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VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE LIFE
SEPARATE ACCOUNT
------------------------
This prospectus describes an individual flexible premium variable and fixed
life insurance policy offered by Valley Forge Life Insurance Company to you, the
Owner. The policy is designed to provide insurance protection on the life of the
insured named in the policy, and at the same time provide you with the
flexibility to vary the amount and timing of premium payments and, within
certain limits, to change the amount of death benefits payable under the Policy.
This flexibility permits you to provide for changing insurance needs with a
single insurance policy.
You may, within limits, allocate net premium payments and policy value to
one or more subaccounts of the Valley Forge Life Insurance Company Variable Life
Separate Account, which is a variable account, or to our VFL general account,
which is a fixed account. When we discuss policy values in this prospectus, we
are generally referring only to the values allocated to the variable account.
The assets of each subaccount of the variable account are invested in a
corresponding investment fund.
The prospectuses for the funds describe the investment objectives and risks
of investing in the subaccount corresponding to each investment fund. You bear
the entire investment risk for the value of your policy allocated to a
subaccount. Consequently, except as to policy value allocated to the fixed
account, the policy has no guaranteed minimum policy value.
It may not be advantageous to replace existing insurance with this policy.
Within certain limits, you may return the policy, or convert it to a policy that
provides benefits that do not vary with the investment results of the variable
account by exercising a special transfer right.
THIS PROSPECTUS CONTAINS INFORMATION YOU NEED BEFORE YOU PURCHASE A POLICY.
IF YOU DECIDE TO BUY THIS POLICY, YOU SHOULD KEEP THIS PROSPECTUS FOR YOUR
RECORDS. YOU SHOULD ALSO REVIEW THE PROSPECTUSES FOR EACH OF THE FUNDS, TO HELP
YOU DECIDE IN WHICH MUTUAL FUNDS YOU WANT TO INVEST.
You may also obtain this prospectus from the Securities and Exchange
Commission's website (http://www.sec.gov).
Please note, this policy is not:
- approved by any government organization;
- Federally insured; or
- a bank deposit or obligation.
May 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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You may choose to invest in the following funds:
- -- Federated High Income Bond Fund II
- -- Federated Prime Money Fund II
- -- Federated Utility Fund II
- -- Fidelity VIP II Asset Manager Portfolio
- -- Fidelity VIP II Contrafund(R) Portfolio
- -- Fidelity VIP II Index 500 Portfolio
- -- Fidelity VIP Equity-Income Portfolio
- -- Alger American Growth Portfolio
- -- Alger American Mid-Cap Growth Portfolio
- -- Alger American Small Capitalization Portfolio
- -- Alger American Leveraged AllCap Portfolio
- -- MFS Emerging Growth Series
- -- MFS Growth With Income Series
- -- MFS Research Series
- -- MFS Total Return Series
- -- MFS Limited Maturity Series (shares are no longer available)
- -- First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
- -- Van Eck Worldwide Emerging Markets Fund
- -- Van Eck Worldwide Hard Assets Fund
- -- 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 Premier Growth Portfolio
- -- Alliance Growth and Income Portfolio
- -- American Century VP Income & Growth Fund
- -- American Century VP Value Fund
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- -- Templeton Developing Markets Securities Fund (formerly, Templeton Developing
Markets Fund)
- -- Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
- -- Lazard Retirement Equity Portfolio
- -- Lazard Retirement Small Cap Portfolio
- -- Morgan Stanley International Magnum Portfolio
- -- Morgan Stanley Emerging Markets Equity Portfolio
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF THE POLICY....................................... 2
FUND EXPENSES............................................... 5
Fee Table Annual Fund Expenses............................ 5
GENERAL INFORMATION ABOUT VFL, THE VARIABLE ACCOUNT AND THE
FUNDS..................................................... 9
VFL....................................................... 9
The Variable Account...................................... 9
The Funds................................................. 10
THE POLICY.................................................. 17
Purchasing a Policy....................................... 17
Cancellation Privilege.................................... 17
Premium Payments.......................................... 18
Net Premium Allocations................................... 18
Policy Lapse and Reinstatement............................ 19
Variable Policy Value..................................... 20
Fixed Policy Value........................................ 21
Transfers of Policy Values................................ 22
Surrender Privilege....................................... 24
Withdrawal Privilege...................................... 24
Policy Loans.............................................. 24
Maturity Benefits......................................... 26
Death Benefit Proceeds.................................... 26
Settlement Options........................................ 29
Telephone Transaction Privileges.......................... 31
THE FIXED ACCOUNT........................................... 32
The Fixed Account......................................... 32
Interest Credited on Fixed Policy Value................... 32
CHARGES AND DEDUCTIONS...................................... 33
Sales Charges............................................. 33
Premium Tax Charge........................................ 33
Federal Tax Charge........................................ 33
Surrender Charge.......................................... 33
Other Taxes............................................... 35
Monthly Deduction......................................... 35
Daily Mortality and Expense Risk Charge................... 37
Transfer Processing Fee................................... 37
Fund Expenses............................................. 38
OTHER POLICY BENEFITS AND PROVISIONS........................ 39
Ownership................................................. 39
VFL's Right to Contest the Policy......................... 39
Suicide Exclusion......................................... 40
Misstatement of Age or Sex................................ 40
Modification of the Policy................................ 40
Suspension or Delay in Payments........................... 41
Reports to Owners......................................... 41
Supplemental Benefits and/or Riders....................... 42
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
FEDERAL INCOME TAX CONSIDERATIONS........................... 43
Introduction.............................................. 43
Tax Status of the Policies................................ 43
Tax Treatment of Policy Benefits.......................... 43
Tax Treatment of Settlement Options....................... 45
Special Rules for Pension and
Profit-Sharing Plans................................... 45
Business Uses of the Policy............................... 46
Possible Tax Law Changes.................................. 46
VFL's Taxes............................................... 46
OTHER INFORMATION ABOUT THE POLICIES AND VFL................ 47
Sale of the Policies...................................... 47
Voting Privileges......................................... 47
Directors and Executive Officers.......................... 49
Company Holidays.......................................... 50
State Regulation.......................................... 50
Additional Information.................................... 50
Experts................................................... 50
GLOSSARY.................................................... 52
FINANCIAL STATEMENTS........................................ 55
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES, DEATH
BENEFITS AND ACCUMULATED PREMIUM PAYMENTS................. 88
Appendix.................................................... A-1
</TABLE>
------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, THE PROSPECTUS OF THE FUNDS, OR THE STATEMENT OF ADDITIONAL
INFORMATION OF THE FUNDS.
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SUMMARY OF THE POLICY
You should read the following summary of prospectus information together
with the detailed information appearing elsewhere in this prospectus. Unless
otherwise indicated, the description of the policy in this prospectus assumes
that the insured is alive, the policy is in force and there are no outstanding
loans under the policy.
OVERVIEW OF THE POLICY. The policy is similar in many ways to a
fixed-benefit life insurance policy. As with a fixed-benefit life insurance
policy, you (the "Owner") make premium payments in return for insurance coverage
on the person insured. Also, as in many fixed-benefit life insurance policies,
this policy provides for (1) the accumulation of net premiums; and (2) a
surrender value, which we pay to you if you surrender the policy during the
insured's lifetime. Finally, as with many fixed-benefit life insurance policies,
your surrender value during the early years of the policy is likely to be
substantially lower than the total amount of premium payments you made.
However, this policy differs from a fixed-benefit life insurance policy in
several important respects. First, unlike a fixed-benefit life insurance policy,
under this policy, we may increase or decrease the death benefit, and increase
or decrease the policy value to reflect the investment performance of any
subaccounts to which you allocate your policy value. Also, unless you allocate
the entire policy value to the fixed account, we do not guarantee a minimum
surrender value. If the policy value is insufficient to pay charges due, then,
after a grace period, the policy will lapse without value. However, we guarantee
that the policy will remain in force during the first five years as long as you
meet certain requirements related to the minimum monthly premium payments. If
your policy lapses while loans are outstanding, you may become subject to income
tax and a 10% penalty tax.
PURPOSE OF THE POLICY. We designed this policy to provide you with
lifetime insurance benefits and long-term investment benefits. You should
evaluate the policy in conjunction with other insurance coverage that you may
have, as well as your need for insurance, and the policy's long-term investment
potential. It may not be advantageous for you to replace your existing insurance
coverage with this policy. In particular, you should carefully consider
replacement if you are basing your decision to replace your existing coverage
solely on a comparison of policy illustrations.
POLICY BENEFITS. You may choose from two death benefit options under this
policy:
(1) a level death benefit; or
(2) a death benefit that may increase or decrease.
We guarantee that the death benefit proceeds will never be less than a
specified amount (less any outstanding Loan Amount and past due charges) as long
as you make sufficient premiums payments to keep the policy in force. The policy
provides for a surrender value that you may obtain by surrendering the policy.
The policy also permits you to take out loans and to withdraw amounts, within
limits.
ILLUSTRATIONS. We based the illustrations used in this prospectus in
connection with the purchase of a policy on hypothetical rates of return. We do
not guarantee these rates of return. They are illustrative only and you should
not consider them to be a representation of past or future performance. Actual
rates of return may be higher or lower than those reflected in policy
illustrations, and therefore, your actual policy values will be different from
those illustrated.
TAX CONSIDERATIONS. We intend for the policy to satisfy the definition of
a life insurance contract under federal tax law. However, a policy may be a
"modified endowment contract" under federal tax law depending upon the amount of
premium payments you make in relation to the death benefit provided under the
policy. We will monitor your policy and will attempt to notify you on a
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timely basis if your policy is in jeopardy of becoming a modified endowment
contract. For further discussion of the tax status of a Policy and the tax
consequences of being treated as a life insurance contract or a modified
endowment contract, see "TAX CONSIDERATIONS," found later in this prospectus.
CANCELLATION PRIVILEGE AND SPECIAL TRANSFER RIGHT. For a limited time
after the policy is issued, you may cancel the policy and receive a refund. In
certain states, until the end of this cancellation period, we will allocate your
net premium payments to the subaccount investing in the Prime Money Market Fund.
At any time within 24 months after the date that coverage begins under the
policy, you may transfer the entire policy value held in the variable account to
the Fixed Account (1) without payment of any transfer fee; and (2) without the
transfer counting as one of the 12 transfers per year that may be made without
incurring a transfer fee.
OWNER INQUIRIES. If you have any questions, you may write or call VFL's
Variable Support Center at P.O. Box 305153, Nashville, Tennessee 37230-5153, or
1-800-262-1755.
PREMIUM PAYMENTS
- You may select a payment plan but you are not required to pay premium
payments according to the plan. You can vary the amount and frequency and
can skip Planned Periodic Premium Payments.
- Your Minimum Initial Premium Payment and Minimum Monthly Premium Payment
depend on the Insured's age, sex, and risk class, Specified Amount
selected, and any supplemental benefits and/or riders.
- You may make unscheduled premium payments, within limits.
DEDUCTIONS FROM PREMIUM PAYMENTS
We will deduct amounts from your premium payments:
- For a sales charges (4% of premium payments up to the Target Premium
Payment in Policy Years 1 through 10; 2% of premium payments up to the
Target Premium Payment in Policy Year 11 and thereafter);
- For federal taxes (1.25% of premium payments); and
- For state and local premium taxes (2.25% of premium payments).
NET PREMIUM PAYMENTS
- You may allocate Net Premium Payments among 35 Subaccounts and the Fixed
Account.
- The Subaccounts invest in corresponding Funds. Funds available are:
<TABLE>
<S> <C>
Federated High Income Bond Fund II Fidelity VIP II Asset Manager Portfolio
Federated Prime Money Fund II Fidelity VIP II Contrafund Portfolio
Federated Utility Fund II Fidelity VIP Equity-Income Portfolio
Alger American Growth Portfolio Fidelity VIP II Index 500 Portfolio
Alger American Mid-Cap Growth Portfolio MFS Emerging Growth Series
Alger American Small Capitalization Portfolio MFS Growth with Income Series
Alger American Leveraged AllCap Portfolio MFS Research Series
First Eagle SoGen Overseas Variable Fund MFS Total Return Series
Van Eck Worldwide Emerging Markets Fund MFS Limited Maturity Series (shares are not available)
Van Eck Worldwide Hard Assets Fund Janus Aspen Series Capital Appreciation Portfolio
Alliance Premium Growth Portfolio Janus Aspen Series Growth Portfolio
Alliance Growth and Income Portfolio Janus Aspen Series Balanced Portfolio
American Century VP Income & Growth Fund Janus Aspen Series Flexible Income Portfolio
American Century VP Value Fund Janus Aspen Series International Growth Portfolio
Templeton Developing Markets Securities Fund Janus Aspen Series Worldwide Growth Portfolio
Templeton Asset Strategy Fund Morgan Stanley International Magnum Portfolio
Lazard Retirement Equity Portfolio Morgan Stanley Emerging Markets Equity Portfolio
Lazard Retirement Small Cap Portfolio
</TABLE>
- We credit interest on amounts you allocate to the Fixed Account at a
minimum guaranteed rate of 4%.
DEDUCTIONS FROM POLICY VALUE
We will deduct the following amounts from your Policy Value, on a monthly
basis:
- Cost of insurance charge;
- Policy fees (currently $6.00 per month);
- First-year issue fee (currently $20.00 per month for first 12 months);
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- Specified Amount Increase fee (currently $10.00 per month for the first
12 months following an increase); and
- Charges for any supplemental and/or rider benefits.
DEDUCTION FROM ASSETS
- We deduct a daily charge at an annual rate of 0.90% from the Subaccounts
for mortality and expense risks during the first 10 Policy Years, and
0.45% in the eleventh Policy Year and thereafter. This charge is not
deducted from Fixed Policy Value.
- Investment advisory fees and fund operating expenses are also deducted
from the assets of each Fund.
POLICY VALUE
Your Policy Value:
- Is equal to Net Premiums, as adjusted each Valuation Day to reflect
Subaccount investment experience, interest credited on Fixed Policy
Value, charges deducted and other Policy transactions (such as transfers
and withdrawals).
- May vary from day to day. We do not guarantee a minimum Policy Value. The
Policy may Lapse if the Policy Value is insufficient to cover a Monthly
Deduction due.
- Can be transferred between and among the Subaccounts and the Fixed
Account. A transfer fee of $25.00 per transfer may apply if more than 12
transfers are made in a Policy Year. Policy loans reduce the amount
available for allocations and transfers.
- Is the starting point for calculating certain values under a Policy, such
as the Cash Value, Surrender Value, and the Death Benefit that we use to
determine Death Benefit Proceeds.
POLICY BENEFITS
- You may take out Loans for amounts up to 90% of Surrender Value, at an
effective annual interest rate of 8%.
- You may withdraw amounts provided there is sufficient remaining Surrender
Value.
- You may surrender the Policy in full at any time for its Surrender Value.
We will deduct a declining deferred Surrender Charge in connection with
the initial Specified Amount on your surrenders or withdrawals during the
first 14 Policy Years. It consists of (1) a Sales Surrender Charge of up
to 34% of premium payments in the first Policy Year up to the Target
Premium Payment and 33% of premium payments up to the Target Premium
Payment in each of Policy Years 2 through 6 until the total Sales
Surrender Charge equals 100% of a single Target Premium Payment, and (2)
an Administration Surrender Charge of up to $5.00 per $1,000 of Specified
Amount.
- We will deduct a declining deferred Sales Surrender Charge in connection
with an increase in Specified Amount on your surrenders or withdrawals
within 14 Policy Years of such increase. The Charge is 34% of premium
payments attributable to the increase up to the Target Premium Payment
for the increase in the year following the increase, and 33% of premium
payments attributable to the increase up to the Target Premium Payment
for the increase in each of the next 5 years following the increase until
the sales Surrender Charge for the increase equals 100% of the Target
Premium Payment for the increase.
DEATH BENEFITS
- Death Benefits are available as a lump sum or under a variety of
Settlement Options.
- The minimum Specified Amount is $100,000.
- Two Death Benefit Options available: Option 1, equal to the Specified
Amount, and Option 2, equal to the Specified Amount plus Policy Value.
- You have the flexibility to change the Death Benefit Option and Specified
Amount.
- Supplemental benefits and/or riders are available.
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FUND EXPENSES
The value of the net assets of each Subaccount includes the investment
advisory fees and other expenses incurred by the corresponding Fund in which the
Subaccount invests. See the prospectus for the Funds.
FEE TABLE ANNUAL FUND EXPENSES
(as a percentage of Fund average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL ANNUAL
EXPENSES EXPENSES
(AFTER WAIVERS (AFTER WAIVERS
AND/OR AND/OR
REIMBURSEMENTS REIMBURSEMENTS
MANAGEMENT WITH RESPECT TO WITH RESPECT TO
FEES 12b-1 FEES CERTAIN FUNDS) CERTAIN FUNDS)
---------- ---------- --------------- ---------------
<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), INITIAL CLASS (See Note 5)
Fidelity VIP II Asset Manager
Portfolio............................. 0.53% 0.09% 0.62%
Fidelity VIP II Contrafund Portfolio..... 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income Portfolio..... 0.48% 0.08% 0.56%
Fidelity VIP II Index 500 Portfolio...... 0.24% 0.04% 0.28%
MFS VARIABLE INSURANCE TRUST (See Note 6)
MFS Emerging Growth Series............... 0.75% 0.09% 0.84%
MFS Growth With Income Series............ 0.75% 0.13% 0.88%
MFS Research Series...................... 0.75% 0.11% 0.86%
MFS Total Return Series.................. 0.75% 0.15% 0.90%
</TABLE>
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<TABLE>
<CAPTION>
OTHER TOTAL ANNUAL
EXPENSES EXPENSES
(AFTER WAIVERS (AFTER WAIVERS
AND/OR AND/OR
REIMBURSEMENTS REIMBURSEMENTS
MANAGEMENT WITH RESPECT TO WITH RESPECT TO
FEES 12b-1 FEES CERTAIN FUNDS) CERTAIN FUNDS)
---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
MFS Limited Maturity Series (See Note 7)... 0.55% 0.45% 1.00%
JANUS ASPEN SERIES, INSTITUTIONAL SHARES
(See Note 8)
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 9)
American Century VP Income & Growth
Fund.................................. 0.70% -- 0.00% 0.70%
American Century VP Value Fund........... 1.00% -- 0.00% 1.00%
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST, CLASS 2 SHARES (See Note
10)
Templeton Developing Markets Securities
Fund (see Note 11).................... 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund (see Note
11)................................... 0.60% 0.25% 0.18% 1.03%
LAZARD RETIREMENT SERIES (See Note 12)
Lazard Retirement Equity Portfolio....... 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap Portfolio.... 0.75% 0.25% 0.25% 1.25%
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
(See Note 13)
Morgan Stanley International Magnum
Portfolio............................. 0.29% -- 0.87% 1.16%
Morgan Stanley Emerging Markets Equity
Portfolio............................. 0.42% -- 1.37% 1.79%
</TABLE>
- -------------------------
1. The Fund did not pay or accrue the shareholder services fee during the
fiscal year ended December 31, 1999. The Fund has no present intention of
paying or accruing the shareholder services fee during the fiscal year
ending December 31, 2000. The maximum shareholder services fee is 0.25%.
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<PAGE> 11
2. Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
3. The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1999 would have been 3.32% without the effect of
the investment advisory fee waiver and expense reimbursement provided by
the advisor.
4. For the year ended December 31, 1999, Van Eck Associates Corporation
(Adviser) agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.5% of average daily net assets for the period January
1, 1999 to May 12, 1999. For the period May 13, 1999 to December 31, 1999,
the Adviser agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.30% of average daily net assets. Without such waivers
and assumption of expenses, for the year ended December 31, 1999, other
expenses were .54% and total annual expenses were 1.54%
5. A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds', custodian credits realized as a
result of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. Without these reductions, the total operating
expenses presented in the table would have been .57% for Equity-Income
Portfolio, .63% for Asset Manager Portfolio, and .71% for Contrafund
Portfolio. FMR agreed to reimburse a portion of the Index 500 Portfolio's
expenses during the period. Without this reimbursement, the Portfolio's
management fee, other expenses and total expenses would have been .24%,
.10% and .34%, respectively.
6. Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
7. MFS has contractually agreed, subject to reimbursement, to bear expenses
for the Series such the Series other expenses do not exceed 0.45% (after
taking into account the expense offset arrangement described above under
footnote 6) of the average daily net assets of the Series during the
current fiscal year. Absent such reimbursement, for the year ended December
31, 1999, other expenses were 1.93% and total annual expenses were 2.48%.
8. Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for the Growth,
Capital Appreciation, International Growth, Worldwide Growth, and Balanced
Portfolios. All expenses are shown without the effect of expense offset
arrangements.
9. The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as the
funds' assets increase.
10. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
11. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees, which
apply to the combined fund effective 5/1/00. The table shows restated total
expenses based on the new fees and the assets of the fund
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<PAGE> 12
as of 12/31/99, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's
expenses after 5/1/00 would be estimated as: Templeton Developing Markets
Securities Fund -- Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses
0.29%, and Total Annual Expenses 1.79%; Templeton Asset Strategy Fund --
Management Fees 0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total
Annual Expenses 0.99%.
12. Effective May 1, 1999, Lazard Asset Management, the Fund's investment
adviser, has agreed to waive its fee and/or reimburse the Portfolios through
December 31, 2000 to the extent total annual portfolio expenses exceed 1.25%
of the Portfolio's average daily net assets. Absent such an agreement, the
other expenses and total annual portfolio expenses for the year ended
December 31, 1999 would have been 4.63% and 5.63% for the Lazard Retirement
Equity Portfolio and 6.31% and 7.31% for the Lazard Retirement Small Cap
Portfolio.
13. With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the management
fees and reimbursed other expenses of the portfolios to the extent total
operating expenses exceed the following percentages: Emerging Markets Equity
Portfolio 1.75%, International Magnum Portfolio 1.15%. The adviser may
terminate this voluntary waiver at any time at its sole discretion. Absent
such reductions, the "Management Fees" and "Other Expenses" would have been
as follows: 1.25% and 1.37%, respectively for the Emerging Markets Equity
Portfolio; and 0.80% and 0.87%, respectively for the International Magnum
Portfolio.
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the
costs and expenses that he or she will bear directly or indirectly. The table
reflects the anticipated expenses of the Variable Account and reflect the actual
expenses for each Fund for the year ended December 31, 1999. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
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<PAGE> 13
GENERAL INFORMATION ABOUT VFL,
THE VARIABLE ACCOUNT AND THE FUNDS
VFL
VFL is a life insurance company organized under the laws of the
Commonwealth of Pennsylvania in 1956 and is authorized to transact business in
the District of Columbia, Puerto Rico, Guam and all states except New York.
VFL's home office is located at 401 Penn St., Reading, Pennsylvania 19601, and
its executive office is located at CNA Plaza, Chicago, Illinois 60685. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a life
insurance company which, as of December 31, 1999, had consolidated assets of
approximately $14 billion. Subject to a coinsurance pooling agreement (a type of
reinsurance arrangement) with Assurance, VFL assumes all insurance risks under
the Policies, and VFL's assets, which as of December 31, 1999 exceeded $3.5
billion, support the benefits under the Policies. See "Other Information About
The Policies And VFL," for more detail regarding VFL.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of VFL established
under Pennsylvania law on October 18, 1995. VFL owns the assets of the Variable
Account. These assets are held separately from VFL's general account and its
other accounts. That portion of the Variable Account's assets that is equal to
the reserves and other Policy liabilities of the Variable Account is not
chargeable with liabilities arising out of any other business VFL may conduct.
If the assets exceed the required reserves and other Policy liabilities, VFL may
transfer the excess to VFL's general account. The Variable Account's assets will
at all times equal or exceed the sum of the Subaccount Values of all policies
funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or VFL. The Variable Account also is governed by the laws
of Pennsylvania, VFL's state of domicile, and may also be governed by laws of
other states in which VFL does business.
The Variable Account has 35 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of VFL.
Where permitted by applicable law, VFL may make the following changes to
the Variable Account:
1. Any changes required by the 1940 Act or other applicable law or
regulation;
2. Combine separate accounts, including the Variable Account;
3. Add new subaccounts to or remove existing subaccounts from the
Variable Account or combine Subaccounts;
4. Make Subaccounts (including new subaccounts) available to such
classes of Policies as VFL may determine;
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5. Add new Funds or remove existing Funds;
6. Substitute new Funds for any existing Fund if shares of the Fund
are no longer available for investment or if VFL determines that investment
in a Fund is no longer appropriate in light of the purposes of the Variable
Account;
7. Deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. Operate the Variable Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. You will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is
either an open-end diversified management investment company or a separate
investment portfolio of such a company and is managed by a registered investment
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
Certain Funds may have investment objectives and policies similar to other
funds that are managed by the same investment adviser or manager. The investment
results of the Funds, however, may be higher or lower than those of such other
funds. We do not guarantee or make any representation that the investment
results of the Funds will be comparable to any other Fund, even those with the
same investment adviser or manager.
A Fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a Fund with a small asset base. A
Fund may not experience similar performance as its assets grow.
FEDERATED INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Federated Insurance Series ("IS"). IS
issues 12 "series" or classes of shares, each of which represents an interest in
a Fund of IS. Three of these series of shares are available as investment
options under the Contracts. The investment objectives of these Funds are set
forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
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IS is advised by Federated Investment Management Company.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
FIDELITY VIP II ASSET MANAGER PORTFOLIO. This Fund seeks high total
return with reduced risk over the long-term by allocating its assets among
domestic and foreign stocks, bonds and short-term fixed-income instruments.
FIDELITY VIP II CONTRAFUND PORTFOLIO. This Fund seeks capital
appreciation over the long-term by investing in companies that are
undervalued or out-of-favor.
FIDELITY VIP EQUITY-INCOME PORTFOLIO. This Fund seeks current income
by investing primarily in income producing equity securities. In choosing
these securities, the Fund also considers the potential for capital
appreciation.
FIDELITY VIP II INDEX 500 PORTFOLIO. This Fund seeks investment
results that correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Index of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth, Alger American Small
Capitalization and Alger American Leveraged AllCap Subaccounts each invest in
shares of corresponding Funds (i.e., investment portfolios) of The Alger
American Fund ("AAF"). AAF issues six "series" or classes of shares, each of
which represents an interest in a Fund of AAF. Four of these series of shares
are available as investment options under the Policies. The investment
objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MID-CAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the Portfolio invests
primarily in equity securities of companies having a market capitalization
within the range of companies in the S&P(R) Mid-Cap 400 Index.
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ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing primarily in the equity
securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) Small Cap 600 Index.
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the portfolio invests in
the equity securities of companies of any size which demonstrate promising
growth potential. The portfolio can leverage, that is, borrow money, up to
one-third of its total assets to buy additional securities. By borrowing
money, the portfolio has the potential to increase its returns if the
increase in the value of the securities purchased exceeds the cost of
borrowing, including interest paid on the money borrowed.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity, MFS
Research and MFS Total Return Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of MFS Variable Insurance Trust ("MFSVIT").
MFSVIT issues 16 "series" or classes of shares, each of which represents an
interest in a Fund of MFSVIT. Five of these series of shares are available as
investment options under the Policies. The investment objectives of these Funds
are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of companies that are
early in their life cycle but which have the potential to become major
enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFS LIMITED MATURITY SERIES. This Fund seeks as high a level of
current income as is believed to be consistent with prudent investment
risk. Its secondary objective is to protect shareholders' capital. Shares
of this Fund are no longer available.
MFSVIT is advised by Massachusetts Financial Services Company.
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (FORMERLY, SOGEN VARIABLE FUNDS, INC.)
The First Eagle SoGen Overseas Variable subaccount invests in shares of a
corresponding Fund (i.e., investment portfolio) of First Eagle SoGen Variable
Funds, Inc. ("FESG"). FESG issues one "series" or class of shares, which
represents an interest in a Fund of FESG. This series of shares is available as
an investment option under the Policies. The investment objective of this Fund
is set forth below.
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<PAGE> 17
FIRST EAGLE SOGEN OVERSEAS VARIABLE FUND (formerly, SoGen Overseas
Variable Fund). This Fund seeks long-term growth of capital by investing
primarily in securities of small and medium size non-U.S. companies.
FESG is advised by Arnhold and S. Bleichroeder Advisers, Inc. (prior to
December 31, 1999, Societe Generale Asset Management Corp. was the adviser).
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues five "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Policies. The
investment objectives of these Funds are set forth below.
VAN ECK WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital
appreciation by investing primarily in equity securities in emerging
markets around the world.
VAN ECK WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
JANUS ASPEN SERIES, INSTITUTIONAL SHARES
The Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen
Balanced, Janus Aspen Flexible Income, Janus Aspen International Growth and
Janus Aspen Worldwide Growth Subaccounts each invest in shares of corresponding
Funds (i.e., "investment portfolios") of Janus Aspen Series ("JAS"). JAS issues
multiple portfolios, each of which offers two or more classes of shares. Six of
these portfolios are available as investment options under the Contract. The
investment objectives of these Funds are set forth below.
JANUS ASPEN SERIES CAPITAL APPRECIATION PORTFOLIO. This Fund seeks
long-term growth of capital by investing primarily in common stocks
selected for their growth potential.
JANUS ASPEN SERIES GROWTH PORTFOLIO. This Fund seeks long-term growth
of capital in a manner consistent with the preservation of capital by
investing primarily in common stocks selected for their growth potential.
JANUS ASPEN SERIES BALANCED PORTFOLIO. This Fund seeks long-term
capital growth, consistent with preservation of capital and balanced by
current income by normally investing 40-60% of its assets in securities
selected primarily for their growth potential and 40-60% of its assets in
securities selected primarily for their income potential.
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<PAGE> 18
JANUS ASPEN SERIES FLEXIBLE INCOME PORTFOLIO. This Fund seeks to
obtain maximum total return, consistent with preservation of capital by
investing primarily in a wide variety of income-producing securities such
as corporate bonds and notes, government securities and preferred stock.
JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO. This Fund seeks
long-term growth of capital by normally investing at least 65% of its total
assets in securities of issuers from at least five different countries,
excluding the United States.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO. This Fund seeks
long-term growth of capital in a manner consistent with the preservation of
capital by investing primarily in common stocks of companies of any size
throughout the world.
JAS is advised by Janus Capital Corporation.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, CLASS B SHARES
The Alliance Premier Growth and Alliance Growth and Income Subaccounts each
invest in shares of a corresponding Fund of Alliance Variable Products Series
Fund ("AVP"). AVP has multiple Funds. Two of these Funds are available as
investment options under the Contract. The investment objectives of these Funds
are set forth below.
ALLIANCE PREMIER GROWTH PORTFOLIO. This Fund seeks long term growth
of capital by pursuing aggressive investment policies.
ALLIANCE GROWTH AND INCOME PORTFOLIO. This Fund seeks appreciation
through investments primarily in dividend paying common stocks.
AVP is advised by Alliance Capital Management L.P.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The American Century VP Income & Growth and American Century VP Value
Subaccounts each invest in shares of Funds of American Century Variable
Portfolios, Inc. ("ACVP"). ACVP consists of multiple Funds. Two of the Funds are
available as investment options under the Contract. The investment objectives of
these Funds are set forth below.
AMERICAN CENTURY VP INCOME & GROWTH FUND. This Fund seeks dividend
growth, current income and capital appreciation by investing in common
stocks.
AMERICAN CENTURY VP VALUE FUND. This Fund seeks long-term capital
growth by investing primarily in common stocks. Income is a secondary
objective.
ACVP is advised by American Century Investment Management, Inc.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, CLASS 2 SHARES
The Templeton Developing Markets Securities and the Templeton Asset
Strategy Subaccounts each invest in Class 2 shares of Funds of Franklin
Templeton Variable Insurance Products Trust ("FTVIPT"). Effective May 1, 2000,
the funds of Templeton Variable Products Series Fund were merged into similar
funds of Franklin Templeton Variable Insurance Products Trust. FTVIPT consists
of multiple Funds. Two of the Funds
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are available as investment options under the Contract. The investment
objectives of the Funds are set forth below.
TEMPLETON DEVELOPING MARKETS SECURITIES FUND (formerly, Templeton
Developing Markets Fund). This Fund seeks long-term capital appreciation.
The Fund invests, under normal market conditions, at least 65% of its total
assets in emerging markets equity securities.
TEMPLETON ASSET STRATEGY FUND (formerly, Templeton Asset Allocation
Fund). This Fund seeks high total return. The Fund invests in equity
securities of companies in any nation, debt securities of companies and
governments of any nation, and in money market instruments.
The Templeton Developing Markets Securities Fund is advised by Templeton
Asset Management Inc. and the Templeton Asset Strategy Fund is advised by
Templeton Investment Counsel, Inc.
LAZARD RETIREMENT SERIES
The Lazard Retirement Equity and Lazard Retirement Small Cap Subaccounts
each invest in shares of a corresponding Fund of Lazard Retirement Series
("LRS"). LRS is comprised of multiple Funds, two of which are available as
investment options under the Contract. The investment objectives of the Funds
are set forth below.
LAZARD RETIREMENT EQUITY PORTFOLIO. This Fund seeks long-term capital
appreciation.
LAZARD RETIREMENT SMALL CAP PORTFOLIO. This Fund seeks long-term
capital appreciation.
LRS is advised by Lazard Asset Management
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean Witter
Universal Funds, Inc.)
The Morgan Stanley International Magnum and the Morgan Stanley Emerging
Markets Equity Subaccounts each invest in a corresponding Fund of The Universal
Institutional Funds, Inc. ("Universal Funds"). Universal Funds consists of
multiple Funds, two of which are available as investment options under the
Contract. The investment objectives of the Funds are set forth below.
MORGAN STANLEY INTERNATIONAL MAGNUM PORTFOLIO. This Fund seeks long
term capital appreciation by investing primarily in equity securities of
non-U.S. issuers domiciled in EAFE countries.
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO. This Fund seeks
long term capital appreciation by investing primarily in equity securities
of issuers in emerging market countries.
Universal Funds is advised by Morgan Stanley Asset Management, Inc.
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No one can assure that any fund will achieve its stated objectives and policies.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund that accompanies this prospectus and the
current Statement of Additional Information for the Funds. The Funds' prospectus
should be read carefully before any decision is made concerning the allocation
of premium payments or transfers among the Subaccounts.
Not all of the Funds described in the prospectuses for the Funds are
available with the Contract. Moreover, VFL cannot guarantee that each Fund will
always be available for its variable annuity contracts, but in the event that a
Fund is not available, VFL will take reasonable steps to secure the availability
of a comparable fund. Shares of each Fund are purchased and redeemed at net
asset value, without a sales charge.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser will pay VFL a
servicing fee based upon an annual percentage of the average aggregate net
assets invested by VFL on behalf of the Variable Account. These agreements
reflect administrative services provided to the Funds by VFL. Payments of such
amounts by an adviser will not increase the fees paid by the Funds or their
shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with VFL or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Policy Values are allocated to the Variable Account, and of owners of
other policies whose policy values are allocated to one or more other separate
accounts investing in any one of the Funds. Shares of some of the Funds may also
be sold to certain pension and retirement plans qualifying under Section 401 of
the Code. As a result, there is a possibility that a material conflict may arise
between the interests of Owners or owners of other policies (including policies
issued by other companies), and such retirement plans or participants in such
retirement plans. In the event of any such material conflicts, VFL will consider
what action may be appropriate, including removing the Fund from the Variable
Account or replacing the Fund with another Fund. There are certain risks
associated with mixed and shared funding and with the sale of shares to
qualified pension and retirement plans, as disclosed in each Fund's prospectus.
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<PAGE> 21
THE POLICY
PURCHASING A POLICY
To purchase a Policy, a prospective Owner must submit a completed
application and the Minimum Initial Premium Payment through a licensed agent of
VFL who is also a registered representative of broker-dealer having a selling
agreement with CNA Investor Services, Inc. ("CNA/ISI"), the principal
underwriter of the Policies. VFL requires satisfactory evidence of the Insured's
insurability, which may include a medical examination of the Insured. Generally,
VFL issues Policies covering Insureds up to age 75 if evidence of insurability
satisfies VFL's underwriting criteria. Acceptance of an application is subject
to VFL's underwriting criteria, and VFL reserves the right to reject an
application for any reason.
Insurance coverage under a Policy begins on the later of the Policy
Effective Date or the date that VFL receives the Minimum Initial Premium
Payment. Generally VFL establishes the Policy Effective Date (shown on the
Policy) after it completes the underwriting process and accepts the application.
Where the Minimum Initial Premium Payment is received by VFL after the Policy
Effective Date, coverage under the Policy is conditioned upon the Insured's
state of health being the same as that described in the application.
With VFL's prior approval, in order to obtain a lower Issue Age, an Owner
may "backdate" a Policy by electing a Policy Effective Date up to six months
prior to the date of the original application. A lower Issue Age for the Insured
generally results in slightly more favorable cost of insurance rates. Charges
for the monthly deduction for the backdated period are deducted as of the Policy
Effective Date.
Insurance coverage under the Policy terminates upon the first to occur of
the following events: (1) the Insured dies, (2) the Owner surrenders the Policy,
(3) the Policy reaches the Maturity Date, or (4) the Policy Lapses.
CANCELLATION PRIVILEGE
An Owner may cancel a Policy for a refund during the Cancellation Period by
returning it to the Service Center or to the sales representative who sold it
along with a Written Notice requesting cancellation. The Cancellation Period is
determined by the law of the state in which the Owner resides or in which the
application is signed and is shown on the Policy. In most states it expires at
the latest of (1) 10 days after the Owner first receives the Policy, (2) 45 days
after the Owner signs the application, or (3) 10 days after VFL mails or
delivers a notice of the Owner's withdrawal rights. Return of the Policy by mail
is effective upon receipt at the Service Center. When cancelled, the Policy is
treated as if it had never been issued. Within seven calendar days after
receiving the returned Policy, VFL will refund an amount equal to the sum of (1)
the difference between premium payments made (including any fees and charges
deducted) and the amounts allocated to the Fixed Account and to the Subaccounts,
(2) Fixed Policy Value determined as of the date the returned Policy is
received, and (3) Variable Policy Value determined as of the date the returned
Policy is received. This amount may be more or less than the aggregate premium
payments made under the Policy. In states where required, VFL will instead
refund premium payments.
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PREMIUM PAYMENTS
MINIMUM INITIAL PREMIUM PAYMENT. The Minimum Initial Premium Payment
required depends on a number of factors, including the sex, Issue Age, and risk
class of the proposed Insured, the initial Specified Amount requested by the
applicant, any supplemental benefits and/or riders requested by the applicant,
and the Planned Periodic Premium Payments that the applicant selects. Owners
should consult their sales representative for information about the Minimum
Initial Premium Payment required for the coverage that they seek.
PLANNED PERIODIC PREMIUM PAYMENTS. Owners may establish a schedule of
monthly (bank draft or pre-authorized payment only), quarterly, semi-annual or
annual Planned Periodic Premium Payments. Subject to VFL's approval, Owners may
change the amount or frequency of Planned Periodic Premium Payments by Written
Notice. VFL will send Owners reminder notices for Planned Periodic Premium
Payments. VFL also may arrange with Owners to have Planned Periodic Premium
Payments made under a pre-authorized payment arrangement. Owners are not
required to pay Planned Periodic Premium Payments.
UNPLANNED PREMIUM PAYMENTS. Subject to the limitations described below,
Owners generally may make additional premium payments at any time before the
Maturity Date while the Insured is alive and the Policy is in force. Unless the
Owner specifies otherwise in the application or by subsequent Written Notice,
VFL considers all unplanned premium payments first as repayments of any
outstanding Loan Amounts under the Policy.
PREMIUM PAYMENT LIMITATIONS. Unless otherwise approved by VFL, all premium
payments must be made payable to "Valley Forge Life Insurance Company" at the
Service Center. No premium payments are accepted after a Policy's Maturity Date.
Premium payments must be at least $50 and must be remitted to the Service
Center. VFL reserves the right to reject any premium payment in the event that
it determines that acceptance of such payment would cause a Policy to fail to
qualify as a life insurance contract under the Code or applicable regulations or
rulings thereunder. VFL will promptly return any premium payment that it rejects
for this reason. VFL will monitor Policies and will attempt to notify the Owner
on a timely basis if his or her Policy is in jeopardy of becoming a modified
endowment contract under the Code. (See "Tax Considerations.")
PREMIUM PAYMENTS UPON INCREASE IN SPECIFIED AMOUNT. Depending on the
Policy Value at the time of an increase in the Specified Amount and the amount
of the increase requested, an additional premium payment may be necessary or a
change in the amount of Planned Periodic Premium Payments may be advisable. (See
"Death Benefit Proceeds.")
REJECTION OF PREMIUM PAYMENTS FOR TAX PURPOSES. VFL reserves the right to
reject any premium payment in the event that it determines that acceptance of
such payment would cause a Policy to fail to qualify as a life insurance
contract under the Code or applicable regulations or rulings thereunder. VFL
will promptly return any premium payment that it rejects for this reason.
NET PREMIUM ALLOCATIONS
Net Premium Payments are allocated among and between the Subaccounts and
the Fixed Account as of the date that they are received at the Service Center
according to the Owner's allocation instructions in the application or in a
subsequent Written Notice.
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Allocation instructions must be in whole percentages and the minimum amount that
VFL can allocate to any Subaccount or the Fixed Account is 1% of any Net Premium
Payment. VFL reserves the right to establish additional limitations on premium
payment allocations.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike a conventional life insurance policy, failure to make
Planned Periodic Premium Payments does not necessarily cause a Policy to Lapse.
Conversely, making all Planned Periodic Premium Payments does not necessarily
prevent a Policy from Lapsing. Rather, except when the Lapse Prevention
Guarantee is in effect, whether a Policy Lapses depends on whether its Surrender
Value is sufficient to cover the monthly deduction on each Monthly Anniversary
Day. Surrender Value could become insufficient to cover the monthly deduction if
investment experience has been sufficiently unfavorable that it has resulted in
a decrease in Policy Value or the Policy Value has decreased because the Owner
did not make sufficient Net Premium Payments to offset prior monthly deductions.
If the Surrender Value on a Monthly Anniversary Day is insufficient to
cover the monthly deduction due on that Day, VFL will mail to the Owner and to
any assignee of record at their last known address(es), a notice stating that
the Policy will only remain in force for 61 days from the date that the notice
was mailed. This 61 day period is called the Grace Period. If the Owner does not
make sufficient premium payments to cover the monthly deduction(s) through the
end of the Grace Period by the end of the Grace Period, then the Policy will
terminate without value and all coverage under the Policy will terminate. The
notice mailed to the Owner and to any assignee of record will indicate how much
in additional premium payments the Owner must make before the end of the Grace
Period to keep the Policy in force. Coverage under the Policy continues during
the Grace Period and VFL will deduct unpaid monthly deductions when computing
Death Benefit Proceeds if the Insured dies during the Grace Period.
REINSTATEMENT. If the Policy Lapses, the Owner may reinstate it at any
time within five years of Lapse but before the Maturity Date. A Policy that has
been surrendered cannot be reinstated. To reinstate a Policy, the Owner must
submit to the Service Center:
1. evidence of insurability satisfactory to VFL;
2. premium payments in an amount sufficient to result (along with any
loan repayments) in a positive Surrender Value; and
3. premium payments in an amount sufficient that the resulting Net
Premium Payments equal or exceed the amount of the next two monthly
deductions.
Upon reinstatement of the Policy, VFL will reinstate any remaining Loan
Amount. The Policy Value of a reinstated Policy is the amount provided by the
Net Premium Payments submitted with the application for reinstatement. The
effective date of a reinstated Policy is the Monthly Anniversary Date that falls
on or next follows the later of the date that the application for reinstatement
is approved or the above-listed items are received at the Service Center.
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LAPSE PREVENTION GUARANTEE. VFL guarantees that a Policy will not Lapse
for a period of up to the first five Policy Years, regardless of the Surrender
Value, if, throughout that period, (a) exceeds (b) where:
(a) is the aggregate premium payments made less the amount of any
withdrawals (including applicable surrender charges) less any Loan Amount,
and
(b) is the Minimum Monthly Premium Payment multiplied by the number of
complete months since the Policy Effective Date, including the current
month.
If the Policy's Specified Amount is increased while the Lapse Prevention
Guarantee is in effect, VFL will recalculate the Minimum Monthly Premium
Payment, which will generally increase following an increase in Specified
Amount. VFL will notify Owners of any increase in the Minimum Monthly Premium
Payment and will amend the Policy to reflect the change.
VARIABLE POLICY VALUE
The Variable Policy Value is the sum of all Subaccount Values and therefore
reflects the investment experience of the Subaccounts to which it is allocated.
There is no guaranteed minimum Variable Policy Value.
SUBACCOUNT VALUE. The Subaccount Value of any Subaccount as of the Policy
Effective Date is equal to the amount of the initial Net Purchase Payment
allocated to that Subaccount. On subsequent Valuation Days prior to the Maturity
Date, the Subaccount Value is equal to that part of any Net Purchase Payment
allocated to the Subaccount and any Policy Value transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses, realized or
unrealized, and decreased by withdrawals (including any applicable surrender
charges) and any Policy Value transferred out of that Subaccount.
UNITS. For each Subaccount, Net Premium Payment(s) allocated to a
Subaccount or amounts of Policy Value transferred to a Subaccount are converted
into Units. The number of Units credited to a Policy is determined by dividing
the dollar amount directed to each Subaccount by the value of the Unit for that
Subaccount for the Valuation Day as of which the Net Premium Payment(s) or
transferred amount is invested in the Subaccount. Therefore, Net Premium
Payments allocated to or amounts transferred to a Subaccount under a Policy
increase the number of Units of that Subaccount credited to the Policy.
Certain events reduce the number of Units of a Subaccount credited to a
Policy. Withdrawals or transfers of Subaccount Value from a Subaccount result in
the cancellation of the appropriate number of Units of that Subaccount as do:
surrender of the Policy; payment of the Death Benefit Proceeds; and the
deduction of the monthly deduction. Units are cancelled as of the end of the
Valuation Period in which VFL receives Written Notice regarding the event.
UNIT VALUE. For each Subaccount there exist two types of Units: A Units
and B Units. A Units represent Subaccount Value during the first ten Policy
Years under any Policy, while B Units represent Subaccount Value during Policy
Years 11 and later. On the tenth Policy Anniversary, all A Units of any
Subaccount under a Policy are automatically exchanged for B Units on an
equivalent dollar value basis.
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A Units and B Units both represent a fractional undivided interest in a
Subaccount. They differ only in their value as a result of the fact that the
mortality and expense risk charge deducted from each Subaccount is larger for
Policies in the first ten Policy Years than the charge deducted for Policies in
Policy Years 11 and later. This difference in charges is reflected in a
different Net Investment Factor (described below) for A Units and B Units for
each Valuation Period.
The A Unit and B Unit values for each Subaccount were arbitrarily set
initially at $10 when that Subaccount began operations. Thereafter, the Unit
Value at the end of every Valuation Day is the Unit Value at the end of the
previous Valuation Day multiplied by the Net Investment Factor for that type of
Unit (either A or B), as described below. The Subaccount Value for a Policy is
determined on any Valuation Day by multiplying the number of Units of the
appropriate type (either A or B) attributable to the Policy in that Subaccount
by the value for that type of Unit for that Subaccount on that day.
NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of either A Units or B Units of a Subaccount
from one Valuation Period to the next. The Net Investment Factor for any
Subaccount for any Valuation Period is determined by dividing 1 by 2 and
subtracting 3 from the result, where:
1. is the result of:
a. the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the Fund held in the Subaccount, if the "ex-dividend" date occurs
during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by VFL to have resulted from the operations of the Subaccount.
2. is the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the last prior Valuation Period.
3. is a daily factor representing the mortality and expense risk charge for
the type of Unit deducted from the Subaccount adjusted for the number of days in
the Valuation Period.
FIXED POLICY VALUE
The Fixed Policy Value on any Valuation Day is equal to:
1. aggregate Net Premium Payments allocated to the Fixed Account; plus
2. Policy Value transferred to the Fixed Account; plus
3. interest credited to the Fixed Account; less
4. any withdrawals (including any applicable surrender charges
deducted) or transfers (including any applicable transfer charge deducted)
from the Fixed Account; less
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5. any surrender charges deducted in the event of a decrease in
Specified Amount; less
6. the portion of monthly deductions made from Fixed Policy Value.
See "The Fixed Account," for a discussion of how interest is credited to
the Fixed Account.
TRANSFERS OF POLICY VALUES
GENERAL. Before the Maturity Date while the Insured is still living and
the Policy is in force, the Owner may, by Written Notice, transfer all or part
any Subaccount Value to another Subaccount(s) (subject to its availability) or
to the Fixed Account, or transfer all or part of Fixed Policy Value to any
Subaccount(s), (subject to its availability) subject to the following
restrictions and the additional restrictions for transfers from the Fixed
Account shown below:
1. the minimum transfer amount is $500 (or, the entire Subaccount
Value or Fixed Policy Value, if less); and
2. a transfer request that would reduce any Subaccount Value or the
Fixed Policy Value below $500 is treated as a transfer request for the
entire Subaccount Value or Fixed Policy Value.
The first 12 transfers during each Contract Year are free. VFL assesses a
transfer processing fee of $25 for each transfer in excess of 12 during a
Contract Year. (See "Charges and Deductions.")
RESTRICTIONS ON TRANSFERS OF FROM THE FIXED ACCOUNT. An Owner may transfer
all or part of the Fixed Policy Value to a Subaccount. Only one transfer may be
made each Policy Year from the Fixed Account to one or more Subaccounts and this
transfer must be at least 12 calendar months after the most recent transfer from
the Fixed Account. An unused transfer option does not carry over to the next
year. The maximum transfer amount is 25% of the Fixed Policy on the date of the
transfer, unless the balance after the transfer is less than $500.
SPECIAL TRANSFER PRIVILEGE. During the first 24 Policy Months following
the date that coverage begins under the Policy, Owners may make one transfer of
the entire Variable Policy Value to the Fixed Account without imposition of the
transfer processing fee or the transfer counting as one of the 12 free transfers
for a Policy Year. Likewise, during the first 24 Policy Months following the
effective date of any Specified Amount increase, Owners may make one transfer of
that portion of the Variable Policy Value attributable to the increase to the
Fixed Account without imposition of the transfer processing fee or the transfer
counting as one of the 12 free transfers for a Policy Year.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Maturity Date while the Insured is still living and
the Policy is in force by Written Notice, an Owner may systematically transfer
(on a monthly, quarterly, semi-annual or annual basis) specified dollar amounts
from the Money Market Subaccount to other Subaccounts. This is known as the
"dollar-cost averaging" method of investment. The fixed-dollar amount purchases
more Units of a Subaccount when their value is lower and fewer Units when their
value is higher. Over time, the cost per Unit averages out to be less than if
all purchases of Units had been made at the highest value and greater than
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if all purchases had been made at the lowest value. The dollar-cost averaging
method of investment reduces the risk of making purchases only when the price of
Units is high. It does not assure a profit or protect against a loss in
declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Maturity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Policy Year. VFL
reserves the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason or to change its features.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested by Written Notice at any time thereafter prior to the Maturity Date
while the Insured is still living and the Policy is in force, an Owner may
instruct VFL to automatically transfer (on a quarterly, semi-annual or annual
basis) Variable Policy Value between and among specified Subaccounts in order to
achieve a particular percentage allocation of Variable Policy Value among such
Subaccounts ("automatic Subaccount Value rebalancing"). Such percentage
allocations must be in whole numbers. Once elected, automatic Subaccount Value
rebalancing begins on the first Valuation Day of the next calendar quarter or
other period (or, if later, the next calendar quarter or other period after the
expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time at least
seven calendar days before the first Valuation Day in a new period. Owners may
specify allocations between and among as many Subaccounts as are available at
the time automatic Subaccount Value rebalancing is elected. Once automatic
Subaccount Value rebalancing has been elected, any subsequent allocation
instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to or termination of automatic
Subaccount Value rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one of the 12 transfers available
without a transfer processing fee during any Policy Year. If automatic
Subaccount Value rebalancing is elected at the same time as the dollar-cost
averaging facility or when the dollar-cost
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averaging facility is being utilized, automatic Subaccount rebalancing will be
postponed until the first Valuation Day in the calendar quarter or other period
following the termination of dollar-cost averaging facility. VFL reserves the
right to discontinue offering the automatic Subaccount Value rebalancing
facility at any time and for any reason or to change its features.
SURRENDER PRIVILEGE
At any time while the Insured is still living and the Policy is in force
prior to the Maturity Date, the Owner may, by Written Notice, surrender it for
its Surrender Value. A surrender is effective as of the date on which a Written
Notice requesting surrender is received at the Service Center. If the Owner
surrenders the Policy during the first 14 Policy Years, or the first 14 Policy
Years following an increase in Specified Amount, VFL will deduct a surrender
charge. (See "Surrender Charge.") Once the Policy is surrendered, all coverage
and other benefits under it cease and it cannot be reinstated.
WITHDRAWAL PRIVILEGE
After the first Policy Year, while the Insured is still living and the
Policy is in force prior to the Maturity Date, an Owner may, by Written Request,
withdraw any part of the Surrender Value of the Policy, subject to certain
conditions. A withdrawal is effective as of the date on which a Written Notice
requesting withdrawal is received at the Service Center. As of that date, Policy
Value is reduced by the amount of the withdrawal plus any applicable surrender
charge. The minimum amount that may be withdrawn is $500. If the Owner has
selected Death Benefit Option 1, VFL will reduce the Specified Amount by the
amount of the withdrawal plus any applicable surrender charge deduction. (See
"Death Benefit Proceeds.")
Unless otherwise indicated in the Written Request for Withdrawal, amounts
withdrawn and surrender charges deducted in connection with the withdrawals are
taken from Subaccount Values and Fixed Policy Value based on the proportion that
each Subaccount Value and the Fixed Policy Value bear to Policy Value. If the
Owner requests a decrease in Specified Amount or requests a change in the Death
Benefit Option as of the same date as a withdrawal request, then the withdrawal
is effected after the decrease in Specified Amount or change in Death Benefit
Option.
Notwithstanding the foregoing, VFL reserves the right to reject a
withdrawal request if the request would cause the Specified Amount to be reduced
below the minimum Specified Amount shown in the Policy. Likewise, VFL reserves
the right to deny a withdrawal request if the request would cause the Policy to
fail to qualify as a life insurance contract under the Code or regulations or
rulings thereunder, as interpreted by VFL.
POLICY LOANS
GENERAL. At any time prior to the Maturity Date while the Insured is still
living and the Policy is in force, the Owner may, by Written Notice, borrow
money from VFL using the Policy as the sole security for the loan provided that
(a) a written loan agreement is signed by the Owner, and (b) the Owner makes a
satisfactory assignment of the Policy to VFL. In taking a loan, an Owner must
borrow at least $500. The maximum amount that an Owner may borrow is 90% of the
Surrender Value of the Policy as of the date of the loan.
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INTEREST. VFL charges interest on amounts borrowed by Owners. The interest
rate charged is 8% and is an effective annual rate compounded annually on the
Policy Anniversary. Interest is charged in arrears from the date of the loan and
is due from Owners on each Policy Anniversary for the prior Policy Year. If the
Owner does not pay such interest when due, the amount of the interest is added
to the outstanding Loan Amount. Thus, unpaid interest is charged interest during
the ensuing Policy Year. For Policies in the 11th Policy Year or later, VFL
charges a preferred 6% effective annual interest rate on amounts borrowed up to
an amount equal to Policy Value less aggregate premium payments made to date.
VFL credits Loan Account Value with interest at an effective annual rate of
6%. On each Policy Anniversary, interest earned on Loan Account Value since the
preceding Anniversary is transferred to the Subaccounts and the Fixed Account.
Unless the Owner specifies otherwise, such transfers are allocated in the same
manner as transfers of collateral to the Loan Account.
LOAN COLLATERAL. When VFL makes a loan to Owners, it transfers an amount
of Cash Value sufficient to secure the loan out of the Subaccounts and the Fixed
Account and into the Loan Account. Owners may specify how this transferred Cash
Value is allocated from among the Subaccount Values and the Fixed Policy Value.
If an Owner does not specify the allocation, VFL makes the allocation based on
the proportion that each Subaccount Value and the Fixed Policy Value bear to the
Cash Value as of the date that the transfer is made. If unpaid interest is due
from an Owner on a Policy Anniversary it is added to the Loan Amount. Cash Value
in the amount of the interest also is transferred to the Loan Account as of that
Anniversary. The Cash Value transferred in connection with unpaid interest is
allocated on the same basis as other Cash Value transferred by VFL to the Loan
Account.
Loan Account Value is recalculated when interest is added to the Loan
Amount, a loan repayment is made, and a new loan is made under Policy.
NON-PAYMENT OF POLICY LOANS. If Loan Account Value exceeds Cash Value,
then the Owner must make either a loan repayment or a premium payment sufficient
to raise the Cash Value or lower the Loan Account Value so that Cash Value
exceeds the Loan Account Value. VFL will send the Owner and any assignee of
record a notice indicating the amount that must be paid. If payment is not
received at the Service Center within 30 days of the notice being mailed, the
Grace Period will begin. (See "Policy Lapse and Reinstatement.") If the Grace
Period expires without the payment being made, then the Policy Lapses.
LOAN REPAYMENT. The Owner may repay a loan or repay any part of a loan at
any time while the Insured is still living and the Policy is in force prior to
the Maturity Date. Upon repayment of any part of a loan, Loan Account Value in
an amount equal to the payment is transferred to the Subaccounts and the Fixed
Account as of the date that the payment is received at the Service Center.
Unless the Owner specifies otherwise, the amount transferred is allocated among
or between the Subaccounts and the Fixed Account in accordance with the Owner's
allocation instructions for Net Premium Payments in effect at that time.
EFFECT OF POLICY LOAN. A loan, whether or not repaid, has a permanent
effect on the Death Benefit and Policy values because the investment results of
the Subaccounts and current interest rates credited on Fixed Policy Value do not
apply to Policy Value in the
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Loan Account. The larger the loan and the longer the loan is outstanding, the
greater will be the effect of Policy Value being held as collateral in the Loan
Account. Depending on the investment results of the Subaccounts or credited
interest rates for the Fixed Account while the loan is outstanding, the effect
could be favorable or unfavorable. Policy loans also may increase the potential
for lapse if investment results of the Subaccounts to which Surrender Value is
allocated is unfavorable. If Loan Account Value exceeds Cash Value, then the
Owner must make either a loan repayment or a premium payment sufficient to raise
the Cash Value or lower the Loan Account Value so that Cash Value exceeds the
Loan Account Value. VFL will send the Owner and any assignee of record a notice
indicating the amount that must be paid. If payment is not received at the
Service Center within 30 days of the notice being mailed, the Grace Period will
begin. If the Grace Period expires without the payment being made, the Policy
Lapses. If a Policy lapses with loans outstanding, certain amounts may be
subject to income tax and a 10% penalty tax. See "Tax Considerations," for a
discussion of the tax treatment of Policy loans. In addition, if a Policy is a
"modified endowment contract," loans may be currently taxable and subject to a
10% penalty tax.
MATURITY BENEFITS
VFL will pay the Surrender Value, if any, to the Owner on the Maturity
Date. In some states, the Maturity Date is the Policy Anniversary nearest the
Insured's 95th birthday. In other states, the Owner may elect to extend the
Policy beyond the Policy Anniversary nearest the Insured's 95th birthday, in
which case the death benefit would be the greater of Cash Value or 101% of the
Policy Value. The tax consequences associated with extending the maturity date
beyond age 100 are unclear. A tax advisor should be consulted on the issue.
DEATH BENEFIT PROCEEDS
Upon receipt of Due Proof of Death of the Insured at the Service Center
while the Policy is in force before the Maturity Date, VFL will pay the Death
Benefit Proceeds to the Beneficiary (or Beneficiaries) or the Contingent
Beneficiary (or Contingent Beneficiaries). VFL pays the Death Benefit Proceeds
in a lump sum unless the Beneficiary (or Contingent Beneficiary) elects to
receive the Proceeds under a Settlement Option. (See "Settlement Options.")
Under certain circumstances, payment of the Death Benefit Proceeds may be
delayed. (See "Suspension or Delay in Payments.")
CALCULATION OF DEATH BENEFIT PROCEEDS. The Death Benefit Proceeds are
determined as of the date of the Insured's death and are equal to:
1. the Death Benefit under the Death Benefit Option selected by the
Owner; plus
2. any death benefit under any rider to the Policy; less
3. any Loan Amount; and less
4. any unpaid monthly deductions if the Insured dies during the Grace
Period.
Under certain circumstances, the amount of the Death Benefit Proceeds may
be further adjusted. (See "VFL's Right to Contest the Policy" and "Misstatement
of Age or Sex.")
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If part or all of the Death Benefit is paid in one sum, VFL will pay
interest on this sum as required by applicable state law from the date of
receipt of due proof of the Insured's death to the date of payment.
DEATH BENEFIT OPTIONS. The Owner may select one of two Death Benefit
Options.
1. Death Benefit Option 1 is the greater of:
(a) the Specified Amount on the date of the Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
2. Death Benefit Option 2 is the greater of:
(a) the Specified Amount plus the Policy Value on the date of the
Insured's death; or
(b) a percentage of the Policy Value on the date of the Insured's
death as indicated in the Table of Policy Value Percentages in the
Appendix.
The specified percentage is 250% if the Insured dies at Attained Age 40 or
less, and decreases with each year of Attained Age thereafter so that the
percentage is 100% if the Insured dies at an Attained Age of 95. A table showing
these percentages for Attained Ages 0 to 94 and examples of Death Benefit
calculations for both Death Benefit Options are found in the Appendix.
Under Death Benefit Option 1, the Death Benefit remains level at the
Specified Amount unless the Policy Value multiplied by the specified percentage
exceeds that Specified Amount, in which event the Death Benefit will vary as the
Policy Value varies. Owners who are satisfied with the amount of their insurance
coverage under the Policy and who prefer to have favorable investment
performance and additional Net Premium Payments reflected in higher Policy
Value, rather than increased Death Benefits, generally should select Option 1.
Under Death Benefit Option 2, the Death Benefit always varies as the Policy
Value varies (although it is never less than the Specified Amount). Owners who
prefer to have favorable investment performance and additional Net Premium
Payments reflected in increased Death Benefits generally should select Option 2.
CHANGING THE DEATH BENEFIT OPTION. After the first Policy Anniversary
while the Insured is still living and the Policy is in force prior to the
Maturity Date, the Owner may request a change in the Death Benefit Option. A
Death Benefit Option change becomes effective on the Monthly Anniversary Day on
or next following the date that VFL accepts a request for the change. VFL may
require satisfactory evidence of insurability before permitting a change in the
Death Benefit Option. After a change in Death Benefit Option, VFL will send the
Owner a supplemental policy specifications page showing the new Death Benefit
and Specified Amount. Changing the Death Benefit Option could have federal tax
consequences. (See "TAX CONSIDERATIONS.")
INCREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary, while
the Insured is living and the Policy is in force prior to the Maturity Date, the
Owner may submit a supplemental application for an increase in Specified Amount.
VFL requires evidence of insurability before agreeing to an increase in
Specified Amount and may, depending upon the circumstances, also require
additional premium payments or the repayment of part or all of any Loan Amount
under the Policy. The Insured's Attained Age at the time of the
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increase may not exceed 75. The amount of any requested increase in Specified
Amount must be at least $25,000 and not more than the amount that would increase
the total Specified Amount above the maximum specified amount for which VFL
would issue a new Policy.
An increase in Specified Amount causes an increase in the Minimum Monthly
Premium Payment. Each increase in Specified Amount has a Target Premium Payment
and a Guideline Annual Premium Payment associated with it.
Any increase in Specified Amount is effective as of the date that VFL
approves it. Each increase in Specified Amount creates an increment of Specified
Amount to which a portion of Policy Value is thereafter attributed for the
purpose of computing sales surrender charges, the Net Amount at Risk and the
monthly cost of insurance charge and for the purpose of exercising the Special
Transfer Privilege. An additional monthly cost of insurance charge is deducted
for each additional increment in Specified Amount. This additional cost of
insurance charge is deducted from Policy Value attributable to the increase in
Specified Amount. Each increase in Specified Amount also results in additional
surrender charges. After an increase in Specified Amount, VFL will send the
Owner a supplemental policy specifications page showing the effective date of
the increase, the monthly cost of insurance charge for the increase, additional
sales surrender charges arising as a result of the increase and any changes to
premium payment information from the previous or original policy specifications
page.
The cancellation privilege applies to any increase in Specified Amount
except that when no additional premium payments are required for an increase,
only the monthly deduction(s) for the increase made before the cancellation is
refunded if the increase is cancelled. (See "Cancellation Privilege.")
Increasing the Specified Amount could have federal tax consequences. (See "Tax
Considerations.")
DECREASE OF SPECIFIED AMOUNT. After the first Policy Anniversary while the
Insured is still living and the Policy is in force prior to the Maturity Date,
the Owner may by Written Notice request a decrease of Specified Amount. The
amount of any requested decrease in Specified Amount must be at least $25,000
and not be more than the amount that would decrease the total Specified Amount
below $100,000. Specified Amount may not be decreased when, to do so, would
cause Surrender Value to fall below zero. Any decrease becomes effective on the
Monthly Anniversary Day on or next following the date that VFL accepts the
request for the decrease. The decrease is first applied to reduce prior
increases in Specified Amount in the reverse order in which they occurred. After
all prior increases in Specified Amount have been eliminated, a decrease is
applied to reduce the initial Specified Amount.
A decrease of Specified Amount may result in the imposition of a surrender
charge. In this event, the charge is deducted from Policy Value as of the
effective date of the decrease. (See "Charges and Deductions.") A decrease in
Specified Amount causes a decrease in the Minimum Monthly Premium Payment and in
the Target Premium Payment and Guideline Annual Premium Payment associated with
the increment of Specified Amount being decreased. After a decrease in Specified
Amount, VFL will send the Owner a supplemental policy specifications page
showing the effective date of the decrease, the monthly cost of insurance charge
after the decrease, surrender charges deducted as a result of the decrease, and
any changes to premium payment information from the previous or original
specifications page.
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VFL reserves the right to deny a request for a decrease in Specified Amount
for 12 months following the most recent increase in Specified Amount and to
limit decreases in Specified Amount to one per Policy Year.
If a decrease in the Specified Amount would result in total premiums paid
exceeding the premium limitations prescribed under current tax law to qualify
the Policy as a life insurance contract, VFL will contact the Owner and inquire
whether he or she wants to receive the excess above the premium limitations or
to forego the decrease. VFL reserves the right to decline a requested decrease
in the Specified Amount if compliance with the guideline premium limitations
under current tax law would require payment of excess premium to the Owner in an
amount that would exceed the Surrender Value under the Policy. Decreasing the
Specified Amount could have federal tax consequences. (See "Tax
Considerations.")
SETTLEMENT OPTIONS
SELECTING A SETTLEMENT OPTION. VFL pays Owners or Beneficiaries (or
Contingent Beneficiaries), as appropriate, the amount of any surrender,
withdrawal, or Death Benefit Proceeds in a lump sum unless the Owner has, by
Written Notice, selected one of the Settlement Options described below. If the
amount being paid by VFL is less than $5,000, however, payment is only made in a
lump sum. In addition, if the Owner or Beneficiary (or Contingent Beneficiary)
receiving payment is an executor, administrator, trustee, or not a natural
person, payment is made in a lump sum unless VFL specifically consents to
payment under one of the Settlement Options.
Owners may select a Settlement Option for payment of the Death Benefit
Proceeds in lieu of a lump sum, at any time while the Insured is still living
and the Policy is in force prior to the Maturity Date. If no election is made by
the Owner before the Insured's death, then, upon the Insured's death, the
Beneficiary (or Contingent Beneficiary) may elect a Settlement Option before the
Death Benefit Proceeds are paid. The Owner also may elect to receive the
Surrender Value of a Policy or the amount of a withdrawal in the form of a
Settlement Option at any time before the payment of the Surrender Value or
withdrawal. For purposes of describing the Settlement Options, the term "Payee"
means Owner or Beneficiary (or Contingent Beneficiary), as appropriate.
FREQUENCY OF PAYMENTS. If Settlement Option 1, 2, or 3 is selected,
payments will be made every 1 year, 6 months, 3 months, or every month. The
Payee must specify the payment frequency when selecting a settlement option. If
settlement option 4, 5, or 6 is selected, payments will be made monthly. If
payment under any option would be less than $50, VFL will adjust the frequency
of payments so that each payment is at least $50.
FIRST PAYMENT. Depending on the payment frequency selected, the first
payment under Settlement Option 1 is made as of 1 year, 6 months, 3 months, or 1
month from the date of the Insured's death. Depending on the payment frequency
selected and subject to VFL's right to suspend or delay payments (see
"Suspension or Delay in Payments"), the first payment under Settlement Option 1
is made as of 1 year, 6 months, 3 months, or 1 month from the effective date of
any surrender or withdrawal. The first payment under any other Settlement Option
is made, subject to VFL's right to suspend or delay payments, as of the date of
the Insured's death or the effective date of any surrender or withdrawal.
BETTERMENT OF RATES. If, under Settlement Options 4, 5, or 6, VFL's
regular annuity purchase rates on the date of the Insured's death or the
effective date of any surrender or
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<PAGE> 34
withdrawal are more favorable than those upon which Options 4, 5, or 6 are
based, VFL shall compute payments using the regular annuity rates. VFL will
furnish information about the regular annuity rates upon request.
DEATH OF PAYEE. Unless instructed otherwise at the time that the
Settlement Option is selected, at the death of the Payee VFL pays the amounts
below in a lump sum to the Payee's estate:
1. Under Settlement Option 1, the amount left on deposit with VFL to
accumulate interest.
2. Under Settlement Option 2, 3, or 5, the commuted value of the
amount payable at the Payee's death as provided under the Option selected.
The commuted value is based on interest at the rate that would have been
used to compute the first of the remaining Payments under that option.
OPTION 1: INTEREST PAYMENTS. VFL holds the Death Benefit Proceeds (or the
Surrender Value or the amount of a withdrawal) as principal and pays interest to
the Payee. The interest rate is 3% per year compounded annually. VFL pays
interest every 1 year, 6 months, 3 months, or 1 month, as specified at the time
this option is selected. At the death of the Payee, the value of the remaining
payments are paid as stated above.
OPTION 2: PAYMENTS OF A SPECIFIED AMOUNT. VFL pays the Death Benefit
Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments every 1 year, 6 months, 3 months, or 1 month. The amount and frequency
of the payments is specified at the time this option is selected. After each
payment, interest is added to the remaining amount applied under this option
that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, VFL pays the value of the remaining
payments as stated above.
OPTION 3: INSTALLMENTS FOR A SPECIFIED PERIOD. VFL pays the Death Benefit
Proceeds (or the Surrender Value or the amount of a withdrawal) in equal
payments for the number of years specified when the option is selected. Payments
are made every 1 year, 6 months, 3 months, or 1 month, as specified when the
option is selected. The amount of each payment for each $1,000 applied under
this option is shown in Policy. These amounts are calculated at an interest rate
of 3% per year compounded annually. If the Payee dies before the expiration of
the specified number of years, VFL pays the value of the remaining payments as
stated above.
OPTION 4: LIFE ANNUITY. VFL makes monthly payments to the Payee for as
long as he or she lives. The amount of each payment for each $1,000 applied
under this option is shown in the Policy.
OPTION 5: LIFE ANNUITY WITH PERIOD CERTAIN. VFL makes monthly payments to
the Payee for as long as the Payee lives. At the time this option is selected, a
period certain of 5, 10, 15, or 20 years must also be selected. If the Payee
dies before the specified period certain ends, the payments to the Payee's
estate will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected. The amount of
each payment for each period certain available is shown in the Policy. The
amounts shown are for each $1,000 applied under this option. If at any age the
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amount of the payments is the same for two or more periods certain, payment will
be made as if the longest period certain was selected.
OPTION 6: JOINT LIFE AND SURVIVORSHIP ANNUITY. VFL makes monthly payments
to two Payees while both are living. After the death of either Payee, payments
continue to the other Payee for as long as the other Payee lives. The amount of
each payment for each $1,000 applied under this option is shown in the Policy.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by VFL, an Owner
may make transfers or change allocation instructions by telephoning the Service
Center. A telephone authorization form received by VFL at the Service Center is
valid until it is rescinded or revoked by Written Notice or until a subsequently
dated form signed by the Owner is received at the Service Center. VFL will send
Owners a written confirmation of all transfers and allocation instructions made
pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If VFL follows these procedures, it is not
liable for any losses due to unauthorized or fraudulent transactions. VFL
reserves the right to suspend telephone transaction privileges at any time for
any reason.
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THE FIXED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 nor has the
Fixed Account been registered as an investment company under the Investment
Company Act of 1940. Accordingly, neither the Fixed Account nor any interests
therein are subject to the provisions of these Acts and, as a result, the staff
of the Securities and Exchange Commission has not reviewed the disclosure in
this Prospectus relating to the Fixed Account. The disclosure regarding the
Fixed Account may, however, be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
THE FIXED ACCOUNT
The Fixed Account consists of assets owned by VFL with respect to the
Policies, other than those in the Variable Account. It is part of VFL's General
Account assets. VFL's general account assets are used to support its insurance
and annuity obligations other than those supported by separate accounts, and are
subject to the claims of VFL's general creditors. Subject to applicable law, VFL
has sole discretion over the investment of the assets of the Fixed Account. The
Loan Account is part of the Fixed Account. Guarantees of Net Premiums allocated
to the Fixed Account, and interest credited thereto, are supported by VFL. The
Fixed Policy Value is calculated daily. (See "Fixed Policy Value.")
INTEREST CREDITED ON FIXED POLICY VALUE
VFL guarantees that it will credit interest on Fixed Policy Value at an
effective annual rate of not less than 4.0%. In its discretion, VFL will credit
interest at rates higher than 4.0%. VFL may vary the way in which it credits
interest on Fixed Policy Value from time to time. The following is a description
of VFL's current method for crediting interest on Fixed Policy Value.
"FULL-YEAR" RATES. Before the beginning of each calendar year, VFL
publishes an effective annual rate at which it will credit Fixed Policy Value
under the Policies for that year. Fixed Policy Values at the beginning of the
calendar year under all Policies are credited with that rate of interest for the
entire calendar year.
"NEW-MONEY" RATES. VFL credits Net Premium Payments allocated to and
Policy Value transferred to the Fixed Account during a calendar year with
interest at an effective annual rate in effect on the date that the Net Premium
Payment is received at the Service Center or the date that as of which the
transfer is made. These amounts are credited with interest at this rate until
the end of the calendar year. VFL publishes this "new money" rate from time to
time during a calendar year and may change the "new money" rate at its
discretion throughout any calendar year.
For purposes of crediting interest, Policy Value deducted, transferred, or
withdrawn from the Fixed Account, is accounted for on a "first-in, first-out"
basis.
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CHARGES AND DEDUCTIONS
SALES CHARGES
VFL deducts a sales charge from certain premium payments. In Policy Years 1
through 10, the sales charge deducted is 4% of premium payments received up to a
Target Premium Payment for the initial Specified Amount. In Policy Year 11 and
each Policy Year thereafter, the sales charge deducted is 2% of premium payments
received up to a Target Premium Payment for the initial Specified Amount. Absent
an increase in Specified Amount, no sales charge is deducted in any Policy Year
from premium payments in excess of a Target Premium Payment for the initial
Specified Amount.
If the Owner increases the Specified Amount, a Target Premium Payment is
established for the increase. Therefore, there is a Target Premium Payment for
each increment of Specified Amount. VFL deducts the sales charge from premium
payments attributable to the increase. For purposes of computing and deducting
sales charges, all Premium Payments made after an increase in Specified Amount
are apportioned to each increment of Specified Amount on the basis of the
relative Guideline Annual Premium Payments for each such increment. For the
first ten 12-month periods following an increase in Specified Amount, the charge
is 4% of premium payments made in each such 12-month period attributable to the
increase up to a Target Premium Payment for the increase. For subsequent
12-month periods, the sales charge is 2% of premium payments made during the
12-month period attributable to the increase in Specified Amount up to a Target
Premium Payment for the increase.
PREMIUM TAX CHARGE
A 2.25% charge for state and local premium taxes is also deducted from each
premium payment. The state and local premium tax charge reimburses VFL for
premium taxes associated with the Policies. VFL expects to pay an average state
and local premium tax rate of approximately 2.25% of premium payments for all
states. This tax can range generally from 2% to 16% of premium payments and
generally varies by the applicant's state of residence.
FEDERAL TAX CHARGE
VFL also deducts a charge for federal taxes from each premium payment. This
charge is 1.25% of all premium payments and compensates VFL for its federal
income tax liability resulting from Section 848 of the Code. The amount of this
charge, which may be increased or decreased, is reasonable in relation to VFL's
increased federal tax burden under Section 848 resulting from the receipt of
premium payments under the Policies.
SURRENDER CHARGE
GENERAL. If the Owner surrenders the Policy, makes a withdrawal, decreases
the Specified Amount or if the Policy lapses, VFL may deduct a surrender charge.
The purpose of the surrender charge is to reimburse VFL for some of the expenses
incurred in the distribution of the Policies. The surrender charge consists of
two parts, a sales
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surrender charge (i.e., a contingent deferred sales charge) and an
administration surrender charge. The total surrender charge declines over time
as follows:
100% of the total Surrender Charge in Policy Years 1 through 6
80% of the total Surrender Charge in Policy Year 7
70% of the total Surrender Charge in Policy Year 8
60% of the total Surrender Charge in Policy Year 9
50% of the total Surrender Charge in Policy Year 10
40% of the total Surrender Charge in Policy Year 11
30% of the total Surrender Charge in Policy Year 12
20% of the total Surrender Charge in Policy Year 13
10% of the total Surrender Charge in Policy Year 14
No Charge in Policy Years 15 and later
DEDUCTION OF THE SURRENDER CHARGE. If assessed upon the surrender of the
Policy, the surrender charge reduces the amount otherwise paid to the Owner. If
assessed upon Lapse of the Policy, the amount of the charge is not restored to
Policy Value in the event that the Policy is reinstated. If assessed upon a
decrease in Specified Amount, the charge is deducted from the remaining Policy
Value and reduces the amount of any remaining applicable surrender charge. If
assessed on a withdrawal, the surrender charge is deducted from the remaining
Policy Value and reduces the amount of any remaining applicable surrender
charge. Unless otherwise indicated in the request for a decrease or a
withdrawal, surrender charges deducted in connection with decreases in Specified
Amount or withdrawals are taken from Subaccount Values and Fixed Policy Value
based on the proportion that each Subaccount Value and the Fixed Policy Value
bear to the Policy Value before the deduction.
If taken upon a decrease in Specified Amount, the surrender charge is the
pro-rata portion of the total surrender charge based on the ratio that the
Specified Amount decrease bears to the total Specified Amount before the
decrease. If assessed upon a withdrawal, the surrender charge is the pro-rata
portion of the total surrender charge based on the ratio that the withdrawn
amount bears to the total Surrender Value before the withdrawal.
SALES SURRENDER CHARGE FOR DECREASING INITIAL SPECIFIED AMOUNT. If an
Owner elects to decrease the Specified Amount selected on the Policy Effective
Date, then a sales surrender charge will be assessed. The sales surrender charge
shall equal the sum of the premium payments as set forth below, up to a maximum
of 100% of the Target Premium Payment for the initial Specified Amount:
34% of the premium payments made in the first Policy Year; plus
33% of the premium payments made in any of the Policy Years 2 through
6
However, VFL will limit the sales surrender charge, calculated above, so
that the charge calculated for Policy Years 1 and 2 is never more than the sum
of:
26% of the first Guideline Annual Premium payment for the initial
Specified Amount; plus
6% of the second Guideline Annual Premium payment for the initial
Specified Amount; plus
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5% of all additional Premium Payments attributable to the initial
Specified Amount.
ADMINISTRATION SURRENDER CHARGE. The Administration Surrender Charge is
$2.00 per $1,000 of initial Specified Amount for Policies on Insureds age 25 or
less on the Policy Effective Date, and $5.00 per $1,000 of initial Specified
Amount for Policies on Insureds age 35 or older on the Policy Effective Date.
For Insureds of other ages, the Administration Surrender Charge is the following
per $1,000 of Specified Amount: age 26 -- $2.30, age 27 -- $2.60, age
28 -- $2.90, age 29 -- $3.20, age 30 -- $3.50, age 31 -- $3.80, age 32 -- $4.10,
age 33 -- $4.40, age 34 -- $4.70.
SALES SURRENDER CHARGE IN CONNECTION WITH INCREASES IN SPECIFIED
AMOUNT. The surrender charge is computed and assessed separately for the
initial Specified Amount and for each increase in Specified Amount. Only the
sales charge component of the surrender charge, however, is assessed for an
increase in Specified Amount. For purposes of computing and assessing the sales
surrender charge attributable to an increase in Specified Amount, all premium
payments made after an increase in Specified Amount are apportioned to each
increment of Specified Amount on the basis of the relative Guideline Annual
Premium Payments for each such increment. Likewise, Policy Value is apportioned
to each increment of Specified Amount on the basis of the relative Guideline
Annual Premium Payments for each such increment. The sales surrender charge for
an increase in Specified Amount is as follows: In the first 12 months following
the increase, the sales surrender charge is 34% of premium payments received up
to a Target Premium Payment for the increase in Specified Amount, and, in each
of the five subsequent 12-month periods following the increase, the charge is
33% of premium payments received up to a Target Premium Payment for the increase
in Specified Amount in each such 12-month period until the total sales surrender
charge for the increase equals 100% of a single Target Premium Payment for the
increase in Specified Amount. Notwithstanding the foregoing, during the first 24
months following an increase in Specified Amount, the sales surrender charge for
the increase is never more than the sum of: (1) 26% of the first Guideline
Annual Premium Payment for the increase in Specified Amount, (2) 6% of the
second Guideline Annual Premium Payment for the increase in Specified Amount,
and (3) 5% of all additional Premium Payments attributable to the increase in
Specified Amount. In addition, the sales surrender charge for an increase in
Specified Amount declines over the 7th through the 15th 12-month period
following the increase in the same manner as the surrender charge in connection
with the initial Specified Amount.
OTHER TAXES
Currently a charge for federal income taxes is not deducted from the
Variable Account of the Policy Value. VFL reserves the right in the future to
make a charge to the Variable Account or the Policy Value for any federal, state
or local income taxes that VFL incurs that it determines to be properly
attributable to the Variable Account of the Policies. VFL will notify Owners
promptly of any such charge.
MONTHLY DEDUCTION
The monthly deduction is a charge made by VFL as of the Policy Effective
Date and every Monthly Anniversary Day thereafter by reducing Subaccount Values
(i.e., liquidating Units) and Fixed Policy Value in the proportion that each
Subaccount Value and Fixed Policy Value bears to Policy Value. The monthly
deduction consists of (1) the monthly
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cost of insurance charge, (2) the monthly policy fee, (3) the monthly first-year
issue fee (when applicable), (4) the monthly Specified Amount increase fee (when
applicable), and (5) the cost of any riders (when applicable).
MONTHLY COST OF INSURANCE CHARGE. The monthly cost of insurance charge is
computed at the beginning of each Policy month by subtracting 2 from 1 and
multiplying the result by 3, where:
1. is the Death Benefit on the first day of the Policy month divided
by 1 plus the monthly equivalent of 4.0%;
2. is the Policy Value before deduction of the monthly policy fee, the
monthly first-year issue fee (when applicable), the monthly Specified
Amount increase fee (when applicable), and the cost of any riders (when
applicable); and
3. is the cost of insurance rate as described below.
The monthly cost of insurance charge is computed separately for the initial
Specified Amount and for each increment of Specified Amount resulting from
increases in Specified Amount. For the purpose of computing the Net Amount at
Risk (the result of subtracting 2 from 1 above), Policy Value is apportioned to
each increment of Specified Amount on the basis of the relative Guideline Annual
Premium Payments for each such increment. Where the Death Benefit is a percent
of Policy Value the monthly cost of insurance charge is computed separately, and
Policy Value is apportioned to, an increment of Death Benefit corresponding to
each increment of Specified Amount.
The monthly cost of insurance rate for a Policy is based on the sex,
Attained Age, Issue Age, risk class, and number of years that the Policy or
increment of Specified Amount has been in force. The Issue Age of the Insured
will usually be different for each increase in Specified Amount. VFL reviews
monthly cost of insurance rates on an ongoing basis (at least once every 5
years) based on its expectations as to future mortality experience, investment
earnings, persistency, taxes and other expenses. Any changes in cost of
insurance rates are made on a uniform basis for Insureds of the same class as
defined by sex, Attained Age, Issue Age, risk class, and Policy duration. VFL
guarantees that the cost of insurance rates used to calculate the monthly cost
of insurance charge will not exceed the maximum cost of insurance rates set
forth in the Policies.
VFL places each Insured in a risk class when a Policy is first
underwritten. This risk class applies to the initial Specified Amount. When an
Owner requests an increase in Specified Amount, VFL conducts additional
underwriting before approving the increase to determine whether a different risk
class should apply to the increase. If the risk class for the increase would
have a lower cost of insurance rate than the class for the initial Specified
Amount (or a previous increase), the risk class for the increase is applied to
the initial Specified Amount (or any previous increases in Specified Amount). If
the risk class for the increase would have a higher cost of insurance rate than
the class for the initial Specified Amount (or a previous increase), then the
risk class for the increase only applies to the increase in Specified Amount.
In connection with the cost of insurance rates guaranteed in the Policy,
VFL places Insureds into standard smoker and standard nonsmoker risk classes.
The guaranteed rates for standard classes are based on the 1980 Commissioners'
Standard Ordinary Mortality Tables, Male or Female, Smoker or Nonsmoker
Mortality Rates ("1980 CSO Tables"). The guaranteed rates for substandard
classes are based on multiples of or additions to the
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1980 CSO Tables. In connection with current cost of insurance rates, VFL places
Insureds into the following risk classes: standard smoker, standard nonsmoker,
preferred smoker, preferred nonsmoker and preferred plus nonsmoker.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker class are less than or equal to rates for an Insured of the same age
and sex in the same smoker class. Cost of insurance rates (whether guaranteed or
current) for an Insured in a nonsmoker or smoker standard class are generally
lower than guaranteed rates for an Insured of the same age and sex and smoking
status in a substandard class.
MONTHLY POLICY FEE, MONTHLY FIRST-YEAR ISSUE FEE, AND MONTHLY SPECIFIED
AMOUNT INCREASE FEE. These charges compensate VFL for administration expenses
associated with the Policies and the Variable Account. These expenses relate to
premium payment billing and collection, recordkeeping, processing death benefit
claims, Policy loans, Policy changes, reporting and overhead costs, processing
applications and establishing Policy records. The monthly policy fee is $6.00
per month. The monthly first-year issue fee is $20.00 per month during the first
Policy Year, and the monthly Specified Amount increase fee is $10.00 per month
for the first 12 months after an increase in Specified Amount.
SUPPLEMENTAL BENEFIT AND/OR RIDER CHARGES. See "Supplemental Benefits
and/or Riders."
DAILY MORTALITY AND EXPENSE RISK CHARGE
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the Policy.
The daily charge is at the rate of 0.002477% (approximately equivalent to an
effective annual rate of 0.90%) of the net assets of the Variable Account during
the first 10 Policy Years and .001236% (approximately equivalent to an effective
annual rate of 0.45%) of the net assets of the Variable Account during Policy
Years 11 and thereafter. During the first 10 Policy Years, approximately .35% of
this annual charge is for the assumption of mortality risk and .55% is for the
assumption of expense risk. During Policy Years 11 and thereafter, approximately
.35% of this annual charge is for the assumption of mortality risk and .10% is
for the assumption of expense risk.
The mortality risk that VFL assumes is the risk that Insureds, as a group,
will live for a shorter period of time than VFL estimated when it established
the guaranteed costs of insurance rates in the Policy. Because of these
guarantees, each Owner is assured that the morbidity of a particular Insured
will not have an adverse effect on the Death Benefit Proceeds that a Beneficiary
would receive. The expense risk that VFL assumes is the risk that the monthly
Policy fee, monthly first-year issue fee, and monthly Specified Amount increase
fee (and the transfer processing fee, imposed) may be insufficient to cover the
actual expenses of administering the Policies.
TRANSFER PROCESSING FEE
The first 12 transfers during each Policy Year are free. VFL assesses a
Transfer Processing Fee of $25 for each transfer in excess of 12 during a Policy
Year. For the purposes of assessing the Transfer Processing Fee, each Written
Notice of transfer is considered to be one transfer, regardless of the number of
Subaccounts affected by the transfer. The Transfer Processing Fee is deducted
from the amount being transferred.
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FUND EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory (management) fees and other expenses incurred by the corresponding Fund
in which the Subaccount invests. See the prospectus for the Funds. For a summary
of investment advisory fees and other expenses as a percentage of Fund average
net assets, see "Fee Table Annual Fund Expenses" on page 5.
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OTHER POLICY BENEFITS AND PROVISIONS
OWNERSHIP
GENERAL. The Policy belongs to the Owner. An Owner may exercise all of the
rights and options described in the Policy. The Insured is the Owner unless the
application specifies a different person as Owner.
CHANGING THE OWNER. The Owner may change the Owner by Written Notice at
any time while the Insured is alive and the Policy is in force prior to the
Maturity Date. A change of Ownership is effective as of the date that the
Written Notice is signed; however, VFL is not liable for payments it makes
before it receives a Written Notice of a change in Ownership. A change in Owner
may have significant tax consequences. (See "TAX CONSIDERATIONS.")
CONTINGENT OWNER. If the Owner is not the Insured, he or she may name a
Contingent Owner in the application or by subsequent Written Notice. The
Contingent Owner becomes the Owner in the event that the Owner dies before the
Insured. If no Contingent Owner survives the Owner, then upon the death of the
last surviving Owner, that Owner's estate becomes the Owner.
ASSIGNMENT. By Written Notice the Owner may assign his or her rights under
this Policy. VFL is not bound by the assignment unless it receives a duplicate
of the original assignment at the Service Center. VFL is not responsible for the
validity or sufficiency of any assignment and is not liable for any payment it
makes before receipt of the duplicate original assignment. An assignment does
not change or revoke the Beneficiary designation in effect at the time that the
assignment is made. If an assignment is absolute, the Owner's rights and
privileges under the Policy, including any right to change the Beneficiary, pass
to the assignee. If an assignment is collateral, the collateral assignee has
priority over the interest of any revocable Beneficiary or revocable payee under
any optional method of settlement selected by the Owner. Any claim under any
assignment is subject to proof of interest and the extent of the assignment. An
assignment is subject to any Loan Amount.
SELECTING THE BENEFICIARY. The Owner designates the Beneficiary in the
application. Any Beneficiary designation is revocable unless otherwise stated in
the designation. Owners may designate Contingent Beneficiaries. Where more than
one Beneficiary or more than one Contingent Beneficiary is designated, each
Beneficiary or Contingent Beneficiary, as appropriate, shares in any Death
Benefit Proceeds equally unless the Beneficiary designation states otherwise.
CHANGING THE BENEFICIARY. The Owner may change the Beneficiary by Written
Notice at any time while the Insured is alive and the Policy is in force before
the Maturity Date. If, however, the Owner previously irrevocably named a
Beneficiary, that Beneficiary's written consent must be provided to VFL before a
new Beneficiary is designated. Any change of Beneficiary is effective as of the
date Written Notice is signed by the Owner but VFL is not liable for any
payments it makes under the Policy prior to the time it receives Written Notice
of any Beneficiary change.
VFL'S RIGHT TO CONTEST THE POLICY
VFL has the right to contest the validity of the Policy or to resist a
claim under it on the basis of any material misrepresentation of a fact stated
in the application or any
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supplemental application. VFL also has the right to contest the validity of any
increase of Specified Amount or other change to the Policy on the basis of any
material misrepresentation of a fact stated in the application (or supplemental
application) for such increase in coverage or change. In issuing this Policy,
VFL relies on all statements made by or for the Insured in the application or in
a supplemental application. In the absence of fraud, VFL considers statements
made in the application(s) to be representations and not warranties.
In the absence of fraud, VFL cannot bring any legal action to contest the
validity of the Policy after it has been in force during the lifetime of the
Insured for two years from the Policy Effective Date, or if reinstated, for two
years from the date of reinstatement. Likewise, VFL cannot contest any increase
in coverage effective after the Policy Effective Date, or any reinstatement
thereof, after such increase or reinstatement has been in force during the
lifetime of the Insured for two years from its effective date.
SUICIDE EXCLUSION
If the Insured commits suicide, while sane or insane, within two years of
the Policy Effective Date, VFL's liability is limited to an amount equal to the
Policy Value less any Loan Amount. VFL will pay this amount to the Beneficiary
in one sum.
If the Insured commits suicide, while sane or insane, within two years from
the effective date of any increase in Specified Amount, VFL's liability with
respect to that increase is limited to an amount equal to the cost of insurance
attributable to the increase from the effective date of the increase to the date
of death.
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Insured has been stated incorrectly in the
application or any supplemental application, VFL will adjust the Death Benefit
and any benefits provided by rider or endorsement it pays under this Policy to
the amount that would have been payable at the correct age and sex based on the
most recent deduction for cost of insurance and the cost of any benefits
provided by rider or endorsement. If the age of the Insured has been overstated
or understated, VFL will recalculate the Policy Value using the cost of
insurance (and the cost of benefits provided by rider or endorsement) based on
the Insured's correct age and sex.
MODIFICATION OF THE POLICY
Only an officer of VFL may modify this Policy or waive any of VFL's rights
or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind VFL by making any promise not contained in this
Policy.
Upon notice to the Owner, VFL may modify the Policy to:
1. conform the Policy or the operations of VFL or of the Variable
Account to the requirements of any law (or regulation issued by a
government agent) to which the Policy, VFL or the Variable Account is
subject);
2. assure continued qualification of the Policy as a life insurance
contract under the Code; or
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3. reflect a change (permitted by the Policy) in the operation of the
Variable Account.
In the event of any such modification, VFL will make appropriate
endorsements to the Policy. If any provision of the Policy conflicts with the
laws of a jurisdiction that govern the Policy, the Policy provides that such
provision be deemed to be amended to conform with such laws.
SUSPENSION OR DELAY IN PAYMENTS
VFL usually pays the amounts of any surrender, withdrawals, Death Benefit
Proceeds, or settlement options within seven business days after receipt of all
applicable Written Notices and/or Due Proofs of Death. However, VFL can postpone
such payments if:
1. the New York Stock Exchange is closed, other than customary weekend
and holiday closing, or trading on the exchange is restricted as determined
by the SEC; or
2. the SEC permits, by an order, the postponement for the protection
of Owners; or
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Variable Account or the determination of
their value not reasonably practicable.
If a recent check or draft has been submitted, VFL has the right to defer
payment of surrenders, withdrawals, Death Benefit Proceeds, or payments under a
settlement option until such check or draft has been honored.
VFL has the right to defer payment of any surrender, withdrawal, or
transfer of Fixed Policy Value for up to six months from the date of receipt of
your Written Notice.
REPORTS TO OWNERS
At least annually, or more often as required by law, VFL will mail to
Owners at their last known address a report showing the following items as of
the end of the report period:
1. the period covered by the report;
2. the current Policy Value, Cash Value and Surrender Value;
3. the current Variable Policy Value (including each Subaccount
Value), Fixed Policy Value and Loan Account Value;
4. the current Loan Amount;
5. any premium payments, withdrawals, or surrenders made, Death
Benefit Proceeds paid and charges deducted since the last report;
6. current Net Premium Payment allocations; and
7. any other information required by law.
Owners may request additional copies of reports from VFL, but VFL reserves
the right to charge a fee for such additional copies. In addition, VFL will send
written confirmations of premium payments and other financial transactions
requested by Owners.
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Owners will also be sent copies of the annual and semi-annual report to
shareholders for each Fund in which they are indirectly invested.
SUPPLEMENTAL BENEFITS AND/OR RIDERS
The following supplemental benefits and/or riders may be available and may
be added to a Policy. The supplemental benefits and/or riders may not be
available in all states. Monthly charges for these benefits and/or riders are
deducted from Policy Value as part of the monthly deduction. The supplemental
benefits and/or riders available with the Policies provide fixed benefits that
do not vary with the investment experience of the Variable Account.
CHILDREN'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of a covered child. This rider has no cash value.
SPOUSE'S TERM LIFE INSURANCE RIDER. This rider provides a death benefit
payable upon the death of the Insured's spouse. This rider has no cash value.
DISABILITY BENEFIT RIDER. This rider provides for the waiver of the
monthly deduction under the Policy during the total disability of the Owner.
LONG TERM CARE MONTHLY BENEFIT RIDER. This rider provides a monthly
benefit payable while the Insured is confined in a long term care facility for
up to a stated maximum benefit period. This rider has no cash value.
ADDITIONAL TERM LIFE INSURANCE RIDER. This rider provides an additional
death benefit payable upon the death of the Insured. This rider has no cash
value.
OTHER INSURED TERM LIFE INSURANCE RIDER. This rider provides a death
benefit payable upon the death of an Other Insured Person named in the Policy.
This rider has no cash value.
IMMINENT DEATH RIDER. This rider provides for the accelerated payment of a
portion of the death benefit upon evidence of the Insured's imminent death
(within six months). This rider has no cash value.
Additional rules and limits apply to these supplemental benefits and/or
riders.
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<PAGE> 47
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon VFL's understanding of the
present federal income tax laws. No representation is made as to the likelihood
of continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under federal tax law, a Policy must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements should be applied is limited. Nevertheless, VFL believes that
Policies issued on a standard premium class basis should satisfy the applicable
requirements. There is less guidance, however, with respect to Policies issued
on a substandard basis, and it is not clear whether such Policies will in all
cases satisfy the applicable requirements, particularly if the Owner pays the
full amount of premiums permitted under the Policy. If it is subsequently
determined that a Policy does not satisfy the applicable requirements, we may
take appropriate steps to bring the Policy into compliance with such
requirements and we reserve the right to restrict Policy transactions in order
to do so.
In certain circumstances, owners of variable life insurance contracts have
been considered for federal income tax purposes to be the owners of the assets
of the separate account supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the separate account assets. There is little guidance in this area, and some
features of the Policies, such as the flexibility of an Owner to allocate
premium payments and Policy Value and the narrow investment objective of certain
Funds, have not been explicitly addressed in published rulings. While VFL
believes that the Policies do not give Owners investment control over Separate
Account assets, VFL reserves the right to modify the Policies as necessary to
prevent an Owner from being treated as the owner of the Separate Account assets
supporting the Policy.
In addition, the Internal Revenue Code requires that the investments of the
Separate Accounts be adequately diversified in order for the Policies to be
treated as life insurance contracts for federal income tax purposes. It is
intended that the Separate Accounts, through the Funds, will satisfy these
diversification requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. VFL believes that the death benefit under a Policy should be
excludible from the gross income of the Beneficiary.
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<PAGE> 48
Federal, state and local transfer, estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or beneficiary. A tax advisor should be consulted on
these consequences.
Generally, the Owner will not be deemed to be in constructive receipt of
the Policy's Policy Value until there is a distribution. When distributions from
a Policy occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a Modified Endowment
Contract.
Modified Endowment Contracts. Under the Internal Revenue Code, certain
life insurance contracts are classified as a Modified Endowment Contracts, with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
Modified Endowment Contract. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy years or seven years following a material change to the Policy. Certain
changes in a Policy after it is issued could also cause it to be classified as a
Modified Endowment Contract. A current or prospective Owner should consult with
a competent advisor to determine whether a Policy transaction will cause the
Policy to be classified as a Modified Endowment Contract.
Distributions Other Than Death Benefits from Modified Endowment Contracts.
Policies classified as Modified Endowment Contracts are subject to the following
tax rules:
- All distributions other than death benefits from a Modified Endowment
Contract, including distributions upon surrender and withdrawals, are
treated first as distributions of gain taxable as ordinary income and as
tax-free recovery of the Owner's investment in the Policy only after all
gain has been distributed.
- Loans taken from or secured by a Policy classified as a Modified
Endowment Contract are treated as distributions and taxed in same manner
as surrenders and withdrawals.
- A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the Owner has
attained age 59 1/2 or is disabled, or where the distribution is part of
a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies)
of the Owner and the Owner's Beneficiary or designated Beneficiary.
Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts. Distributions other than death benefits from a Policy that
is not classified as a Modified Endowment Contract are generally treated first
as a recovery of the Owner's investment in the Policy and only after the
recovery of all investment in the Policy as taxable income. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance contract for federal income tax purposes if Policy
benefits are reduced during the first 15 Policy years may be treated in whole or
in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a Modified Endowment Contract
are generally not treated as distributions. However, the tax consequences
associated with Policy loans after the later of the 10th Policy Anniversary or
Attained Age 65 is less clear and a tax advisor should be consulted about such
loans.
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<PAGE> 49
Finally, neither distributions from nor loans from or secured by a Policy
that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
INVESTMENT IN THE POLICY. The Owner's investment in the Policy is
generally the aggregate premium payments. When a distribution is taken from the
Policy, the Owner's investment in the Policy is reduced by the amount of the
distribution that is tax-free.
TAX TREATMENT OF SETTLEMENT OPTIONS
Under the Code, a portion of the settlement option payments which are in
excess of the death benefit proceeds are included in the beneficiary's taxable
income. Under a settlement option payable for the lifetime of the beneficiary,
the death benefit proceeds are divided by the beneficiary's life expectancy (or
joint life expectancy in the case of a joint and survivor option) and proceeds
received in excess of these prorated amounts are included in taxable income. The
value of the death benefit proceeds is reduced by the value of any period
certain or refund guarantee. Under a fixed payment or fixed period option, the
death benefit proceeds are prorated by dividing the proceeds over the payment
period under the option. Any payments in excess of the prorated amount will be
included in taxable income.
POLICY LOANS. In general, interest on a Policy loan will not be
deductible. Before taking out a Policy loan, an Owner should consult a tax
advisor as to the tax consequences.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by VFL
(or its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount that
would be included in the Owner's income when a taxable distribution occurs.
SPECIAL RULES FOR PENSION AND PROFIT-SHARING PLANS
If a Policy is purchased by a pension or profit-sharing plan, or similar
deferred compensation arrangement, the federal, state and estate tax
consequences could differ. A competent tax advisor should be consulted in
connection with such a purchase.
The amounts of life insurance that may be purchased on behalf of a
participant in a pension or profit-sharing plan are limited. The current cost of
insurance for the net amount at risk is treated as a current fringe benefit, and
must be included annually in the plan participant's gross income. VFL reports
this cost to the participant annually. If the plan participant dies while
covered by the plan and the Policy proceeds are paid to the participant's
beneficiary, then the excess of the death benefit over the Policy's Policy Value
is not taxable. However, the cash value will generally be taxable to the extent
it exceeds the participant's cost basis in the Policy. Policies owned under
these types of plans may be subject to restrictions under the Employee
Retirement Income Security Act of 1974 (ERISA). You should consult a qualified
advisor regarding ERISA.
Department of Labor regulations impose requirements for participant loans
under retirement plans covered by ERISA. Plan loans must also satisfy tax
requirements to be treated as nontaxable. Plan loan requirements and provisions
may differ from Policy loan provisions. Failure of plan loans to comply with the
requirements and provisions of the Department of Labor regulations and of tax
law may result in adverse tax consequences and/or adverse consequences under
ERISA. Plan fiduciaries and participants should
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<PAGE> 50
consult a qualified advisor before requesting a loan under a Policy held in
connection with a retirement plan.
BUSINESS USES OF THE POLICY
Businesses can use the Policy in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, tax exempt and nonexempt welfare benefit
plans, retiree medical benefit plans and others. The tax consequences of such
plans may vary depending on the particular facts and circumstances. If an Owner
is purchasing the Policy for any arrangement the value of which depends in part
on its tax consequences, he or she should consult a qualified tax advisor. In
recent years, moreover, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a new
Policy or a change in an existing Policy should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. Consult a tax advisor with respect to legislative
developments and their effect on the Policy.
VFL'S TAXES
Under current federal income tax law, VFL is not taxed on the Separate
Account's operations. Thus, currently VFL does not deduct charges from the
Separate Account for its federal income taxes. VFL reserves the right to charge
the Separate Account for any future federal income taxes that it may incur.
Under current laws in several states, VFL may incur state and local taxes
(in addition to premium taxes). These taxes are not now significant and we are
not currently charging for them. If they increase, VFL may deduct charges for
such taxes.
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<PAGE> 51
OTHER INFORMATION ABOUT THE POLICIES AND VFL
SALE OF THE POLICIES
CNA Investor Services, Inc. ("CNA/ISI"), which is located at CNA Plaza,
Chicago, Illinois 60685, is principal underwriter and distributor of the
Policies as well as of other policies issued through other separate accounts of
VFL or affiliates of VFL. CNA/ISI is an affiliate of VFL, is registered with the
SEC as a broker-dealer, and is a member of the National Association of
Securities Dealers, Inc. ("NASD"). VFL pays CNA/ISI for acting as principal
underwriter under a distribution agreement. The Policies are offered on a
continuous basis and VFL does not anticipate discontinuing the offer.
Applications for Policies are solicited by agents who are licensed by
applicable state insurance authorities to sell VFL insurance contracts and who
are registered representatives of a broker-dealer having a selling agreement
with CNA/ISI or with CNA/ISI directly. Such broker-dealers generally receive
commissions based on a percent of premium payments made (up to a maximum of
100%) plus a percent of Policy Values (up to a maximum of 1.00% a year). The
writing agent receives a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions. Total commissions may be as high as 130% of target
premium which would be split between wholesale and retail broker dealer.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, VFL votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or VFL otherwise determines that it is
allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner has the right to instruct is calculated
separately for each Subaccount, and may include fractional votes. While the
Insured is still living and the Policy is in force prior to the Maturity Date,
an Owner holds a voting interest in each Subaccount to which Variable Policy
Value is allocated. For each Owner, the number of votes attributable to a
Subaccount is determined by dividing the Owner's Subaccount Value by the Net
Asset Value Per Share of the Fund in which that Subaccount invests.
After the Maturity Date, the Payee under a Settlement Option has a voting
interest in each Subaccount from which variable Settlement Payments are made.
For each such Payee, the number of votes attributable to a Subaccount is
determined by dividing the liability for future variable Settlement Payments to
be paid from that Subaccount by the Net Asset Value Per Share of the Fund in
which that Subaccount invests. This liability for future payments is calculated
on the basis of the mortality assumptions, the selected Benchmark Rate of Return
and the Settlement Unit value of that Subaccount on the date that the number of
votes is determined. As Variable Settlement Payments are made to the Payee, the
liability for future payments decreases as does the number of votes.
The number of votes available to an Owner or Payee is determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions are solicited by written communication prior
to such meeting in accordance with procedures established for
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<PAGE> 52
the Fund. Each Owner or Payee having a voting interest in a Subaccount will
receive proxy materials and reports relating to any meeting of shareholders of
the Fund in which that Subaccount invests.
Fund shares as to which no timely instructions are received and shares held
by VFL in a Subaccount as to which no Owner or Payee has a beneficial interest
are voted in proportion to the voting instructions that are received with
respect to all Policies participating in that Subaccount. Voting instructions to
abstain on any item to be voted upon will be applied to reduce the total number
of votes eligible to be cast on a matter. Under the 1940 Act, certain actions
affecting the Variable Account may require Owner approval. In that case, an
Owner will be entitled to vote in proportion to his or her Variable Policy
Value.
VFL may, if required by state insurance regulators, disregard Owner and
Payee voting instructions if such instructions would require Fund shares to be
voted so as to cause a change in sub-classification or investment objectives of
a Fund, or to approve or disapprove an investment management agreement or an
investment advisory agreement. In addition, VFL may under certain circumstances
disregard voting instructions that would require changes in an investment
management agreement, investment manager, an investment advisory agreement or an
investment adviser of a Fund, provided that VFL reasonably disapproves of such
changes in accordance with applicable regulations under the 1940 Act. If VFL
ever disregards voting instructions, Owners and Payees will be advised of that
action and of the reasons for such action in the next semiannual report for the
appropriate Fund.
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<PAGE> 53
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business
experience during the past five years for the VFL's directors and executive
officers are listed in the following table:
<TABLE>
<CAPTION>
OFFICERS OF VFL
- -------------------------------------------------------------------------------------------
POSITION(S)
HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH VFL DURING PAST FIVE YEARS
- ---------------- --- ----------- -----------------------
<S> <C> <C> <C>
Bernard L. Hengesbaugh 52 Director, Chairman of the Board and Chief
CNA Plaza Chairman of Executive Officer of CNA since
Chicago, IL 60685 the Board and February, 1999. Prior thereto, Mr.
Chief Hengesbaugh was Executive Vice
Executive President and Chief Operating Officer
Officer of CNA since February, 1998. Prior
thereto, Mr. Hengesbaugh was Senior
Vice President of CNA since November,
1990. Mr. Hengesbaugh has served as a
Director of VFL since February, 1999.
Peter E. Jokiel 51 Senior Vice Senior Vice President of CNA since
CNA Plaza President November, 1990. Chief Financial
Chicago, IL 60685 Officer of CNA from November, 1990
through October, 1997. Mr. Jokiel
served as a Director of VFL from
July, 1992 through October, 1997.
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and
CNA Plaza President, General Counsel of CNA since April,
Chicago, IL 60685 Secretary, 1997. Group Vice President of CNA
General since April, 1994. Prior thereto, Mr.
Counsel and Kantor was a partner at the law firm
Director of Shea & Gould.* Mr. Kantor has
served as a Director of VFL since
April, 1997.
Robert V. Deutsch 39 Senior Vice Senior Vice President, Chief
CNA Plaza President, Financial Officer and Director since
Chicago, IL 60685 Chief August 16, 1998. Prior thereto,
Financial Officer for Executive Risk, Inc.
Officer,
Director
Thomas Pontarelli 51 Senior Vice Senior Vice President, Human
CNA Plaza President, Resources since April 2000. Prior
Chicago, IL 60685 Director thereto, Group Vice President, Human
Resources. From May 1974 to December
1997, series of positions culminating
in the position of Chairman, CEO and
President of Washington National
Insurance Company.
</TABLE>
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<PAGE> 54
<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>
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate
CNA Plaza President, Finance Department since October
Chicago, IL 60685 Director 1998. Prior thereto,
partner-in-charge of
PricewaterhouseCoopers LLP.
John M. Squarok 46 Group Vice Group Vice President of CNA since
CNA Plaza President and July 1998. Prior thereto, Mr. Squarok
Chicago, IL 60685 Director was Chief Financial Officer of
various businesses of GE Capital from
August 1988 until July 1998. Director
since August 1998.
</TABLE>
- ------------------------------------
* Shea & Gould declared bankruptcy in 1995.
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of VFL. Executive officers serve at the discretion of the Board of
Directors.
COMPANY HOLIDAYS
VFL is closed on the following days: New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
STATE REGULATION
VFL is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines the financial
condition and operations of VFL. VFL is also subject to the insurance laws and
regulations of all jurisdictions where it does business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
VFL is required to submit annual statements of operations, including
financial statements, to the insurance departments of the various jurisdictions
where it does business to determine solvency and compliance with applicable
insurance laws and regulations.
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of
December 31, 1999 and 1998 and for each of the three years in the period ended
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<PAGE> 55
December 31, 1999 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The financial statements for each of the subaccounts that comprise the
Valley Forge Life Insurance Company Variable Life Separate Account as of and for
the year ended December 31, 1999 (for the two years ended December 31, 1999 with
respect to the statements of changes in net assets) included in this Prospectus
which is part of this registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing in the
registration statement, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Rodney
E. Rishel, Jr., FSA, MAAA, whose opinion is filed as an exhibit to the
registration statement.
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<PAGE> 56
GLOSSARY
ATTAINED AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date, plus the number of complete Policy Years since the Policy
Effective Date.
BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds are paid
upon the death of the Insured. The Owner may designate primary, contingent, and
irrevocable Beneficiaries.
CANCELLATION PERIOD -- The period shown in the Policy during which the
Owner may cancel the Policy for a refund by returning it to VFL.
CASH VALUE -- Policy Value minus any applicable Surrender Charge.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT BENEFICIARY -- The person(s) to whom the Death Benefit Proceeds
are paid upon the death of the Insured if the primary Beneficiary (or
Beneficiaries) is not living.
DEATH BENEFIT -- The amount payable to the Beneficiary under a Death
Benefit Option before adjustments if the Insured dies while the Policy is in
force before the Maturity Date.
DEATH BENEFIT OPTION -- One of two options that an Owner may select for the
computation of the Death Benefit Proceeds.
DEATH BENEFIT PROCEEDS -- The total amount payable to the Beneficiary if
the Insured dies while the Policy is in force before the Maturity Date.
DUE PROOF OF DEATH -- Proof of death satisfactory to VFL. Due Proof of
Death may consist of the following: (a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or (c) any
other proof satisfactory to VFL.
FIXED ACCOUNT -- Part of VFL's General Account to which Policy Value may be
transferred or Net Premium Payments may be allocated under a Policy.
FIXED POLICY VALUE -- The Policy Value in the Fixed Account.
FUND -- Any open-end management investment company or investment portfolio
thereof, or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT -- The assets of VFL other than those allocated to the
Variable Account or any other separate account of VFL.
GRACE PERIOD -- A 61-day period during which an Owner may make premium
payments to cover the overdue (and other specified) monthly deductions and
thereby prevent the Policy from Lapsing.
GUIDELINE ANNUAL PREMIUM -- The "guideline annual premium" as defined in
applicable regulations under the Investment Company Act of 1940, as amended.
INITIAL SPECIFIED AMOUNT -- The Specified Amount on the Policy Effective
Date.
INSURED -- The person whose life is insured by the Policy.
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<PAGE> 57
ISSUE AGE -- The Insured's age as of the nearest birthday on the Policy
Effective Date.
LAPSE -- Termination of the Policy at the expiration of the Grace Period
while the Insured is still living before the Maturity Date.
LOAN ACCOUNT -- A portion of VFL's General Account to which Variable Policy
Value or Fixed Policy Value is transferred to provide collateral for any loan
taken under the Policy.
LOAN ACCOUNT VALUE -- The Policy Value in the Loan Account.
LOAN AMOUNT -- At any time other than a Policy Anniversary, the Loan
Account Value plus any interest charges accrued on the Loan Account Value up to
that time. On a Policy Anniversary, the Loan Amount equals the Loan Account
Value.
MATURITY DATE -- The date shown in the Policy on which the Owner is paid
the Surrender Value, if any, provided the Insured is still living while the
Policy is in force. It is the Policy Anniversary nearest the Insured's 95th
birthday.
MINIMUM INITIAL PREMIUM PAYMENT -- The amount shown in the Policy that the
Owner must pay before coverage becomes effective under the Policy.
MINIMUM MONTHLY PREMIUM PAYMENT -- The minimum amount of monthly premium
payments (or the equivalent) that an Owner must make in order for the Lapse
Prevention Guarantee to remain in effect.
MONTHLY ANNIVERSARY DAY -- The same day as the Policy Effective Date for
each succeeding month.
NET AMOUNT AT RISK -- As of any Monthly Anniversary Day, the Death Benefit
under the Policy (discounted for the upcoming month) less the Policy Value
(before the deduction of the monthly policy fee, monthly first-year issue fee
and the cost of additional benefits provided by rider).
NET ASSET VALUE PER SHARE -- The value per share of any Fund on any
Valuation Day. The method of computing the Net Asset Value is described in the
prospectuses for the Funds.
NET PREMIUM PAYMENT -- Any premium payment less any premium tax charge,
deferred acquisition cost tax charge, and sales charge deducted from the premium
payment.
OWNER -- The person or persons who owns (or own) the Policy and who is
(are) entitled to exercise all rights and privileges provided in the Policy. The
maximum number of joint Owners is two. References in this prospectus to an
action by the "Owner" mean, in the case of joint Owners, both Owners acting
jointly.
OTHER INSURED PERSON -- The person named in the Policy upon whose death a
death benefit is payable.
PLANNED PERIODIC PREMIUM PAYMENT -- The premium payment selected by the
Owner as a level amount that he or she (or they) plans to pay on a monthly,
quarterly, semi-annual or annual basis over the life of the Policy.
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<PAGE> 58
POLICY ANNIVERSARY -- The same date in each Policy Year as the Policy
Effective Date.
POLICY EFFECTIVE DATE -- The date shown in the Policy from which Policy
Years and various other periods described in this prospectus are measured. The
Policy Effective Date is never the 29th, 30th or 31st of a month.
POLICY VALUE -- The sum of the Variable Policy Value, the Fixed Policy
Value, and the Loan Account Value.
POLICY YEAR -- A twelve-month period beginning on the Policy Effective Date
or on a Policy Anniversary.
SERVICE CENTER -- The offices of VFL's administrative department, at P.O.
Box 305153, Nashville, Tennessee 37230-5153 (1-800-262-1755).
SETTLEMENT OPTION -- The manner in which an Owner or Beneficiary (or
Contingent Beneficiary) elects to receive the amount of any surrender or
withdrawal or the Death Benefit Proceeds.
SETTLEMENT PAYMENT -- Payments made by VFL under a Settlement Option.
SPECIFIED AMOUNT -- A dollar amount selected by the Owner and shown in the
Policy that is used to determine the Death Benefit.
SUBACCOUNT -- A subdivision of the Variable Account, the assets of which
are invested in a corresponding Fund.
SUBACCOUNT VALUE -- The Policy Value in a Subaccount.
SURRENDER VALUE -- The Cash Value minus any Loan Amount.
TARGET PREMIUM PAYMENT -- An amount of premium payments, computed
separately for each increment of Specified Amount under a Policy, used to
compute sales charges and sales surrender charges.
UNIT -- A unit of measurement used to calculate Variable Policy Value.
VALUATION DAY -- For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in this
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD -- The period that starts at the close of regular trading
on the New York Stock Exchange on any valuation day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT -- Valley Forge Life Insurance Company Variable Life
Separate Account.
VARIABLE POLICY VALUE -- The sum of all Subaccount Values.
VFL -- Valley Forge Life Insurance Company.
WRITTEN NOTICE -- A written notice or request in a form satisfactory to VFL
that is signed by the Owner and received at the Service Center.
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<PAGE> 59
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
55
<PAGE> 60
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ----------- --------- ------------ ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below).......................... $1,337,536 $123,711 $107,312 $628,527 $266,010 $1,819,650 $1,141,432
---------- -------- -------- -------- -------- ---------- ----------
TOTAL ASSETS........................ 1,337,536 123,711 107,312 628,527 266,010 1,819,650 1,141,432
---------- -------- -------- -------- -------- ---------- ----------
LIABILITIES:
Payable for fund withdrawals and
surrenders...................... (26,564) (867) -- (13,051) -- -- (601,696)
---------- -------- -------- -------- -------- ---------- ----------
TOTAL LIABILITIES................... (26,564) (867) -- (13,051) -- -- (601,696)
---------- -------- -------- -------- -------- ---------- ----------
NET ASSETS.......................... $1,310,972 $122,844 $107,312 $615,476 $266,010 $1,819,650 $ 539,736
========== ======== ======== ======== ======== ========== ==========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost.............. $1,310,972 $122,453 $109,593 $623,780 $247,427 $1,879,231 $1,080,717
========== ======== ======== ======== ======== ========== ==========
<CAPTION>
VAN ECK JANUS ASPEN JANUS
EMERGING CAPITAL ASPEN
MARKETS APPRECIATION GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO
- ----------------- -------- ------------ ---------
<S> <C> <C> <C>
ASSETS:
Investments, at market value (see
supplemental cost information
below).......................... $85,808 $231,654 $118,851
------- -------- --------
TOTAL ASSETS........................ 85,808 231,654 118,851
------- -------- --------
LIABILITIES:
Payable for fund withdrawals and
surrenders...................... -- -- --
------- -------- --------
TOTAL LIABILITIES................... -- -- --
------- -------- --------
NET ASSETS.......................... $85,808 $231,654 $118,851
======= ======== ========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost.............. $60,834 $192,395 $102,538
======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
56
<PAGE> 61
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- (CONTINUED)
<TABLE>
<CAPTION>
JANUS JANUS THE ALGER THE ALGER MFS
JANUS ASPEN JANUS ASPEN ASPEN AMERICAN THE ALGER AMERICAN MFS GROWTH
ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE SMALL AMERICAN MIDCAP EMERGING MFS WITH
BALANCED INCOME GROWTH GROWTH CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES
--------- --------- ------------- ---------- -------------- ---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$12,165 $217 $31,404 $94,996 $306,155 $1,359,820 $457,509 $915,394 $428,976 $502,242
------- ---- ------- ------- -------- ---------- -------- -------- -------- --------
12,165 217 31,404 94,996 306,155 1,359,820 457,509 915,394 428,976 502,242
------- ---- ------- ------- -------- ---------- -------- -------- -------- --------
(23) (1) (14) -- (14,699) -- (3,400) (8) (2,698) (373)
------- ---- ------- ------- -------- ---------- -------- -------- -------- --------
(23) (1) (14) -- (14,699) -- (3,400) (8) (2,698) (373)
------- ---- ------- ------- -------- ---------- -------- -------- -------- --------
$12,142 $216 $31,390 $94,996 $291,456 $1,359,820 $454,109 $915,386 $426,278 $501,869
======= ==== ======= ======= ======== ========== ======== ======== ======== ========
$11,102 $215 $26,521 $77,201 $253,752 $1,193,861 $387,900 $686,138 $348,548 $466,568
======= ==== ======= ======= ======== ========== ======== ======== ======== ========
<CAPTION>
VAN ECK
MFS MFS SOGEN WORLDWIDE
LIMITED TOTAL OVERSEAS HARD
MATURITY RETURN VARIABLE ASSETS
SERIES SERIES FUND FUND
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
$77,690 $341,613 $288,735 $23,391
------- -------- -------- -------
77,690 341,613 288,735 23,391
------- -------- -------- -------
(4,181) -- -- (26)
------- -------- -------- -------
(4,181) -- -- (26)
------- -------- -------- -------
$73,509 $341,613 $288,735 $23,365
======= ======== ======== =======
$77,882 $350,610 $247,934 $22,339
======= ======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
57
<PAGE> 62
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)
======== ======= ======== ======== ======= ========= =========
<CAPTION>
VAN ECK JANUS ASPEN JANUS JANUS
EMERGING CAPITAL ASPEN ASPEN
FOR THE YEAR ENDED MARKETS APPRECIATION GROWTH BALANCED
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------ -------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Investment income:
Dividend income................. -- -- -- --
------- ------- ------- ------
-- -- -- --
------- ------- ------- ------
Expenses:
Mortality and expense risk
charges....................... $ 167 $ 453 $ 133 $ 12
Policy fees/Cost of insurance... 6,146 1,330 684 137
------- ------- ------- ------
6,313 1,783 817 149
------- ------- ------- ------
NET INVESTMENT INCOME (LOSS).... (6,313) (1,783) (817) (149)
Investment gains and (losses):
Net realized gains (losses)..... 6,510 23,381 (237) 11
Net unrealized gains (losses)... 25,767 39,259 16,313 1,040
------- ------- ------- ------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES)..... 32,277 62,640 16,076 1,051
------- ------- ------- ------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS...................... $25,964 $60,857 $15,259 $ 902
======= ======= ======= ======
</TABLE>
See accompanying Notes to Financial Statements
58
<PAGE> 63
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
JANUS JANUS THE ALGER THE ALGER MFS
ASPEN JANUS ASPEN ASPEN AMERICAN THE ALGER AMERICAN MFS GROWTH MFS
FLEXIBLE INTERNATIONAL WORLD WIDE SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
INCOME GROWTH GROWTH CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
--------- ------------- ---------- -------------- --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- -- -- $16,693 $ 62,822 $38,874 -- $ 2,935 $ 1,986 $ 4,218
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
-- -- -- 16,693 62,822 38,874 -- 2,935 1,986 4,218
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
-- $ 58 $ 157 1,619 7,580 2,650 $ 4,133 3,363 3,016 586
$ 38 293 651 21,221 90,363 30,100 58,872 36,824 39,310 8,706
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
38 351 808 22,840 97,943 32,750 63,005 40,187 42,326 9,292
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
(38) (351) (808) (6,147) (35,121) 6,124 (63,005) (37,252) (40,340) (5,074)
-- 11,007 11,697 23,168 77,813 9,208 23,492 10,097 5,229 (210)
1 4,869 17,795 27,800 122,720 43,822 188,807 59,131 18,997 (3,124)
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
1 15,876 29,492 50,968 200,533 53,030 212,299 69,228 24,226 (3,334)
---- ------- ------- ------- -------- ------- -------- -------- -------- -------
$(37) $15,525 $28,684 $44,821 $165,412 $59,154 $149,294 $ 31,976 $(16,114) $(8,408)
==== ======= ======= ======= ======== ======= ======== ======== ======== =======
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE
TOTAL OVERSEAS HARD
RETURN VARIABLE ASSETS
SERIES FUND FUND
-------- -------- ---------
<S> <C> <C> <C>
$ 12,074 $ 3,304 $ 190
-------- -------- -------
12,074 3,304 190
-------- -------- -------
2,243 2,004 154
26,801 31,183 2,422
-------- -------- -------
29,044 33,187 2,576
-------- -------- -------
(16,970) (29,883) (2,386)
4,670 38,990 760
(14,859) 42,033 1,839
-------- -------- -------
(10,189) 81,023 2,599
-------- -------- -------
$(27,159) $ 51,140 $ 213
======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
59
<PAGE> 64
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FEDERATED FIDELITY FIDELITY
FEDERATED FEDERATED HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED PRIME MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II 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
========== ======== ======== ======== ======== ========== =========
<CAPTION>
THE ALGER THE ALGER
AMERICAN THE ALGER AMERICAN MFS
SMALL AMERICAN MIDCAP EMERGING
FOR THE YEAR ENDED CAPITALIZATION GROWTH GROWTH GROWTH
DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO SERIES
- ------------------ -------------- ---------- --------- --------
<S> <C> <C> <C> <C>
From operations:
Net investment income
(loss).................. $ (6,147) $ (35,121) $ 6,124 $(63,005)
Net realized and
unrealized investment
gains (losses).......... 50,968 200,533 53,030 212,299
-------- ---------- -------- --------
Change in net assets
resulting from
operations.............. 44,821 165,412 59,154 149,294
-------- ---------- -------- --------
From capital transactions:
Net premiums/deposits..... 149,226 813,146 190,974 344,008
Surrenders and
withdrawals............. (1,485) (25,742) (972) (3,708)
Transfers in (out of)
subaccounts, net -- Note
1....................... (32,320) 126,761 36,116 139,533
-------- ---------- -------- --------
Change in net assets
resulting from capital
transactions.......... 115,421 914,165 226,118 479,833
-------- ---------- -------- --------
Increase in net assets...... 160,242 1,079,577 285,272 629,127
Net assets at beginning of
period.................... $131,214 280,243 168,837 286,259
-------- ---------- -------- --------
NET ASSETS AT END OF
PERIOD.................... $291,456 $1,359,820 $454,109 $915,386
======== ========== ======== ========
NET ASSET VALUE PER UNIT AT
END OF PERIOD............. $ 55.15 $ 64.38 $ 32.23 $ 37.94
======== ========== ======== ========
UNITS OUTSTANDING AT END OF
PERIOD.................... 5,285 21,122 14,090 24,127
======== ========== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
60
<PAGE> 65
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS --(CONTINUED)
<TABLE>
<CAPTION>
MFS VAN ECK JANUS
GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK JANUS ASPEN JANUS JANUS ASPEN
MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING CAPITAL ASPEN ASPEN FLEXIBLE
RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS APPRECIATION GROWTH BALANCED INCOME
SERIES SERIES SERIES SERIES FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- -------- -------- -------- -------- --------- -------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$(37,252) $(40,340) $ (5,074) $(16,970) $(29,883) $(2,386) $(6,313) $ (1,783) $ (817) $ (149) $ (38)
69,228 24,226 (3,334) (10,189) 81,023 2,599 32,277 62,640 16,076 1,051 1
-------- -------- -------- -------- -------- ------- ------- -------- -------- ------- ------
31,976 (16,114) (8,408) (27,159) 51,140 213 25,964 60,857 15,259 902 (37)
-------- -------- -------- -------- -------- ------- ------- -------- -------- ------- ------
187,325 301,314 42,954 243,333 94,031 14,568 40,337 170,800 103,592 11,240 253
(1,274) (2,829) (315) (547) 2,448 (75) (1,098) -- -- -- --
2,955 8,922 (14,192) (2,322) 6,797 (1,744) 1,766 (3) -- -- --
-------- -------- -------- -------- -------- ------- ------- -------- -------- ------- ------
189,006 307,407 28,447 240,464 103,276 12,749 41,005 170,797 103,592 11,240 253
-------- -------- -------- -------- -------- ------- ------- -------- -------- ------- ------
220,982 291,293 20,039 213,305 154,416 12,962 66,969 231,654 118,851 12,142 216
205,296 210,576 53,470 128,308 134,319 10,403 18,839 -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -------- -------- ------- ------
$426,278 $501,869 $ 73,509 $341,613 $288,735 $23,365 $85,808 $231,654 $118,851 $12,142 $ 216
======== ======== ======== ======== ======== ======= ======= ======== ======== ======= ======
$ 23.34 $ 21.31 $ 9.81 $ 17.75 $ 14.18 $ 10.96 $ 14.26 $ 33.17 $ 33.65 $ 27.92 $11.42
======== ======== ======== ======== ======== ======= ======= ======== ======== ======= ======
18,264 23,551 7,493 19,245 20,362 2,132 6,017 6,984 3,532 435 19
======== ======== ======== ======== ======== ======= ======= ======== ======== ======= ======
<CAPTION>
JANUS
JANUS ASPEN ASPEN
INTERNATIONAL WORLD WIDE
GROWTH GROWTH
PORTFOLIO PORTFOLIO
------------- ----------
<S> <C> <C>
$ (351) $ (808)
15,876 29,492
------- -------
15,525 28,684
------- -------
15,865 66,312
-- --
-- --
------- -------
15,865 66,312
------- -------
31,390 94,996
-- --
------- -------
$31,390 $94,996
======= =======
$ 38.67 $ 47.75
======= =======
812 1,989
======= =======
</TABLE>
See accompanying Notes to Financial Statements
61
<PAGE> 66
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS --(CONTINUED)
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED MONEY UTILITY BOND INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 FUND II FUND II 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
========== ======= ======= ======== ======= ======== ========
<CAPTION>
THE ALGER THE ALGER
AMERICAN THE ALGER AMERICAN
SMALL AMERICAN MIDCAP
FOR THE YEAR ENDED CAPITALIZATION GROWTH GROWTH
DECEMBER 31, 1998 PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------ -------------- --------- ---------
<S> <C> <C> <C>
From operations:
Net investment income (loss)............... $ (3,424) $ (6,097) $ (9,436)
Net realized and unrealized investment
gains (losses)........................... 4,449 44,836 22,499
-------- -------- --------
Change in net assets resulting from
operations............................. 1,025 38,739 13,063
-------- -------- --------
From capital transactions:
Net premiums/deposits...................... 88,005 171,948 119,140
Surrenders and withdrawals................. (313) (1,636) (1,360)
Transfers in (out of) subaccounts, net --
Note 1................................... 26,949 37,058 26,519
-------- -------- --------
Change in net assets resulting from
capital transactions................... 114,641 207,370 144,299
-------- -------- --------
Increase (decrease) in net assets............ 115,666 246,109 157,362
Net assets at beginning of period............ 15,548 34,134 11,475
-------- -------- --------
NET ASSETS AT END OF PERIOD.................. $131,214 $280,243 $168,837
======== ======== ========
NET ASSET VALUE PER UNIT AT END OF PERIOD.... $ 43.97 $ 53.22 $ 28.87
======== ======== ========
UNITS OUTSTANDING AT END OF PERIOD........... 2,984 5,266 5,848
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
62
<PAGE> 67
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS --(CONTINUED)
<TABLE>
<CAPTION>
MFS VAN ECK
MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
-------- -------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(22,642) $(15,787) $(18,580) $(4,763) $ (5,524) $(14,549) $ (417) $(3,614)
40,816 18,836 12,276 (499) 6,093 (3,210) (3,800) (3,708)
-------- -------- -------- ------- -------- -------- ------- -------
18,174 3,049 (6,304) (5,262) 569 (17,759) (4,217) (7,322)
-------- -------- -------- ------- -------- -------- ------- -------
214,349 173,364 141,269 47,751 97,181 135,934 9,690 20,390
(734) (2,718) (2,367) (363) (194) (2,482) (156) (296)
27,749 11,059 51,081 (7) 28,785 5,437 (816) (690)
-------- -------- -------- ------- -------- -------- ------- -------
241,364 181,705 189,983 47,381 125,772 138,889 8,718 19,404
-------- -------- -------- ------- -------- -------- ------- -------
259,538 184,754 183,679 42,119 126,341 121,130 4,501 12,082
26,721 20,542 26,897 11,351 1,967 13,189 5,902 6,757
-------- -------- -------- ------- -------- -------- ------- -------
$286,259 $205,296 $210,576 $53,470 $128,308 $134,319 $10,403 $18,839
======== ======== ======== ======= ======== ======== ======= =======
$ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
======== ======== ======== ======= ======== ======== ======= =======
13,333 10,777 10,471 5,263 7,081 13,339 1,131 2,646
======== ======== ======== ======= ======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
63
<PAGE> 68
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
Fund II Contrafund Portfolio
("Fidelity Contrafund Portfolio")
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
64
<PAGE> 69
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Emerging Markets Fund
JANUS CAPITAL CORPORATION --
INSTITUTIONAL CLASS:
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen 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.
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.
65
<PAGE> 70
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
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.
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.
66
<PAGE> 71
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1999
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.
67
<PAGE> 72
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
68
<PAGE> 73
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
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 expenses............................... 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.
69
<PAGE> 74
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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.
70
<PAGE> 75
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
------ ---------- ------------- -------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
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.
71
<PAGE> 76
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1999 1998 1997
----------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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.
72
<PAGE> 77
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
73
<PAGE> 78
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
74
<PAGE> 79
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
values and losses are charged to income when a decline in value is considered to
be other than temporary.
SECURITIES LENDING ACTIVITIES -- VFL lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with VFL equal to 100% of the fair value of the securities if the
collateral is cash, or 102% if the collateral is securities. Cash deposits from
these transactions are invested in short term investments (primarily commercial
paper) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
SEPARATE ACCOUNT BUSINESS -- VFL writes certain variable annuity contracts
and universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
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
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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>
75
<PAGE> 80
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (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
-------- ------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales........ $1,339,905 $2,647 $741,277 $ 5 $278,459 $2,447
========== ====== ======== ==== ======== ======
Gross realized gains....... $ 4,399 $1,667 $ 17,604 $ -- $ 4,793 $1,113
Gross realized losses...... (25,380) -- (697) -- (1,460) (92)
---------- ------ -------- ---- -------- ------
NET REALIZED GAINS
(LOSSES) ON SALES.... $ (20,981) $1,667 $ 16,907 $ -- $ 3,333 $1,021
========== ====== ======== ==== ======== ======
</TABLE>
76
<PAGE> 81
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1999 1998
---------------------------- -------------------------
GAINS LOSSES NET GAINS LOSSES NET
------ -------- -------- ------ ------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
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
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
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>
77
<PAGE> 82
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
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
78
<PAGE> 83
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for securities purchased and certain other assets and other liabilities because
of their short-term nature. Accordingly, these financial instruments are not
listed in the table below. The carrying amounts and estimated fair values of
VFL's other financial instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
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
79
<PAGE> 84
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
include interest rate caps, put and call options, commitments to purchase
securities, futures and forwards. VFL also uses derivatives to mitigate the risk
associated with certain guaranteed annuity contracts by purchasing certain
options in a notional amount equal to the original customer deposit. VFL
generally does not hold or issue these instruments for trading purposes.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial assets
(liabilities) in the general account and Separate Accounts at December 31, 1999
totaled $0.4 million and $0.1 million, respectively, and compares to $0.1
million and $0.5 million, respectively, at December 31, 1998. Net realized gains
(losses) on derivative financial instruments at December 31, 1999 totaled $0.4
million in the general account and ($0.1) million in the Separate Accounts. At
December 31, 1998, net realized losses on derivative financial instruments held
in the general account totaled $0.2 million and net realized gains on
derivatives in the Separate Accounts were $0.1 million.
80
<PAGE> 85
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------
PRE-TAX TAX (EXPENSE) NET
AMOUNT BENEFIT AMOUNT
-------- ------------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment
securities:
Net unrealized holding gains (losses) arising
during the period......................... $(19,684) $ 6,889 $(12,795)
Adjustment for (gains) losses included in net
income.................................... (4,080) 1,428 (2,652)
-------- ------- --------
Total Other Comprehensive Income
(Losses).......................... $(23,764) $ 8,317 $(15,447)
======== ======= ========
</TABLE>
81
<PAGE> 86
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
PRE-TAX TAX (EXPENSE) NET
AMOUNT BENEFIT AMOUNT
------- ------------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising
during the period........................... $ 3,756 $(1,314) $ 2,442
Adjustment for (gains) losses included in net
income...................................... (3,592) 1,257 (2,335)
------- ------- -------
Total Other Comprehensive Income....... $ 164 $ (57) $ 107
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------
PRE-TAX TAX (EXPENSE) NET
AMOUNT BENEFIT AMOUNT
------- ------------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment
securities:
Net unrealized holding gains (losses) arising
during the period............................ $ 6,447 $(2,256) $4,191
Adjustment for (gains) losses included in net
income....................................... (1,228) 427 (801)
------- ------- ------
Total Other Comprehensive Income........ $ 5,219 $(1,829) $3,390
======= ======= ======
</TABLE>
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
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.
82
<PAGE> 87
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan that allows employees to make regular contributions of up to
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has no plans for such a distribution and as a result,
has not provided for such a tax.
Significant components of VFL's net deferred tax liabilities as of December
31, 1999 and 1998 are shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
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.
83
<PAGE> 88
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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>
YEAR ENDED DECEMBER 31
---------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
1999 INCOME 1998 INCOME 1997 INCOME
------ ------ ------ ------ ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates.... $2,136 35.0 $9,290 35.0 $7,219 35.0
Other.............................. (49) (0.8) (199) (0.8) 78 0.4
------ ---- ------ ---- ------ ----
INCOME TAX AT EFFECTIVE
RATES................. $2,087 34.2 $9,091 34.2 $7,297 35.4
====== ==== ====== ==== ====== ====
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL. VFL
places reinsurance with other carriers only after careful review of the nature
of the contract and a thorough assessment of the reinsurers' credit quality and
claim settlement performance. For carriers that are not authorized reinsurers in
VFL's state of domicile, VFL receives collateral, primarily in the form of bank
letters of credit.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short
84
<PAGE> 89
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
duration contracts. The effects of reinsurance on premium revenues are shown in
the following table:
<TABLE>
<CAPTION>
PREMIUMS ASSUMED/NET
----------------------------------------- -----------
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- ---------------------- -------- -------- -------- -------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
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 %
-------- ------- -------- ------- -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
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
85
<PAGE> 90
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to the appropriate companies. All acquisition and underwriting expenses
allocated to VFL are further subject to the Reinsurance Pooling Agreement with
Assurance, so that acquisition and underwriting expenses recognized by VFL are
ten percent of the acquisition and underwriting expenses of the combined pool.
Pursuant to the foregoing agreements, VFL recorded amortization of deferred
acquisition costs and other operating expenses totaling $37.5 million, $47.6
million and $45.3 million for 1999, 1998 and 1997, respectively. Expenses of VFL
exclude $5.6 million, $9.2 million and $9.9 million of general and
administrative expenses incurred by VFL and allocated to CNAF for the years
ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999 VFL
had a payable of $12.4 million to affiliated companies and a $1.9 million
payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables. In
1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and
retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its Separate Account business,
to Assurance which is then pooled with the business of Assurance, excluding
Assurance's participating contracts and separate account business, and 10% of
the combined pool is assumed by VFL.
The following presents premiums by product group for each of the years in
the three years ended December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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
86
<PAGE> 91
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
under the Reinsurance Pooling Agreement totaled $209 million, $202 million and
$212 million for the years ended December 31, 1999, 1998 and 1997, respectively.
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.
87
<PAGE> 92
ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUM PAYMENTS
The following tables have been prepared to illustrate hypothetically how
certain values under a Policy change with investment performance over an
extended period of time. The tables illustrate how Policy Values, Surrender
Values and Death Benefits under a Policy covering an Insured of a given age on
the Policy Effective Date, would vary over time if the Planned Periodic Premium
Payments were paid annually and the return on the assets in each fund were an
assumed uniform gross annual rate of 0%, 6% and 12%. The values would be
different from those shown if the returns averaged 0%, 6% or 12% but fluctuated
over and under those averages throughout the years shown. The tables also show
Planned Periodic Premium Payments accumulated at 5% interest compounded
annually. THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF
RETURN. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return illustrated and will depend on a
number of factors including the investment allocations made by an Owner and
prevailing rates. These illustrations assume that the Net Premiums are allocated
equally among the 35 Subaccounts available under the Policy, and that no amounts
are allocated to the Fixed Account.
The illustrations reflect the fact that the net investment returns on the
assets held in the Subaccounts is lower than the gross after tax return of the
selected Funds. The tables assume an average annual expense ratio of .95% of the
average daily net assets of the Funds available.
In addition, the illustrations reflect the daily charge to the Variable
Account for assuming mortality and expense risk, which is equivalent to an
effective annual charge of 0.90% during Policy Years 1-10 and 0.45% during
Policy Years 11 and later. After deduction of Fund expenses and the mortality
and expense risk charge, the illustrated gross annual investment rates of return
of 0%, 6% and 12% would correspond to approximate net annual rates of -1.85%,
4.15% 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 Sales Charges, Premium
Tax Charge, Federal Tax Charge and Monthly Deduction for the hypothetically
insured. The Surrender charge is reflected in the Surrender Value column. VFL's
current cost of insurance charges and the guaranteed maximum cost of insurance
charges that VFL has the contractual right to charge, are reflected in separate
illustrations on each of the following pages. All the illustrations reflect the
fact that no charges for federal or state income taxes are currently made
against the Variable Account and assumes no Loan Amount or partial
withdrawals/surrenders or charges for supplemental and/or rider benefits.
The illustrations are based on VFL's Preferred Nonsmoker risk class. Upon
request, Owner(s) will be furnished with a comparable illustration based on the
proposed Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables. Because the Death Benefit values vary depending on the Death Benefit
Option in effect, level and increasing death benefit options are illustrated
separately.
The illustrations show contract values that would result based upon the
hypothetical investment rates of return if premiums are paid as indicated and
all net premiums are allocated to subaccounts.
88
<PAGE> 93
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,224 350 100,000
2.................... 4,316 2,641 1,500 100,000
3.................... 6,638 4,009 2,409 100,000
4.................... 9,075 5,327 3,727 100,000
5.................... 11,634 6,594 4,994 100,000
6.................... 14,321 7,809 6,209 100,000
7.................... 17,143 8,967 7,687 100,000
8.................... 20,105 10,064 8,944 100,000
9.................... 23,216 11,097 10,137 100,000
10................... 26,483 12,060 11,260 100,000
11................... 29,912 13,032 12,392 100,000
12................... 33,513 13,929 13,449 100,000
13................... 37,294 14,749 14,429 100,000
14................... 41,265 15,487 15,327 100,000
15................... 45,433 16,135 16,135 100,000
16................... 49,810 16,685 16,685 100,000
17................... 54,406 17,128 17,128 100,000
18................... 59,232 17,450 17,450 100,000
19................... 64,299 17,636 17,636 100,000
20................... 69,620 17,668 17,668 100,000
21................... 75,206 17,529 17,529 100,000
22................... 81,072 17,204 17,204 100,000
23................... 87,231 16,675 16,675 100,000
24................... 93,698 15,921 15,921 100,000
25................... 100,488 14,916 14,916 100,000
26................... 107,618 13,619 13,619 100,000
27................... 115,105 11,924 11,924 100,000
28................... 122,966 9,865 9,865 100,000
29................... 131,219 7,304 7,304 100,000
30................... 139,886 4,142 4,142 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
89
<PAGE> 94
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED DEATH
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,317 443 100,000
2.................... 4,316 2,912 1,770 100,000
3.................... 6,638 4,550 2,950 100,000
4.................... 9,075 6,233 4,633 100,000
5.................... 11,634 7,959 6,359 100,000
6.................... 14,321 9,730 8,130 100,000
7.................... 17,143 11,543 10,263 100,000
8.................... 20,105 13,396 12,276 100,000
9.................... 23,216 15,287 14,327 100,000
10................... 26,483 17,213 16,413 100,000
11................... 29,912 19,280 18,640 100,000
12................... 33,513 21,392 20,912 100,000
13................... 37,294 23,553 23,233 100,000
14................... 41,265 25,763 25,603 100,000
15................... 45,433 28,020 28,020 100,000
16................... 49,810 30,323 30,323 100,000
17................... 54,406 32,672 32,672 100,000
18................... 59,232 35,063 35,063 100,000
19................... 64,299 37,494 37,494 100,000
20................... 69,620 39,960 39,960 100,000
21................... 75,206 42,464 42,464 100,000
22................... 81,072 45,007 45,007 100,000
23................... 87,231 47,597 47,597 100,000
24................... 93,698 50,238 50,238 100,000
25................... 100,488 52,939 52,939 100,000
26................... 107,618 55,703 55,703 100,000
27................... 115,105 58,509 58,509 100,000
28................... 122,966 61,411 61,411 100,000
29................... 131,219 64,395 64,395 100,000
30................... 139,886 67,477 67,477 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
90
<PAGE> 95
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED DEATH
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,410 536 100,000
2.................... 4,316 3,195 2,053 100,000
3.................... 6,638 5,137 3,537 100,000
4.................... 9,075 7,254 5,654 100,000
5.................... 11,634 9,562 7,962 100,000
6.................... 14,321 12,080 10,480 100,000
7.................... 17,143 14,826 13,546 100,000
8.................... 20,105 17,822 16,702 100,000
9.................... 23,216 21,092 20,132 100,000
10................... 26,483 24,664 23,864 100,000
11................... 29,912 28,711 28,071 100,000
12................... 33,513 33,163 32,683 100,000
13................... 37,294 38,069 37,749 100,000
14................... 41,265 43,488 43,328 100,000
15................... 45,433 49,484 49,484 100,000
16................... 49,810 56,132 56,132 100,000
17................... 54,406 63,521 63,521 100,000
18................... 59,232 71,755 71,755 100,000
19................... 64,299 80,960 80,960 100,390
20................... 69,620 91,172 91,172 111,230
21................... 75,206 102,414 102,414 122,896
22................... 81,072 114,766 114,766 136,572
23................... 87,231 128,338 128,338 151,439
24................... 93,698 143,250 143,250 167,602
25................... 100,488 159,631 159,631 185,172
26................... 107,618 177,625 177,625 204,268
27................... 115,105 197,448 197,448 223,116
28................... 122,966 219,341 219,341 243,469
29................... 131,219 243,542 243,542 265,460
30................... 139,886 270,345 270,345 289,269
</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.
91
<PAGE> 96
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,388 514 100,000
2.................... 4,316 2,931 1,789 100,000
3.................... 6,638 4,393 2,793 100,000
4.................... 9,075 5,803 4,203 100,000
5.................... 11,634 7,187 5,587 100,000
6.................... 14,321 8,548 6,948 100,000
7.................... 17,143 9,888 8,608 100,000
8.................... 20,105 11,207 10,087 100,000
9.................... 23,216 12,505 11,545 100,000
10................... 26,483 13,783 12,983 100,000
11................... 29,912 15,113 14,473 100,000
12................... 33,513 16,407 15,927 100,000
13................... 37,294 17,658 17,338 100,000
14................... 41,265 18,898 18,738 100,000
15................... 45,433 20,117 20,117 100,000
16................... 49,810 21,204 21,204 100,000
17................... 54,406 22,227 22,227 100,000
18................... 59,232 23,188 23,188 100,000
19................... 64,299 24,080 24,080 100,000
20................... 69,620 24,895 24,895 100,000
21................... 75,206 25,638 25,638 100,000
22................... 81,072 26,294 26,294 100,000
23................... 87,231 26,864 26,864 100,000
24................... 93,698 27,342 27,342 100,000
25................... 100,488 27,706 27,706 100,000
26................... 107,618 27,960 27,960 100,000
27................... 115,105 28,080 28,080 100,000
28................... 122,966 28,071 28,071 100,000
29................... 131,219 27,920 27,920 100,000
30................... 139,886 27,591 27,591 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
92
<PAGE> 97
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,485 611 100,000
2.................... 4,316 3,218 2,076 100,000
3.................... 6,638 4,969 3,369 100,000
4.................... 9,075 6,768 5,168 100,000
5.................... 11,634 8,641 7,041 100,000
6.................... 14,321 10,597 8,997 100,000
7.................... 17,143 12,640 11,360 100,000
8.................... 20,105 14,773 13,653 100,000
9.................... 23,216 17,002 16,042 100,000
10................... 26,483 19,331 18,531 100,000
11................... 29,912 21,868 21,228 100,000
12................... 33,513 24,511 24,031 100,000
13................... 37,294 27,260 26,940 100,000
14................... 41,265 30,149 29,989 100,000
15................... 45,433 33,178 33,178 100,000
16................... 49,810 36,259 36,259 100,000
17................... 54,406 39,457 39,457 100,000
18................... 59,232 42,785 42,785 100,000
19................... 64,299 46,245 46,245 100,000
20................... 69,620 49,847 49,847 100,000
21................... 75,206 53,606 53,606 100,000
22................... 81,072 57,529 57,529 100,000
23................... 87,231 61,634 61,634 100,000
24................... 93,698 65,940 65,940 100,000
25................... 100,488 70,458 70,458 100,000
26................... 107,618 75,220 75,220 100,000
27................... 115,105 80,247 80,247 100,000
28................... 122,966 85,579 85,579 100,000
29................... 131,219 91,256 91,256 100,000
30................... 139,886 97,279 97,279 104,088
</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.
93
<PAGE> 98
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
2,005 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
LEVEL DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 2,105 1,583 709 100,000
2.................... 4,316 3,518 2,376 100,000
3.................... 6,638 5,593 3,993 100,000
4.................... 9,075 7,854 6,254 100,000
5.................... 11,634 10,346 8,746 100,000
6.................... 14,321 13,096 11,496 100,000
7.................... 17,143 16,133 14,853 100,000
8.................... 20,105 19,488 18,368 100,000
9.................... 23,216 23,194 22,234 100,000
10................... 26,483 27,289 26,489 100,000
11................... 29,912 31,964 31,324 100,000
12................... 33,513 37,137 36,657 100,000
13................... 37,294 42,859 42,539 100,000
14................... 41,265 49,217 49,057 100,000
15................... 45,433 56,276 56,276 100,000
16................... 49,810 64,057 64,057 100,000
17................... 54,406 72,693 72,693 100,000
18................... 59,232 82,293 82,293 103,689
19................... 64,299 92,906 92,906 115,203
20................... 69,620 104,620 104,620 127,637
21................... 75,206 117,555 117,555 141,066
22................... 81,072 131,822 131,822 156,868
23................... 87,231 147,560 147,560 174,121
24................... 93,698 164,919 164,919 192,955
25................... 100,488 184,060 184,060 213,510
26................... 107,618 205,171 205,171 235,947
27................... 115,105 228,493 228,493 258,197
28................... 122,966 254,281 254,281 282,252
29................... 131,219 282,818 282,818 308,272
30................... 139,886 314,420 314,420 336,430
</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.
94
<PAGE> 99
ILLUSTRATION OF POLICY
VALUES VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1..................... 4,854 3,697 2,823 103,697
2..................... 9,950 7,535 6,298 107,535
3..................... 15,301 11,272 9,672 111,272
4..................... 20,920 14,908 13,308 114,908
5..................... 26,820 18,441 16,841 118,441
6..................... 33,015 21,870 20,270 121,870
7..................... 39,519 25,192 23,912 125,192
8..................... 46,349 28,400 27,280 128,400
9..................... 53,520 31,492 30,532 131,492
10.................... 61,050 34,460 33,660 134,460
11.................... 68,956 37,495 36,855 137,495
12.................... 77,258 40,406 39,926 140,406
13.................... 85,974 43,191 42,871 143,191
14.................... 95,127 45,843 45,683 145,843
15.................... 104,737 48,354 48,354 148,354
16.................... 114,828 50,714 50,714 150,714
17.................... 125,423 52,911 52,911 152,911
18.................... 136,548 54,930 54,930 154,930
19.................... 148,229 56,754 56,754 156,754
20.................... 160,494 58,363 58,363 158,363
21.................... 173,372 59,740 59,740 159,740
22.................... 186,895 60,874 60,874 160,874
23.................... 201,093 61,749 61,749 161,749
24.................... 216,002 62,351 62,351 162,351
25.................... 231,655 62,659 62,659 162,659
26.................... 248,092 62,643 62,643 162,643
27.................... 265,350 62,205 62,205 162,205
28.................... 283,472 61,412 61,412 161,412
29.................... 302,499 60,150 60,150 160,150
30.................... 322,478 58,364 58,364 158,364
</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.
95
<PAGE> 100
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1..................... 4,854 3,941 3,067 103,941
2..................... 9,950 8,262 7,025 108,262
3..................... 15,301 12,732 11,132 112,732
4..................... 20,920 17,353 15,753 117,353
5..................... 26,820 22,129 20,529 122,129
6..................... 33,015 27,063 25,463 127,063
7..................... 39,519 32,156 30,876 132,156
8..................... 46,349 37,406 36,286 137,406
9..................... 53,520 42,814 41,854 142,814
10.................... 61,050 48,377 47,577 148,377
11.................... 68,956 54,354 53,714 154,354
12.................... 77,258 60,520 60,040 160,520
13.................... 85,974 66,880 66,560 166,880
14.................... 95,127 73,436 73,276 173,436
15.................... 104,737 80,184 80,184 180,184
16.................... 114,828 87,120 87,120 187,120
17.................... 125,423 94,241 94,241 194,241
18.................... 136,548 101,537 101,537 201,537
19.................... 148,229 108,993 108,993 208,993
20.................... 160,494 116,596 116,596 216,596
21.................... 173,372 124,331 124,331 224,331
22.................... 186,895 132,188 132,188 232,188
23.................... 201,093 140,155 140,155 240,155
24.................... 216,002 148,217 148,217 248,217
25.................... 231,655 156,355 156,355 256,355
26.................... 248,092 164,535 164,535 264,535
27.................... 265,350 172,654 172,654 272,654
28.................... 283,472 180,773 180,773 280,773
29.................... 302,499 188,769 188,769 288,769
30.................... 322,478 196,575 196,575 296,575
</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.
96
<PAGE> 101
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING GUARANTEED COST OF INSURANCE
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1..................... 4,854 4,186 3,312 104,186
2..................... 9,950 9,019 7,782 109,019
3..................... 15,301 14,311 12,711 114,311
4..................... 20,920 20,106 18,506 120,106
5..................... 26,820 26,450 24,850 126,450
6..................... 33,015 33,396 31,796 133,396
7..................... 39,519 40,998 39,718 140,998
8..................... 46,349 49,316 48,196 149,316
9..................... 53,520 58,415 57,455 158,415
10.................... 61,050 68,365 67,565 168,365
11.................... 68,956 79,595 78,955 179,595
12.................... 77,258 91,926 91,446 191,926
13.................... 85,974 105,469 105,149 205,469
14.................... 95,127 120,345 120,185 220,345
15.................... 104,737 136,682 136,682 236,682
16.................... 114,828 154,623 154,623 254,623
17.................... 125,423 174,323 174,323 274,323
18.................... 136,548 195,949 195,949 295,949
19.................... 148,229 219,684 219,684 319,684
20.................... 160,494 245,726 245,726 345,726
21.................... 173,372 274,301 274,301 374,301
22.................... 186,895 305,658 305,658 405,658
23.................... 201,093 340,073 340,073 440,073
24.................... 216,002 377,851 377,851 477,851
25.................... 231,655 419,323 419,323 519,323
26.................... 248,092 464,842 464,842 564,842
27.................... 265,350 514,729 514,729 614,729
28.................... 283,472 569,515 569,515 669,515
29.................... 302,499 629,590 629,590 729,590
30.................... 322,478 695,455 695,455 795,455
</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.
97
<PAGE> 102
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 4,854 3,867 2,993 103,867
2.................... 9,950 7,841 6,604 107,841
3.................... 15,301 11,685 10,085 111,685
4.................... 20,920 15,430 13,830 115,430
5.................... 26,820 19,102 17,502 119,102
6.................... 33,015 22,707 21,107 122,707
7.................... 39,519 26,247 24,967 126,247
8.................... 46,349 29,723 28,603 129,723
9.................... 53,520 33,135 32,175 133,135
10................... 61,050 36,487 35,687 136,487
11................... 68,956 39,957 39,317 139,957
12................... 77,258 43,354 42,874 143,354
13................... 85,974 46,669 46,349 146,669
14................... 95,127 49,941 49,781 149,941
15................... 104,737 53,157 53,157 153,157
16................... 114,828 56,176 56,176 156,176
17................... 125,423 59,084 59,084 159,084
18................... 136,548 61,883 61,883 161,883
19................... 148,229 64,558 64,558 164,558
20................... 160,494 67,104 67,104 167,104
21................... 173,372 69,523 69,523 169,523
22................... 186,895 71,794 71,794 171,794
23................... 201,093 73,921 73,921 173,921
24................... 216,002 75,892 75,892 175,892
25................... 231,655 77,679 77,679 177,679
26................... 248,092 79,289 79,289 179,289
27................... 265,350 80,688 80,688 180,688
28................... 283,472 81,888 81,888 181,888
29................... 302,499 82,875 82,875 182,875
30................... 322,478 83,605 83,605 183,605
</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.
98
<PAGE> 103
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 4,854 4,114 3,240 104,114
2.................... 9,950 8,581 7,344 108,581
3.................... 15,301 13,174 11,574 113,174
4.................... 20,920 17,926 16,326 117,926
5.................... 26,820 22,871 21,271 122,871
6.................... 33,015 28,019 26,419 128,019
7.................... 39,519 33,381 32,101 133,381
8.................... 46,349 38,967 37,847 138,967
9.................... 53,520 44,784 43,824 144,784
10................... 61,050 50,844 50,044 150,844
11................... 68,956 57,415 56,775 157,415
12................... 77,258 64,264 63,784 164,264
13................... 85,974 71,393 71,073 171,393
14................... 95,127 78,856 78,696 178,856
15................... 104,737 86,653 86,653 186,653
16................... 114,828 94,655 94,655 194,655
17................... 125,423 102,956 102,956 202,956
18................... 136,548 111,571 111,571 211,571
19................... 148,229 120,500 120,500 220,500
20................... 160,494 129,747 129,747 229,747
21................... 173,372 139,330 139,330 239,330
22................... 186,895 149,240 149,240 249,240
23................... 201,093 159,495 159,495 259,495
24................... 216,002 170,098 170,098 270,098
25................... 231,655 181,033 181,033 281,033
26................... 248,092 192,320 192,320 292,320
27................... 265,350 203,940 203,940 303,940
28................... 283,472 215,917 215,917 315,917
29................... 302,499 228,250 228,250 328,250
30................... 322,478 240,909 240,909 340,909
</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.
99
<PAGE> 104
ILLUSTRATION OF POLICY VALUES
VALLEY FORGE LIFE INSURANCE COMPANY
MALE PREFERRED NON-SMOKER
4,623 ANNUAL PLANNED PREMIUM
100,000 FACE AMOUNT
INCREASING DEATH BENEFIT OPTION
USING CURRENT COST OF INSURANCE
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 4,854 4,362 3,488 104,362
2.................... 9,950 9,352 8,115 109,352
3.................... 15,301 14,784 13,184 114,784
4.................... 20,920 20,733 19,133 120,733
5.................... 26,820 27,278 25,678 127,278
6.................... 33,015 34,483 32,883 134,483
7.................... 39,519 42,417 41,137 142,417
8.................... 46,349 51,154 50,034 151,154
9.................... 53,520 60,774 59,814 160,774
10................... 61,050 71,367 70,567 171,367
11................... 68,956 83,410 82,770 183,410
12................... 77,258 96,706 96,226 196,706
13................... 85,974 111,376 111,056 211,376
14................... 95,127 127,606 127,446 227,606
15................... 104,737 145,550 145,550 245,550
16................... 114,828 165,240 165,240 265,240
17................... 125,423 186,948 186,948 286,948
18................... 136,548 210,891 210,891 310,891
19................... 148,229 237,291 237,291 337,291
20................... 160,494 266,400 266,400 366,400
21................... 173,372 298,509 298,509 398,509
22................... 186,895 333,912 333,912 433,912
23................... 201,093 372,961 372,961 472,961
24................... 216,002 416,033 416,033 516,033
25................... 231,655 463,524 463,524 563,524
26................... 248,092 515,908 515,908 615,908
27................... 265,350 573,671 573,671 673,671
28................... 283,472 637,393 637,393 737,393
29................... 302,499 707,695 707,695 807,695
30................... 322,478 785,228 785,228 885,228
</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.
100
<PAGE> 105
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
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 984 212 100,000
2.................... 3,672 2,171 1,135 100,000
3.................... 5,647 3,318 2,018 100,000
4.................... 7,721 4,425 3,125 100,000
5.................... 9,899 5,492 4,192 100,000
6.................... 12,185 6,515 5,215 100,000
7.................... 14,586 7,496 6,456 100,000
8.................... 17,106 8,431 7,521 100,000
9.................... 19,753 9,316 8,536 100,000
10................... 22,532 10,151 9,501 100,000
11................... 25,450 11,004 10,484 100,000
12................... 28,514 11,809 11,419 100,000
13................... 31,731 12,569 12,309 100,000
14................... 35,109 13,285 13,155 100,000
15................... 38,656 13,956 13,956 100,000
16................... 42,380 14,577 14,577 100,000
17................... 46,291 15,139 15,139 100,000
18................... 50,397 15,631 15,631 100,000
19................... 54,708 16,035 16,035 100,000
20................... 59,235 16,337 16,337 100,000
21................... 63,988 16,529 16,529 100,000
22................... 68,979 16,606 16,606 100,000
23................... 74,219 16,564 16,564 100,000
24................... 79,722 16,402 16,402 100,000
25................... 85,499 16,112 16,112 100,000
26................... 91,565 15,672 15,672 100,000
27................... 97,935 15,051 15,051 100,000
28................... 104,623 14,200 14,200 100,000
29................... 111,646 13,063 13,063 100,000
30................... 119,020 11,580 11,580 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
101
<PAGE> 106
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
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 1,061 289 100,000
2.................... 3,672 2,395 1,359 100,000
3.................... 5,647 3,767 2,467 100,000
4.................... 7,721 5,177 3,877 100,000
5.................... 9,899 6,627 5,327 100,000
6.................... 12,185 8,114 6,814 100,000
7.................... 14,586 9,641 8,601 100,000
8.................... 17,106 11,206 10,296 100,000
9.................... 19,753 12,807 12,027 100,000
10................... 22,532 14,445 13,795 100,000
11................... 25,450 16,210 15,690 100,000
12................... 28,514 18,029 17,639 100,000
13................... 31,731 19,904 19,644 100,000
14................... 35,109 21,845 21,715 100,000
15................... 38,656 23,852 23,852 100,000
16................... 42,380 25,925 25,925 100,000
17................... 46,291 28,064 28,064 100,000
18................... 50,397 30,261 30,261 100,000
19................... 54,708 32,511 32,511 100,000
20................... 59,235 34,807 34,807 100,000
21................... 63,988 37,152 37,152 100,000
22................... 68,979 39,548 39,548 100,000
23................... 74,219 42,005 42,005 100,000
24................... 79,722 44,534 44,534 100,000
25................... 85,499 47,140 47,140 100,000
26................... 91,565 49,825 49,825 100,000
27................... 97,935 52,587 52,587 100,000
28................... 104,623 55,420 55,420 100,000
29................... 111,646 58,320 58,320 100,000
30................... 119,020 61,286 61,286 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
102
<PAGE> 107
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
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5% INTEREST
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 1,139 367 100,000
2.................... 3,672 2,630 1,594 100,000
3.................... 5,647 4,255 2,955 100,000
4.................... 7,721 6,026 4,726 100,000
5.................... 9,899 7,959 6,659 100,000
6.................... 12,185 10,069 8,769 100,000
7.................... 14,586 12,372 11,332 100,000
8.................... 17,106 14,889 13,979 100,000
9.................... 19,753 17,638 16,858 100,000
10................... 22,532 20,645 19,995 100,000
11................... 25,450 24,055 23,535 100,000
12................... 28,514 27,813 27,423 100,000
13................... 31,731 31,962 31,702 100,000
14................... 35,109 36,552 36,422 100,000
15................... 38,656 41,634 41,634 100,000
16................... 42,380 47,266 47,266 100,000
17................... 46,291 53,512 53,512 100,000
18................... 50,397 60,444 60,444 100,000
19................... 54,708 68,147 68,147 100,000
20................... 59,235 76,724 76,724 100,000
21................... 63,988 86,290 86,290 103,548
22................... 68,979 96,859 96,859 115,262
23................... 74,219 108,499 108,499 128,029
24................... 79,722 121,323 121,323 141,947
25................... 85,499 135,449 135,449 157,121
26................... 91,565 151,010 151,010 173,662
27................... 97,935 168,187 168,187 190,051
28................... 104,623 187,155 187,155 207,742
29................... 111,646 208,119 208,119 226,850
30................... 119,020 231,314 231,314 247,506
</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.
103
<PAGE> 108
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
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 1,157 385 100,000
2.................... 3,672 2,499 1,463 100,000
3.................... 5,647 3,796 2,496 100,000
4.................... 7,721 5,052 3,752 100,000
5.................... 9,899 6,276 4,976 100,000
6.................... 12,185 7,471 6,171 100,000
7.................... 14,586 8,632 7,592 100,000
8.................... 17,106 9,768 8,858 100,000
9.................... 19,753 10,879 10,099 100,000
10................... 22,532 11,965 11,315 100,000
11................... 25,450 13,103 12,583 100,000
12................... 28,514 14,223 13,833 100,000
13................... 31,731 15,328 15,068 100,000
14................... 35,109 16,404 16,274 100,000
15................... 38,656 17,469 17,469 100,000
16................... 42,380 18,502 18,502 100,000
17................... 46,291 19,499 19,499 100,000
18................... 50,397 20,456 20,456 100,000
19................... 54,708 21,377 21,377 100,000
20................... 59,235 22,258 22,258 100,000
21................... 63,988 23,094 23,094 100,000
22................... 68,979 23,887 23,887 100,000
23................... 74,219 24,628 24,628 100,000
24................... 79,722 25,319 25,319 100,000
25................... 85,499 25,958 25,958 100,000
26................... 91,565 26,530 26,530 100,000
27................... 97,935 27,041 27,041 100,000
28................... 104,623 27,472 27,472 100,000
29................... 111,646 27,822 27,822 100,000
30................... 119,020 28,068 28,068 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
104
<PAGE> 109
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
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 1,239 467 100,000
2.................... 3,672 2,742 1,706 100,000
3.................... 5,647 4,287 2,987 100,000
4.................... 7,721 5,878 4,578 100,000
5.................... 9,899 7,526 6,226 100,000
6.................... 12,185 9,237 7,937 100,000
7.................... 14,586 11,008 9,968 100,000
8.................... 17,106 12,850 11,940 100,000
9.................... 19,753 14,767 13,987 100,000
10................... 22,532 16,762 16,112 100,000
11................... 25,450 18,940 18,420 100,000
12................... 28,514 21,221 20,831 100,000
13................... 31,731 23,613 23,353 100,000
14................... 35,109 26,106 25,976 100,000
15................... 38,656 28,724 28,724 100,000
16................... 42,380 31,455 31,455 100,000
17................... 46,291 34,300 34,300 100,000
18................... 50,397 37,265 37,265 100,000
19................... 54,708 40,357 40,357 100,000
20................... 59,235 43,586 43,586 100,000
21................... 63,988 46,953 46,953 100,000
22................... 68,979 50,472 50,472 100,000
23................... 74,219 54,147 54,147 100,000
24................... 79,722 57,992 57,992 100,000
25................... 85,499 62,019 62,019 100,000
26................... 91,565 66,235 66,235 100,000
27................... 97,935 70,661 70,661 100,000
28................... 104,623 75,309 75,309 100,000
29................... 111,646 80,200 80,200 100,000
30................... 119,020 85,356 85,356 100,000
</TABLE>
- -------------------------
* In the absence of additional premium, the Policy would lapse
(1) Assumes that no policy loans have been made and no withdrawals have been
made.
(2) Assumes that 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.
105
<PAGE> 110
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
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 1,791 1,321 549 100,000
2.................... 3,672 2,996 1,960 100,000
3.................... 5,647 4,818 3,518 100,000
4.................... 7,721 6,807 5,507 100,000
5.................... 9,899 8,989 7,689 100,000
6.................... 12,185 11,387 10,087 100,000
7.................... 14,586 14,019 12,979 100,000
8.................... 17,106 16,917 16,007 100,000
9.................... 19,753 20,110 19,330 100,000
10................... 22,532 23,628 22,978 100,000
11................... 25,450 27,650 27,130 100,000
12................... 28,514 32,106 31,716 100,000
13................... 31,731 37,049 36,789 100,000
14................... 35,109 42,520 42,390 100,000
15................... 38,656 48,592 48,592 100,000
16................... 42,380 55,317 55,317 100,000
17................... 46,291 62,771 62,771 100,000
18................... 50,397 71,036 71,036 100,000
19................... 54,708 80,208 80,208 100,000
20................... 59,235 90,374 90,374 110,256
21................... 63,988 101,609 101,609 121,931
22................... 68,979 114,022 114,022 135,686
23................... 74,219 127,734 127,734 150,726
24................... 79,722 142,883 142,883 167,173
25................... 85,499 159,618 159,618 185,156
26................... 91,565 178,102 178,102 204,817
27................... 97,935 198,541 198,541 224,351
28................... 104,623 221,144 221,144 245,469
29................... 111,646 246,151 246,151 268,305
30................... 119,020 273,828 273,828 292,996
</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.
106
<PAGE> 111
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
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5%
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 2,873 2,101 102,873
2.................... 7,976 5,909 4,873 105,909
3.................... 12,265 8,867 7,567 108,867
4.................... 16,769 11,744 10,444 111,744
5.................... 21,498 14,543 13,243 114,543
6.................... 26,463 17,261 15,961 117,261
7.................... 31,677 19,896 18,856 119,896
8.................... 37,151 22,448 21,538 122,448
9.................... 42,899 24,910 24,130 124,910
10................... 48,935 27,285 26,635 127,285
11................... 55,272 29,723 29,203 129,723
12................... 61,926 32,081 31,691 132,081
13................... 68,913 34,360 34,100 134,360
14................... 76,249 36,562 36,432 136,562
15................... 83,952 38,686 38,686 138,686
16................... 92,041 40,726 40,726 140,726
17................... 100,533 42,671 42,671 142,671
18................... 109,450 44,508 44,508 144,508
19................... 118,813 46,217 46,217 146,217
20................... 128,645 47,781 47,781 147,781
21................... 138,967 49,192 49,192 149,192
22................... 149,806 50,443 50,443 150,443
23................... 161,187 51,533 51,533 151,533
24................... 173,137 52,465 52,465 152,465
25................... 185,684 53,230 53,230 153,230
26................... 198,859 53,808 53,808 153,808
27................... 212,693 54,166 54,166 154,166
28................... 227,218 54,257 54,257 154,257
29................... 242,469 54,028 54,028 154,028
30................... 258,483 53,428 53,428 153,428
</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.
107
<PAGE> 112
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
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5%
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 3,066 2,294 103,066
2.................... 7,976 6,483 5,447 106,483
3.................... 12,265 10,017 8,717 110,017
4.................... 16,769 13,673 12,373 113,673
5.................... 21,498 17,454 16,154 117,454
6.................... 26,463 21,360 20,060 121,360
7.................... 31,677 25,395 24,355 125,395
8.................... 37,151 29,561 28,651 129,561
9.................... 42,899 33,856 33,076 133,856
10................... 48,935 38,286 37,636 138,286
11................... 55,272 43,054 42,534 143,054
12................... 61,926 47,994 47,604 147,994
13................... 68,913 53,112 52,852 153,112
14................... 76,249 58,418 58,288 158,418
15................... 83,952 63,919 63,919 163,919
16................... 92,041 69,615 69,615 169,615
17................... 100,533 75,504 75,504 175,504
18................... 109,450 81,579 81,579 181,579
19................... 118,813 87,826 87,826 187,826
20................... 128,645 94,234 94,234 194,234
21................... 138,967 100,800 100,800 200,800
22................... 149,806 107,521 107,521 207,521
23................... 161,187 114,403 114,403 214,403
24................... 173,137 121,451 121,451 221,451
25................... 185,684 128,663 128,663 228,663
26................... 198,859 136,023 136,023 236,023
27................... 212,693 143,501 143,501 243,501
28................... 227,218 151,052 151,052 251,052
29................... 242,469 158,620 158,620 258,620
30................... 258,483 166,147 166,147 266,147
</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.
108
<PAGE> 113
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
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
AT 5%
END OF POLICY YEAR PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 3,259 2,487 103,259
2.................... 7,976 7,079 6,043 107,079
3.................... 12,265 11,263 9,963 111,263
4.................... 16,769 15,844 14,544 115,844
5.................... 21,498 20,863 19,563 120,863
6.................... 26,463 26,358 25,058 126,358
7.................... 31,677 32,377 31,337 132,377
8.................... 37,151 38,967 38,057 138,967
9.................... 42,899 46,181 45,401 146,181
10................... 48,935 54,080 53,430 154,080
11................... 55,272 63,006 62,486 163,006
12................... 61,926 72,827 72,437 172,827
13................... 68,913 83,637 83,377 183,637
14................... 76,249 95,542 95,412 195,542
15................... 83,952 108,655 108,655 208,655
16................... 92,041 123,096 123,096 223,096
17................... 100,533 138,994 138,994 238,994
18................... 109,450 156,486 156,486 256,486
19................... 118,813 175,717 175,717 275,717
20................... 128,645 196,853 196,853 296,853
21................... 138,967 220,083 220,083 320,083
22................... 149,806 245,619 245,619 345,619
23................... 161,187 273,703 273,703 373,703
24................... 173,137 304,603 304,603 404,603
25................... 185,684 338,606 338,606 438,606
26................... 198,859 376,016 376,016 476,016
27................... 212,693 417,157 417,157 517,157
28................... 227,218 462,372 462,372 562,372
29................... 242,469 512,030 512,030 612,030
30................... 258,483 566,544 566,544 666,544
</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.
109
<PAGE> 114
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
HYPOTHETICAL 0% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 3,050 2,278 103,050
2.................... 7,976 6,251 5,215 106,251
3.................... 12,265 9,370 8,070 109,370
4.................... 16,769 12,413 11,113 112,413
5.................... 21,498 15,390 14,090 115,390
6.................... 26,463 18,303 17,003 118,303
7.................... 31,677 21,148 20,108 121,148
8.................... 37,151 23,934 23,024 123,934
9.................... 42,899 26,663 25,883 126,663
10................... 48,935 29,336 28,686 129,336
11................... 55,272 32,113 31,593 132,113
12................... 61,926 34,847 34,457 134,847
13................... 68,913 37,542 37,282 137,542
14................... 76,249 40,179 40,049 140,179
15................... 83,952 42,782 42,782 142,782
16................... 92,041 45,324 45,324 145,324
17................... 100,533 47,801 47,801 147,801
18................... 109,450 50,208 50,208 150,208
19................... 118,813 52,547 52,547 152,547
20................... 128,645 54,815 54,815 154,815
21................... 138,967 57,004 57,004 157,004
22................... 149,806 59,115 59,115 159,115
23................... 161,187 61,138 61,138 161,138
24................... 173,137 63,075 63,075 163,075
25................... 185,684 64,920 64,920 164,920
26................... 198,859 66,656 66,656 166,656
27................... 212,693 68,287 68,287 168,287
28................... 227,218 69,791 69,791 169,791
29................... 242,469 71,162 71,162 171,162
30................... 258,483 72,371 72,371 172,371
</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.
110
<PAGE> 115
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
HYPOTHETICAL 6% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 3,247 2,475 103,247
2.................... 7,976 6,840 5,804 106,840
3.................... 12,265 10,559 9,259 110,559
4.................... 16,769 14,411 13,111 114,411
5.................... 21,498 18,411 17,111 118,411
6.................... 26,463 22,566 21,266 122,566
7.................... 31,677 26,879 25,839 126,879
8.................... 37,151 31,364 30,454 131,364
9.................... 42,899 36,028 35,248 136,028
10................... 48,935 40,878 40,228 140,878
11................... 55,272 46,147 45,627 146,147
12................... 61,926 51,656 51,266 151,656
13................... 68,913 57,417 57,157 157,417
14................... 76,249 63,425 63,295 163,425
15................... 83,952 69,713 69,713 169,713
16................... 92,041 76,266 76,266 176,266
17................... 100,533 83,094 83,094 183,094
18................... 109,450 90,200 90,200 190,200
19................... 118,813 97,601 97,601 197,601
20................... 128,645 105,305 105,305 205,305
21................... 138,967 113,318 113,318 213,318
22................... 149,806 121,656 121,656 221,656
23................... 161,187 130,319 130,319 230,319
24................... 173,137 139,325 139,325 239,325
25................... 185,684 148,683 148,683 248,683
26................... 198,859 158,391 158,391 258,391
27................... 212,693 168,468 168,468 268,468
28................... 227,218 178,905 178,905 278,905
29................... 242,469 189,715 189,715 289,715
30................... 258,483 200,880 200,880 300,880
</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.
111
<PAGE> 116
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
HYPOTHETICAL 12% GROSS INVESTMENT RETURN
<TABLE>
<CAPTION>
PREMIUMS ACCUMULATED
END OF POLICY YEAR AT 5% PER YEAR POLICY VALUE SURRENDER VALUE DEATH BENEFIT
- ------------------ -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1.................... 3,891 3,444 2,672 103,444
2.................... 7,976 7,454 6,418 107,454
3.................... 12,265 11,844 10,544 111,844
4.................... 16,769 16,656 15,356 116,656
5.................... 21,498 21,942 20,642 121,942
6.................... 26,463 27,752 26,452 127,752
7.................... 31,677 34,133 33,093 134,133
8.................... 37,151 41,152 40,242 141,152
9.................... 42,899 48,873 48,093 148,873
10................... 48,935 57,368 56,718 157,368
11................... 55,272 67,036 66,516 167,036
12................... 61,926 77,724 77,334 177,724
13................... 68,913 89,546 89,286 189,546
14................... 76,249 102,602 102,472 202,602
15................... 83,952 117,048 117,048 217,048
16................... 92,041 133,002 133,002 233,002
17................... 100,533 150,621 150,621 250,621
18................... 109,450 170,074 170,074 270,074
19................... 118,813 191,558 191,558 291,558
20................... 128,645 215,286 215,286 315,286
21................... 138,967 241,486 241,486 341,486
22................... 149,806 270,424 270,424 370,424
23................... 161,187 302,376 302,376 402,376
24................... 173,137 337,665 337,665 437,665
25................... 185,684 376,640 376,640 476,640
26................... 198,859 419,673 419,673 519,673
27................... 212,693 467,200 467,200 567,200
28................... 227,218 519,674 519,674 619,674
29................... 242,469 577,615 577,615 677,615
30................... 258,483 641,572 641,572 741,572
</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.
112
<PAGE> 117
APPENDIX
EXAMPLES OF DEATH BENEFIT COMPUTATIONS
UNDER OPTIONS 1 AND 2
EXAMPLES OF OPTION 1. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 1, a Policy with a $100,000 Specified Amount will generally
pay $100,000 in Death Benefits. However, because the Death Benefit must be equal
to or be greater than 250% of the Policy Value, any time that the Policy Value
exceeds $40,000, the Death Benefit will exceed the $100,000 Specified Amount.
Each additional dollar of Policy Value above $40,000 will increase the Death
Benefit by $2.50. A Policy with a $100,000 Specified Amount and a Policy Value
of $60,000 will provide Death Benefit of $150,000 ($60,000 X 250%); a Policy
Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X 250%); a
Policy Value of $100,000 will provide a Death Benefit of $250,000 ($100,000 X
250%).
Similarly, as long as Policy Value exceeds $40,000, each dollar taken out
of Policy Value will reduce the Death Benefit by $2.50. If, for example, the
Policy Value is reduced from $50,000 to $40,000 because of partial surrenders,
charges, or negative investment performance, the Death Benefit will be reduced
from $125,000 to $100,000. If at any time, however, the Policy Value multiplied
by the applicable percentage is less than the Specified Amount, the Death
Benefit will equal the current Specified Amount of the Policy.
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than between 0 and 40), the Policy Value
percentage would be 185%. The Death Benefit would not exceed the $100,000
Specified Amount unless the Policy Value exceeded approximately $54,054 (rather
than $40,000), and each dollar then added to or taken from the Policy Value
would change the Death Benefit by $1.85 (rather than $2.50).
EXAMPLES OF OPTION 2. For purposes of this example, assume that the
Insured's Attained Age is between 0 and 40 and that there is no outstanding Loan
Amount. Under Option 2, a Policy with a Specified Amount of $100,000 will
generally provide a Death Benefit of $100,000 plus Policy Value. Thus, for
example, a Policy with a Policy Value of $10,000 will have a Death Benefit of
$110,000 ($100,000 + $10,000); a Policy Value of $20,000 will provide a Death
Benefit of $120,000 ($110,000 + $20,000). The Death Benefit, however, must be at
least 250% of the Policy Value. As a result, if the Policy Value exceeds
$66,667, the Death Benefit will be greater than the Specified Amount plus Policy
Value. Each additional dollar of Policy Value above $66,667 will increase the
Death Benefit by $2.50. A Policy with a Specified Amount of $100,000 and a
Policy Value of $80,000 will provide a Death Benefit of $200,000 ($80,000 X
250%); a Policy Value of $120,000 will provide a Death Benefit of $300,000
($120,000 X 250%).
Similarly, any time Policy Value exceeds $66,667, each dollar taken out of
Policy Value will reduce the Death Benefit by $2.50. If, for example, the Policy
Value is reduced from $80,000 to $70,000 because of partial surrenders, charges,
or negative investment performance, the Death Benefit will be reduced from
$200,000 to $175,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Specified Amount plus the Policy Value,
then the Death Benefit will be the current Specified Amount plus the Policy
Value.
A-1
<PAGE> 118
The applicable Policy Value percentage becomes lower as the Insured's
Attained Age increases. If the Attained Age of the Insured in the example above
were, for example, 50 (rather than under 40), the Policy Value percentage would
be 185%. The amount of the Death Benefit would be the sum of the Policy Value
plus $100,000 unless the Policy Value exceeded $117,647 (rather than $66,667),
and each dollar then added to or taken from the Policy Value would change the
Death Benefit by $1.85 (rather than $2.50).
TABLE OF POLICY VALUE PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243% 51 178% 61 128% 71 113%
42 236% 52 171% 62 126% 72 111%
43 229% 53 164% 63 124% 73 109%
44 222% 54 157% 64 122% 74 107%
45 215% 55 150% 65 120% 75-90 105%
46 209% 56 146% 66 119% 91 104%
47 203% 57 142% 67 118% 92 103%
48 197% 58 138% 68 117% 93 102%
49 191% 59 134% 69 116% 94 101%
</TABLE>
A-2
