<PAGE> 1
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE
SEPARATE ACCOUNT
AND
VALLEY FORGE LIFE INSURANCE COMPANY
This prospectus describes the Flexible Premium Variable Life Insurance
Policy that we (Valley Forge Life Insurance Company) are offering.
The policy is a variable benefit policy. We have designed the policy for
use in estate and retirement planning and other insurance needs of individuals.
You, the policyowner, have a number of investment choices in the policy.
These investment choices include fixed account options as well as the investment
options listed below. When you buy a policy and allocate funds to the investment
options you are subject to investment risk. This means that the value of your
policy may increase and decrease depending upon the investment performance of
the investment option(s) you select. Under some circumstances, the death benefit
and the duration of the policy will also increase and decrease depending upon
investment performance. The duration of a policy (how long a policy will remain
in force) is affected by how much cash value the policy has, which increases and
decreases depending upon investment performance.
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
Life Insurance Policy. The Securities and Exchange Commission (SEC) maintains a
Web site (http://www.sec.gov) that contains information regarding companies that
file electronically with the SEC.
The policy:
- is not a bank deposit.
- is not federally insured.
- is not endorsed by any bank or government agency.
THE POLICY IS SUBJECT TO INVESTMENT RISK. YOU MAY BE SUBJECT TO LOSS OF
PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES NOR HAS IT DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES IN ANY STATE, COUNTRY,
OR JURISDICTION IN WHICH WE ARE NOT AUTHORIZED TO SELL THE POLICIES. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR THAT WE HAVE
REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT.
Date: June 1, 2000
<PAGE> 2
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
- Federated High Income Bond Fund II
- Federated Prime Money Fund II
- Federated Utility Fund II
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
- Alger American Growth Portfolio
- Alger American Mid-Cap Growth Portfolio
- Alger American Small Capitalization Portfolio
- Alger American Leveraged AllCap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC.
(formerly, SOGEN VARIABLE FUNDS, INC.)
Advised by Arnhold and S. Bleichroeder Advisers, Inc.
- First Eagle SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
- Van Eck Worldwide Emerging Markets Fund
- Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
- Fidelity VIP II Asset Manager Portfolio
- Fidelity VIP II Contrafund(R) Portfolio
- Fidelity VIP Equity-Income Portfolio
- Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
- MFS Emerging Growth Series
- MFS Growth With Income Series
- MFS Research Series
- MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
- Janus Aspen Series Capital Appreciation Portfolio
- Janus Aspen Series Growth Portfolio
- Janus Aspen Series Balanced Portfolio
- Janus Aspen Series Flexible Income Portfolio
- Janus Aspen Series International Growth Portfolio
- Janus Aspen Series Worldwide Growth Portfolio
<PAGE> 3
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management, L.P.
- Alliance Premier Growth Portfolio
- Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
- American Century VP Income & Growth Fund
- American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, Class 2 Shares
Advised by Templeton Asset Management Ltd.
- Templeton Developing Markets Securities Fund (formerly, Templeton Developing
Markets Fund)
Advised by Templeton Investment Counsel, Inc.
- Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
- Lazard Retirement Equity Portfolio
- Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
(formerly, Morgan Stanley Dean Witter Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management, Inc.
- Morgan Stanley International Magnum Portfolio
- Morgan Stanley Emerging Markets Equity Portfolio
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HIGHLIGHTS.................................................. 1
THE COMPANY................................................. 4
THE VARIABLE LIFE INSURANCE POLICY.......................... 4
EXPENSES.................................................... 5
PURCHASES................................................... 12
INVESTMENT CHOICES.......................................... 15
DEATH BENEFIT............................................... 20
TAXES....................................................... 23
ACCESS TO YOUR MONEY........................................ 24
OTHER INFORMATION........................................... 26
MORE INFORMATION............................................ 29
EXECUTIVE OFFICERS AND DIRECTORS.......................... 29
VOTING.................................................... 30
DISREGARD OF VOTING INSTRUCTIONS.......................... 30
LEGAL OPINIONS............................................ 30
OUR RIGHT TO CONTEST...................................... 30
FEDERAL TAX STATUS........................................ 31
REPORTS TO OWNERS......................................... 34
LEGAL PROCEEDINGS......................................... 34
EXPERTS................................................... 34
FINANCIAL STATEMENTS...................................... 35
APPENDIX A -- ILLUSTRATIONS OF POLICY VALUES................ A-1
APPENDIX B -- EXAMPLES OF ADDITIONAL INSURANCE RIDER........ B-1
APPENDIX C -- RATES OF RETURN............................... C-1
</TABLE>
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INDEX OF SPECIAL TERMS
This prospectus is written in plain English to make it as understandable as
possible. However, by the very nature of the policy, the use of certain
technical words or terms are unavoidable. We have identified some of these words
or terms. For some we have provided you with a definition below. For the
remainder, we believe that you will find an adequate discussion in the text. We
have identified these terms and provided you with a page number that indicates
where you will find the explanation for the word or term. The word or term on
the page is in italics.
DEATH PROCEEDS: The amount of money payable to the beneficiary if the
insured dies while this policy is in force.
DEBT: Any amount you owe us as the result of a policy loan. This includes
any accrued loan interest.
GENERAL ACCOUNT: Our assets other than those allocated to the Variable
Account or any other separate account.
INVESTMENT OPTION: An investment choice within Valley Forge Life Insurance
Company Variable Life Separate Account available under the policy.
POLICY LOAN ACCOUNT: That portion of the cash value resulting from a policy
loan.
RIDERS: An endorsement that is incorporated into your policy.
SPECIFIED AMOUNT: A dollar amount used to determine the death benefit of
your policy. This amount is chosen by you. The minimum specified amount is
$100,000.
TARGET PREMIUM: A premium calculated when a policy is issued, based on the
insured's age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the surrender charge.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Beneficiary, Contingent Beneficiary......................... 27
Business Day................................................ 15
Cash Value, Net Cash Value, Cash Surrender Value............ 14
Fixed Account I, Fixed Account II........................... 17
Insured..................................................... 20
Monthly Date................................................ 12
Owner, Joint Owner, Contingent Owner........................ 27
Policy Year, Policy Anniversary............................. 12
Policy Date................................................. 12
</TABLE>
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<PAGE> 6
HIGHLIGHTS
THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy is a contract between you, the owner,
and us, an insurance company. The policy provides for life insurance coverage on
the insured. It has cash values, a death benefit, surrender rights, loan
privileges and other characteristics associated with traditional and universal
life insurance. However, since the policy is a variable life insurance policy,
the value of your policy will increase or decrease depending upon the investment
experience of the investment option(s) you choose. The death benefit associated
with the policy is distributed free from federal income taxes to the named
beneficiary. However, estate taxes may apply. We will issue the policy as an
individual policy in most states; and as a group life insurance policy in other
states.
EXPENSES
The policy has both insurance and investment features, and there are costs
related to each that reduce the return on your investment. We deduct:
- a premium charge from each premium payment made;
- an expense charge daily from amounts allocated to the investment
options;
- a monthly deduction from cash value for: cost of insurance; cost of any
rider(s); and monthly policy fee; and
- daily investment option charges which apply to the average daily value
of the investment options.
We may assess a surrender charge if you take out money from your policy. If
you make more than 12 transfers in any policy year, unless the transfer is
pre-scheduled, we will charge a transfer processing fee. Also, for the first 12
months after an increase in the specified amount, we will deduct $10 each month
from your policy.
Once the insured turns 95, we will no longer deduct the Monthly Deduction.
There are fees and expenses which are deducted from the assets of the
investment options.
PURCHASES
You purchase the policy by completing the proper forms. In some
circumstances, we may contact you for additional information regarding the
insured. We may require the insured to provide us with medical records,
physicians' statements or a complete paramedical examination.
The minimum initial premium payment we accept is computed for you based on
the specified amount you request. The policy is designed for the payment of
subsequent premiums. The minimum subsequent premium payment you can make is $50.
INVESTMENT CHOICES
You can put your money in the fixed account options and/or in any of the
investment options. Currently, you may invest in all investment choices at any
one time. However, we reserve the right to limit this in the future.
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DEATH BENEFIT
The amount of the death benefit depends on:
- the specified amount of insurance of your policy;
- the death benefit option in effect at the time of death;
- under some circumstances, your cash value; and
- the death benefit of any rider.
There are two death benefit options: Option 1 and Option 2. Under certain
circumstances you can change death benefit options. You can also change the
specified amount under certain circumstances after your policy has been in force
for one year.
If death benefit Option 1 is in effect, the death benefit is the greater of
your specified amount, or your cash value on the date of death multiplied by the
applicable factor. Under this option, the amount of the death benefit is fixed,
except when we use the factor to determine the benefit percentage.
If death benefit Option 2 is in effect, the death benefit is the greater of
your specified amount in effect plus the cash value, or the cash value on the
date of death multiplied by the applicable factor. Under this option, the amount
of the death benefit is variable.
TAXES
Your policy has been designed to comply with the definition of life
insurance in the Internal Revenue Code. As a result, the death proceeds paid
under the policy should be excludable from the gross income of your beneficiary.
Any earnings in your policy are not taxed until you take them out. The tax
treatment of the loan proceeds and surrender proceeds will depend on whether the
policy is considered a Modified Endowment Contract (MEC). Proceeds taken out of
a MEC are considered to come from earnings first and are includible in taxable
income. If you are younger than 59 1/2 when you take money out of a MEC, you may
also be subject to a 10% federal tax penalty on the earnings withdrawn.
ACCESS TO YOUR MONEY
You can make a total surrender of your policy at any time and we will pay
you the net cash value. You may make a partial surrender at any time after the
5th policy anniversary, or earlier if required by state law. When you make a
total or partial surrender, a surrender charge may be assessed.
You can also borrow some of your net cash value.
OTHER INFORMATION
FREE LOOK. You can cancel the policy within 10 days after you receive it
(or whatever period is required in your state). We will refund an amount equal
to the cash value plus fees or charges deducted from premium payments less any
debt. When we receive your initial net premium, we will credit the amount to
your policy on the policy date. Your initial premium will be allocated to the
selected investment options on the latest of:
- two business days after the policy date;
- two business days after our receipt of your initial premium at our
Administrative Office; or
- the date our underwriters approve your application for a policy.
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<PAGE> 8
ADDITIONAL FEATURES. The following additional features are offered:
- You can arrange to have a regular amount of money automatically
transferred from the Federated Prime Money Fund II to selected
investment options or our general account each month, theoretically
giving you a lower average cost per unit over time than a single one
time purchase. We call this feature the dollar cost averaging option.
- You can arrange to have us automatically rebalance amounts in selected
investment options and Fixed Account I to return to your original
percentage allocations. We call this feature the automatic transfer
option.
- In some states, at any time during the first 18 months your policy is in
force, you can convert the policy to any permanent non-variable policy
offered by us in your state. We call this feature the right to convert.
- If the insured becomes terminally ill, we will pay you a portion of the
death benefit. We call this feature the accelerated benefit.
- If the insured becomes disabled, under certain circumstances, we will
waive the monthly deductions. We call this the waiver of monthly
deduction benefit.
- We also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
INQUIRIES. If you need more information about buying a policy, please
contact us at:
Valley Forge Life Insurance Company
100 CNA Drive
Nashville, TN 37214
(800) 262-1755
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THE COMPANY
Valley Forge Life Insurance Company, with its administrative office located
at 100 CNA Drive, Nashville, TN 37214, is a wholly-owned subsidiary of
Continental Assurance Company ("Assurance"). Assurance is a wholly-owned
subsidiary of Continental Casualty Company ("Casualty"), which is wholly-owned
by CNA Financial Corporation ("CNA"). Loews Corporation owns approximately 86%
of the outstanding common stock of CNA as of December 31, 1999.
We are principally engaged in the sale of life insurance and annuities. We
are licensed in the District of Columbia, Guam, Puerto Rico and all states
except New York, where we are only admitted as a reinsurer.
THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy is a contract between you, the owner,
and us, an insurance company. The policy described in this prospectus is a
flexible premium variable life insurance policy. The policy is "flexible"
because:
- the frequency and amount of premium payments can vary;
- you can choose between death benefit options; and
- you can increase or decrease the amount of insurance coverage, all within
the same policy of insurance.
The policy is "variable" because the cash value, when allocated to the
investment options, may increase or decrease depending upon the investment
results of the selected investment options. Under certain circumstances, the
death benefit and the duration of your policy may also vary. The death benefit
may vary because investment performance of the selected investment options may
be sufficient to result in the death benefit being greater than the specified
amount. The duration of your policy is also affected by investment performance
because charges under the policy, when coupled with poor performance, may mean
that at sometime there may not be enough cash value in your policy to pay the
charges and your policy will terminate unless you make a premium payment(s).
During the life of the insured, you can surrender the policy for all or
part of its net cash value. You may also obtain a policy loan using the policy
as security and by properly assigning it to us.
We also make available a number of riders to meet a variety of your estate
planning needs.
To the extent you select any of the investment options, you bear the
investment risk. If your net cash value is insufficient to pay any expense
charges, the policy may terminate.
Because the policy is like traditional and universal life insurance, it
provides a death benefit which is paid to your named beneficiary. These proceeds
should be excludable from the gross income of the beneficiary, however estate
taxes may apply. The income tax-free death proceeds makes this an excellent way
to accumulate money you do not think you will use in your lifetime. It is also a
tax-efficient way to provide for those you leave behind. If you need access to
your money, you can borrow from the policy or make a total or partial surrender.
We will issue the policy as an individual policy in most states, and as a
group certificate under a group life insurance policy in other states. As used
in this prospectus, the term policy refers to either: the individual life
policy, or to a certificate issued under a group life policy.
4
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PURCHASING CONSIDERATIONS
The policy is designed for individuals and businesses that have a need for
death protection but who also desire to potentially increase the values in their
policies through investments in the investment options. The policy offers the
following to individuals:
- create or conserve one's estate;
- supplement retirement income; and
- access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the policy described in
this prospectus is appropriate. Replacement of an existing policy with this
policy may not be advantageous to your situation.
EXPENSES
There are charges and other expenses associated with the policy that reduce
the return on your investment in the policy. The charges and expenses are
described below.
PREMIUM CHARGE
We deduct a premium charge from each premium payment you make to reimburse
us for the expenses associated with selling the policy and for tax charges and
costs we incur. The premium charge is as follows:
<TABLE>
<S> <C>
Policy Years 1-10:................... 7.5% of all premiums up to the target premium.
Policy Years 11 and later:........... 5.5% of all premiums up to the target premium.
All Years:........................... 3.5% of all premiums in excess of the target
premium.
</TABLE>
MONTHLY DEDUCTIONS
Each monthly date, we will make certain deductions from the cash value of
your policy. The monthly deduction is for:
- the cost of insurance for the following month;
- the monthly cost of any riders attached to your policy; and
- the monthly policy fee.
The first monthly deduction will be determined as of the policy date. The
monthly deduction will be deducted on a pro-rata basis from the cash surrender
value allocated to the investment options and fixed accounts.
COST OF INSURANCE. This charge compensates us for the insurance coverage we
provide in the month following the charge. We determine the monthly cost of
insurance rate each year as of the policy anniversary. The rate will be charged
for the next policy year. The cost of insurance rate for a specified amount of
insurance portion for a policy month equals the sum of:
- the standard cost of insurance rate for that month from the table of our
standard cost of insurance rates; and
- an additional rate or charge for any extra mortality risk classification
(substandard insurance) that applies for the specified amount of
insurance portion.
The additional rate or charge for an extra mortality risk classification
for any policy month equals the amount of extra mortality that the risk
classification represents for that month. Each
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portion of the specified amount will have its own cost of insurance rate which
may be different from any other portion.
The total cost of insurance rate for a policy month will be uniform for all
specified amount of insurance portions that:
- are in the same specified amount band, sex, and risk classification;
- take effect when the insureds are the same age; and
- have been in force the same length of time.
- We may charge less than the maximum cost of insurance rates shown in
your policy from time to time based on our expectations as to future
cost elements such as: investment earnings, mortality, persistency,
expenses and taxes. Any change we make will apply to all specified
amount portions in the same risk classification.
Since the mortality tables used with the policy distinguish between males
and females, the cost of insurance and the benefits payable will differ between
males and females of the same age. Employers, employee plans and employee
organizations should seek legal advice to determine whether the Civil Rights Act
of 1964, Title VII, or other applicable law prohibits the use of sex distinct
mortality tables. We will offer the policy based upon unisex mortality tables
where required.
MONTHLY COST OF RIDERS. The amount of any charges associated with riders,
if any, each policy month is determined in accordance with the rider and is
shown on the schedule page of your policy.
MONTHLY POLICY FEE. There is a monthly policy fee which is equal to $26 per
policy month for the first policy year. Thereafter, the fee is $6 per policy
month. The charges reimburse us for expenses incurred in the administration of
the policies. Such expenses include: confirmations, annual account statements,
maintenance of policy records, maintenance of variable account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
policy owner servicing and all accounting, valuation, regulatory and updating
requirements.
EXPENSE CHARGE
We deduct an expense charge from each investment option each business day.
The expense charge is equal to:
<TABLE>
<S> <C>
Policy Years 1-10:................... Approximately .90%, on an annual basis, of the cash
value of each investment option.
Policy Years 11 and later:........... Approximately .45%, on an annual basis, of the cash
value of each investment option.
</TABLE>
This charge compensates us for some of the mortality risks we assume, and
the risk that we will experience costs above that for which we are compensated.
It also compensates us for some of the administrative costs in administering the
policy. We expect to profit from the charge.
SURRENDER CHARGES
A surrender charge may be deducted if you make a full or partial surrender.
A surrender charge may also be applicable when you reduce the specified amount.
The surrender charge varies by issue age, specified amount, sex, smoking status,
and contract duration. The surrender
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charge is a percentage of specified amount of insurance for the first 6 policy
years. The charge then grades down to zero over policy years 7 through 15 as
shown in the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
POLICY YEARS % OF SURRENDER CHARGE
-------------------------------------------------------------------------------
<S> <C>
1-6................................................... 100%
7..................................................... 80%
8..................................................... 70%
9..................................................... 60%
10.................................................... 50%
11.................................................... 40%
12.................................................... 30%
13.................................................... 20%
14.................................................... 10%
15+................................................... No Surrender Charge
</TABLE>
TRANSFER PROCESSING FEE
You may transfer values from one investment option to another, or to or
from the fixed accounts. The first 12 transfers in a policy year are free. The
fee for each additional transfer is currently $25. The transfer processing fee
is deducted from the amount which is transferred. Prescheduled dollar cost
averaging transfers or automatic transfers are not counted when we determine
transfer processing fees. Each transfer request is considered to be one request
regardless of the number of investment options or any fixed account involved in
the transfer.
CHARGES AFTER THE INSURED'S 95TH BIRTHDAY
Once the insured turns 95, we will no longer deduct the insurance related
charges, but will continue to deduct the asset based charges.
WAIVER OF MONTHLY DEDUCTION RIDER
If you choose the waiver of monthly deduction rider, we will waive monthly
deductions if the insured becomes totally disabled, as defined in the rider. The
waiver will begin on the latest date when:
- we have been notified of the onset of a total disability;
- we have received due proof of total disability; and
- total disability has continued for 6 consecutive months.
If you choose this feature, the monthly cost of this rider is shown on your
policy schedule. The rider will terminate:
- on the first policy anniversary on or after the insured's 65th birthday;
- if you give us written notice to terminate it; or
- when the policy terminates.
This benefit may not be available in your state.
The annual expenses of the portfolios for the year ended December 31, 1999
below are based on data provided by the respective fund groups. We have not
independently verified such data. Future expenses may be greater or less than
those shown.
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INVESTMENT OPTION EXPENSES: (as a percentage of the average daily net
assets of an investment option)
<TABLE>
<CAPTION>
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OTHER TOTAL ANNUAL
EXPENSES EXPENSES
(AFTER WAIVERS (AFTER
AND/OR WAIVERS AND/OR
REIMBURSEMENTS REIMBURSEMENTS
WITH RESPECT WITH RESPECT
TO CERTAIN TO CERTAIN
MANAGEMENT 12B-1 INVESTMENT INVESTMENT
(ADVISORY FEES) FEES OPTIONS) OPTIONS)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERATED INSURANCE SERIES (See
Note 1)
Federated High Income Bond Fund
II............................. 0.60% 0.19% 0.79%
Federated Prime Money Fund II.... 0.50% 0.23% 0.73%
Federated Utility Fund II........ 0.75% 0.19% 0.94%
THE ALGER AMERICAN FUND
Alger American Growth
Portfolio...................... 0.75% 0.04% 0.79%
Alger American Mid-Cap Growth
Portfolio...................... 0.80% 0.05% 0.85%
Alger American Small
Capitalization Portfolio....... 0.85% 0.05% 0.90%
Alger American Leveraged AllCap
Portfolio (See Note 2)......... 0.85% 0.08% 0.93%
FIRST EAGLE SOGEN VARIABLE FUNDS,
INC. (See Note 3)
First Eagle SoGen Overseas
Variable Fund.................. 0.75% 0.75% 1.50%
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Emerging
Markets Fund (See Note 4)...... 1.00% 0.34% 1.34%
Van Eck Worldwide Hard Assets
Fund........................... 1.00% 0.26% 1.26%
VARIABLE INSURANCE PRODUCTS FUND
(VIP) AND VARIABLE INSURANCE
PRODUCTS FUND II (VIP II),
(See Note 5)
Fidelity VIP II Asset Manager
Portfolio...................... 0.53% 0.10% 0.63%
Fidelity VIP II Contrafund
Portfolio...................... 0.58% 0.09% 0.67%
Fidelity VIP Equity-Income
Portfolio...................... 0.48% 0.09% 0.57%
Fidelity VIP II Index 500
Portfolio...................... 0.24% 0.04% 0.28%
</TABLE>
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<TABLE>
<CAPTION>
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OTHER TOTAL ANNUAL
EXPENSES EXPENSES
(AFTER WAIVERS (AFTER
AND/OR WAIVERS AND/OR
REIMBURSEMENTS REIMBURSEMENTS
WITH RESPECT WITH RESPECT
TO CERTAIN TO CERTAIN
MANAGEMENT 12B-1 INVESTMENT INVESTMENT
(ADVISORY FEES) FEES OPTIONS) OPTIONS)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS VARIABLE INSURANCE TRUST (See
Note 6)
MFS Emerging Growth Series....... 0.75% 0.09% 0.84%
MFS Growth With Income Series.... 0.75% 0.13% 0.88%
MFS Research Series.............. 0.75% 0.11% 0.86%
MFS Total Return Series.......... 0.75% 0.15% 0.90%
JANUS ASPEN SERIES, INSTITUTIONAL
SHARES (See Note 7)
Janus Aspen Series Capital
Appreciation Portfolio......... 0.65% 0.04% 0.69%
Janus Aspen Series Growth
Portfolio...................... 0.65% 0.02% 0.67%
Janus Aspen Series Balanced
Portfolio...................... 0.65% 0.02% 0.67%
Janus Aspen Series Flexible
Income Portfolio............... 0.65% 0.07% 0.72%
Janus Aspen Series International
Growth Portfolio............... 0.65% 0.11% 0.76%
Janus Aspen Series Worldwide
Growth Portfolio............... 0.65% 0.05% 0.70%
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, CLASS B SHARES
Alliance Premier Growth
Portfolio...................... 1.00% 0.25% 0.04% 1.29%
Alliance Growth and Income
Portfolio...................... 0.63% 0.25% 0.09% 0.97%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC. (See Note 8)
American Century VP Income &
Growth Fund.................... 0.70% -- 0.00% 0.70%
American Century VP Value Fund... 1.00% -- 0.00% 1.00%
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST, CLASS
2 SHARES (See Note 9)
Templeton Developing Markets
Securities Fund (See Note
10)............................ 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund
(See Note 10).................. 0.60% 0.25% 0.18% 1.03%
</TABLE>
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<TABLE>
<CAPTION>
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OTHER TOTAL ANNUAL
EXPENSES EXPENSES
(AFTER WAIVERS (AFTER
AND/OR WAIVERS AND/OR
REIMBURSEMENTS REIMBURSEMENTS
WITH RESPECT WITH RESPECT
TO CERTAIN TO CERTAIN
MANAGEMENT 12B-1 INVESTMENT INVESTMENT
(ADVISORY FEES) FEES OPTIONS) OPTIONS)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES
(See Note 11)
Lazard Retirement Equity
Portfolio...................... 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap
Portfolio...................... 0.75% 0.25% 0.25% 1.25%
THE UNIVERSAL INSTITUTIONAL
FUNDS, INC. (See Note 12)
Morgan Stanley International
Magnum Portfolio............... 0.29% -- 0.87% 1.16%
Morgan Stanley Emerging Markets
Equity Portfolio............... 0.42% -- 1.37% 1.79%
</TABLE>
NOTES TO TABLE OF FEES AND EXPENSES
1. The Fund did not pay or accrue the shareholder services fee during the fiscal
year ended December 31, 1999. The Fund has no present intention of paying or
accruing the shareholder services fee during the fiscal year ending December
31, 2000. The maximum shareholder services fee is 0.25%.
2. Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
3. The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1999 would have been 3.32% without the effect of
the investment advisory fee waiver and expense reimbursement provided by the
advisor.
4. For the year ended December 31, 1999, Van Eck Associates Corporation
(Adviser) agreed to waive its management fees and assume all expenses of the
Fund except interest, taxes, brokerage commissions and extraordinary expenses
exceeding 1.5% of average daily net assets for the period January 1, 1999 to
May 12, 1999. For the period May 13, 1999 to December 31, 1999, the Adviser
agreed to waive its management fees and assume all expenses of the Fund
except interest, taxes, brokerage commissions and extraordinary expenses
exceeding 1.30% of average daily net assets. Without such waivers and
assumption of expenses, for the year ended December 31, 1999, other expenses
were .54% and total annual expenses were 1.54%.
5. A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain funds',
or FMR on behalf of certain funds', custodian credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable
fund's expenses. Including these reductions, the total operating expenses
presented in the table would have been .56% for Equity-Income Portfolio, .62%
for Asset Manager Portfolio, and .65% 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.
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<PAGE> 16
6. Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
7. Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for the Growth,
Capital Appreciation, International Growth, Worldwide Growth, and Balanced
Portfolios. All expenses are shown without the effect of expense offset
arrangements.
8. The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as the
funds' assets increase.
9. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
10. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees, which
apply to the combined fund effective 5/1/00. The table shows restated total
expenses based on the new fees and the assets of the fund as of 12/31/99,
and not the assets of the combined fund. However, if the table reflected
both the new fees and the combined assets, the fund's expenses after 5/1/00
would be estimated as: Templeton Developing Markets Securities
Fund -- Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses 0.29%, and
Total Annual Expenses 1.79%; Templeton Asset Strategy Fund -Management Fees
0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total Annual Expenses
0.99%. The fund's class 2 distribution plan or "rule 12b-1 plan" is
described in the fund's prospectus.
11. Effective May 1, 1999, Lazard Asset Management, the Fund's investment
adviser, has agreed to waive its fee and/or reimburse the Portfolios through
December 31, 2000 to the extent total annual portfolio expenses exceed 1.25%
of the Portfolio's average daily net assets. Absent such an agreement, the
other expenses and total annual portfolio expenses for the year ended
December 31, 1999 would have been 4.63% and 5.63% for the Lazard Retirement
Equity Portfolio and 6.31% and 7.31% for the Lazard Retirement Small Cap
Portfolio.
12. With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the management
fees and reimbursed other expenses of the portfolios to the extent total
operating expenses exceed the following percentages: Emerging Markets Equity
Portfolio 1.75%, International Magnum Portfolio 1.15%. The adviser may
terminate this voluntary waiver at any time at its sole discretion. Absent
such reductions, the "Management Fees" and "Other Expenses" would have been
as follows: 1.25% and 1.37%, respectively for the Emerging Markets Equity
Portfolio; and 0.80% and 0.87%, respectively for the International Magnum
Portfolio.
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<PAGE> 17
PURCHASES
PREMIUMS
The initial premium is due on the policy date. The policy date is the date
coverage under the policy becomes effective. Other premiums may be required. All
premiums must be sent to us at our Administrative Office. Before we send out the
policy, the application and the premium must be in good order as determined by
our administrative rules.
Your first policy year starts on the day the coverage is effective under
your policy (the policy date). The twelve month period beginning on the policy
date and ending the day before the same date in the next calendar year (and each
succeeding twelve month period) is referred to as a policy year. Future policy
years start on the same day and month in each subsequent year. We call that date
a policy anniversary. Your monthly date is the same day as the policy date for
each succeeding month.
APPLICATION FOR A POLICY
In order to purchase a policy, you must submit an application to us that
requests information about the proposed insured. In some cases, we may contact
you for additional information. We may request that the insured provide us with
medical records, a physician's statement or possibly require other medical
tests.
SUBSEQUENT PREMIUMS
The policy is designed to allow you to make subsequent premium payments.
You can make premiums during the lifetime of the insured or until the insured's
age 95. You may change the amount and frequency of premiums. We have the right
to limit the amount of any increase. Each premium after the initial premium must
be at least $50. Unless you tell us otherwise, any subsequent payments will be
considered premiums and not loan repayments. Subsequent premium payments will be
credited to your policy as of the day they are received.
ALLOCATION OF PREMIUM
The initial premium is credited on the policy date. The initial premium
will be allocated to the investment options on the latest of:
- 2 business days after the policy date;
- 2 business days after our receipt of your initial premium at our
administrative office; or
- the date our underwriters approve this policy.
Your premium is then allocated to the available fixed accounts or one or
more of the investment options, as selected by you. This allocation is not
subject to the transfer fee provision (see "Transfer Fee"). Currently, you can
select as many investment options as you wish. However, we reserve the right to
limit this in the future. All allocation percentages must be in whole numbers
and at least 1%.
You may change the allocation of future premiums by providing us with
written notice. The change will be effective on the date we receive your request
at our administrative office.
OUR RIGHT TO REJECT OR RETURN A PREMIUM PAYMENT
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the policy to return any premiums paid which we have determined
will cause the policy to fail as life insurance. We
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<PAGE> 18
also have the right to make changes in the policy or to make a distribution to
the extent we determine this is necessary to continue to qualify the policy as
life insurance. Such distributions may have current income tax consequences to
you.
If subsequent premiums will cause your policy to become a Modified
Endowment Contract (MEC), we will contact you prior to applying the premium to
your policy. If you elect to have the premium applied, we require that you
acknowledge that you understand the tax consequences of a MEC before we will
apply the premiums.
TOTAL DISABILITY WAIVER OF PREMIUM RIDER
We make available a total disability waiver of premium rider. Under this
rider, we will credit a premium while the policy is in force if the insured
becomes totally disabled, as defined in the rider. The monthly premium credited
will be the lesser of:
- 1/12th of the waiver of premium amount shown on your policy schedule; or
- the monthly average of premiums paid on your policy over the last 36
policy months.
In order to receive the benefits under the Total Disability Waiver of
Premium Rider, you must notify us of your total disability. You must also
provide us with proof of your total disability. You are not eligible for this
benefit until your total disability has continued for at least six consecutive
months. If you choose this feature, the monthly cost of this rider is shown on
your policy schedule. The rider will terminate:
- on the first policy anniversary on or after the insured's 65th birthday;
- if you give us written notice to terminate it; or
- when the policy terminates.
The rider may not be available in your state.
GRACE PERIOD
If the net cash value on any business day is not sufficient to cover any
expense charges which are due but unpaid, a grace period of 61 days will be
allowed for the payment of sufficient premium to keep your policy in force. We
will send you a notice at the start of the grace period to your last known
address and to any assignee. A minimum payment of an amount equal to 2 monthly
deductions must be paid. The grace period will end 61 days after we mail you the
notice. If sufficient premium is not paid by the end of the grace period, the
policy will terminate without value. If the insured dies during the grace
period, we will pay the death proceeds. If the lapse prevention guarantee
described below is in effect, the grace period will not apply until the
beginning of the policy year following the lapse prevention guarantee period.
REINSTATEMENT
If your policy terminated at the end of a grace period and you have not
surrendered it for its cash surrender value, you can request that we reinstate
it (restore your insurance coverage). To reinstate your policy you must:
- submit a written request for reinstatement at any time within 3 years
after the end of the grace period;
- submit proof of insurability satisfactory to us;
- pay an amount large enough to cover the next 2 monthly deductions;
- pay any negative cash surrender value that existed at the end of the
grace period; and
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<PAGE> 19
- repay or reinstate any debt which existed at the end of the grace period.
The effective date of a reinstatement is the monthly date on or following
the day we approve the request for reinstatement.
If a surrender charge was applied when the policy lapsed, the surrender
charge applied will be credited to the cash value of your policy. The surrender
charge on the date of reinstatement is equal to the surrender charge on the date
of lapse. To determine the surrender charge on any date after the effective date
of reinstatement, we will not consider the period during which the policy was
lapsed. Unless you tell us otherwise, the allocation of the amount of the
surrender charge, additional premiums and loan repayments will be based on the
allocations in effect at the start of the grace period.
LAPSE PREVENTION GUARANTEE
We guarantee that your policy will not lapse during the selected lapse
prevention guarantee period if throughout that period, (a) equals or exceeds (b)
where:
(a) is the aggregate premium payments made less the amount of any
surrenders (including applicable surrender charges) less any loan
amount; and
(b) is the minimum monthly lapse prevention guarantee premium multiplied by
the number of complete months since the policy date, including the
current month.
There are five lapse prevention guarantee periods you can select:
5 years
10 years
20 years
until you are 65
until you are 85
CASH VALUE
The cash value is the sum of the value in each investment option, any fixed
account and the policy loan account. On the policy date, the cash value in each
investment option is equal to the portion of the initial premium allocated to
the investment option. After the policy date the cash value equals the sum of
the value in the fixed accounts and in the investment options you have selected.
The cash value reflects:
- premiums paid;
- the monthly deductions;
- the investment experience of the investment options selected;
- any interest credited on any fixed account selected;
- any interest earned or interest charged on amounts allocated to the
policy loan account; and
- any deductions due as a result of a transfer or a partial surrender.
CASH SURRENDER VALUE AND NET CASH VALUE
Your cash surrender value equals your cash value less the surrender charge.
Your net cash value equals the cash surrender value less any debt.
During the insured's life, you may:
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<PAGE> 20
- take loans based on the net cash value;
- make partial surrenders (after the 5th policy anniversary); or
- surrender the policy for its net cash value.
METHOD OF DETERMINING YOUR CASH VALUE ALLOCATED TO AN INVESTMENT OPTION
The value of your policy will go up or down depending upon the investment
performance of the investment option(s) you choose and the charges and
deductions made against your cash value. In order to keep track of the value of
your cash value, we use a unit of measure we call an accumulation unit. (An
accumulation unit works like a share of a mutual fund.)
Every business day we determine the value of an accumulation unit by
multiplying the accumulation unit value for the immediately preceding business
day by a factor for the investment option for the current business day.
The factor is determined by:
- dividing the value of an investment option at the end of the current
business day by the value of an investment option for the previous
business day; and
- subtracting the expense charge.
The value of an accumulation unit may go up or down from day to day.
When you make a premium payment, we credit your policy with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of premiums allocated to the investment option by the value of the
accumulation unit for that investment option. When we assess any charges we do
so by deducting accumulation units from your policy. When you take a loan we
reduce the number of the accumulation units in your policy and transfer the
amount to the loan account.
Our business day is each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 p.m. Eastern time.
INVESTMENT CHOICES
The policy offers investment options which invest in various funds. The
investment options listed below are currently available in connection with the
policy.
You should read this prospectus and the accompanying prospectuses for the
investment options carefully before investing. Certain portfolios may not be
available under the policy offered by this prospectus.
The investment objectives and policies of certain investment options are
similar to the investment objectives and policies of other mutual funds that the
investment advisers manage. Although the objectives and policies may be similar,
the investment results of the investment options may be higher or lower than the
results of such other mutual funds. The investment advisers cannot guarantee,
and make no representation, that the investment results of similar funds will be
comparable even though the funds have the same advisers.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II (seeks high current income and moderate capital
appreciation by
investing in securities of utility companies)
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<PAGE> 21
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Leveraged AllCap Portfolio
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Funds,
Inc.) Advised by Arnhold and S. Bleichroeder Advisers, Inc. (Prior to
December 31, 1999,
Societe Generale Asset Management Corp. was the adviser)
First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund(R) Portfolio (long-term capital appreciation)
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series (seeks long-term capital growth and future income)
MFS Total Return Series
JANUS ASPEN SERIES, Institutional Shares
Advised by Janus Capital Corporation
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST*,
Class 2 Shares
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Securities Fund (formerly, Templeton Developing
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<PAGE> 22
Markets Fund)
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
* Effective May 1, 2000, the funds of Templeton Variable Products Series
Fund were merged into similar funds of Franklin Templeton Variable
Insurance Products Trust.
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
Advised by Morgan Stanley Asset Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
We may enter into certain arrangements under which we are reimbursed by the
investment options' advisers, distributors and/or affiliates for the
administrative services which we provide to the funds.
SUBSTITUTION AND LIMITATIONS ON FURTHER INVESTMENTS
We may substitute one of the investment options you have selected with
another investment option. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
investment option. We will give you notice of our intention to do this.
FIXED ACCOUNT OPTIONS
You may allocate premiums and cash values to one of our fixed account
options. Fixed Account I is part of our general account, and will offer a
uniform interest rate guaranteed for one policy year by us. At our discretion,
we may declare an excess interest rate for this account. Fixed Account II offers
various interest rates and time periods to select from. We have segregated our
assets in Fixed Account II from our general account. The interest rates offered
by Fixed Account II will depend on the time period you select. In certain
circumstances, if you make a surrender from Fixed Account II before the
expiration of the time period, you may be subject to an interest adjustment. The
adjustment may be positive or negative. We also offer a dollar cost averaging
option from our general account (see below).
TRANSFERS
You can make transfers as described below. We have the right to terminate
or modify these transfer provisions.
You can make transfers by telephone. If you own the policy with a joint
owner, unless we are instructed otherwise, we will accept instructions from
either you or the other owner. We will use reasonable procedures to confirm that
instructions given to us by telephone are genuine. If we fail to use such
procedures, we may be liable for any losses due to unauthorized
17
<PAGE> 23
or fraudulent instructions. However, we will not be liable for following
telephone instructions that we reasonably believe to be genuine. We may tape
record telephone instructions.
Transfers are also subject to the following:
- Currently, you can make 12 transfers every policy year without charge.
- We will assess a $25 transfer fee for each transfer in excess of the free
12 transfers allowed per policy year. Transfers made pursuant to the
dollar cost averaging option and the automatic transfer option will not
count in determining the application of any transfer fee.
* The minimum amount which you can transfer is $250 or your entire value in
the investment option or any fixed account option, if it is less. This
requirement is waived if the transfer is made in connection with the
dollar cost averaging option or the automatic transfer option.
- You may not make a transfer until after the end of the free-look period.
- A transfer will be effected as of the end of the business day when we
receive transfer request that contains all the information that is
necessary for us to process the request.
- We are not liable for a transfer made in accordance with your
instructions.
- Your right to make transfers is subject to modification if we determine,
in our sole opinion, that the exercise of the right by one or more owners
is, or would be, to the disadvantage of other owners. Restrictions may be
applied in any manner reasonably designed to prevent any use of the
transfer right which is considered by us to be to the disadvantage of
other owners. A modification could be applied to transfers to, or from,
one or more of the investment options and could include, but is not
limited to:
a. the requirement of a minimum time period between each transfer; or
b. not accepting a transfer request from an agent acting under a power
of attorney on behalf of more than one owner; or
c. limiting the dollar amount that may be transferred between
investment options by an owner at any one time.
- Transfers do not change your allocation instructions for future premium
payments.
DOLLAR COST AVERAGING
Dollar cost averaging allows you to systematically transfer a set amount
each month from a source account to any of the investment options or Fixed
Account I. By allocating amounts on a regularly scheduled basis as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations. Dollar cost averaging may not be available
in your state.
We offer two different Dollar Cost Averaging (DCA) riders. You can have
only one DCA account at a time. When you select a DCA option, we will open a
dollar cost averaging account for you. If you select DCA Rider I, you must have
at least $1,000 in the Federated Prime Money Fund II in order to participate in
the dollar cost averaging option. The minimum amount which can be transferred
each month is $100. If you select DCA Rider II, which is only available at
issue, you must commit at least $5,000 to the DCA account. Your DCA account II
is part of our general account assets and will be credited interest. You can
select either a 6 or 12 month period when you elect DCA Rider II.
Dollar cost averaging transfers will begin on the date you request, but no
sooner than 7 business days after we receive the request provided the transfers
do not begin until 30 days
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<PAGE> 24
after the effective date of your policy. All dollar cost averaging transfers are
made effective the same day each month. However, this day may not be later than
the 28th of each month. If the calendar day selected is not a business day,
transfers are made as of the next business day.
Dollar cost averaging will terminate when any of the following occurs:
* at the end of the selected month period you designate; or
* within 7 days of your written request to terminate these transfers.
If your DCA option is terminated, all money remaining in the dollar cost
averaging account will be transferred to the Federated Prime Money Fund II. We
have the right to modify, discontinue or suspend the dollar cost averaging
option. If you participate in the dollar cost averaging option, the transfers
made under the program are not taken into account in determining any transfer
fee. There is no additional charge for this option.
Dollar cost averaging does not assure a profit and does not protect against
loss in declining markets. Dollar cost averaging involves continuous investment
in the selected investment option(s) regardless of fluctuating price levels of
the investment option(s). You should consider your financial ability to continue
the dollar cost averaging option through periods of fluctuating price levels.
AUTOMATIC TRANSFER OPTION
Once your money has been allocated among the investment choices, the
performance of the elected options may cause your allocation to shift. You can
direct us to automatically rebalance your cash value in selected investment
options and Fixed Account I to return to your original percentage allocations by
selecting our automatic transfer option. The automatic transfer option may not
be available in your state.
You have the choice of rebalancing monthly, quarterly, semi-annually or
annually. All transfers must take place before the 28th of the month. Allocation
percentages must be in whole numbers.
If you participate in the automatic transfer option, the transfers made
under the program are not taken into account in determining any transfer fee.
You may stop the automatic transfer option at any time by written notice. We
must receive your written notice at least seven days before the first business
day in a new period. Once automatic transfer has been elected, any subsequent
transfer instructions that differ from the then current instructions are treated
as a request to change the automatic transfer allocation. All changes must be by
written notice.
EXAMPLE:
Assume that you want your initial premium split between 2
investment options. You want 80% to be in the MFS Growth With Income
Series and 20% to be in the Janus Aspen International Growth Portfolio.
Over the next 2 1/2 months the domestic market does very well while the
international market performs poorly. At the end of the quarter, the
MFS Growth With Income Series now represents 86% of your holdings
because of its increase in value. If you had chosen to have your
holdings rebalanced quarterly, on the first day of the next quarter, we
would sell some of your units in the MFS Growth With Income Series to
bring its value back to 80% and use the money to buy more units in the
Janus Aspen International Growth Portfolio to increase those holdings
to 20%.
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<PAGE> 25
DEATH BENEFIT
The amount of the death benefit depends on the total specified amount of
insurance, your cash value on the date of the insured's death and the death
benefit option (Option 1 or Option 2) in effect at that time. The insured is the
person whose life is covered by this policy. The insured is named on the
schedule page of your policy. The actual amount we pay the beneficiary will be
reduced by any outstanding debt and any due and unpaid charges.
The initial specified amount and the death benefit option in effect on the
policy date (the date when the insured's life is covered under the policy) are
shown on the schedule page of your policy.
OPTION 1. The amount of the death benefit under Option 1 is the greater of:
- the specified amount; or
- the applicable percentage of the cash value on the date of death.
OPTION 2. The amount of the death benefit under Option 2 is the greater of:
- the specified amount plus the cash value on the date of death; or
- the applicable percentage of the cash value on the date of death.
DEATH PROCEEDS
The death proceeds equal:
- the death benefit provided by your policy; plus
- any insurance on the insured's life that may be provided by riders to
your policy; less
- any debt; less
- any due and unpaid premiums.
We will pay the death proceeds after we receive due proof of death and any
other information that we reasonably require. The death proceeds may be adjusted
under certain conditions.
CHANGE IN SPECIFIED AMOUNT
You may change the specified amount after this policy has been in force for
1 year subject to the following:
- You must request the change in writing.
- A decrease will be applied first against prior increases, if any, on a
last-in, first-out basis, then against the initial specified amount. A
decrease in specified amount will not reduce the specified amount lower
than $100,000. A prorata share of any applicable surrender charge may
apply.
- An increase in specified amount will require proof of insurability.
- Any change in the specified amount must be for at least $25,000.
If you increase the specified amount, we will deduct a $10.00 monthly
specified amount increase fee for the first 12 months after the increase.
A change will be effective on the monthly date following our approval or
recording of the change. We will show the effective date of any change in
specified amount in a supplemental policy schedule we will send you.
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<PAGE> 26
CHANGE IN DEATH BENEFIT OPTION
You may change the death benefit, without the imposition of any charge,
option subject to the following:
- You must request the change in writing.
- If you want to change death benefit Option 1 to Option 2, you must submit
proof of insurability satisfactory to us. The specified amount will be
reduced by the amount of cash value so that the death benefit is not
increased as of the date of change.
- If you want to change death benefit Option 2 to Option 1, the specified
amount will be increased by the amount of cash value.
OTHER RIDERS
ACCELERATED BENEFIT RIDER
You can elect the accelerated benefit rider. There is no additional charge
if you elect the accelerated benefit rider. This rider provides that you may
elect to receive an advance of the death benefit proceeds of the policy if the
insured is terminally ill, as defined in the rider. Receipt of an accelerated
death benefit amount may be taxable. You should contact your personal tax or
financial adviser for specific information.
The maximum accelerated death benefit will be the lesser of:
- 75% of the policy death benefit on the day we receive the request; or
- $250,000 from all policies in force with us.
If payments are made in other than a lump sum, the minimum amount of any
payment will be $500. Surrender charges will not be assessed against any
benefits paid under this rider.
This rider terminates on the earliest of: the date the policy terminates,
or the date you give us written notice to terminate; or the date that the
benefit advance plus accrued interest equals the policy death benefit less all
debt.
Death benefits, cash values, and loan values, if any, will be reduced if a
benefit is paid pursuant to this rider. Also, the receipt of an accelerated
death benefit amount may adversely affect the recipient's eligibility for
Medicaid or other government benefits or entitlements.
ACCIDENTAL DEATH BENEFIT RIDER
You can elect the accidental death benefit rider. This rider provides that
if the insured dies accidentally (as defined in the rider), we will pay the
accidental death benefit amount shown on your policy schedule. The injury that
causes the death must occur after attained age 1 and before the policy
anniversary on or immediately following the insured's 70th birthday.
This rider terminates on the policy anniversary on or after the insured's
age 70; or if you give us written notice to terminate it; or when the policy
terminates.
ADDITIONAL INSURANCE RIDER
You can elect the additional insurance rider. This rider provides that we
will pay the additional insurance death benefit when we receive due written
proof of the insured's death. The additional insurance death benefit will be the
additional insurance specified amount shown on your policy schedule less the
excess, if any, of 1 over 2 or 3, where:
(1) is the cash value on the date of death times the applicable percentage
of cash value shown on your policy schedule;
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<PAGE> 27
(2) is the specified amount, if death benefit option 1 is shown on your
policy schedule; and
(3) is the specified amount plus the cash value, if death benefit option 2
is shown on your policy schedule.
To help you understand how this benefit works, we have set out some
examples in Appendix B.
This rider terminates when you give us written notice to terminate it; or
on the policy anniversary on or after the insured's age 95; or when the policy
terminates.
We require an additional premium for this rider as shown on your policy
schedule.
TERM INSURANCE ON CHILDREN RIDER
You can elect the term insurance on children rider pursuant to our
underwriting guidelines and state laws. This rider provides that we will pay the
beneficiary an amount per unit of coverage if a covered child's (as defined in
the rider) death occurs while the rider is in force or within a certain period
as described below:
- $250 if the covered child's death occurs after he/she is 14 days old and
before he/she is 6 months old; or
- $1,000 if the covered child's death occurs on or after he/she turns 6
months old and before the policy anniversary nearest the covered child's
22nd birthday.
If the policy terminates because the insured dies, existing coverage on any
child under this rider will be continued as fully paid-up insurance until the
child's 22nd birthday. At age 22, conversion will be allowed as provided in the
rider.
This rider terminates when you give us written notice to terminate it and
send us the policy to show the change; or on the policy anniversary on or
nearest the insured's age 65; or when the policy terminates.
The cost for this rider, as shown on your policy schedule, will be added to
the monthly deduction.
OTHER INSURED TERM INSURANCE RIDER
You can elect the other insured term insurance rider. This rider provides
that we will pay the other insured (unless changed, the other insured is the
person named in the application for this rider) specified amount shown on your
policy schedule when we receive proof of the other insured's death.
Under certain conditions, you can change the other insured specified amount
any time after the rider is one year old by written notice to us.
This rider terminates at the earliest of: the policy date on or after the
other insured's 70th birthday; or the date you give us written notice to
terminate it; or the date the policy terminates.
We require an additional premium for this rider as shown on your policy
schedule.
YOU SHOULD READ THE RIDERS CAREFULLY FOR THE TERMS AND CONDITIONS OF EACH
SPECIFIC RIDER.
SETTLEMENTS
When your policy becomes a claim because of the death of the insured,
settlement will be made upon due proof of death. Proceeds may be paid in a lump
sum, or under one of the optional modes of settlement described below. If no
settlement option has been chosen before
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the insured's death, the beneficiary may choose one. Once the proceeds are
applied under an optional mode of settlement, any amounts payable are paid from
our general account and will not be affected by the investment experience of the
investment options.
OPTION 1 -- PAYMENT CERTAIN. Under this option we pay you the cash value in
equal payments as specified. After each payment, interest of 3% compounded
annually is added to the remaining amount which has not been paid. Payments are
made until the amount applied, plus interest, is exhausted. The total of all
payments made each year must be at least 5% of the amount applied under this
option. Any outstanding balance may be withdrawn at any time.
OPTION 2 -- PERIOD CERTAIN. Under this option we pay the cash value in
equal payments over a designated period of time, as chosen by you. An interest
rate of at least 3% will be credited. Outstanding balances may be withdrawn at
any time, however, this will forfeit any future payments.
OPTION 3 -- LIFE ANNUITY. Under this option we make monthly payments during
the lifetime of the payee.
OPTION 4 -- LIFE ANNUITY WITH A PERIOD CERTAIN. Under this option we make
monthly payments while the payee lives. If the payee dies before we have made
all of the payments within the selected period, the payments will continue until
the end of the specified period. If, at any age, the amount of payments is the
same for 2 or more periods certain, payment will be made as if the longest
period was selected.
ADDITIONAL OPTIONS. We may make other options available.
The portion of the payments received under a settlement option which are in
excess of the death benefit proceeds will be treated as taxable income (see "Tax
Treatment of Settlement Options" under "More Information -- Federal Tax
Status").
TAXES
NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON FEDERAL INCOME TAXES AS
A GENERAL DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU
SHOULD CONSULT YOUR TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. WE HAVE INCLUDED
AN ADDITIONAL DISCUSSION REGARDING TAXES UNDER THE SECTION "MORE INFORMATION."
LIFE INSURANCE IN GENERAL
Life insurance, such as this policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code (Code) for life insurance.
Simply stated, these rules provide that you will not be taxed on the
earnings on the money held in your life insurance policy until you take the
money out. Beneficiaries generally are not taxed when they receive the death
proceeds upon the death of the insured. However, estate taxes may apply.
TAKING MONEY OUT OF YOUR POLICY
You, as the owner, will not be taxed on increases in the value of your
policy until a distribution occurs either as a surrender or as a loan. If your
policy is a MEC, any loans or surrenders from the policy will be treated as
first coming from earnings and then from your investment in the policy.
Consequently, these distributed earnings are included in taxable income.
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The Code also provides that any amount received from a MEC which is
included in income may be subject to a 10% penalty. The penalty will not apply
if the income received is:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code); or
(3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If your policy is not a MEC, any surrender proceeds will be treated as
first a recovery of the investment in the policy and to that extent will not be
included in taxable income. Furthermore, any loan will be treated as
indebtedness under the policy and not as a taxable distribution. See "Federal
Tax Status" in the section "More Information" for more details including an
explanation of whether your policy is a MEC.
DIVERSIFICATION
The Code provides that the underlying investments for a variable life
policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the portfolios are being managed
so as to comply with such requirements.
Under current federal tax law, it is unclear as to the circumstances under
which you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
portfolios. If you are considered the owner of the investments, it will result
in the loss of the favorable tax treatment for the policy. It is unknown to what
extent owners are permitted to select portfolios, to make transfers among the
portfolios or the number and type of portfolios owners may select from without
being considered the owner of the shares. If guidance from the Internal Revenue
Service is provided which is considered a new position, the guidance would
generally be applied prospectively. However, if such guidance is considered not
to be a new position, it may be applied retroactively. This would mean that you,
as the owner of the policy, could be treated as the owner of the portfolios. Due
to the uncertainty in this area, we reserve the right to modify the policy in an
attempt to maintain favorable tax treatment.
ACCESS TO YOUR MONEY
POLICY LOANS
You may obtain a loan at any time while your policy is in force. Your
request for a loan must be in writing. The amount of the loan and all existing
loans may not be more than 90% of the net cash value as of the date of the loan.
The amount of the loan may not be less than $500. A loan will only be made upon
proper assignment of your policy to us with the policy as the sole security for
the loan.
When you take a policy loan, we will transfer an amount equal to the policy
loan from the investment option(s) or Fixed Account I to the policy loan
account. Unless you state otherwise, transfers from the investment options to
the policy loan account will be on a pro-rata basis as of the loan date. If you
do not have a sufficient amount in the investment option(s), we will transfer
any remaining amount from Fixed Account I. We will also transfer any loan
interest that becomes due and unpaid in the same manner. Amounts transferred to
the policy loan account will earn interest daily from the date of transfer.
Policy loans may also have federal tax consequences (see "Federal Tax Status").
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EFFECT OF A LOAN
Policy loans will have a permanent effect on any death benefit and cash
surrender value of your policy. The effect may be favorable or unfavorable. If
loans are not repaid, the debt will reduce the amount of any death proceeds.
Loans have a permanent effect on the policy because the amount transferred to
the policy loan account will not share in the investment results of the
investment options while the loan is outstanding. If the policy loan account
earnings rate is less than the performance of the selected investment options
and/or Fixed Account I, the values and benefits under the policy will be reduced
(and the policy may even terminate) as a result of the loan.
LOAN INTEREST
The loan interest rate charged is currently 8%. The loan interest credited
to your policy is currently 6%. Interest is charged daily and is payable at the
end of each policy year. Unpaid interest will be added to the existing debt as
of the due date and will be charged interest at the same rate as the rest of the
loan.
We will credit a higher effective annual interest rate in the following
circumstances;
- for amounts borrowed up to an amount equal to cash value less the
aggregate premium payments made to date (preferred loans); and
- for all loans against policies that are in the 11th policy year or later.
Preferred loans include the amount of any outstanding policy loan
transferred in a tax-free exchange.
REPAYING POLICY DEBT
The debt, or any part, may be repaid at any time as long as the policy is
in force. Any debt outstanding will be deducted before any benefit proceeds are
paid. When you repay part or all of the loan, we will transfer an amount equal
to the amount you repay from the policy loan account to an investment option or
to any fixed account.
When there is debt outstanding, any payments received will be applied first
as a premium payment, rather than repayment of debt, unless we are instructed
otherwise. If total debt equals or exceeds the cash value less the surrender
charge, your policy will terminate without value. A termination of the policy
with a loan outstanding may have federal income tax consequences (see "More
Information -- Federal Tax Status").
PARTIAL SURRENDERS
You may make a partial surrender at any time after the 5th policy
anniversary by written notice.
When you make a partial surrender, we will reduce the cash value by the
partial surrender amount and any surrender charges. We will require that any
partial surrender amounts be first deducted from the cash value in the
investment options proportionately among all accounts unless the owner
specifically requests otherwise. We will also reduce the specified amount. The
reduction in specified amount will be proportional to the reduction in cash
value due to the partial surrender.
The minimum partial surrender amount is currently $500. We may assess a
surrender charge on the amount surrendered. See "Surrender Charges" above.
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Partial surrenders will be allowed only if the policy continues to qualify
as a contract of life insurance under the Code. We will also limit the maximum
amount of all partial surrenders you can make in a policy year to the greater
of:
- 10% of the total premium payments; or
- cash value less total premiums paid less any policy debt.
FULL SURRENDERS
You may completely surrender your policy and receive the net cash value at
any time while the policy is in force. If you make a full surrender, we will
require that you return your policy.
The date of surrender will be the date we receive your written request. The
net cash value will be determined as of the end of the business day which your
written request is received. All coverage will end on the date of surrender.
Partial and full surrenders may have federal tax consequences (see "Federal
Tax Status").
For your protection, a request for surrender, policy loan, or a change in
ownership must be by written notice. We may require the signature to be
guaranteed by a member firm of the New York, Boston, Midwest, Philadelphia, or
Pacific Stock Exchange, or by a commercial bank (not a savings bank), which is a
member of the Federal Deposit Insurance Corporation. In some cases, we may
require additional documentation of a customary nature.
OTHER INFORMATION
THE VARIABLE ACCOUNT
We established a variable account, Valley Forge Life Insurance Company
Variable Life Separate Account (Variable Account), to hold the assets that
underlie the contracts. Our Board of Directors adopted a resolution to establish
the Variable Account under Illinois insurance law on February 12, 1996. We have
registered the Variable Account with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940.
The assets of the Variable Account are held in our name on behalf of the
Variable Account and legally belong to us. However, those assets that underlie
the contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
We reserve the right to modify the structure or operation of the Variable
Account. However, we guarantee that a modification will not affect the value of
your contract.
DISTRIBUTOR
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
CNA Investor Services, Inc. ("CNA/ISI") serves as the distributor for the
policies. CNA/ISI is located at CNA Plaza, Chicago, Illinois 60685.
Broker-dealers will be paid commissions up to 90% of premiums paid.
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SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone any payments or transfers for any
period when:
(1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
(2) trading on the New York Stock Exchange is restricted;
(3) an emergency exists as a result of which disposal of shares of the
portfolios is not reasonably practicable or we cannot reasonably value
the shares of the portfolios;
(4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We have the right to defer payment of any surrender or transfer of any
fixed account value for not more than 6 months from the date we receive your
written notice, unless otherwise provided by your state.
OWNERSHIP
OWNER. You, as the owner of the policy or the certificate, have all of the
rights under the policy while the insured is living. Your rights in the policy
belong to your estate if you die before the insured dies and there is no joint
owner or contingent owner.
JOINT OWNER. The policy can be owned by joint owners. Joint owners have
equal ownership rights. Authorization of both joint owners is required for all
policy changes except for transfers and allocations.
CONTINGENT OWNER. The contingent owner, if any, is named in the
application, unless changed. You may name a contingent owner at any time while
the insured is living by providing us with written notice. Once recorded, the
designation will be effective as of the date the written notice was signed. Such
change will not affect any payment we make or action we take before it was
recorded.
The contingent owner, if any, will become the owner if the named owner dies
before the date of the insured's death. If there are joint owners, the
contingent owner will become the owner if both named joint owners die before the
insured.
BENEFICIARY. The beneficiary is the person or entity you name to receive
any death proceeds. The primary beneficiary is the person who will be paid death
proceeds when the insured dies. The contingent beneficiary, if any, will become
the beneficiary if no primary beneficiary is living on the date of the insured's
death. More than one primary and contingent beneficiary can be named. If there
is more than one primary beneficiary alive when the insured dies, we will pay
the primary beneficiaries in equal shares unless you provide otherwise.
The primary beneficiary and contingent beneficiary on the policy date are
named in the application. While the insured is alive, you may change any
beneficiary. Any change must be by written notice. Once recorded, the change
will take effect as of the date you signed it. Such change will not affect any
payment we make or action we take before it was recorded. An irrevocable
beneficiary must consent in writing to any change in beneficiary.
If any beneficiary dies before the insured, that beneficiary's interest in
the death benefit will end. If any beneficiary dies at the same time as the
insured, or within 30 days of the insured, that beneficiary's interest in the
death benefit will end if no benefits have been paid to that beneficiary. If the
interest of all designated beneficiaries has ended when the insured dies, we
will pay the death benefit to you, or your estate if you are not living.
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ASSIGNMENT
You can assign any or all rights under your policy while the insured is
living. Assignment of all rights is a change of ownership. An irrevocable
beneficiary must consent in writing to any assignment. We are not responsible
for the sufficiency or validity of any assignment. An assignment will not affect
any payments we made or actions we have taken before we receive notice of the
assignment.
An assignment may be a taxable event. You should consult a tax adviser if
you want to assign the policy.
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MORE INFORMATION
EXECUTIVE OFFICERS AND DIRECTORS
The name, age, positions and offices, term as director, and business
experience during the past five years for the VFL's directors and executive
officers are listed in the following table:
<TABLE>
<CAPTION>
OFFICERS OF VFL
----------------------------------------------------------------------------------------------
POSITION(S)
HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH VFL DURING PAST FIVE YEARS
---------------- --- ----------- --------------------------------------------
<S> <C> <C> <C>
Bernard L. Hengesbaugh... 52 Director, Chairman of the Board and Chief Executive
CNA Plaza Chairman of Officer of CNA since February, 1999. Prior
Chicago, IL 60685 the Board and thereto, Mr. Hengesbaugh was Executive Vice
Chief President and Chief Operating Officer
Executive Officer of CNA since February, 1998. Prior
Officer 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 President
CNA Plaza President November, 1990. Chief Financial Officer of
Chicago, IL 60685 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, 1997.
Chicago, IL 60685 Secretary, Group Vice President of CNA General since
General April, 1994. Prior thereto, Mr. Kantor was a
Counsel and partner at the law firm of Shea & Gould.*
Director 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, 1998.
Chicago, IL 60685 Chief Prior thereto, Officer for Executive Risk,
Financial Inc.
Officer,
Director
Thomas Pontarelli........ 51 Senior Vice Senior Vice President, Human Resources since
CNA Plaza President, April 2000. Prior thereto, Group Vice
Chicago, IL 60685 Director 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 1998.
CNA Plaza President and Prior thereto, Mr. Squarok was Chief
Chicago, IL 60685 Director 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.
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Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of Valley Forge. Executive officers serve at the discretion of the
Board of Directors.
VOTING
Pursuant to our view of present applicable law, we will vote the shares of
the portfolios at special meetings of shareholders in accordance with
instructions received from all owners having a voting interest. We will vote
shares for which we have not received instructions and any shares that are ours
in the same proportion as the shares for which we have received instructions.
If the Investment Company Act of 1940 or any regulation thereunder is
amended or if the present interpretation of the Act changes so as to permit us
to vote the shares in our own right, we may elect to do so.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required to do so by state insurance authorities, vote shares
of the portfolios without regard to instructions from owners. We will do this if
such instructions would require the shares to be voted to cause a portfolio to
make, or refrain from making, investments which would result in changes in the
sub-classification or investment objectives of the portfolio. We may also
disapprove changes in the investment policy initiated by owners or
trustees/directors of the portfolios, if such disapproval:
- is reasonable and is based on a good faith determination by us that the
change would violate state or federal law;
- the change would not be consistent with the investment objectives of the
portfolios; or
- varies from the general quality and nature of investments and investment
techniques used by other portfolios with similar investment objectives
underlying other variable contracts offered by us or of an affiliated company.
In the event we do disregard voting instructions, a summary of this action
and the reasons for such action will be included in the next semi-annual report
to owners.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the policies.
OUR RIGHT TO CONTEST
Except for accidental death and disability benefits, we cannot contest your
policy after it has been in force during the lifetime of the insured for two
years from the policy date; nor can we contest any increased benefit or
reinstatement after it has been in force, while the insured is alive, for two
years after the effective date of such increase or reinstatement.
We cannot contest your policy, any reinstatement or any increase in
benefits after the policy date of the policy, reinstatement, or increase in
benefits unless:
- an answer in the application for the policy, reinstatement or increase in
benefits was not true or correct; and
- if we had known the truth, we would not have issued the policy as we did
or increased the benefits.
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Any statement made by the insured will not be used in any contest unless a
copy is furnished to the beneficiary.
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON OUR UNDERSTANDING OF CURRENT
FEDERAL INCOME TAX LAW APPLICABLE TO LIFE INSURANCE IN GENERAL. WE CANNOT
PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE. PURCHASERS
ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY OF SUCH
CHANGES. SECTION 7702 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE"),
DEFINES THE TERM "LIFE INSURANCE CONTRACT" FOR PURPOSES OF THE CODE. WE BELIEVE
THAT THE POLICIES TO BE ISSUED WILL QUALIFY AS "LIFE INSURANCE CONTRACTS" UNDER
SECTION 7702. WE DO NOT GUARANTEE THE TAX STATUS OF THE POLICIES. PURCHASERS
BEAR THE COMPLETE RISK THAT THE POLICIES MAY NOT BE TREATED AS "LIFE INSURANCE"
UNDER FEDERAL INCOME TAX LAWS. PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISERS.
IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE
AND THAT SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN
CERTAIN SITUATIONS.
INTRODUCTION. The discussion contained herein is general in nature and is
not intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income
tax purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
DIVERSIFICATION. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the policy prior
to the receipt of payments under the policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the policies. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these regulations, all securities of the same
issuer are treated as a single investment. The Code provides that, for purposes
of determining whether or not the
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<PAGE> 37
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer." We intend that
each portfolio underlying the policies will be managed by the investment
managers in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification regulations
do not provide guidance regarding the circumstances in which owner control of
the investments of the separate account will cause the owner to be treated as
the owner of the assets of the separate account, thereby resulting in the loss
of favorable tax treatment for the policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the policy is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policyowner
was not the owner of the assets of the separate account. It is unknown whether
these differences, such as the owner's ability to transfer among investment
choices or the number and type of investment choices available, would cause the
owner to be considered the owner of the assets of the separate account.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in you being
retroactively determined to be the owner of the assets of the separate account.
Due to the uncertainty in this area, we reserve the right to modify the
policy in an attempt to maintain favorable tax treatment.
TAX TREATMENT OF THE POLICY. The policy has been designed to comply with
the definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a policy issued on a substandard risk basis
and thus it is even less clear whether a policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area
is very complex and unclear. There is a risk, therefore, that the Internal
Revenue Service will not concur with our interpretations of Section 7702 that
were made in determining such compliance. In the event the policy is determined
not to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies. You should consult your own tax advisers with
respect to the tax consequences of purchasing the policy.
POLICY PROCEEDS. The tax treatment accorded to loan proceeds and/or
surrender payments from the policies will depend on whether the policy is
considered to be a MEC. (See "Tax Treatment of Loans and Surrenders.")
Otherwise, we believe that the policy should receive the same federal income tax
treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under Section
101(a) of the Code. Also, you are not deemed to be in constructive receipt of
the Net Cash Value, including increments thereon, under a policy until there is
a distribution of such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of policy proceeds, depend on the circumstances of each
owner or beneficiary.
32
<PAGE> 38
TAX TREATMENT OF LOANS AND SURRENDERS. Section 7702A of the Code sets forth
the rules for determining when a life insurance policy will be deemed to be a
MEC. A MEC is a contract which is entered into or materially changed on or after
June 21, 1988 and fails to meet the 7-pay test. A policy fails to meet the 7-pay
test when the cumulative amount paid under the policy at any time during the
first 7 policy years exceeds the sum of the net level premiums which would have
been paid on or before such time if the policy provided for paid-up future
benefits after the payment of seven (7) level annual premiums. A material change
would include any increase in the future benefits or addition of qualified
additional benefits provided under a policy unless the increase is attributable
to: (1) the payment of premiums necessary to fund the lowest death benefit and
qualified additional benefits payable in the first seven policy years; or (2)
the crediting of interest or other earnings (including policyholder dividends)
with respect to such premiums.
Furthermore, any policy received in exchange for a policy classified as a
MEC will be treated as a MEC regardless of whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the policy will not cause the policy to be
treated as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the policy, the determination of
whether it qualifies for treatment as a MEC depends on the individual
circumstances of each policy.
If the policy is classified as a MEC, then surrenders and/or loan proceeds
are taxable to the extent of income in the policy. Such distributions are deemed
to be on a last-in, first-out basis, which means the taxable income is
distributed first. Loan proceeds and/or surrender payments, including those
resulting from the lapse of the policy, may also be subject to an additional 10%
federal income tax penalty applied to the income portion of such distribution.
The penalty shall not apply, however, to any distributions: (1) made on or after
the date on which the taxpayer reaches age 59 1/2; (2) which is attributable to
the taxpayer becoming disabled (within the meaning of Section 72(m)(7) of the
Code); or (3) which is part of a series of substantially equal periodic payments
made not less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer and
his beneficiary.
If a policy is not classified as a MEC, then any surrenders shall be
treated first as a recovery of the investment in the policy which would not be
received as taxable income. However, if a distribution is the result of a
reduction in benefits under the policy within the first fifteen years after the
policy is issued in order to comply with Section 7702, such distribution will,
under rules set forth in Section 7702, be taxed as ordinary income to the extent
of income in the policy.
Any loans from a policy which is not classified as a MEC, will be treated
as indebtedness of the owner and not a distribution. Upon complete surrender or
lapse of the policy, if the amount received plus loan indebtedness exceeds the
total premiums paid that are not treated as previously surrendered by the policy
owner, the excess generally will be treated as ordinary income.
Personal interest payable on a loan under a policy owned by an individual
is generally not deductible. Furthermore, no deduction will be allowed for
interest on loans under policies covering the life of any employee or officer of
the taxpayer or any person financially interested in the business carried on by
the taxpayer to the extent the indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy owners should seek competent tax advice on the tax consequences of
taking loans, distributions, exchanging or surrendering any policy.
33
<PAGE> 39
TAX TREATMENT OF SETTLEMENT OPTIONS. Under the Code, a portion of the
settlement option payments which are in excess of the death benefit proceeds are
included in the beneficiary's taxable income. Under a settlement option payable
for the lifetime of the beneficiary, the death benefit proceeds are divided by
the beneficiary's life expectancy and proceeds received in excess of these
prorated amounts are included in taxable income. The value of the death benefit
proceeds is reduced by the value of any period certain or refund guarantee.
Under a fixed payment or fixed period option, the death benefit proceeds are
prorated by dividing the proceeds over the payment period under the option. Any
payments in excess of the prorated amount will be included in taxable income.
MULTIPLE POLICIES. The Code further provides that multiple MECs which are
issued within a calendar year period to the same owner by one company or its
affiliates are treated as one MEC for purposes of determining the taxable
portion of any loans or distributions. Such treatment may result in adverse tax
consequences including more rapid taxation of the loans or distributed amounts
from such combination of contracts. You should consult a tax adviser prior to
purchasing more than one MEC in any calendar year period.
TAX TREATMENT OF ASSIGNMENTS. An assignment of a policy or the change of
ownership of a policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
policy.
QUALIFIED PLANS. The policies may be used in conjunction with certain
Qualified Plans. Because the rules governing such use are complex, you should
not do so until you have consulted a competent Qualified Plans consultant.
INCOME TAX WITHHOLDING. All distributions or the portion thereof which is
includible in gross income of the policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
REPORTS TO OWNERS
At least once every policy year, we will send you a report showing current
cash values and other information required by laws and regulations. We will mail
this report to you at your last known address.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the
Distributor is a party or to which the assets of the Separate Account are
subject. We are not involved in any litigation that is of material importance in
relation to our total assets or that relates to the Separate Account.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 included in the Statement of Additional Information which is
part of this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the
Valley Forge Life Insurance Company Variable Life Separate Account as of and for
the year ended December 31, 1999 (for the two years ended December 31, 1999 with
respect to the statements of changes in net assets) included in this Prospectus
which is part of this registration statement and have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their
34
<PAGE> 40
report appearing in the registration statement, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
Actuarial matters included in this prospectus have been examined by Rodney
E. Rishel, Jr., FSA, MAAA, whose opinion is filed as an exhibit to the
registration statement.
FINANCIAL STATEMENTS
Our financial statements included herein should be considered only as
bearing upon our ability to meet our obligations under the policies.
35
<PAGE> 41
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
36
<PAGE> 42
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME 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
========== ======== ======== ======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUS
JANUS JANUS JANUS ASPEN
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN WORLD
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL 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.
37
<PAGE> 43
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- CONTINUED
<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.
38
<PAGE> 44
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED PRIME MONEY UTILITY HIGH INCOME 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>
See accompanying Notes to Financial Statements.
39
<PAGE> 45
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- CONTINUED
<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.
40
<PAGE> 46
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- CONTINUED
<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.
41
<PAGE> 47
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
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FOR THE YEAR 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>
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FOR THE YEAR ENDED DECEMBER 31, 1998 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)... $ (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.
42
<PAGE> 48
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- CONTINUED
<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
-------------- --------- --------- -------- -------- ------ -------- ------ -------- --------- --------
<S> <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
======== ========== ======== ======== ======== ======== ======= ======== ======== ======= =======
</TABLE>
<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
-------------- --------- --------- -------- -------- ------ -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ (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.
43
<PAGE> 49
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- CONTINUED
<TABLE>
<CAPTION>
JANUS JANUS JANUS JANUS
ASPEN JANUS JANUS ASPEN ASPEN ASPEN
CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
FOR THE YEAR ENDED APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
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.
44
<PAGE> 50
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.
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
FEDERATED ADVISERS:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Variable Insurance Products
Fund Equity-Income Portfolio
("Fidelity Equity-Income Portfolio")
Fidelity Variable Insurance Products
Fund II Asset Manager Portfolio
("Fidelity Asset Manager Portfolio")
Fidelity Variable Insurance Products
Fund II Index 500 Portfolio
("Fidelity Index 500 Portfolio")
Fidelity Variable Insurance Products
Fidelity Fund II Contrafund(R) Portfolio
("Fidelity Contrafund Portfolio")
45
<PAGE> 51
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 -- CONTINUED
NOTE 1. ORGANIZATION -- (CONTINUED)
FRED ALGER MANAGEMENT, INC.:
The Alger American Small Capitalization
Portfolio
The Alger American Growth Portfolio
The Alger American MidCap Growth Portfolio
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS Limited Maturity Series (closed to
new investments)
MFS Total Return Series
SOCIETE GENERALE ASSET MANAGEMENT
CORP.:
SoGen Overseas Variable Fund
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Emerging Markets Fund
JANUS CAPITAL CORPORATION --
INSTITUTIONAL CLASS:
Janus Aspen Series Capital Appreciation Portfolio
Janus Aspen Series Growth Portfolio
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Flexible Income Portfolio
Janus Aspen Series International Growth Portfolio
Janus Aspen Series World Wide Growth Portfolio
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.
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.
46
<PAGE> 52
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 -- CONTINUED
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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.
47
<PAGE> 53
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 -- CONTINUED
NOTE 3. CHARGES AND DEDUCTIONS -- (CONTINUED)
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.
48
<PAGE> 54
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
49
<PAGE> 55
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.
50
<PAGE> 56
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.
51
<PAGE> 57
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.
52
<PAGE> 58
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.
53
<PAGE> 59
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.
54
<PAGE> 60
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES -- (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.
55
<PAGE> 61
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- ------- ------- -------
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
56
<PAGE> 62
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS -- (CONTINUED)
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>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Proceeds from sales....... $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>
57
<PAGE> 63
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS -- (CONTINUED)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
DECEMBER 31 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>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
(In thousands of dollars)
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>
58
<PAGE> 64
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS -- (CONTINUED)
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
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.
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
59
<PAGE> 65
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. FINANCIAL INSTRUMENTS -- (CONTINUED)
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.
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.
60
<PAGE> 66
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. FINANCIAL INSTRUMENTS -- (CONTINUED)
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
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
61
<PAGE> 67
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED) -- (CONTINUED)
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>
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT BENEFIT AMOUNT
---------------------------- -------- --------- --------
<S> <C> <C> <C>
(In thousands of dollars)
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)
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT BENEFIT AMOUNT
---------------------------- ------- --------- -------
<S> <C> <C> <C>
(In thousands of dollars)
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT BENEFIT AMOUNT
---------------------------- ------- --------- ------
<S> <C> <C> <C>
(In thousands of dollars)
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>
62
<PAGE> 68
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
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.
63
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VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. INCOME TAXES -- (CONTINUED)
Significant components of VFL's net deferred tax liabilities as of December
31, 1999 and 1998 are shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
----------- ------- -------
<S> <C> <C>
(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)
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- ------- ------ ------
<S> <C> <C> <C>
(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
======= ====== ======
</TABLE>
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.
64
<PAGE> 70
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. REINSURANCE -- (CONTINUED)
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
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET 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>
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
65
<PAGE> 71
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. RELATED PARTIES -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(In thousands of dollars)
Life.................................................. $ 77,725 $ 75,259 $ 79,176
Accident and Health................................... 232,994 240,340 252,996
-------- -------- --------
Total............................................... $310,719 $315,599 $332,172
======== ======== ========
</TABLE>
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.
66
<PAGE> 72
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.
67
<PAGE> 73
APPENDIX A
ILLUSTRATIONS OF POLICY VALUES
The following tables have been prepared to illustrate hypothetically how
certain values under a policy change with investment performance over an
extended period of time. The tables illustrate how policy values, cash surrender
values and death benefits under a policy covering an insured of a given age on
the policy date, would vary over time if the planned premiums were paid annually
and the return on the assets in each portfolio were an assumed uniform gross
annual rate of 0%, 6% and 12%. The values would be different from those shown if
the returns averaged 0%, 6% or 12% but fluctuated over and under those averages
throughout the years shown. The tables also show planned premiums accumulated at
5% interest compounded annually. The hypothetical investment rates of return are
illustrative only and should not be considered a representation of past or
future investment rates of return. Actual rates of return for a particular
policy may be more or less than the hypothetical investment rates of return
illustrated and will depend on a number of factors including the investment
allocations you make and prevailing rates. These illustrations assume that the
premiums are allocated equally among the 34 investment options available under
the policy, and that no amounts are allocated to the fixed account options.
The illustrations reflect the fact that the net investment returns on the
assets held in the investment options is lower than the gross after tax return
of the selected underlying portfolios. The tables assume a simple arithmetic
average annual expense ratio of 0.94% of the average daily net assets of the
portfolios available. The tables also assumes that the waivers and/or
reimbursements, if any, for the available portfolios will continue for the
periods shown.
In addition, the illustrations reflect a daily charge assessed against the
investment options for assuming certain mortality and expense risks (expense
charges), which are equivalent to an effective annual charge of 0.90% during
policy years 1-10 and 0.45% during policy years 11 and later. After deduction of
portfolio expenses and the mortality and expense charges, the illustrated gross
annual investment rates of return of 0%, 6% and 12% would correspond to
approximate net annual rates of -1.85%, 4.15% and 10.15% , respectively during
Policy Years 1-10 and -1.40% , 4.60% and 10.60% during Policy Years 11 and
later.
The illustrations also reflect the deduction of the premium charge and
monthly deduction for the hypothetical insured. The surrender charge is
reflected in the cash surrender value column. Our current cost of insurance
charges and the guaranteed maximum cost of insurance charges that we have a
contractual right to charge, are reflected in separate illustrations on each of
the following pages. All the illustrations reflect the fact that no charges for
federal or state income taxes are currently made against the Variable Account
and assumes no loan amount or partial withdrawals/surrenders or charges for
supplemental and/or rider benefits.
The illustrations are based on our Preferred Nonsmoker risk class. Upon
request, you will be furnished with a comparable illustration based on the
proposed insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables. Because the death benefit values vary depending on the death benefit
option in effect, benefit options are illustrated separately.
The illustrations show contract values that would result based upon the
hypothetical investment rates of return if premiums are paid as indicated and
all net premiums are allocated to subaccounts.
A-1
<PAGE> 74
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45
PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
TARGET PREMIUM IS $1,400
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,105 1,213 0 100,000 1,305 0 100,000 1,396 0 100,000
2 4,316 2,620 1,020 100,000 2,886 1,286 100,000 3,164 1,564 100,000
3 6,638 3,979 2,379 100,000 4,511 2,911 100,000 5,088 3,488 100,000
4 9,075 5,289 3,689 100,000 6,180 4,580 100,000 7,183 5,583 100,000
5 11,634 6,548 4,948 100,000 7,891 6,291 100,000 9,465 7,865 100,000
6 14,321 7,757 6,157 100,000 9,647 8,047 100,000 11,954 10,354 100,000
7 17,143 8,909 7,629 100,000 11,444 10,164 100,000 14,667 13,387 100,000
8 20,105 10,002 8,882 100,000 13,281 12,161 100,000 17,625 16,505 100,000
9 23,216 11,030 10,070 100,000 15,154 14,194 100,000 20,851 19,891 100,000
10 26,483 11,990 11,190 100,000 17,062 16,262 100,000 24,372 23,572 100,000
11 29,912 12,964 12,324 100,000 19,119 18,479 100,000 28,379 27,739 100,000
12 33,513 13,863 13,383 100,000 21,222 20,742 100,000 32,786 32,306 100,000
13 37,294 14,685 14,365 100,000 23,373 23,053 100,000 37,642 37,322 100,000
14 41,265 15,425 15,265 100,000 25,573 25,413 100,000 43,004 42,844 100,000
15 45,433 16,077 16,077 100,000 27,820 27,820 100,000 48,936 48,936 100,000
16 49,810 16,631 16,631 100,000 30,113 30,113 100,000 55,511 55,511 100,000
17 54,406 17,077 17,077 100,000 32,451 32,451 100,000 62,819 62,819 100,000
18 59,232 17,404 17,404 100,000 34,832 34,832 100,000 70,960 70,960 100,000
19 64,299 17,593 17,593 100,000 37,251 37,251 100,000 80,059 80,059 100,000
20 69,620 17,629 17,629 100,000 39,706 39,706 100,000 90,174 90,174 110,012
21 75,206 17,494 17,494 100,000 42,196 42,196 100,000 101,308 101,308 121,570
22 81,072 17,172 17,172 100,000 44,727 44,727 100,000 113,543 113,543 135,116
23 87,231 16,646 16,646 100,000 47,301 47,301 100,000 126,986 126,986 149,843
24 93,698 15,895 15,895 100,000 49,927 49,927 100,000 141,755 141,755 165,853
25 100,488 14,893 14,893 100,000 52,611 52,611 100,000 157,980 157,980 183,257
26 107,618 13,596 13,596 100,000 55,356 55,356 100,000 175,803 175,803 202,173
27 115,105 11,903 11,903 100,000 58,141 58,141 100,000 195,437 195,437 220,844
28 122,966 9,843 9,843 100,000 61,019 61,019 100,000 217,122 217,122 241,006
29 131,219 7,280 7,280 100,000 63,975 63,975 100,000 241,092 241,092 262,791
30 139,886 4,114 4,114 100,000 67,025 67,025 100,000 267,641 267,641 286,375
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-2
<PAGE> 75
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45
PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
TARGET PREMIUM IS $1,400
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,105 1,375 0 100,000 1,472 0 100,000 1,568 0 100,000
2 4,316 2,903 1,303 100,000 3,189 1,589 100,000 3,486 1,886 100,000
3 6,638 4,351 2,751 100,000 4,922 3,322 100,000 5,541 3,941 100,000
4 9,075 5,745 4,145 100,000 6,701 5,101 100,000 7,777 6,177 100,000
5 11,634 7,112 5,512 100,000 8,552 6,952 100,000 10,240 8,640 100,000
6 14,321 8,455 6,855 100,000 10,483 8,883 100,000 12,956 11,356 100,000
7 17,143 9,776 8,496 100,000 12,498 11,218 100,000 15,954 14,674 100,000
8 20,105 11,076 9,956 100,000 14,601 13,481 100,000 19,263 18,143 100,000
9 23,216 12,354 11,394 100,000 16,797 15,837 100,000 22,915 21,955 100,000
10 26,483 13,612 12,812 100,000 19,089 18,289 100,000 26,947 26,147 100,000
11 29,912 14,925 14,285 100,000 21,591 20,951 100,000 31,555 30,915 100,000
12 33,513 16,201 15,721 100,000 24,195 23,715 100,000 36,650 36,170 100,000
13 37,294 17,434 17,114 100,000 26,901 26,581 100,000 42,280 41,960 100,000
14 41,265 18,655 18,495 100,000 29,743 29,583 100,000 48,532 48,372 100,000
15 45,433 19,853 19,853 100,000 32,719 32,719 100,000 55,468 55,468 100,000
16 49,810 20,919 20,919 100,000 35,741 35,741 100,000 63,105 63,105 100,000
17 54,406 21,919 21,919 100,000 38,876 38,876 100,000 71,574 71,574 100,000
18 59,232 22,858 22,858 100,000 42,133 42,133 100,000 80,983 80,983 102,038
19 64,299 23,725 23,725 100,000 45,516 45,516 100,000 91,387 91,387 113,320
20 69,620 24,516 24,516 100,000 49,032 49,032 100,000 102,862 102,862 125,492
21 75,206 25,233 25,233 100,000 52,698 52,698 100,000 115,524 115,524 138,629
22 81,072 25,862 25,862 100,000 56,517 56,517 100,000 129,480 129,480 154,081
23 87,231 26,405 26,405 100,000 60,509 60,509 100,000 144,864 144,864 170,939
24 93,698 26,854 26,854 100,000 64,689 64,689 100,000 161,819 161,819 189,329
25 100,488 27,188 27,188 100,000 69,070 69,070 100,000 180,503 180,503 209,383
26 107,618 27,412 27,412 100,000 73,678 73,678 100,000 201,094 201,094 231,258
27 115,105 27,499 27,499 100,000 78,535 78,535 100,000 223,824 223,824 252,921
28 122,966 27,456 27,456 100,000 83,679 83,679 100,000 248,941 248,941 276,324
29 131,219 27,270 27,270 100,000 89,146 89,146 100,000 276,715 276,715 301,620
30 139,886 26,905 26,905 100,000 94,972 94,972 101,620 307,452 307,452 328,973
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-3
<PAGE> 76
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45
PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
TARGET PREMIUM IS $1,400
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ----------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,854 3,688 2,088 103,688 3,929 2,329 103,929 4,171 2,571 104,171
2 9,950 7,519 5,919 107,519 8,237 6,637 108,237 8,985 7,385 108,985
3 15,301 11,251 9,651 111,251 12,694 11,094 112,694 14,254 12,654 114,254
4 20,920 14,885 13,285 114,885 17,302 15,702 117,302 20,021 18,421 120,021
5 26,820 18,417 16,817 118,417 22,064 20,464 122,064 26,331 24,731 126,331
6 33,015 21,849 20,249 121,849 26,985 25,385 126,985 33,237 31,637 133,237
7 39,519 25,174 23,894 125,174 32,063 30,783 132,063 40,791 39,511 140,791
8 46,349 28,388 27,268 128,388 37,298 36,178 137,298 49,053 47,933 149,053
9 53,520 31,487 30,527 131,487 42,691 41,731 142,691 58,086 57,126 158,086
10 61,050 34,464 33,664 134,464 48,239 47,439 148,239 67,648 66,848 167,648
11 68,956 37,514 36,874 137,514 54,217 53,577 154,217 78,331 77,691 178,331
12 77,258 40,441 39,961 140,441 60,387 59,907 160,387 90,028 89,548 190,028
13 85,974 43,243 42,923 143,243 66,752 66,432 166,752 102,835 102,515 202,835
14 95,127 45,915 45,755 145,915 73,087 72,927 173,087 116,857 116,697 216,857
15 104,737 48,446 48,446 148,446 79,060 79,060 179,060 132,199 132,199 232,199
16 114,828 50,826 50,826 150,826 85,093 85,093 185,093 148,973 148,973 248,973
17 125,423 53,045 53,045 153,045 91,182 91,182 191,182 167,339 167,339 267,339
18 136,548 55,087 55,087 155,087 97,294 97,294 197,294 187,439 187,439 287,439
19 148,229 56,934 56,934 156,934 103,392 103,392 203,392 209,423 209,423 309,423
20 160,494 58,567 58,567 158,567 109,431 109,431 209,431 233,455 233,455 333,455
21 173,372 59,969 59,969 159,969 115,366 115,366 215,366 259,716 259,716 359,716
22 186,895 61,128 61,128 161,128 121,181 121,181 221,181 288,467 288,467 388,467
23 201,093 62,028 62,028 162,028 126,834 126,834 226,834 319,953 319,953 419,953
24 216,002 62,655 62,655 162,655 132,284 132,284 232,284 354,448 354,448 454,448
25 231,655 62,989 62,989 162,989 137,472 137,472 237,472 392,243 392,243 492,243
26 248,092 62,998 62,998 162,998 142,315 142,315 242,315 433,645 433,645 533,645
27 265,350 62,584 62,584 162,584 146,556 146,556 246,556 478,726 478,726 578,726
28 283,472 61,815 61,815 161,815 150,252 150,252 250,252 527,897 527,897 627,897
29 302,499 60,575 60,575 160,575 153,129 153,129 253,129 581,310 581,310 681,310
30 322,478 58,811 58,811 158,811 155,007 155,007 255,007 639,186 639,186 739,186
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-4
<PAGE> 77
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE ISSUE AGE 45
PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
TARGET PREMIUM IS $1,400
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ----------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,854 3,852 2,252 103,852 4,099 2,499 104,099 4,345 2,745 104,345
2 9,950 7,808 6,208 107,808 8,546 6,946 108,546 9,314 7,714 109,314
3 15,301 11,632 10,032 111,632 13,115 11,515 113,115 14,718 13,118 114,718
4 20,920 15,353 13,753 115,353 17,838 16,238 117,838 20,633 19,033 120,633
5 26,820 18,999 17,399 118,999 22,748 21,148 122,748 27,134 25,534 127,134
6 33,015 22,576 20,976 122,576 27,858 26,258 127,858 34,287 32,687 134,287
7 39,519 26,085 24,805 126,085 33,176 31,896 133,176 42,157 40,877 142,157
8 46,349 29,528 28,408 129,528 38,710 37,590 138,710 50,817 49,697 150,817
9 53,520 32,905 31,945 132,905 44,470 43,510 144,470 60,346 59,386 160,346
10 61,050 36,219 35,419 136,219 50,466 49,666 150,466 70,633 69,833 170,633
11 68,956 39,655 39,015 139,655 56,969 56,329 156,969 82,320 81,680 182,320
12 77,258 43,015 42,535 143,015 63,742 63,262 163,742 95,206 94,726 195,206
13 85,974 46,291 45,971 146,291 70,765 70,445 170,765 109,399 109,079 209,399
14 95,127 49,522 49,362 149,522 77,849 77,689 177,849 125,097 124,937 225,097
15 104,737 52,695 52,695 152,695 85,234 85,234 185,234 142,436 142,436 242,436
16 114,828 55,669 55,669 155,669 92,689 92,689 192,689 161,362 161,362 261,362
17 125,423 58,530 58,530 158,530 100,365 100,365 200,365 182,189 182,189 282,189
18 136,548 61,280 61,280 161,280 108,273 108,273 208,273 205,121 205,121 305,121
19 148,229 63,906 63,906 163,906 116,394 116,394 216,394 230,357 230,357 330,357
20 160,494 66,400 66,400 166,400 124,722 124,722 224,722 258,128 258,128 358,128
21 173,372 68,766 68,766 168,766 133,265 133,265 233,265 288,701 288,701 388,701
22 186,895 70,984 70,984 170,984 142,004 142,004 242,004 322,366 322,366 422,366
23 201,093 73,055 73,055 173,055 150,948 150,948 250,948 359,459 359,459 459,459
24 216,002 74,970 74,970 174,970 160,086 160,086 260,086 400,332 400,332 500,332
25 231,655 76,702 76,702 176,702 169,373 169,373 269,373 445,348 445,348 545,348
26 248,092 78,254 78,254 178,254 178,816 178,816 278,816 494,954 494,954 594,954
27 265,350 79,596 79,596 179,596 188,329 188,329 288,329 549,503 549,503 649,503
28 283,472 80,738 80,738 180,738 197,913 197,913 297,913 609,488 609,488 709,488
29 302,499 81,668 81,668 181,668 207,527 207,527 307,527 675,408 675,408 775,408
30 322,478 82,340 82,340 182,340 217,067 217,067 317,067 747,750 747,750 847,750
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-5
<PAGE> 78
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
TARGET PREMIUM IS $1,050
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,791 975 0 100,000 1,051 0 100,000 1,127 0 100,000
2 3,672 2,153 853 100,000 2,374 1,074 100,000 2,605 1,305 100,000
3 5,647 3,293 1,993 100,000 3,735 2,435 100,000 4,214 2,914 100,000
4 7,721 4,393 3,093 100,000 5,133 3,833 100,000 5,967 4,667 100,000
5 9,899 5,454 4,154 100,000 6,570 5,270 100,000 7,879 6,579 100,000
6 12,185 6,472 5,172 100,000 8,045 6,745 100,000 9,964 8,664 100,000
7 14,586 7,448 6,408 100,000 9,559 8,519 100,000 12,240 11,200 100,000
8 17,106 8,379 7,469 100,000 11,110 10,200 100,000 14,725 13,815 100,000
9 19,753 9,260 8,480 100,000 12,696 11,916 100,000 17,437 16,657 100,000
10 22,532 10,093 9,443 100,000 14,320 13,670 100,000 20,402 19,752 100,000
11 25,450 10,947 10,427 100,000 16,077 15,557 100,000 23,780 23,260 100,000
12 28,514 11,755 11,365 100,000 17,888 17,498 100,000 27,502 27,112 100,000
13 31,731 12,516 12,256 100,000 19,756 19,496 100,000 31,610 31,350 100,000
14 35,109 13,235 13,105 100,000 21,689 21,559 100,000 36,153 36,023 100,000
15 38,656 13,910 13,910 100,000 23,688 23,688 100,000 41,184 41,184 100,000
16 42,380 14,534 14,534 100,000 25,754 25,754 100,000 46,759 46,759 100,000
17 46,291 15,100 15,100 100,000 27,886 27,886 100,000 52,941 52,941 100,000
18 50,397 15,596 15,596 100,000 30,076 30,076 100,000 59,801 59,801 100,000
19 54,708 16,004 16,004 100,000 32,318 32,318 100,000 67,423 67,423 100,000
20 59,235 16,310 16,310 100,000 34,606 34,606 100,000 75,908 75,908 100,000
21 63,988 16,507 16,507 100,000 36,944 36,944 100,000 85,374 85,374 102,449
22 68,979 16,588 16,588 100,000 39,332 39,332 100,000 95,844 95,844 114,054
23 74,219 16,550 16,550 100,000 41,782 41,782 100,000 107,375 107,375 126,703
24 79,722 16,393 16,393 100,000 44,302 44,302 100,000 120,078 120,078 140,491
25 85,499 16,107 16,107 100,000 46,900 46,900 100,000 134,072 134,072 155,524
26 91,565 15,671 15,671 100,000 49,576 49,576 100,000 149,487 149,487 171,910
27 97,935 15,053 15,053 100,000 52,330 52,330 100,000 166,503 166,503 188,148
28 104,623 14,206 14,206 100,000 55,153 55,153 100,000 185,293 185,293 205,676
29 111,646 13,072 13,072 100,000 58,041 58,041 100,000 206,061 206,061 224,606
30 119,020 11,591 11,591 100,000 60,996 60,996 100,000 229,038 229,038 245,071
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-6
<PAGE> 79
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
TARGET PREMIUM IS $1,050
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,791 1,146 0 100,000 1,227 0 100,000 1,309 9 100,000
2 3,672 2,476 1,176 100,000 2,718 1,418 100,000 2,969 1,669 100,000
3 5,647 3,761 2,461 100,000 4,247 2,947 100,000 4,774 3,474 100,000
4 7,721 5,003 3,703 100,000 5,822 4,522 100,000 6,743 5,443 100,000
5 9,899 6,213 4,913 100,000 7,452 6,152 100,000 8,901 7,601 100,000
6 12,185 7,393 6,093 100,000 9,141 7,841 100,000 11,270 9,970 100,000
7 14,586 8,538 7,498 100,000 10,889 9,849 100,000 13,868 12,828 100,000
8 17,106 9,657 8,747 100,000 12,706 11,796 100,000 16,727 15,817 100,000
9 19,753 10,751 9,971 100,000 14,594 13,814 100,000 19,875 19,095 100,000
10 22,532 11,820 11,170 100,000 16,558 15,908 100,000 23,341 22,691 100,000
11 25,450 12,944 12,424 100,000 18,707 18,187 100,000 27,305 26,785 100,000
12 28,514 14,049 13,659 100,000 20,955 20,565 100,000 31,696 31,306 100,000
13 31,731 15,139 14,879 100,000 23,310 23,050 100,000 36,561 36,301 100,000
14 35,109 16,198 16,068 100,000 25,763 25,633 100,000 41,942 41,812 100,000
15 38,656 17,246 17,246 100,000 28,338 28,338 100,000 47,911 47,911 100,000
16 42,380 18,261 18,261 100,000 31,019 31,019 100,000 54,517 54,517 100,000
17 46,291 19,240 19,240 100,000 33,812 33,812 100,000 61,832 61,832 100,000
18 50,397 20,178 20,178 100,000 36,718 36,718 100,000 69,936 69,936 100,000
19 54,708 21,079 21,079 100,000 39,747 39,747 100,000 78,923 78,923 100,000
20 59,235 21,940 21,940 100,000 42,905 42,905 100,000 88,883 88,883 108,437
21 63,988 22,755 22,755 100,000 46,196 46,196 100,000 99,883 99,883 119,860
22 68,979 23,526 23,526 100,000 49,632 49,632 100,000 112,028 112,028 133,314
23 74,219 24,244 24,244 100,000 53,216 53,216 100,000 125,435 125,435 148,013
24 79,722 24,913 24,913 100,000 56,961 56,961 100,000 140,236 140,236 164,076
25 85,499 25,527 25,527 100,000 60,879 60,879 100,000 156,574 156,574 181,626
26 91,565 26,075 26,075 100,000 64,977 64,977 100,000 174,608 174,608 200,799
27 97,935 26,561 26,561 100,000 69,273 69,273 100,000 194,534 194,534 219,823
28 104,623 26,966 26,966 100,000 73,779 73,779 100,000 216,554 216,554 240,375
29 111,646 27,289 27,289 100,000 78,514 78,514 100,000 240,899 240,899 262,580
30 119,020 27,507 27,507 100,000 83,498 83,498 100,000 267,824 267,824 286,572
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-7
<PAGE> 80
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
TARGET PREMIUM IS $1,050
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ----------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,891 2,865 1,565 102,865 3,056 1,756 103,056 3,246 1,946 103,246
2 7,976 5,895 4,595 105,895 6,462 5,162 106,462 7,051 5,751 107,051
3 12,265 8,849 7,549 108,849 9,986 8,686 109,986 11,216 9,916 111,216
4 16,769 11,724 10,424 111,724 13,630 12,330 113,630 15,774 14,474 115,774
5 21,498 14,522 13,222 114,522 17,399 16,099 117,399 20,765 19,465 120,765
6 26,463 17,241 15,941 117,241 21,294 19,994 121,294 26,228 24,928 126,228
7 31,677 19,879 18,839 119,879 25,317 24,277 125,317 32,208 31,168 132,208
8 37,151 22,434 21,524 122,434 29,471 28,561 129,471 38,753 37,843 138,753
9 42,899 24,902 24,122 124,902 33,754 32,974 133,754 45,913 45,133 145,913
10 48,935 27,283 26,633 127,283 38,170 37,520 138,170 53,750 53,100 153,750
11 55,272 29,733 29,213 129,733 42,939 42,419 142,939 62,636 62,116 162,636
12 61,926 32,104 31,714 132,104 47,881 47,491 147,881 72,170 71,780 172,170
13 68,913 34,396 34,136 134,396 53,002 52,742 153,002 82,458 82,198 182,458
14 76,249 36,613 36,483 136,613 58,314 58,184 158,314 93,765 93,635 193,765
15 83,952 38,753 38,753 138,753 63,821 63,821 163,821 106,191 106,191 206,191
16 92,041 40,809 40,809 140,809 69,526 69,526 169,526 119,836 119,836 219,836
17 100,533 42,773 42,773 142,773 75,426 75,426 175,426 134,828 134,828 234,828
18 109,450 44,628 44,628 144,628 80,910 80,910 180,910 151,283 151,283 251,283
19 118,813 46,356 46,356 146,356 86,339 86,339 186,339 169,320 169,320 269,320
20 128,645 47,940 47,940 147,940 91,798 91,798 191,798 189,075 189,075 289,075
21 138,967 49,371 49,371 149,371 97,267 97,267 197,267 210,710 210,710 310,710
22 149,806 50,642 50,642 150,642 102,739 102,739 202,739 234,433 234,433 334,433
23 161,187 51,754 51,754 151,754 108,208 108,208 208,208 260,469 260,469 360,469
24 173,137 52,707 52,707 152,707 113,671 113,671 213,671 289,064 289,064 389,064
25 185,684 53,493 53,493 153,493 119,107 119,107 219,107 320,479 320,479 420,479
26 198,859 54,093 54,093 154,093 124,470 124,470 224,470 354,978 354,978 454,978
27 212,693 54,472 54,472 154,472 129,664 129,664 229,664 392,753 392,753 492,753
28 227,218 54,585 54,585 154,585 134,576 134,576 234,576 434,039 434,039 534,039
29 242,469 54,377 54,377 154,377 139,071 139,071 239,071 479,065 479,065 579,065
30 258,483 53,797 53,797 153,797 143,006 143,006 243,006 528,062 528,062 628,062
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-8
<PAGE> 81
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
TARGET PREMIUM IS $1,050
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
END OF ACCUMULATED ---------------------------- ----------------------------- -----------------------------
POLICY AT 5% POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,891 3,038 1,738 103,038 3,234 1,934 103,234 3,430 2,130 103,430
2 7,976 6,223 4,923 106,223 6,811 5,511 106,811 7,422 6,122 107,422
3 12,265 9,326 8,026 109,326 10,510 9,210 110,510 11,790 10,490 111,790
4 16,769 12,350 11,050 112,350 14,338 13,038 114,338 16,573 15,273 116,573
5 21,498 15,305 14,005 115,305 18,311 17,011 118,311 21,824 20,524 121,824
6 26,463 18,195 16,895 118,195 22,435 21,135 122,435 27,591 26,291 127,591
7 31,677 21,015 19,975 121,015 26,711 25,671 126,711 33,920 32,880 133,920
8 37,151 23,775 22,865 123,775 31,154 30,244 131,154 40,877 39,967 140,877
9 42,899 26,475 25,695 126,475 35,771 34,991 135,771 48,524 47,744 148,524
10 48,935 29,118 28,468 129,118 40,570 39,920 140,570 56,932 56,282 156,932
11 55,272 31,867 31,347 131,867 45,784 45,264 145,784 66,499 65,979 166,499
12 61,926 34,571 34,181 134,571 51,232 50,842 151,232 76,886 76,496 176,886
13 68,913 37,234 36,974 137,234 56,924 56,664 156,924 88,368 88,108 188,368
14 76,249 39,838 39,708 139,838 62,856 62,726 162,856 101,029 100,899 201,029
15 83,952 42,406 42,406 142,406 69,059 69,059 169,059 115,029 115,029 215,029
16 92,041 44,912 44,912 144,912 75,520 75,520 175,520 130,464 130,464 230,464
17 100,533 47,351 47,351 147,351 81,976 81,976 181,976 147,484 147,484 247,484
18 109,450 49,718 49,718 149,718 88,661 88,661 188,661 166,244 166,244 266,244
19 118,813 52,016 52,016 152,016 95,589 95,589 195,589 186,934 186,934 286,934
20 128,645 54,243 54,243 154,243 102,763 102,763 202,763 209,751 209,751 309,751
21 138,967 56,388 56,388 156,388 110,176 110,176 210,176 234,902 234,902 334,902
22 149,806 58,456 58,456 158,456 117,846 117,846 217,846 262,647 262,647 362,647
23 161,187 60,433 60,433 160,433 125,762 125,762 225,762 293,245 293,245 393,245
24 173,137 62,324 62,324 162,324 133,937 133,937 233,937 327,000 327,000 427,000
25 185,684 64,121 64,121 164,121 142,371 142,371 242,371 364,240 364,240 464,240
26 198,859 65,809 65,809 165,809 151,042 151,042 251,042 405,307 405,307 505,307
27 212,693 67,392 67,392 167,392 159,952 159,952 259,952 450,574 450,574 550,574
28 227,218 68,846 68,846 168,846 169,060 169,060 269,060 500,431 500,431 600,431
29 242,469 70,168 70,168 170,168 178,359 178,359 278,359 555,333 555,333 655,333
30 258,483 71,326 71,326 171,326 187,788 187,788 287,788 615,728 615,728 715,728
</TABLE>
---------------
* In the absence of additional premium, the Policy would lapse.
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
A-9
<PAGE> 82
APPENDIX B
EXAMPLE OF ADDITIONAL INSURANCE RIDER (AIR)
DEFINITIONS
EXCESS CALCULATION UNDER DEATH BENEFIT OPTION 1
Cash Value * Applicable Percentage less Specified Amount.
EXCESS CALCULATION UNDER DEATH BENEFIT OPTION 2
Cash Value * Applicable Percentage less Specified Amount plus Cash Value.
GENERAL
For purposes of administrative processing, excess is subtracted first from the
AIR rider specified amount and then from the base policy specified amount, to
the extent necessary.
EXAMPLES
(A) Example without Excess
Insured's Age = 57
Death Benefit = Option 2
Base Policy Specified Amount = $100,000
Additional Insured Specified Amount = $50,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.42) = $106,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
<TABLE>
<S> <C>
(1).................................. $106,500 -- cash value * applicable percentage
(3).................................. $175,000 -- base policy specified amount + cash value
(1) less (3)......................... -- $68,500 (No Excess)
</TABLE>
Therefore, the Additional Insurance Death Benefit = $50,000
(B) Example with Excess -- Death Benefit Option 1
Insured's Age = 58
Death Benefit = Option: 1
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $25,000
Cash Value = $75,000
Cash Value * Applicable Percentage (1.38) = $103,500
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (2), where:
<TABLE>
<S> <C>
(1).................................. $103,500 -- cash value * applicable percentage
(2).................................. $100,000 -- base policy specified amount
(1) less (2)......................... $3,500 (Amount of Excess)
</TABLE>
Therefore, the Additional Insurance Death Benefit = $25,000 - $3,500 = $21,500
B-1
<PAGE> 83
(C) Example with Excess -- Death Benefit Option 2
Insured's Age = 70
Death Benefit Option : 2
Base Policy Specified Amount = $100,000
Additional Insurance Specified Amount = $75,000
Cash Value = $1,000,000
Cash Value * Applicable Percentage (1.15) = $1,150,000
Additional Insurance Death Benefit will be the Additional Insured Specified
Amount less the excess, if any, of (1) over (3), where:
<TABLE>
<S> <C>
(1).................................. $1,150,000 -- cash value * applicable percentage
(3).................................. $1,100,000 -- base policy specified amount + cash value
(1) less (3)......................... $50,000 (Amount of Excess)
</TABLE>
Therefore, the Additional Insurance Death Benefit = $75,000 - $50,000 = $25,000
B-2
<PAGE> 84
APPENDIX C
RATES OF RETURN
From time to time, we may report different types of historical performance
for the investment options available under the policy. We may report the average
annual total returns of the funds over various time periods. Such returns will
reflect the operating expenses (including management fees) of the funds, but not
deductions at the Variable Account or policy level for the expense charge and
other policy expenses, which if included, would reduce performance.
At the request of a purchaser, Valley Forge Life Insurance Company will
accompany the returns of the funds with at least one of the following: (i)
returns, for the same periods as shown for the funds, which include deductions
under the Variable Account for the expense charge in addition to the deductions
of fund expenses, but does not include other charges under the policy; or (ii)
an illustration of cash values and cash surrender values as of the performance
reporting date for a hypothetical insured of given age, gender, risk
classification, Premium level and initial specified amount. The illustration
will be based either on actual historic fund performance or on a hypothetical
investment return between 0% and 12% as requested by the purchaser. The cash
surrender value figures will assume all fund charges, the expense charge, and
all other policy charges are deducted. The cash value figures will assume all
charges except the surrender charges are deducted.
We also may distribute sales literature comparing the percentage change in
the net asset values of the funds or in the Accumulation Unit Values for any of
the investment options to established market indices, such as the Standard &
Poor's 500 Composite Stock Price Index and the Dow Jones Industrial Average. We
also may make comparisons to the percentage change in values of other mutual
funds with investment objectives similar to those of the investment options
being compared.
The chart below shows the Effective Annual Rates of Return of the funds
based on the actual investment performance (after deduction of investment
arrangement fees and direct operating expenses of the funds). These rates do not
reflect the expense charge assessed. The rates do not reflect deductions from
premiums or Monthly Deductions assessed against the cash value of the policy,
nor do they reflect the policy's surrender charges. Therefore, these rates are
illustrative of how actual investment performance will affect the benefits under
the policy. These rates of return shown are not indicative of future
performance. These rates of return may be considered, however, in assessing the
competence and performance of the investment advisers.
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<PAGE> 85
<TABLE>
<CAPTION>
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10
PORTFOLIO YEARS/SINCE
INVESTMENT OPTION INCEPTION DATE 1 YEAR 5 YEARS INCEPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERATED INSURANCE SERIES
Federated High Income Bond
Fund II.......................................... 03/01/1994 2.31 10.48 8.22
Federated Prime Money Fund II...................... 11/21/1994 4.63 4.89 4.88
Federated Utility Fund II.......................... 2/10/1994 1.69 15.25 12.15
THE ALGER AMERICAN FUND
Alger American Growth Portfolio.................... 1/9/1989 33.74 30.94 23.05
Alger American Mid-Cap Growth Portfolio............ 5/3/1993 31.85 26.14 24.72
Alger American Small Capitalization
Portfolio........................................ 9/21/1988 43.42 22.64 20.86
Alger American Leveraged AllCap Portfolio.......... 01/25/1995 78.06 NA 46.44
FIRST EAGLE SOGEN VARIABLE FUNDS, INC.
First Eagle SoGen Overseas Variable Fund........... 2/3/1997 42.15 NA 13.56
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Emerging Markets
Fund............................................. 12/27/1995 100.28 NA 9.92
Van Eck Worldwide Hard Assets Fund................. 9/1/1989 21.00 1.49 3.06
VARIABLE INSURANCE PRODUCTS FUND (VIP) & VARIABLE
INSURANCE PRODUCTS FUND II (VIP II)
Fidelity VIP II Asset Manager Portfolio............ 9/6/1989 11.09 15.63 13.14
Fidelity VIP II Contrafund(R) Portfolio............ 1/3/1995 24.25 NA 27.73
Fidelity VIP Equity-Income Portfolio............... 10/9/1986 6.33 18.61 14.49
Fidelity VIP II Index 500 Portfolio................ 8/27/1992 20.52 28.16 21.07
MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series......................... 7/24/1995 76.71 NA 36.44
MFS Growth With Income Series...................... 10/9/1995 6.69 NA 21.12
MFS Research Series................................ 7/26/1995 24.05 NA 22.86
MFS Total Return Series............................ 1/3/1995 3.08 NA 15.42
JANUS ASPEN SERIES, INSTITUTIONAL SHARES
Janus Aspen Series Capital Appreciation
Portfolio........................................ 5/2/1997 67.00 NA 57.18
Janus Aspen Series Balanced Portfolio.............. 9/13/1993 26.76 24.68 20.62
Janus Aspen Series Growth Portfolio................ 9/13/1993 43.98 29.89 24.28
Janus Aspen Series Flexible Income
Portfolio........................................ 9/13/1993 1.60 10.88 8.50
Janus Aspen Series International Growth
Portfolio........................................ 5/2/1994 82.27 33.25 28.19
Janus Aspen Series Worldwide Growth
Portfolio........................................ 9/13/1993 64.45 33.60 29.71
ALLIANCE VARIABLE PRODUCTS SERIES FUND, CLASS B
SHARES
Alliance Premier Growth Portfolio.................. 06/26/1992 32.32 36.03 26.31
Alliance Growth and Income Portfolio............... 01/14/1991 11.37 23.91 15.48
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century VP Income & Growth Fund........... 10/30/1997 18.02 NA 16.96
American Century VP Value Fund..................... 05/01/1996 -0.85 NA 11.10
</TABLE>
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<PAGE> 86
<TABLE>
<CAPTION>
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10
PORTFOLIO YEARS/SINCE
INVESTMENT OPTION INCEPTION DATE 1 YEAR 5 YEARS INCEPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS
TRUST, CLASS 2 SHARES
Templeton Developing Markets Securities Fund....... 03/04/1996 53.27 NA -5.45
Templeton Asset Strategy Fund...................... 05/01/1997 22.54 16.92 13.01
LAZARD RETIREMENT SERIES
Lazard Retirement Equity Portfolio................. 3/18/1998 8.16 NA 10.68
Lazard Retirement Small Cap Portfolio.............. 11/04/1997 5.13 NA 0.13
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
Morgan Stanley International Magnum
Portfolio........................................ 01/02/1997 25.19 NA 13.57
Morgan Stanley Emerging Markets Equity Portfolio... 10/01/1996 95.68 NA 12.31
</TABLE>
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