, Inc.
333 S. Wabash, 34 South
Chicago, IL 60685
Attn: Ron Chapon
Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Section 11. Voting Procedures
Subject to the cost allocation procedures set forth in Section 3 hereof,
Insurer will distribute all proxy material furnished by the Fund to Participants
and will vote Fund shares in accordance with instructions received from
Participants. Insurer will vote Fund shares that are (a) not attributable to
Participants or (b) attributable to Participants, but for which no instructions
have been received, in the same proportion as Fund shares for which said
instructions have been received from Participants. Insurer agrees that it will
disregard Participant voting instructions only to the extent if would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 11.
Section 12. Foreign Tax Credits
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
Section 13. Indemnification
13.1 Of Fund, Distributor and Adviser by Insurer.
(a) Except to the extent provided in Sections 13.1(b) and 13.1(c), below,
Insurer agrees to indemnify and hold harmless the Fund, Distributor and
Adviser, each of their directors and officers, and each person, if any, who
controls the Fund, Distributor or Adviser within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Insurer)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, the Separate Account Prospectus, the
Contracts or, to the extent prepared by Insurer or Contracts
Distributor, sales literature or advertising for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933 Act
registration statement, the Separate Account Prospectus, the
Contracts, or sales literature or advertising (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Fund's 1933
Act registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of Insurer or
Contracts Distributor) or the negligent, illegal or fraudulent conduct
of Insurer or Contracts Distributor or persons under their control
(including, without limitation, their employees and "Associated
Persons," as that term is defined in paragraph (m) of Article I of the
NASD's By-Laws), in connection with the sale or distribution of the
Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information furnished to
the Fund, Adviser or Distributor by or on behalf of Insurer or
Contracts Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, sales literature or advertising of the
Fund, or any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement.
(b) Insurer shall not be liable under this Section 13.1 with respect to any
losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance by that Indemnified Party of
its duties or by reason of that Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to Distributor or to the
Fund.
(c) Insurer shall not be liable under this Section 13.1 with respect to any
action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of
the action shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Insurer of any such action shall
not relieve Insurer from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
Section 13.1 in case any such action is brought against an Indemnified
Party, Insurer shall be entitled to participate, at its own expense, in the
defense of such action. Insurer shall be entitled to assume the defense
thereof. After notice from Insurer to such Indemnified Party of Insurer's
election to assume the defense thereof, the Indemnified Party will
cooperate fully with Insurer and shall bear the fees and expenses of any
additional counsel retained by it, and Insurer will not be liable to such
Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection
with the defense thereof, other than reasonable costs of investigation.
13.2 Indemnification of Insurer and Contracts Distributor by Adviser.
(a) Except to the extent provided in Sections 13.2(d) and 13.2(e), below,
Adviser agrees to indemnify and hold harmless Insurer and Contracts
Distributor, each of their directors and officers, and each person, if any,
who controls Insurer or Contracts Distributor within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Adviser)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund or, to the extent not prepared by Insurer or
Contracts Distributor, sales literature or advertising for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
this agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished to Distributor, Adviser or the Fund by or on behalf of
Insurer or Contracts Distributor for use in the funds 1933 act
registration statement, Fund Prospectus, or in sales literature or
advertising (or any amendment or supplement to any of the foregoing);
or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising for the Contracts, or any
amendment or supplement to any of the foregoing, not supplied for use
therein by or on behalf of Distributor, Adviser, or the Fund) or the
negligent, illegal or fraudulent conduct of the Fund, Distributor,
Adviser or persons under their control (including, without limitation,
their employees and Associated Persons), in connection with the sale
or distribution of the Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, Separate Account Prospectus, sales
literature or advertising covering the Contracts, or any amendment or
supplement to any of the foregoing, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statement therein not misleading, if
such statement or omission was made in reliance upon and in conformity
with information furnished to Insurer or Contracts Distributor by or
on behalf of the Fund, Distributor or Adviser for use in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising covering the Contracts, or
any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement;
(b) Except to the extent provided in Sections 13.2(d) and 13.2(e) hereof,
Adviser agrees to indemnify and hold harmless the Indemnified Parties from and
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement thereof with, except as set forth in Section 13.2(c) below, the
written consent of Adviser) or actions in respect thereof (including, to the
extent reasonable, legal and other expenses) to which the Indemnified Parties
may become subject directly or indirectly under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions
directly or indirectly result from or arise out of the failure of any Portfolio
to operate as a regulated investment company in compliance with (i) Subchapter M
of the Code and regulations thereunder and (ii) Section 817(h) of the Code and
regulations thereunder (except to the extent that such failure is caused by
Insurer), including, without limitation, any income taxes and related penalties,
rescission charges, liability under state law to Contract owners or Participants
asserting liability against Insurer or Contracts Distributor pursuant to the
Contracts, the costs of any ruling and closing agreement or other settlement
with the Internal Revenue Service, and the cost of any substitution by Insurer
of shares of another investment company or portfolio for those of any adversely
affected Portfolio as a funding medium for the Separate Account that Insurer
deems necessary or appropriate as a result of the noncompliance.
(c) The written consent of Adviser referred to in Section 13.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 13.2 with respect to any
losses, claims; damages, liabilities or actions to which an Indemnified Party
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or to the
Separate Account.
(e) Adviser shall not be liable under this Section 13.2 with respect to any
action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Adviser of any such action shall not relieve
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13.2. In
case any such action is brought against an Indemnified Party, Adviser will be
entitled to participate, at its own expense, in the defense of such action.
Adviser also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the Internal Revenue Service).
After notice from Adviser to such Indemnified Party of Adviser's election to
assume the defense thereof, the Indemnified Party will cooperate fully with
Adviser and shall bear the fees and expenses of any additional counsel retained
by it, and Adviser will not be liable to such Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
13.3 Effect of Notice.
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Section 13.1(c) or 13.2(e) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability, or responsibility, and the
indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
Section 13. Applicable Law
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
Section 14. Execution in Counterparts
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
Section 15. Severability
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
Section 16. Rights 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, that the Parties are entitled to under federal and state
laws.
Section 17. Restrictions on Sales of Fund Shares
Insurer agrees that the Fund will be permitted (subject to the other terms
of this Agreement) to make its shares available to separate accounts of other
life insurance companies.
Section 18. Headings
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
VALLEY FORGE LIFE INSURANCE
COMPANY
By: S/David L. Stone
-------------------------
Name: David L. Stone
Title: Vice President
CNA INVESTOR SERVICES, INC.
By: S/Ronald Chapon
------------------------
Name: Ronald Chapon
Title: Vice President
ALLIANCE CAPITAL MANAGEMENT LP
By: Alliance Capital Management Corporation,
its General Partner
By: __________________________________
Name: /s/
Title: /s/
ALLIANCE FUND DISTRIBUTORS, INC.
By: ___________________________________
Name: /s/
Title: Senior Vice President
SHAREHOLDER SERVICES AGREEMENT
THIS SHAREHOLDER SERVICES AGREEMENT is made and entered into as of December
31, 1999 by and between VALLEY FORGE LIFE INSURANCE COMPANY (the "Company"), and
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM").
WHEREAS, the Company offers to the public certain group and individual
variable annuity and variable life insurance contracts (the "Contracts"); and
WHEREAS, the Company wishes to make available as investment options under
the Contracts VP Income & Growth and VP Value (the "Funds"), each of which is a
series of mutual fund shares registered under the Investment Company Act of
1940, as amended, and issued by American Century Variable Portfolios, Inc. (the
"Issuer"); and
WHEREAS, on the terms and conditions hereinafter set forth, ACIM desires to
make shares of the Funds available as investment options under the Contracts and
to retain the Company to perform certain administrative services on behalf of
the Funds, and the Company is willing and able to furnish such services;
NOW, THEREFORE, the Company and ACIM agree as follows:
1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this
Agreement, ACIM will cause the Issuer to make shares of the Funds available to
be purchased, exchanged, or redeemed, by or on behalf of the Accounts (defined
in SECTION 7(A) below) through a single account per Fund at the net asset value
applicable to each order. The Funds' shares shall be purchased and redeemed on a
net basis in such quantity and at such time as determined by the Company to
satisfy the requirements of the Contracts for which the Funds serve as
underlying investment media. Dividends and capital gains distributions will be
automatically reinvested in full and fractional shares of the Funds.
2. ADMINISTRATIVE SERVICES. The Company agrees to provide all
administrative services for the Contract owners, including but not limited to
those services specified in EXHIBIT A (the "Administrative Services"). Neither
ACIM nor the Issuer shall be required to provide Administrative Services for the
benefit of Contract owners. The Company agrees that it will maintain and
preserve all records as required by law to be maintained and preserved in
connection with providing the Administrative Services, and will otherwise comply
with all laws, rules and regulations applicable to the marketing of the
Contracts and the provision of the Administrative Services. Upon request, the
Company will provide ACIM or its representatives reasonable information
regarding the quality of the Administrative Services being provided and its
compliance with the terms of this Agreement.
3. TIMING OF TRANSACTIONS. ACIM hereby appoints the Company as agent for
the Funds for the limited purpose of accepting purchase and redemption orders
for Fund shares from the Contract owners. On each day the New York Stock
Exchange (the "Exchange") is open for business (each, a "Business Day"), the
Company may receive instructions from the Contract owners for the purchase or
redemption of shares of the Funds ("Orders"). Orders received and accepted by
the Company prior to the close of regular trading on the Exchange (the "Close of
Trading") on any given Business Day (currently, 4:00 p.m. Eastern time) and
transmitted to the Funds' transfer agent by 10:00 p.m. Eastern time on such
Business Day will be executed at the net asset value determined as of the Close
of Trading on such Business Day. Any Orders received by the Company on such day
but after the Close of Trading, and all Orders that are transmitted to the
Funds' transfer agent after 10:00 p.m. Eastern time on such Business Day, will
be executed at the net asset value determined as of the Close of Trading on the
next Business Day following the day of receipt of such Order. The day as of
which an Order is executed by the Funds' transfer agent pursuant to the
provisions set forth above is referred to herein as the "Trade Date". All orders
are subject to acceptance or rejection by ACIM or the Funds in the sole
discretion of either of them.
4. PROCESSING OF TRANSACTIONS.
(a) If transactions in Fund shares are to be settled through the National
Securities Clearing Corporation's Mutual Fund Settlement, Entry, and
Registration Verification (Fund/SERV) system, the terms of the FUND/SERV
AGREEMENT, between Company and American Century Services Corporation, shall
apply.
(b) If transactions in Fund shares are to be settled directly with the
Funds' transfer agent, the following provisions shall apply:
(1) By 6:30 p.m. Eastern time on each Business Day, ACIM (or one of
its affiliates) will provide to the Company via facsimile or other
electronic transmission acceptable to the Company the Funds' net asset
value, dividend and capital gain information and, in the case of income
funds, the daily accrual for interest rate factor (mil rate), determined at
the Close of Trading.
(2) By 10:00 p.m. Eastern time on each Business Day, the Company will
provide to ACIM via facsimile or other electronic transmission acceptable
to ACIM a report stating whether the instructions received by the Company
from Contract owners by the Close of Trading on such Business Day resulted
in the Accounts being a net purchaser or net seller of shares of the Funds.
As used in this Agreement, the phrase "other electronic transmission
acceptable to ACIM" includes the use of remote computer terminals located
at the premises of the Company, its agents or affiliates, which terminals
may be linked electronically to the computer system of ACIM, its agents or
affiliates (hereinafter, "Remote Computer Terminals").
(3) Upon the timely receipt from the Company of the report described
in (2) above, the Funds' transfer agent will execute the purchase or
redemption transactions (as the case may be) at the net asset value
computed as of the Close of Trading on the Trade Date. Payment for net
purchase transactions shall be made by wire transfer to the applicable Fund
custodial account designated by the Funds on the Business Day next
following the Trade Date. Such wire transfers shall be initiated by the
Company's bank prior to 4:00 p.m. Eastern time and received by the Funds
prior to 6:00 p.m. Eastern time on the Business Day next following the
Trade Date ("T+1"). If payment for a purchase Order is not timely received,
such Order will be, at ACIM's option, either (i) executed at the net asset
value determined on the Trade Date, and the Company shall be responsible
for all costs to ACIM or the Funds resulting from such delay, or (ii)
executed at the net asset value next computed following receipt of payment.
Payments for net redemption transactions shall be made by wire transfer by
the Issuer to the account(s) designated by the Company on T+1; provided,
however, the Issuer reserves the right to settle redemption transactions
within the time period set forth in the applicable Fund's then-current
prospectus. On any Business Day when the Federal Reserve Wire Transfer
System is closed, all communication and processing rules will be suspended
for the settlement of Orders. Orders will be settled on the next Business
Day on which the Federal Reserve Wire Transfer System is open and the
original Trade Date will apply.
5. PROSPECTUS AND PROXY MATERIALS.
(a) ACIM shall provide the Company with copies of the Issuer's proxy
materials, periodic fund reports to shareholders and other materials that are
required by law to be sent to the Issuer's shareholders. In addition, ACIM shall
provide the Company with a sufficient quantity of prospectuses of the Funds to
be used in conjunction with the transactions contemplated by this Agreement,
together with such additional copies of the Issuer's prospectuses as may be
reasonably requested by Company. If the Company provides for pass-through voting
by the Contract owners, or if the Company determines that pass-through voting is
required by law, ACIM will provide the Company with a sufficient quantity of
proxy materials for each, as directed by the Company.
(b) The cost of preparing, printing and shipping of the prospectuses, proxy
materials, periodic fund reports and other materials of the Issuer to the
Company shall be paid by ACIM or its agents or affiliates; provided, however,
that if at any time ACIM or its agent reasonably deems the usage by the Company
of such items to be excessive, it may, prior to the delivery of any quantity of
materials in excess of what is deemed reasonable, request that the Company
demonstrate the reasonableness of such usage. If ACIM believes the
reasonableness of such usage has not been adequately demonstrated, it may
request that the party responsible for such excess usage pay the cost of
printing (including press time) and delivery of any excess copies of such
materials. Unless the Company agrees to make such payments, ACIM may refuse to
supply such additional materials and ACIM shall be deemed in compliance with
this SECTION 5 if it delivers to the Company at least the number of prospectuses
and other materials as may be required by the Issuer under applicable law.
(c) The cost of any distribution of prospectuses, proxy materials, periodic
fund reports and other materials of the Issuer to the Contract owners shall be
paid by the Company and shall not be the responsibility of ACIM or the Issuer.
6. COMPENSATION AND EXPENSES.
(a) The Accounts shall be the sole shareholder of Fund shares purchased for
the Contract owners pursuant to this Agreement (the "Record Owner"). The Record
Owner shall properly complete any applications or other forms required by ACIM
or the Issuer from time to time.
(b) ACIM acknowledges that it will derive a substantial savings in
administrative expenses, such as a reduction in expenses related to postage,
shareholder communications and recordkeeping, by virtue of having a single
shareholder account per Fund for the Accounts rather than having each Contract
owner as a shareholder. In consideration of the Administrative Services and
performance of all other obligations under this Agreement by the Company, ACIM
will pay the Company a fee (the "Administrative Services Fee") equal to 25 basis
points (0.25%) per annum of the average aggregate amount invested by the Company
under this Agreement.
(c) The payments received by the Company under this Agreement are for
administrative and shareholder services only and do not constitute payment in
any manner for investment advisory services or for costs of distribution.
(d) For the purposes of computing the payment to the Company contemplated
by this SECTION 6, the average aggregate amount invested by the Company on
behalf of the Accounts in the Funds over a one month period shall be computed by
totaling the Company's aggregate investment (share net asset value multiplied by
total number of shares of the Funds held by the Company) on each Business Day
during the month and dividing by the total number of Business Days during such
month.
(e) ACIM will calculate the amount of the payment to be made pursuant to
this SECTION 6 at the end of each calendar quarter and will make such payment to
the Company within 30 days thereafter. The check for such payment will be
accompanied by a statement showing the calculation of the amounts being paid by
ACIM for the relevant months and such other supporting data as may be reasonably
requested by the Company and shall be mailed to:
CNA
100 CNA Drive
Nashville, TN 37214
Attention: Carol Kuntz
Phone No.: (615) 871-1806
Fax No.: (615) 871-1448
7. REPRESENTATIONS.
(a) The Company represents and warrants that (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms; (ii) it has established the
Valley Forge Life Insurance Company Variable Annuity and Variable Life Separate
Account (the "Account"), which is a duly authorized and established separate
account under Illinois Insurance law, and has registered each Account as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") to
serve as an investment vehicle for the Contracts; (iii) each Contract provides
for the allocation of net amounts received by the Company to an Account for
investment in the shares of one or more specified investment companies selected
among those companies available through the Account to act as underlying
investment media; (iv) selection of a particular investment company is made by
the Contract owner under a particular Contract, who may change such selection
from time to time in accordance with the terms of the applicable Contract; and
(v) the activities of the Company contemplated by this Agreement comply in all
material respects with all provisions of federal and state securities laws
applicable to such activities.
(b) ACIM represents that (i) this Agreement has been duly authorized by all
necessary corporate action and, when executed and delivered, shall constitute
the legal, valid and binding obligation of ACIM, enforceable in accordance with
its terms; (ii) the prospectus of each Fund complies in all material respects
with federal and state securities laws, and (iii) shares of the Issuer are
registered and authorized for sale in accordance with all federal and state
securities laws.
8. ADDITIONAL COVENANTS AND AGREEMENTS.
(a) Each party shall comply with all provisions of federal and state laws
applicable to its respective activities under this Agreement. All obligations of
each party under this Agreement are subject to compliance with applicable
federal and state laws.
(b) Each party shall promptly notify the other parties in the event that it
is, for any reason, unable to perform any of its obligations under this
Agreement.
(c) The Company covenants and agrees that all Orders accepted and
transmitted by it hereunder with respect to each Account on any Business Day
will be based upon instructions that it received from the Contract owners, in
proper form prior to the Close of Trading of the Exchange on that Business Day.
The Company shall time stamp all Orders or otherwise maintain records that will
enable the Company to demonstrate compliance with SECTION 8(C) hereof.
(d) The Company covenants and agrees that all Orders transmitted to the
Issuer, whether by telephone, telecopy, or other electronic transmission
acceptable to ACIM, shall be sent by or under the authority and direction of a
person designated by the Company as being duly authorized to act on behalf of
the owner of the Accounts. ACIM shall be entitled to rely on the existence of
such authority and to assume that any person transmitting Orders for the
purchase, redemption or transfer of Fund shares on behalf of the Company is "an
appropriate person" as used in Sections 8-107 and 8-401 of the Uniform
Commercial Code with respect to the transmission of instructions regarding Fund
shares on behalf of the owner of such Fund shares. The Company shall maintain
the confidentiality of all passwords and security procedures issued, installed
or otherwise put in place with respect to the use of Remote Computer Terminals
and assumes full responsibility for the security therefor. The Company further
agrees to be responsible for the accuracy, propriety and consequences of all
data transmitted to ACIM by the Company by telephone, telecopy or other
electronic transmission acceptable to ACIM.
(e) The Company agrees that, to the extent it is able to do so, it will use
its best efforts to give equal emphasis and promotion to shares of the Funds as
is given to other underlying investments of the Accounts, subject to applicable
Securities and Exchange Commission and/or National Association of Security
Dealers rules. In addition, the Company shall not impose any fee, condition, or
requirement for the use of the Funds as investment options for the Contracts
that operates to the specific prejudice of the Funds vis-a-vis the other
investment media made available for the Contracts by the Company.
(f) The Company shall not, without the written consent of ACIM, make
representations concerning the Issuer or the shares of the Funds except those
contained in the then-current prospectus and in current printed sales literature
approved by ACIM or the Issuer.
(g) Advertising and sales literature with respect to the Issuer or the
Funds prepared by the Company, its agents or ACIM, if any, for use in marketing
shares of the Funds as underlying investment media to Contract owners shall be
submitted to the Company or ACIM for review and approval before such material is
used. No such material shall be used if either party reasonably objects to such
use within twenty-one (21) business days of receipt of such material.
9. USE OF NAMES. Except as otherwise expressly provided for in this
Agreement, neither ACIM nor any of its affiliates or the Funds shall use any
trademark, trade name, service mark or logo of the Company, or any variation of
any such trademark, trade name, service mark or logo, without the Company's
prior written consent, the granting of which shall be at the Company's sole
option. Except as otherwise expressly provided for in this Agreement, the
Company shall not use any trademark, trade name, service mark or logo of the
Issuer, ACIM or any of its affiliates or any variation of any such trademarks,
trade names, service marks, or logos, without the prior written consent of
either the Issuer or ACIM, as appropriate, the granting of which shall be at the
sole option of ACIM and/or the Issuer.
10. PROXY VOTING.
(a) The Company shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the 1940 Act as
requiring such privileges. It shall be the responsibility of the Company to
assure that it and the separate accounts of the other Participating Companies
(as defined in SECTION 12(A) below) participating in any Fund calculate voting
privileges in a consistent manner.
(b) The Company will distribute to Contract owners all proxy material
furnished by ACIM and will vote shares in accordance with instructions received
from such Contract owners. The Company shall vote Fund shares for which no
voting instructions are received in the same proportion as shares for which such
instructions have been received. The Company and its agents shall not oppose or
interfere with the solicitation of proxies for Fund shares held for such
Contract owners.
11. INDEMNITY.
(a) ACIM agrees to indemnify and hold harmless the Company and its
officers, directors, employees, agents, affiliates and each person, if any, who
controls the Company within the meaning of the Securities Act of 1933
(collectively, the "Indemnified Parties" for purposes of this SECTION 11(A))
against any losses, claims, expenses, damages or liabilities (including amounts
paid in settlement thereof) or litigation expenses (including legal and other
expenses) (collectively, "Losses"), to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by ACIM of a material
provision of this Agreement. ACIM will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. ACIM shall not be liable for indemnification
hereunder if such Losses are attributable to the negligence or misconduct of the
Company in performing its obligations under this Agreement.
(b) The Company agrees to indemnify and hold harmless ACIM and the Issuer,
and their respective officers, directors, employees, agents, affiliates and each
person, if any, who controls Issuer or ACIM within the meaning of the Securities
Act of 1933 (collectively, the "Indemnified Parties" for purposes of this
SECTION 11(B)) against any Losses to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by the Company of a
material provision of this Agreement or the use by any person of the Remote
Computer Terminals. The Company will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. The Company shall not be liable for
indemnification hereunder if such Losses are attributable to the negligence or
misconduct of ACIM or the Issuer in performing their obligations under this
Agreement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this SECTION 11. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this SECTION 11 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
(d) If the indemnifying party assumes the defense of any such action, the
indemnifying party shall not, without the prior written consent of the
indemnified parties in such action, settle or compromise the liability of the
indemnified parties in such action, or permit a default or consent to the entry
of any judgment in respect thereof, unless in connection with such settlement,
compromise or consent, each indemnified party receives from such claimant an
unconditional release from all liability in respect of such claim.
12. POTENTIAL CONFLICTS
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by the Issuer on December 21, 1987, with the SEC and the order
issued by the SEC in response thereto (the "Shared Funding Exemptive Order").
The Company has reviewed the conditions to the requested relief set forth in
such application for exemptive relief. As set forth in such application, the
Board of Directors of the Issuer (the "Board") will monitor the Issuer for the
existence of any material irreconcilable conflict between the interests of the
contract owners of all separate accounts ("Participating Companies") investing
in funds of the Issuer. An irreconcilable material conflict may arise for a
variety of reasons, including: (i) an action by any state insurance regulatory
authority; (ii) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar actions by insurance, tax or
securities regulatory authorities; (iii) an administrative or judicial decision
in any relevant proceeding; (iv) the manner in which the investments of any
portfolio are being managed; (v) a difference in voting instructions given by
variable annuity contract owners and variable life insurance contract owners; or
(vi) a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists with regard
to contract owner investments in a Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Accounts from the Fund and
reinvesting such assets in a different investment medium or submitting the
question of whether such segregation should be implemented to a vote of all
affected contract owners and as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Companies)
that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and/or
(ii) establishing a new registered management investment company or
managed separate account.
(d) If a material irreconcilable conflict arises as a result of a decision
by the Company to disregard its contract owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contract owners having an interest in the Issuer, the Company at its sole
cost, may be required, at the Board's election, to withdraw an Account's
investment in the Issuer and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
(e) For the purpose of this SECTION 12, a majority of the disinterested
Board members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the Issuer
be required to establish a new funding medium for any Contract. The Company
shall not be required by this SECTION 12 to establish a new funding medium for
any Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
13. TERMINATION; WITHDRAWAL OF OFFERING. This Agreement may be terminated
by either party upon 120 days' prior written notice to the other parties.
Notwithstanding the above, the Issuer reserves the right, without prior notice,
to suspend sales of shares of any Fund, in whole or in part, or to make a
limited offering of shares of any of the Funds in the event that (A) any
regulatory body commences formal proceedings against the Company, ACIM,
affiliates of ACIM, or the Issuer, which proceedings ACIM reasonably believes
may have a material adverse impact on the ability of ACIM, the Issuer or the
Company to perform its obligations under this Agreement or (B) in the judgment
of ACIM, declining to accept any additional instructions for the purchase or
sale of shares of any such Fund is warranted by market, economic or political
conditions. Notwithstanding the foregoing, this Agreement may be terminated
immediately (i) by any party as a result of any other breach of this Agreement
by another party, which breach is not cured within 30 days after receipt of
notice from the other party, or (ii) by any party upon a determination that
continuing to perform under this Agreement would, in the reasonable opinion of
the terminating party's counsel, violate any applicable federal or state law,
rule, regulation or judicial order. Termination of this Agreement shall not
affect the obligations of the parties to make payments under SECTION 4 for
Orders received by the Company prior to such termination and shall not affect
the Issuer's obligation to maintain the Accounts as set forth by this Agreement.
Following termination, ACIM shall not have any Administrative Services payment
obligation to the Company (except for payment obligations accrued but not yet
paid as of the termination date).
14. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this
Agreement and the arrangement described herein are intended to be non-exclusive
and that each of the parties is free to enter into similar agreements and
arrangements with other entities.
15. SURVIVAL. The provisions of SECTION 9 (use of names) and SECTION 11
(indemnity) of this Agreement shall survive termination of this Agreement.
16. AMENDMENT. Neither this Agreement, nor any provision hereof, may be
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by all of the parties hereto.
17. NOTICES. All notices and other communications hereunder shall be given
or made in writing and shall be delivered personally, or sent by telex,
telecopier, express delivery or registered or certified mail, postage prepaid,
return receipt requested, to the party or parties to whom they are directed at
the following addresses, or at such other addresses as may be designated by
notice from such party to all other parties.
To the Company:
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Attn: G. Stephen Wasteck, Esq.
(312) 822-5971 (office number)
(312) 822-1186 (telecopy number)
To the Issuer or ACIM:
American Century Investment Management, Inc.
4500 Main Street
Kansas City, Missouri 64111
Attention: Charles A. Etherington, Esq.
(816) 340-4051 (office number)
(816) 340-4964 (telecopy number)
Any notice, demand or other communication given in a manner prescribed in this
SECTION 17 shall be deemed to have been delivered on receipt.
18. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the
written consent of all parties to the Agreement at the time of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this Agreement by signing any such counterpart.
20. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT. This Agreement, including the attachments hereto,
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements, written or oral, with
respect to such matters.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
VALLEY FORGE LIFE INSURANCE AMERICAN CENTURY INVESTMENT
COMPANY MANAGEMENT, INC.
By:_______________________ By:_____________________
Name:_____________________ William M. Lyons
Title:____________________ Executive Vice President
EXHIBIT A
ADMINISTRATIVE SERVICES
Pursuant to the Agreement to which this is attached, the Company shall perform
all administrative and shareholder services required or requested under the
Contracts with respect to the Contract owners, including, but not limited to,
the following:
1. Maintain separate records for each Contract owner, which records shall
reflect the shares purchased and redeemed and share balances of such Contract
owners. The Company will maintain a single master account with each Fund on
behalf of the Contract owners and such account shall be in the name of the
Company (or its nominee) as the record owner of shares owned by the Contract
owners.
2. Disburse or credit to the Contract owners all proceeds of redemptions of
shares of the Funds and all dividends and other distributions not reinvested in
shares of the Funds.
3. Prepare and transmit to the Contract owners, as required by law or the
Contracts, periodic statements showing the total number of shares owned by the
Contract owners as of the statement closing date, purchases and redemptions of
Fund shares by the Contract owners during the period covered by the statement
and the dividends and other distributions paid during the statement period
(whether paid in cash or reinvested in Fund shares), and such other information
as may be required, from time to time, by the Contracts.
4. Transmit purchase and redemption orders to the Funds on behalf of the
Contract owners in accordance with the procedures set forth in SECTION 4 to the
Agreement.
5. Distribute to the Contract owners copies of the Funds' prospectus, proxy
materials, periodic fund reports to shareholders and other materials that the
Funds are required by law or otherwise to provide to their shareholders or
prospective shareholders.
6. Maintain and preserve all records as required by law to be maintained
and preserved in connection with providing the Administrative Services for the
Contracts.
PARTICIPATION AGREEMENT
Among
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
And
VALLEY FORGE LIFE INSURANCE COMPANY
DATED AS OF
January 1, 2000
TABLE OF CONTENTS
Page
ARTICLE I. Purchase of Funds Shares
ARTICLE II. Representations and Warranties
ARTICLE III. Prospectuses, Reports to Shareholders
And Proxy Statements, Voting
ARTICLE IV. Sales Material and Information
ARTICLE V. Fees and Expenses
ARTICLE VI. Diversification
ARTICLE VII. Potential Conflicts
ARTICLE VIII. Indemnification
ARTICLE IX. Applicable Law
ARTICLE X. Termination
ARTICLE XI. Notices
ARTICLE XII. Miscellaneous
SCHEDULE A Separate Accounts and Associated Contracts
SCHEDULE B Portfolios of Morgan Stanley Dean
Witter Universal Funds, Inc. Available
Under this Agreement
SCHEDULE C Proxy Voting Procedures
THIS AGREEMENT, made and entered into as of the 1st day of January,
2000 by and among VALLEY FORGE LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Pennsylvania corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereafter referred to as the "Account") and
MORGAN STANLEY DEN WITTER UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a
Maryland corporation, and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, INC.
and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the "Advisers" and
individually the "Adviser"), a Delaware corporation and a Pennsylvania limited
liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products enter into
participation agreements with the Fund and the Advisers (the "Participating
Insurance Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available under this
Agreement; and
WHEREAS, the Fund intends to offer shares of the series set forth on
Schedule B hereto (each such series hereinafter referred to as a "Portfolio") as
may be amended from time to time by mutual agreement of the parties hereto, to
the Account(s) of the Company; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 19, 1996 (file No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Section 9(a), 13(a), 15(a), and 15(b)
of the Investment Company Act of 1940, as amended (hereinafter the "1940 Act"),
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by Variable Insurance Product
separate accounts of both affiliated and unaffiliated life insurance companies
and Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, each Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register under the 1933 Act
the Variable Insurance Products identified on Schedule A hereto (the
"Contracts"), as such Schedule may be amended from time to time by mutual
written agreement of the parties hereto; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the Contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios on behalf
of each Account to fund the Contracts and the Underwriter is authorized to sell
such shares to each such Account at net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Advisers agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1 The Fund agrees to make available for purchase by the Company
shares of the Portfolios and shall execute order placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund, provided that the
Fund receives notice of such order by 10:00 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2 The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset value
per share by the Company and its Accounts on those days on which the Fund
calculates its net asset value pursuant to rules of the Securities and Exchange
commission and the Fund shall use reasonable efforts to calculate such net asset
value of each day which the New York Stock Exchanged is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3 The Fund agrees that shares of the Fund will be sold only to Participating
Insurance Companies and their separate accounts and to certain Qualified Plans.
No shares of any Portfolio will be sold to the general public.
1.4 The Fund agrees to redeem for cash, on the Company's request, any full or
fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund
or its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request
for redemption by 10:00 a.m. Eastern time on the next following Business Day.
1.5 The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Company will give the Fund and the
Advisers 45 days written notice of its intention to make available in the
future, as a funding vehicle under the Contracts, any other investment company.
1.6 The Company shall pay for Fund shares on the next Business Day after an
order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purposes of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Fund.
1.7 Issuance and transfer of the Fund's shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount of each Account.
1.8 The Fund shall furnish same day notice (by wire or telephone, followed by
written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Portfolio's shares. The Company hereby elects to
receive all such income dividends and capital gain distributions as are payable
on the Portfolio shares in additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.9 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m.
Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act, that the Contracts will be issued in compliance
in all material respects with all applicable federal and state laws; and that
the Company will require of every person distributing the Contracts that (i) the
contracts be offered and sold in compliance in all material respects with all
applicable federal and state laws and (ii) each Contract, at the time it is
issued, be a suitable purchase for the applicant therefor under applicable state
insurance laws. The Company further represents and warrants that: (I) it is an
insurance company duly organized and in good standing under applicable law, (ii)
it has legally and validly established each Account prior to any issuance or
sale thereof as a segregated asset account under applicable laws and
regulations, and (iii) it has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold in compliance with the laws of the State of Maryland and all applicable
federal and state securities laws and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the registration statement
for its shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares. The Fund shall
register and qualify the share for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Fund.
2.3 The Fund represents that it is currently qualified as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and that it will make every effort to maintain such qualification
(under Subchapter M or any successor similar provision) and that it will notify
the Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify.
2.4 The Company represents that the Contracts are currently treated as life
insurance policies or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund immediately upon having a reasonable basis for believing that it
has ceased to so qualify.
2.5 The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6 The Fund makes no representation as to whether any aspect of its operations
(including, but not limited to, fees and expenses and investment policies)
complies with the insurance laws or regulations of the various states except
that the Fund represents that the Portfolios' investment policies, fees and
expenses are and shall at all times remain in compliance wit the laws of the
State of Maryland that the Portfolios' operation are and shall at all times
remain in material compliance with the laws of the State of Maryland to the
extent required to perform this Agreement.
2.7 The Fund represents that it is lawfully organized and validly existing under
the laws of the State of Maryland and that it does and will comply in all
material respects with the 1940 Act.
2.8 Each Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9 The Fund represents and warrants that its directors, officers, employees,
and other individuals/entities dealing with the money and/or securities of the
Fund are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in an amount not less than
the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid
blanket fidelity bond shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company.
2.10 The Company represents and warrants that all of its directors, officers,
employees, investment advisers, and other individuals/entities dealing with the
money and/or securities of the Fund are covered by a blanket fidelity bond or
similar coverage, in such amount as is customary for companies engaged in
similar businesses and industries and as reasonably necessary in light of the
Company's obligations under this Agreement. The aforesaid includes coverage for
larceny and embezzlement and shall be issued by a reputable bonding company. The
Company agrees to make all reasonable efforts to see that this bond or another
bond containing these provisions is always in effect, and agrees to notify the
Fund and the Advisers in the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1 The Fund or its designee shall provide the Company with as many printed
copies of the Fund's current prospectus and statement of additional information
as the Company may reasonably request. If requested by the Company, in lieu of
providing printed copies the Fund shall provide camera-ready film or computer
diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2 Except as provided in this Section 3.2, all expenses of preparing, setting
in type, printing and distributing Fund prospectuses and statements of
additional information shall be the expense of the Company. For prospectuses and
statements of additional information provided by the Company to its Contract
owners who currently own shares of one or more Portfolios ("Existing Contract
Owners"), in order to update disclosure as required by the 1933 Act and/or the
1940 Act, the cost of printing shall be borne by the Fund. If the Company
chooses to receive camera-ready film or computer diskettes in lieu of receiving
printed copies of the Fund's prospectus, the Fund shall bear the cost of
typesetting to provide the Fund's prospectus to the Company in the format in
which the Fund is accustomed to formatting prospectuses, and the Company shall
bear the expense of adjusting or changing the format to conform with any of its
prospectuses. In such event, the Fund will reimburse the Company in an amount
equal to the product of x and y where x is the number of such prospectuses
distributed to Existing Contract Owners, and y is the Fund's per unit cost of
typesetting and printing the Fund' s prospectus. The same procedures shall be
followed with respect to the Fund's statement of additional information. The
Company agrees to provide the Fund or its designee with such information as may
be reasonably requested by the Fund to assure that the Fund's expenses do not
include the cost of printing, typesetting or distributing any prospectuses or
statements of additional information other than those actually distributed to
Existing Contract Owners.
3.3 The Fund's statement of additional information shall be obtainable from the
Fund, the Company or such other person as the Fund may designate, as agreed upon
by the parties.
3.4 The Fund, at its expense, shall provide the Company with Copies of its proxy
statements, reports to shareholders, and other communications (except for
prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5 If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii)vote Fund shares for which no instructions have been received in the
same proportion as Funds of such Portfolio for which instructions have
been received;
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by low. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular the Fund will either provide for annual
meetings or comply with Section 16(c) of the 1940 Act (although the Fund is
not one of the trusts described in Section 16(c) as well as with Sections
16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of
directors and with whatever rules the Commission may promulgate with
respect thereto.
3.7 The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1.a. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or an Adviser is named, at least ten Business Days
prior to its use. No such material shall be used without the prior approval of
the Fund or its designee. The Fund shall use its reasonable best efforts to
review any such material as soon as practicable after receipt and no later than
ten Business Days after receipt of such material.
4.1.b. The Fund shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company is named, at least ten Business Days prior to its
use. No such material shall be used without the prior approval of the Company or
its designee. The Company shall use its reasonable best efforts to review any
such material as soon as practicable after receipt and no later than ten
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its Account(s) is named
at least ten Business Days prior to its use. No such material shall be used if
the Company or its designee reasonably objects to such use within ten Business
Days after receipt of such material.
4.4. The Fund and the Advisers shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contact owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares and are relevant to
the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7 For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (i.e..,
any written communication distributed or made generally available to customers
or the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan pursuant to Rule 12b-I to finance distribution expenses, then
the Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this Agreement shall
be paid by the Fund. The Fund shall see to it that all its shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. Except as otherwise set forth in Section 3.2 of
this Agreement, the Fund shall bear the expenses for the cost of registration
and qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders, the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Regulation
817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities; (c)
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by Contract owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of Contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of which it is
aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (2) establishing a new
registered management investment company of managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by the
Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the foregoing six month period, the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority of
the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 Indemnification by the Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each member of the board and officers, and each Adviser and each director and
officer of each Adviser, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) of settlements are related to the sale
or acquisition of the Fund' shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained n
the registration statement or prospectus for the Contracts
or contained in the Contracts or sales literature for the
contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or
on behalf of the Fund for use in the registration statement
or prospectus for the Contracts or in the contracts or sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of
the Fund not supplied by the Company, or persons under its
control and other than statements or representations
authorized by the Fund or an Adviser)d or unlawful conduct
of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of
the Fund or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
Each of paragraphs (i) through (v) above is limited by and in accordance with
the provisions of Sections 8.1(b) and 8.1(c) below.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by Advisers
8.2(a). Each Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company and each of its directors
and officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
and individually, "Indemnified Party," for purposes of this Section 8.2) against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for
the Contracts not supplied by the Fund or persons under its
control and other than statements or representations
authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Underwriter or persons under their control,
with respect to the sale or distribution of the Contracts of
Portfolio shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature
covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any failure by the Adviser to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result form any material breach of any
representation and/or warranty made by the Adviser in this
Agreement or arise out of or result form any other material
breach of this Agreement by the Adviser.
Each of paragraphs (I) through (v) above is limited by and in accordance with
provisions of Sections 8.2(b) and 8.2(c) below.
8.2(b). An Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including reasonable legal and other expenses) to which
the Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund.
Each of paragraphs (I) and (ii) above is limited by and in accordance with the
provisions of Section 8.3(b) and 8.3(c) below.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9,2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the first to
occur of:
(a) termination by any party for any reason by ninety(90) days advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M
of the Code or under any successor or similar provision, or if the
Company reasonably believes that the Fund mail fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
(f) termination by the Fund or an Adviser by written notice to the Company
if the Fund or the Adviser shall determine, in its sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operation, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either Fund or the Adviser has suffered
a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) termination by the Fund or the Adviser by written notice to the
Company, if the Company gives the Fund and the Adviser the written
notice specified in Section 1.5 hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, any termination under
this Section 10.2(h) shall be effective forty five (45) days after the
notice specified in Section 1.5 was given; or
(i) termination by the Fund, an Adviser or the Company upon another
party's material breach of any provision of this Agreement.
10.2. Notwithstanding any termination of this Agreement, the Fund shall at the
option of the Company, continue to make available additional shares of the
Portfolios pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as the "Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to direct
reallocation of investments in the Fund, redemption of investments in the Fund
and/or investment in the Fund upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.2 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (I) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent or general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Contracts, the Company shall not
prevent Contract Owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the Fund 90 days
prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Morgan Stanley Dean Witter Universal Funds, Inc.
c/o Morgan Stanley Dean Witter
Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to the Advisers:
Morgan Stanley Dean Witter Investment Management, Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
and
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, Illinois 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or Shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions 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.
12.4. The Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish State insurance regulators with any information or reports in
connection with services provided under this Agreement which such regulators may
request in order to ascertain whether the insurance operations of the Company
are being conducted in a manner consistent with applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any all rights, remedies and obligations at
law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not be
assigned by any party without the prior written consent of all parties hereto;
provided, however, that an Adviser may assign the Agreement or any rights or
obligations hereunder to any affiliate of or company under common control with
the Advisor, if such assignee is duly licensed and registered to perform the
obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
VALLEY FORGE LIFE INSURANCE COMPANY
By: S/David Stone
- -------------------
Name: David L. Stone
Title: Vice President
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: S/Stefanie Y. Chang
- -----------------------
Name: Stefanie Y. Chang
Title: Vice President
MARGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Managing Director
MILLER ANDERSON & SHERRERD,LLP
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Authorized Signatory
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<CAPTION>
<S> <C>
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF
DATE ESTABLISHED BY BOARD OF DIRECTORS CONTRACT FUNDED BY SEPARATE ACCOUNT
Valley Forge Life Insurance Company - CNA Capital Select Variable Annuity
Variable Annuity Separate Account - CNA Capital Select Plus Variable
(Established October 15, 1995) Annuity
Valley Forge Life Insurance Company - CNA Capital Select Variable Universal
Variable Life Separate Account Life
(Established October 15,1995)
</TABLE>
A-1
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC. AVAILABLE UNDER THIS AGREEMENT
Emerging Markets Equity Portfolio
International Magnum Portfolio
B-1
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each Contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund, as soon as possible, but
no later than two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last
Annual Report to the Company pursuant to the terms of Section 3.3 of
the Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Fund or its affiliate must approve the Card before it is printed.
Allow approximately 2-4 business days for printing information on the
Cards. Information commonly found on the Cards includes:
- - name (legal name as found on account registration)
- - address
- - fund or account number
C-1
- - coding to state number of units
- - individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- - Voting Instruction Card(s)
- - One proxy notice and statement (one document)
- - return envelope (postage pre-paid by Company) addressed to the Company or
its tabulation agent
- - "urge buckslip" - optional, but recommended. (This is a small, single sheet
of paper that requests Customers to vote as quickly as possible and that
their vote is important. One copy will be supplied by the Fund.)
- - cover letter - optional, supplied by Company and reviewed and approved in
advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including,) the meeting,
counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund
C-2
in the past.
o Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) The Fund must review
and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later that 10:00 a.m. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
April 25, 2000
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products
450 Fifth St., N.W.
Washington, D.C. 20549
RE: Opinion of Counsel-Valley Forge Life Insurance Company Variable Life
Separate Account File Nos. 333-01949 and 811-07569.
Gentlemen:
This Opinion of Counsel is rendered in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of Post-Effective Amendment No. 7 to a registration Statement Filed on
Form S-6 for the variable life insurance policies to be issued by Valley Forge
Life Insurance Company and its separate account, Valley Forge Life Insurance
Company Variable Life Separate Account. I have made such examination of the law
and have examined such records and documents as, in my judgement, are necessary
or appropriate to enable me to render the opinions expressed below.
I am 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, an exhibit to the
Registration Statement.
Sincerely,
/s/G. STEPHEN WASTEK
G. Stephen Wastek
Director & Senior Counsel
ACTUARIAL OPINION AND CONSENT
This opinion is furnished in connection with Post-Effective Amendment No. 7 to
the registration of the Individual Variable Flexible Premium Life Insurance
policy of the Valley Forge Life Insurance Company Separate Account, file numbers
333-01949 and 811-07569.
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
- -------------------------
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 Post-Effective Amendment No. 7 to Registration
Statement No. 333-01949 and to Registration Statement No. 811-07569, both
filed 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
April 24, 2000
