<PAGE>
As filed with the Securities and Exchange Commission on December 11, 1998
Registration No. 333-61063
---------
811-7689
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
Immediate Income Builder
FORM N-4
REGISTRATION STATEMENT UNDER THE [ ]
SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. ___ [_]
and
REGISTRATION STATEMENT UNDER [_]
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8 [X]
PFL RETIREMENT BUILDER VARIABLE ANNUITY
ACCOUNT
(Exact Name of Registrant)
PFL LIFE INSURANCE COMPANY
(Name of Depositor)
4333 Edgewood Road N.E.
Cedar Rapids, IA 52499-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (319) 297-8468
Frank A. Camp, Esq.
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499-0001
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esq.
Sutherland, Asbill and Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
<PAGE>
Approximate Date of Proposed Public Offering: As soon as practicable after the
- --------------------------------------------
effective date of the Registration statement.
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Title of Securities Being Registered: Single Premium Immediate Variable Annuity
- ------------------------------------
Contracts
<PAGE>
PFL LIFE INSURANCE COMPANY
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
FORM N-4
Cross Reference Sheet
Pursuant to Rule 495(a)
Under the Securities Act of 1933
PART A
Showing Location of Information in Prospectuses
Form N-4
Item No. Prospectus Caption
- -------- ------------------
1. Cover Page..................................Cover Page
2. Definitions.................................Definitions
3. Synopsis....................................Summary of the Contracts
4. Condensed Financial Information.............Condensed Financial Information;
Financial Statements
5. General Description of Registrant,
Depositor and Portfolio Companies
(a) Depositor..............................PFL Life Insurance Company
(b) Registrant.............................The Separate Account
(c) Portfolio Company......................The Funds
(d) Fund Prospectus........................The Funds
(e) Voting Rights..........................Voting Rights
6. Deductions and Expenses
(a) General................................Charges Under the Contracts
(b) Sales Load %...........................N/A
(c) Special Purchase Plan..................N/A
(d) Commissions............................Distributor of the Contracts
(e) Expenses - Registrant..................Charges Under the Contracts
(f) Fund Expenses..........................Other Expenses including
Investment Advisory Fees
(g) Organizational Expenses................N/A
7. Contracts
(a) Persons with Rights....................Facts About the Contracts;
Types of Annuity Payment
Options; Fixed, Variable or
Combination Annuity Payments;
Voting Rights
(b) (i) Allocation of Premium............Allocations of Your Premium to
i
<PAGE>
the Separate Account
(ii) Transfers........................Allocations of Your Premium to
the Separate Account
(iii) Exchanges........................N/A
(c) Changes................................Facts About the Contracts;
Types of Annuity Payment
Options; Premium; Addition,
Deletion, or Substitution
of Investments
(d) Inquiries..............................Summary of the Contracts
8. Annuity Period..............................Types of Annuity Payment Options
9. Death Benefit...............................Death Proceeds
10. Purchases and Value
(a) Purchases..............................Purchase of a Contract; Premium
Allocation
(b) Valuation..............................Variable Annuity Units
(c) Daily Calculation......................Variable Annuity Units
(d) Underwriter............................Distribution of the Contracts
11. Redemptions
(a) By Owners..............................Types of Annuity Payment
Options - Period Certain Annuity
By Annuitant...........................N/A
(b) Texas OP...............................
(c) Check Delay............................Payments Under the Contract
(d) Lapse..................................N/A
(e) Free Look..............................Summary of the Contracts; Free
Look Privilege
12. Taxes......................................Tax Considerations
13. Legal Proceedings..........................Legal Proceedings
14. Table of Contents for the Statement
of Additional Information..................Statement of Additional
Information
ii
<PAGE>
PART B
Showing Location of Information in Statement of Additional Information
Caption in Statement of
Form N-4 -----------------------
Item No. Additional Information
- ---------- ----------------------
15. Cover Page.................................Cover Page
16. Table of Contents..........................Table of Contents
17. General Information and History............(Prospectus) PFL Life
Insurance Company
18. Services
(a) Fees and Expenses of Registrant.........N/A
(b) Management Policies.....................N/A
(c) Custodian...............................Custody of Assets
Independent Auditors....................Independent Auditors
(d) Assets of Registrant....................Custody of Assets
(e) Affiliated Person.......................N/A
(f) Principal Underwriter...................Distribution of the Contracts
19. Purchase of Securities Being Offered........Distribution of the Contracts
Offering Sales Load.........................N/A
20. Underwriters................................Distribution of the Contracts;
(Prospectus) Distribution of
the Contracts
21. Calculation of Performance Data.............Historical Performance Data
22. Annuity Payments............................(Prospectus) Types of Annuity
Payment Options
23. Financial Statements........................Financial Statements
PART C
Information required to be set forth in Part C is set forth under the
appropriate item, so numbered, in Part C of the registration statement.
iii
<PAGE>
PFL IMMEDIATE INCOME BUILDER
FIXED AND VARIABLE SINGLE PREMIUM IMMEDIATE
ANNUITY CONTRACTS
offered by
PFL LIFE INSURANCE COMPANY
Financial Markets Division--Variable Annuity Department
4333 Edgewood Road N.E., Cedar Rapids, IA 52499-0001
1-800-525-6205
This Prospectus describes a fixed and variable single premium immediate annuity
contract (the "Contract") offered by PFL Life Insurance Company ("PFL," "we",
"us" or "our"). Under the Contract, we provide annuity payments to the Payee at
regular intervals. You choose the frequency of the annuity payments and the
first annuity payment date, which must generally be within 30 days of the
contract issue date. Annuity payments can be for the annuitant's lifetime, for
the lifetime of the annuitant and joint annuitant or for other periods. You may
also choose a guaranteed minimum number of years of annuity payments.
You purchase a Contract with a single premium (the "Premium"). You may not pay
additional premiums. You may allocate your Premium between fixed and variable
annuity payments. If you allocate all or a portion to a variable annuity
payment option, you also choose one or more of the thirteen Subaccounts of the
PFL Retirement Builder Variable Annuity Account (the "Separate Account"), which
invest in the following mutual fund portfolios (the "Portfolios"):
VARIABLE INSURANCE VARIABLE INSURANCE VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II PRODUCTS FUND III
VIP Equity-Income VIP II Asset Manager VIP III Balanced
VIP Growth VIP II Asset Manager: VIP III Growth & Income
VIP High Income Growth VIP III Growth
VIP Money Market VIP II Contrafund Opportunities
VIP Overseas VIP II Index 500
VIP II Investment Grade
Bond
The Variable Insurance Products Fund ("VIP"), Variable Insurance Products Fund
II ("VIP II") and the Variable Insurance Products Fund III ("VIP III")
(collectively, the "Funds") are managed by Fidelity Management & Research
Company ("FMR"). Amounts allocated to the Subaccounts will result in Annuity
Payments that vary in amount according to the investment results of the
Portfolios you select. Additional Portfolios may be offered in the future.
THIS PROSPECTUS PROVIDES INFORMATION THAT YOU SHOULD KNOW BEFORE PURCHASING A
CONTRACT. ADDITIONAL INFORMATION ABOUT THE CONTRACT AND THE SEPARATE ACCOUNT
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF
ADDITIONAL INFORMATION DATED , 1998. THE STATEMENT OF ADDITIONAL INFORMATION
(THE "STATEMENT") IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND IS
AVAILABLE WITHOUT CHARGE BY CALLING PFL AT 1-800-525-6205. THE "TABLE OF
CONTENTS" FOR THE STATEMENT APPEARS ON PAGE . THE SEC MAINTAINS A WEBSITE
(HTTP://WWW.SEC.GOV) THAT CONTAINS THE STATEMENT, MATERIAL INCORPORATED BY
REFERENCE AND OTHER INFORMATION REGARDING THE SEPARATE ACCOUNT.
THE SECURITIES AND EXCHANGE COMMISSION ("SEC") 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.
THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE
VARIABLE INSURANCE PRODUCTS FUND, THE VARIABLE INSURANCE PRODUCTS FUND II AND
THE VARIABLE INSURANCE PRODUCTS FUND III. PLEASE READ THE PROSPECTUSES AND KEEP
THEM FOR FUTURE REFERENCE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED
STATEMENT (OR ANY SALES LITERATURE APPROVED BY PFL) IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE
CONTRACTS ARE NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD
BE UNLAWFUL THEREIN.
PROSPECTUS DATE: , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................................ 3
SUMMARY.................................................................... 5
EXPENSE TABLE.............................................................. 7
PFL, THE SEPARATE ACCOUNT AND THE FUNDS.................................... 9
PFL Life Insurance Company............................................... 9
The Separate Account..................................................... 9
The Funds................................................................ 9
Addition, Deletion or Substitution of Investments...................... 30
Resolving Material Conflicts........................................... 31
THE CONTRACTS.............................................................. 31
Purchase of a Contract................................................... 31
Free Look Privilege...................................................... 32
Allocations of Your Premium to the Separate Account...................... 32
Variable Annuity Units................................................... 32
Charges Under the Contracts.............................................. 33
Premium Taxes.......................................................... 33
Separate Account Charge................................................ 33
Expenses of the Funds.................................................. 33
Other Taxes............................................................ 33
Surrender Value........................................................ 33
Transfers from Variable Annuity Payments to Fixed Annuity Payments....... 33
Transfers Among Subaccounts.............................................. 34
Withdrawals and Surrenders............................................... 34
Annuity Payments......................................................... 34
Annuity Payment Dates.................................................. 34
Payments Under the Contracts........................................... 35
Fixed, Variable or Combination Annuity Payments........................ 35
Assumed Investment Return (AIR)........................................ 35
Types of Annuity Payment Options......................................... 36
Death Proceeds......................................................... 38
FEDERAL TAX CONSIDERATIONS................................................. 39
OTHER INFORMATION.......................................................... 44
Distribution of the Contracts............................................ 44
Voting Rights............................................................ 44
Performance.............................................................. 44
IMSA..................................................................... 45
Year 2000 Matters........................................................ 45
Legal Proceedings........................................................ 46
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 47
APPENDIX--ILLUSTRATIONS OF VALUES.......................................... 48
</TABLE>
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<PAGE>
DEFINITIONS
Allocation Date--The date on which a transfer is made from one Subaccount to
another.
Annuitant and Secondary Annuitant--The person upon whose life the annuity
payments are based. For joint options, annuity payments are based upon the
lives of both the Annuitant and Secondary Annuitant. Either the Annuitant or
the Secondary Annuitant generally must be no older than 80 years of age on the
Contract Issue Date.
Annuity Payments--Payments made by us to the Payee pursuant to the payment
option chosen. Payments may be either fixed or variable or a combination of
both.
Assumed Investment Return (the "AIR")--The annual effective rate shown in the
Contract Specifications Section of the Contract that is used in the calculation
of each variable Annuity Payment.
Beneficiary(ies)--The person(s) who may receive death proceeds or guaranteed
payments under this Contract when there is no longer a living Annuitant (or
last Annuitant for joint options).
Code--The Internal Revenue Code of 1986, as amended.
Contract Issue Date--The date the Contract becomes effective. This will be
stated in the Contract. Generally, the date the initial premium is allocated to
the Separate Account.
Funds--Variable Insurance Products Fund, Variable Insurance Products Fund II,
and Variable Insurance Products Fund III.
Net Investment Factor--A unit of measure used to reflect the change in Variable
Annuity Unit values in a Subaccount from one Valuation Period to the next
Valuation Period.
Non-Qualified Contract--A Contract other than a Qualified Contract. This type
of Contract may be purchased with money from any source.
Owner(s)--"You," "your," and "yours." The person or entity named in the
Contract Specifications Section who may, while any Annuitant is living,
exercise all rights granted by the Contract. The Annuitant must be the Owner,
if the Contract is a Qualified Contract. If there is a Secondary Annuitant, he
or she may also be an Owner (except for a Qualified Contract, where only one
Owner is permitted). The Secondary Annuitant is never required to be an Owner.
Payee--The person or entity to whom Annuity Payments are paid.
Payment Date--The date an Annuity Payment is paid to the Payee. We may require
evidence that any Annuitant and/or Payee is/are alive on the Payment Date.
Qualified Contract--A Contract that qualifies for special tax treatment under
the Code.
Separate Account--PFL Retirement Builder Variable Annuity Account.
Subaccount--The investment options or divisions of the Separate Account.
Currently, there are thirteen Subaccounts. Each Subaccount invests in a
different Portfolio of the Funds. We may make additional Subaccounts available
in the future.
Successor Owner--The person named by the Owner to whom ownership of the
Contract passes upon the Owner's death. If the Owner is also the Annuitant, the
Annuitant's Beneficiary is entitled to the death proceeds of the Contract. If
no person is named, the Owner's estate shall be deemed the Successor Owner.
- 3 -
<PAGE>
Valuation Day--Each day the New York Stock Exchange is open for trading and any
other day when the Securities and Exchange Commission requires mutual funds or
unit investment trusts to be valued. The determination of the Variable Annuity
Unit Value is made at the end of each Valuation Day.
Valuation Period--The period of time beginning at the close of business each
Valuation Day and ending at the close of business on the next Valuation Day.
Variable Annuity Unit--Variable Annuity Payments are expressed in terms of
Variable Annuity Units, the value of which fluctuates in relation to the
selected Subaccounts.
Variable Annuity Payment Calculation Date--The date, no more than seven
business days before each Payment Date, when the amount of the variable Annuity
Payment is determined. If the New York Stock Exchange is closed on a Variable
Annuity Payment Calculation Date, we will determine the amount of annuity
income on the next day it is open.
- 4 -
<PAGE>
SUMMARY
GENERAL DESCRIPTION
This Prospectus is designed to provide you with sufficient information to
decide whether or not to purchase the contract. This summary provides a brief
description of some of the more important aspects of the contract.
PURCHASING A CONTRACT
You purchase this contract with a single premium. No additional premium
payments will be accepted. The minimum premium is $25,000, although smaller
amounts may be accepted with our approval. Generally, you have a ten-day free
look period after the contract is issued. During this time you may cancel the
contract and we will return the premium plus any investment gain or loss of the
Portfolios underlying the Subaccounts. The free look period and amount refunded
may vary from state to state. After the free look period, the contract may not
be surrendered (for any amount) unless a Certain Only or Life with Emergency
Cash SM payment option is selected. See page 25 for more information.
ALLOCATION OF PREMIUM
You must allocate your premium between fixed and variable Annuity Payments. The
amount of your premium allocated to variable Annuity Payments must additionally
be allocated to the various Subaccounts. There are currently 13 Subaccounts to
choose from, all managed by Fidelity Management & Research Company.
ANNUITY PAYMENTS
Annuity Payments may be either fixed, variable or a combination of fixed and
variable. We guarantee the amount of fixed Annuity Payments, we do not
guarantee the amount of variable Annuity Payments. Variable Annuity Payments
are determined by the investment performance of the Subaccounts you select.
Annuity Payments may be scheduled for either monthly or quarterly payments.
Semiannual and annual payments are available only with our approval. Annuity
payments may be partly or fully taxable as ordinary income. See page 28.
TRANSFERS
You may transfer amounts within the various Subaccounts. We may charge a fee
for excessive transfers (we currently do not charge for transfers). You may
also transfer amounts from variable Annuity Payments to fixed Annuity Payments
at any time. The payment option for the fixed Annuity Payments will be a
continuation of the payment option currently applicable to variable Annuity
Payments. Transfers from fixed Annuity Payments to variable Annuity Payments
are not permitted. See page 27.
WITHDRAWALS AND SURRENDERS
You may also withdraw or surrender all or a portion of a contract if either the
Certain Only or Life with Emergency Cash SM Annuity Payment option is selected.
No other payment option allows withdrawals. If you elect a Certain Only payment
option the withdrawals must be at least 25% of the present value of the
remaining payments. If you select the Life with Emergency Cash SM payment
option, we will provide you with a Life with Emergency CashSM Benefit Schedule
that will allow you to determine how much is available to withdraw or
surrender. Withdrawals and surrenders may have adverse tax consequences. You
should consult with your tax advisor before requesting a withdrawal or
surrender. See page 28.
DEATH BENEFITS
Certain Annuity Payment options provide a death benefit in the event the
annuitant(s) die(s) after Annuity Payments begin or if the owner or
annuitant(s) die before Annuity Payments begin. A complete description of the
payment options begins on page 30. See page 32 for a complete description of
the death benefit.
- 5 -
<PAGE>
PORTFOLIO EXPENSES AND FEES
Each Portfolio has investment management and other fees charged directly to it.
In 1997, these ranged from 0.28% to 0.92% annually of average daily net assets.
SEPARATE ACCOUNT CHARGE
If you allocate $50,000 or more to variable Annuity Payments the Separate
Account Charge is 1.15% annually of average daily net assets; if you allocate
less than $50,000 to variable Annuity Payments the Separate Account Charge is
1.35%. This charge will not increase and does not apply to fixed Annuity
Payments.
PREMIUM TAX
In some states, a charge for applicable premium taxes ranging from 0-3.5% is
deducted from the premium when paid. See page 27.
* * *
This summary only provides a brief overview of the more significant aspects of
the Contracts. You will find more detailed information in the rest of this
Prospectus, the Statement and in the Contract. Please keep the Contract and its
riders or endorsements, if any, together with the attached application.
Together they are the entire agreement between you and PFL.
- 6 -
<PAGE>
EXPENSE TABLE
This information is intended to help you understand the various costs and
expenses that a Contract will bear directly or indirectly. The expense table
assumes that your entire Premium is allocated to the Separate Account;
therefore, it reflects expenses of the Separate Account as well as the
underlying Portfolios. The tables below do not reflect any deductions for
taxes. Any applicable premium taxes are deducted from the premium on the
Contract Issue Date. See "Charges Under the Contracts" on page 27 of this
Prospectus for additional information.
EXPENSE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
- -------------------------------------
<TABLE>
<S> <C>
Sales Load charged to premium... None
Annual Contract Administration
Charge......................... None
Transfer Fee (for first six
transfers in any Contract
year).......................... None
Surrender Charge................ None
</TABLE>
There is no surrender charge with
respect to variable annuity
payments under the Contract. For an
explanation of the surrender value,
see "Withdrawals and Surrenders" on
page 28.
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------
<TABLE>
<S> <C>
Separate Account Charge:
Mortality and Expense Risk
Charge........................ 1.20%
(This charge is 1.00% if
allocation to Variable Annuity
Payments is $50,000.00 or
more)
Administration Charge.......... 0.15%
----
Total.......................... 1.35%
</TABLE>
- ------------------------------------------------------------------------------
PORTFOLIO ANNUAL EXPENSES(/2/)
(as a percentage of average net assets and after expense reimbursements)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO
MANAGEMENT OTHER ANNUAL
FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
VIP Equity Income............................. 0.50% 0.08% 0.58%(/3/)
VIP Growth.................................... 0.60% 0.09% 0.69%(/3/)
VIP High Income............................... 0.59% 0.12% 0.71%(/3/)
VIP Money Market.............................. 0.21% 0.10% 0.31%
VIP Overseas.................................. 0.75% 0.17% 0.92%(/3/)
VIP II Asset Manager.......................... 0.55% 0.10% 0.65%(/3/)
VIP II Asset Manager: Growth.................. 0.60% 0.17% 0.77%(/3/)
VIP II Contrafund............................. 0.60% 0.11% 0.71%(/3/)
VIP II Index 500.............................. 0.24% 0.04% 0.28%(/4/)
VIP II Investment Grade Bond.................. 0.44% 0.14% 0.58%
VIP III Balanced.............................. 0.45% 0.16% 0.61%(/3/)
VIP III Growth & Income....................... 0.49% 0.21% 0.70%
VIP III Growth Opportunities.................. 0.60% 0.14% 0.74%(/3/)
</TABLE>
(/1/)There is currently no charge for any transfers, although PFL reserves the
right to charge $15 for transfers in excess of six per year.
(/2/)The fee table information relating to the Portfolios is for 1997 and was
provided to PFL by FMR, and PFL has not independently verified such
information.
(/3/)A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances, were used to reduce custodian expenses.
Including these reductions, the total annual expenses for 1997 presented
in the table would have been as follows:
0.57% for VIP Equity-Income Portfolio
0.67% for VIP Growth Portfolio
0.71% for VIP High Income Portfolio
0.90% for VIP Overseas Portfolio
0.64% for VIP II Asset Manager Portfolio
0.76% for VIP II Asset Manager: Growth Portfolio
0.68% for VIP II Contrafund Portfolio
0.60% for VIP III Balanced Portfolio
0.73% for VIP III Growth Opportunities Portfolio
(/4/)FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during 1997. Without this reimbursement, the Portfolio's management fee,
other expenses and total annual expenses would have been 0.27%, 0.13% and
0.40%, respectively.
The effects of the fees and charges shown above are reflected in the
illustrations of Annuity Payments contained in the Appendix at the end of this
Prospectus. The illustrations are intended to assist you in assessing the
effects of these fees and charges, and the effect of investment performance on
the amount of your Annuity Payments.
- 7 -
<PAGE>
EXAMPLES
The following examples indicate the expenses you would pay in various
situations, based on actual Portfolio expenses for 1997, and the following
assumptions: (a) a $1,000 investment (and, therefore, a 1.35% Separate Account
Charge); (b) a 5.0% annual return on assets; (c) monthly payments; (d) a 5.5%
Assumed Investment Return; (e) there are no Premium taxes; (f) there are no
transfers; and (g) the entire Premium is allocated to a single Subaccount. (Any
different assumption(s) would result in different expenses.)
1. If a Life Only Annuity Payment option for a 65 year old male is selected
with no Life with Emergency Cash(SM) rider, and, therefore, the Contract cannot
be surrendered:
<TABLE>
<CAPTION>
1 3
SUBACCOUNT YEAR YEARS
- -------------------------------------------------------------------------------
<S> <C> <C>
VIP Equity-Income.............................................. $19.00 $53.00
VIP Growth..................................................... $20.00 $56.00
VIP High Income................................................ $20.00 $56.00
VIP Money Market............................................... $16.00 $46.00
VIP Overseas................................................... $22.00 $62.00
VIP II Asset Manager........................................... $19.00 $55.00
VIP II Asset Manager: Growth................................... $20.00 $58.00
VIP II Contrafund.............................................. $20.00 $56.00
VIP II Index 500............................................... $16.00 $45.00
VIP II Investment Grade Bond................................... $19.00 $53.00
VIP III Balanced............................................... $19.00 $54.00
VIP III Growth & Income........................................ $20.00 $56.00
VIP III Growth Opportunities................................... $20.00 $57.00
</TABLE>
2. If a 20 year Period Certain Annuity Payment option is selected and the
Contract is not surrendered:
<TABLE>
<CAPTION>
1 3
SUBACCOUNT YEAR YEARS
- -------------------------------------------------------------------------------
<S> <C> <C>
VIP Equity-Income.............................................. $19.00 $53.00
VIP Growth..................................................... $20.00 $56.00
VIP High Income................................................ $20.00 $57.00
VIP Money Market............................................... $16.00 $46.00
VIP Overseas................................................... $22.00 $62.00
VIP II Asset Manager........................................... $19.00 $55.00
VIP II Asset Manager: Growth................................... $20.00 $58.00
VIP II Contrafund.............................................. $20.00 $57.00
VIP II Index 500............................................... $16.00 $45.00
VIP II Investment Grade Bond................................... $19.00 $53.00
VIP III Balanced............................................... $19.00 $54.00
VIP III Growth & Income........................................ $20.00 $56.00
VIP III Growth Opportunities................................... $20.00 $57.00
</TABLE>
3. If a Life Only Annuity Payment option for a 65 year old male is selected
with a Life with Emergency Cash(SM) Rider, and the Contract is surrendered:
<TABLE>
<CAPTION>
1 3
SUBACCOUNT YEAR YEARS
- -------------------------------------------------------------------------------
<S> <C> <C>
VIP Equity-Income.............................................. $18.00 $52.00
VIP Growth..................................................... $20.00 $55.00
VIP High Income................................................ $20.00 $56.00
VIP Money Market............................................... $16.00 $45.00
VIP Overseas................................................... $22.00 $61.00
VIP II Asset Manager........................................... $19.00 $54.00
VIP II Asset Manager: Growth................................... $20.00 $57.00
VIP II Contrafund.............................................. $20.00 $56.00
VIP II Index 500............................................... $16.00 $45.00
VIP II Investment Grade Bond................................... $18.00 $52.00
VIP III Balanced............................................... $19.00 $53.00
VIP III Growth & Income........................................ $20.00 $56.00
VIP III Growth Opportunities................................... $20.00 $57.00
</TABLE>
These examples should not be considered representations of past or future
performance or expenses. The actual expenses paid or performance achieved may
be greater or less than those shown or assumed above.
- 8 -
<PAGE>
PFL, THE SEPARATE ACCOUNT, AND THE FUNDS
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1997, PFL had
assets of approximately $8.7 billion. PFL is a wholly-owned indirect
subsidiary of AEGON USA, Inc. which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc., is indirectly owned by AEGON n.v. of the Netherlands, the securities of
which are publicly traded. AEGON n.v., a holding company, conducts its
business through subsidiary companies engaged primarily in the insurance
business.
THE SEPARATE ACCOUNT
The Separate Account is registered with the SEC under the Investment Company
Act of 1940 (1940 Act) as a unit investment trust and meets the definition of
a separate account under federal securities laws. However, the SEC does not
supervise the management or the investment practices or policies of the
Separate Account or PFL.
The Separate Account was established as a separate investment account of PFL
under the laws of the State of Iowa on March 29, 1996. If a portion of the
Premium is allocated to the Separate Account, the Separate Account will invest
that portion of the Premium in shares of the Funds managed by FMR.
The Separate Account currently has thirteen Subaccounts that are available
under the Contract. Additional Subaccounts may be established in the future at
the discretion of PFL. Each Subaccount invests exclusively in shares of one of
the Portfolios of the underlying Funds. Shares of the Funds are valued at net
asset value. Any dividends or capital gains distributions of a Portfolio of
the Funds are reinvested in shares of that Portfolio. Under Iowa law, the
assets of the Separate Account are owned by PFL; however, they are held
separately from the other assets of PFL. To the extent that these assets are
attributable to the reserves and other Contract liabilities of the Separate
Account, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in the Separate Account, whether or not realized, are credited to or
charged to the Separate Account without regard to other income, gains or
losses of any other Account or Subaccount of PFL. Therefore, the investment
performance of the Subaccounts should be entirely independent of the
investment performance of PFL's general account assets or any other account or
Subaccount maintained by PFL.
THE FUNDS
The available Subaccounts of the Separate Account currently invest exclusively
in shares of the underlying Funds. The underlying Funds are diversified, open-
end management investment companies organized by FMR. They are the type of
investment company commonly known as a series mutual fund.
Certain information concerning the Funds is set forth below. More detailed
information may be found in the Funds' current prospectuses, which accompany
or precede this Prospectus, and the Funds' current Statements of Additional
Information. The following description is qualified in its entirety by
reference to each underlying Fund's prospectus and Statement of Additional
Information.
FMR provides investment advice and administrative services to the underlying
Funds pursuant to an agreement under which each Portfolio pays FMR a monthly
fee. The thirteen Portfolios offered by the Funds provide a range of
investment alternatives that vary according to the different investment
objectives described in the Funds' prospectuses and summarized below. The
assets of each Portfolio are separate from the others, and each Portfolio has
separate investment objectives and policies. As a result, each Portfolio
operates as a separate investment fund, and the investment performance of one
Portfolio has no effect on the investment performance of any other Portfolio.
Each of the Portfolios may not be available for investment in every state.
- 9 -
<PAGE>
The following is a description of each Portfolio and a graph showing how your
Annuity Payments can fluctuate based on past investment performance (net of all
charges) of the Portfolios through December 31, 1997. The information presented
is for periods prior to the inception date of the Subaccounts. PFL did not sell
the Contracts prior to the date of this Prospectus, and , therefore, the graphs
illustrate what Annuity Payments might have been under a Contract had one
existed during the years shown.
The graphs are based on the adjusted historical performance of the Portfolios,
which means that the 1.35% Separate Account Charge and the actual expenses of
each Portfolio for the year ended December 31, 1997, are reflected in the graph
for each Portfolio. The graphs do not reflect any premium tax charge.
Each graph shows the effect that the Portfolio's investment performance would
have had on the value of an annuity unit and, thus, the value of an Annuity
Payment if a Contract with an AIR of 5.5%, providing an initial monthly Annuity
Payment of $500.00, was purchased on the date the Portfolio commenced
operations. Each graph assumes that the entire premium of the hypothetical
Contract was allocated to the Subaccount being illustrated. Annuity Payments
increase for a given month if the performance of the Portfolio underlying the
Subaccounts, net of all charges, for that month is higher than the AIR, and
decreases for a given month if the performance of the Portfolio underlying the
Subaccounts, net of all charges, for that month is lower than the AIR. The
Premium necessary for an initial monthly Annuity Payment of $500.00 will vary
depending on the age and sex of the Annuitant (and Secondary Annuitant, if
any), the Annuity Payment option and the first Annuity Payment Date. For
example, suppose that a 65 year old male who lives in a state that does not
charge a premium tax wishes to purchase $500.00 of an initial monthly variable
Annuity Payment beginning on the Contract Issue Date with a life only payment
option. If there is no Secondary Annuitant, no guarantee period and he chooses
a 5.5% AIR, the Premium needed would be $71,301.00. If the purchaser were
female, the Premium necessary would be $77,903.00. This is because females have
a longer life expectancy than males.
All of the graphs take into account the 1.35% Separate Account Charge and the
actual expenses of the Portfolio.
THE MONTHLY PAYMENTS DEPICTED IN THE GRAPHS ARE NOT BASED ON ACTUAL CONTRACTS.
THEY ARE BASED ON ADJUSTED HISTORICAL PERFORMANCE RESULTS OF THE PORTFOLIOS AND
ARE NOT PROJECTIONS OR INDICATIONS OF FUTURE RESULTS. PFL DOES NOT GUARANTEE
AND DOES NOT SUGGEST THAT ANY SUBACCOUNT OR CONTRACT ISSUED BY PFL WILL
GENERATE THESE OR SIMILAR AVERAGE MONTHLY PAYMENTS FOR ANY PERIOD OF TIME. THE
GRAPHS ARE FOR ILLUSTRATION PURPOSES ONLY AND DO NOT REPRESENT FUTURE VARIABLE
ANNUITY PAYMENTS OR FUTURE INVESTMENT RETURNS. Variable Annuity Payments under
a real Contract may be more or less than those forming the basis for the
monthly payments shown in these graphs, if the actual returns of the Portfolios
selected by you are different from the adjusted historical returns of the
Portfolios. It is very likely that a Portfolio's investment performance will
fluctuate over time; therefore, you can expect that your variable Annuity
Payments will fluctuate. The total amount of variable Annuity Payments
ultimately received will depend upon the Annuity Payment option selected by
you. See "Types of Annuity Payment Options" on page 30.
* * *
- 10 -
<PAGE>
VIP Equity-Income Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities the Portfolio
will also consider the potential for capital appreciation. The Portfolio's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index. The Portfolio
may be appropriate for investors who are willing to ride out stock market
fluctuations in pursuit of potentially high long-term returns. The Portfolio is
designed for those who want some income from equity and bond investments, but
also want to be invested in the stock market for its long-term growth
potential. The graph below is based on a 5.5% AIR and an initial monthly
Annuity Payment of $500.00.
[EQUITY INCOME GRAPH]
The fund inception date is October 1986. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
----------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $560
1983 N/A 1992 $612
1984 N/A 1993 $677
1985 N/A 1994 $678
1986 $494 1995 $856
1987 $455 1996 $915
1988 $523 1997 $1,096
1989 $575
1990 $455
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ---------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
1997 26.41 % 1 Year 38.86%
1996 12.75 % 5 Years 19.14%
1995 33.31 % 10 Years 15.24%
1994 5.64 % Since Inception 13.85%
1993 16.63 %
1992 15.41 %
1991 29.71 %
1990 (16.43)%
1989 15.78 %
1988 21.34 %
1987 (2.76)%
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP Equity Income Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
VIP Growth Portfolio seeks to achieve capital appreciation normally through the
purchase of common stocks (although the Portfolio's investments are not
restricted to any one type of security). Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks. The
Portfolio may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
Portfolio is designed for those who want to pursue growth wherever it may
arise, and who understand that this strategy often leads to investments in
small, less well-known companies. The Portfolio invests for growth and does not
pursue an income strategy. The graph below is based on a 5.5% AIR and an
initial monthly Annuity Payment of $500.00.
[GROWTH PORTFOLIO GRAPH]
- 12 -
<PAGE>
The fund inception date is October 1986. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
----------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $715
1983 N/A 1992 $731
1984 N/A 1993 $816
1985 N/A 1994 $763
1986 $494 1995 $966
1987 $478 1996 $1,036
1988 $518 1997 $1,197
1989 $637
1990 $525
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------- ------------------------------------------------
<S> <C> <C> <C>
1997 21.84% 1 Year 40.87%
1996 13.17% 5 Years 18.37%
1995 33.57% 10 Years 15.97%
1994 -1.36% Since Inception 14.87%
1993 17.78%
1992 7.86%
1991 43.59%
1990 -12.93%
1989 29.66%
1988 -14.25%
1987 2.18%
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP Growth Portfolio, adjusted to reflect the 1.35% Separate Account Charge.
- 13 -
<PAGE>
VIP High Income Portfolio seeks to obtain a high level of current income by
investing primarily in high-yielding, lower-rated, fixed-income securities. In
choosing these securities growth of capital will also be considered. A fund's
level of risk and potential reward depend on the quality and maturity of its
investments. The Portfolio is for long-term, aggressive investors who
understand the potential risks and rewards of investing in lower-quality debt,
including defaulted securities. Investors must be willing to accept the
Portfolio's greater price movements and credit risks. The graph below is based
on a 5.5% AIR and an initial monthly Annuity Payment of $500.00.
[HIGH INCOME PORTFOLIO GRAPH]
The fund inception date is September 1985. Payments are determined at each
month end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $587
1983 N/A 1992 $676
1984 N/A 1993 $761
1985 $521 1994 $701
1986 $574 1995 $791
1987 $543 1996 $843
1988 $568 1997 $928
1989 $508
1990 $464
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------- ------------------------------------------------
<S> <C> <C> <C>
1997 16.10 % 1 Year 22.17%
1996 12.50 % 5 Years 12.05%
1995 19.00 % 10 Years 11.26%
1994 (2.86)% Since Inception 11.13%
1993 18.91 %
1992 21.41 %
1991 33.48 %
1990 (3.71)%
1989 (5.56)%
1988 10.29 %
1987 (0.13)%
16.12 %
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP High Income Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
VIP Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests only
in high-quality money market instruments. The Portfolio may be appropriate for
investors who would like to earn income at current money market rates while
preserving the value of their investment. The Portfolio is managed to keep its
share price stable at $1.00. The rate of income will vary from day to day,
generally reflecting short-term interest rates. The graph below is based on a
5.5% AIR and an initial monthly Annuity Payment of $500.00.
[MONEY MARKET PORTFOLIO GRAPH]
- 15 -
<PAGE>
The fund inception date is March 1982. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 $519 1991 $566
1983 $530 1992 $550
1984 $548 1993 $531
1985 $554 1994 $518
1986 $553 1995 $512
1987 $550 1996 $505
1988 $553 1997 $498
1989 $564
1990 $570
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------- ------------------------------------------------
<S> <C> <C> <C>
1997 4.08% 1 Year 4.14%
1996 4.00% 5 Years 3.56%
1995 4.47% 10 Years 4.43%
1994 2.87% Since Inception 5.46%
1993 1.86%
1992 2.51%
1991 4.69%
1990 6.62%
1989 7.72%
1988 5.95%
1987 5.03%
1986 5.28%
1985 6.67%
1984 8.89%
1983 7.69%
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP Money Market Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
- 16 -
<PAGE>
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies and
economies outside of the United States. The Portfolio may be appropriate for
investors who want to pursue their investment goals in markets outside of the
United States. By including international investments in your portfolio, you
can achieve additional diversification and participate in growth opportunities
around the world. However, it is important to note that investments in foreign
securities involve risks in addition to those of U.S. investments. In addition
to general risks, international investing involves different or increased
risks. The performance of international funds depends upon currency values, the
political and regulatory environment, and overall economic factors in the
countries in which the fund invests. The graph below is based on a 5.5% AIR and
an initial monthly Annuity Payment of $500.00.
[OVERSEAS PORTFOLIO GRAPH]
The fund inception date is January 1987. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $493
1983 N/A 1992 $412
1984 N/A 1993 $529
1985 N/A 1994 $503
1986 $500 1995 $516
1987 $444 1996 $546
1988 $449 1997 $570
1989 $531
1990 $488
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 10.07 % 1 Year 21.58%
1996 11.70 % 5 Years 12.97%
1995 8.22 % 10 Years 9.20%
1994 0.37 % Since Inception 7.85%
1993 35.42 %
1992 (11.92)%
1991 6.72 %
1990 (3.06)%
1989 24.61 %
1988 6.68 %
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP Overseas Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term,
fixed income instruments. The Portfolio may be appropriate for investors who
want to diversify among domestic and foreign stocks, bonds, short-term
instruments and other types of securities, the fund spreads its assets among
all three asset classes moderating both its risk and return potential. Because
the Portfolio owns different types of investments, the performance is affected
by a variety of factors. The value of the fund's investments and the income
generated will vary from day to day, and generally reflect interest rates,
market conditions, and other company, political and economic news. Performance
also depends on FMR's skills in allocating assets. The graph below is based on
a 5.5% AIR and an initial monthly Annuity Payment of $500.00.
[ASSET MANAGER PORTFOLIO GRAPH]
- 18 -
<PAGE>
The fund inception date is May 1990. Payments are determined at each month end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $576
1983 N/A 1992 $603
1984 N/A 1993 $682
1985 N/A 1994 $599
1986 N/A 1995 $656
1987 N/A 1996 $703
1988 N/A 1997 $793
1989 N/A
1990 $503
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 19.05 % 1 Year 28.51%
1996 13.07 % 5 Years 11.94%
1995 15.40 % 10 Years N/A
1994 (7.35)% Since Inception 12.74%
1993 19.44 %
1992 10.38 %
1991 20.93 %
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP II Asset Manager Portfolio, adjusted to reflect the 1.35% Separate
Account Charge.
- 19 -
<PAGE>
VIP II Asset Manager: Growth Portfolio seeks to maximize total return by
allocating its assets among a mix of domestic and foreign stocks, bonds and
short-term fixed income instruments. The Portfolio may be appropriate for
investors who want to diversify among domestic and foreign stocks, bonds,
short-term instruments and other types of securities, in one fund. The
Portfolio, while spreading its assets among all three asset classes, uses a
more aggressive approach by focusing on stocks for a higher potential return.
Because the Portfolio owns different types of investments, their performance is
affected by a variety of factors. The value of the Portfolio's investments and
the income generated will vary from day to day, and generally reflect interest
rates, market conditions, and other company, political and economic news.
Performance also depends on FMR's skills in allocating assets. The graph below
is based on a 5.5% AIR and an initial monthly Annuity Payment of $500.00.
[ASSET MANAGER GROWTH PORTFOLIO GRAPH]
The fund inception date is January 1995. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 N/A
1984 N/A 1993 N/A
1985 N/A 1994 N/A
1986 N/A 1995 $577
1987 N/A 1996 $647
1988 N/A 1997 $757
1989 N/A
1990 N/A
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 23.41% 1 Year 35.40%
1996 18.33% 5 Years N/A
1995 N/A 10 Years N/A
1994 N/A Since Inception 22.87%
1993 N/A
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP II Asset Manager: Growth Portfolio, adjusted to reflect the 1.35%
Separate Account Charge.
VIP II Contrafund Portfolio seeks capital appreciation by investing primarily
in equity securities of companies that are considered to be undervalued or out-
of-favor by the Fund's advisor. The Portfolio may be appropriate for investors
who are willing to ride out stock market fluctuations in pursuit of potentially
high long-term returns. The Portfolio is designed for those who are looking for
an investment approach that follows a contrarian philosophy. The graph below is
based on a 5.5% AIR and an initial monthly Annuity Payment of $500.00.
[CONTRAFUND PORTFOLIO GRAPH]
- 21 -
<PAGE>
The fund inception date is January 1995. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 N/A
1984 N/A 1993 N/A
1985 N/A 1994 N/A
1986 N/A 1995 $655
1987 N/A 1996 $743
1988 N/A 1997 $863
1989 N/A
1990 N/A
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN *
(PERIODS ENDED 3/31/98)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 22.49% 1 Year 39.95%
1996 19.68% 5 Years N/A
1995 N/A 10 Years N/A
1994 N/A Since Inception 28.80%
1993 N/A
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP II Contrafund Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
- 22 -
<PAGE>
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's Composite Stock Price Index. The Portfolio may be appropriate
for investors who are willing to ride out stock market fluctuations in pursuit
of potentially high long-term returns. The Portfolio is designed for those who
want to pursue growth of capital and current income through a portfolio of
securities that broadly represents the U.S. stock market, as measured by the
S&P 500. The Portfolio seeks to keep expenses low as it attempts to match the
return of the S&P 500. Because the Portfolio seeks to track, rather than beat,
the performance of the S&P 500, it is not managed in the same manner as other
mutual funds. The graph below is based on a 5.5% AIR and an initial monthly
Annuity Payment of $500.00.
[INDEX 500 PORTFOLIO GRAPH]
The fund inception date is August 1992. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 $516
1984 N/A 1993 $530
1985 N/A 1994 $501
1986 N/A 1995 $642
1987 N/A 1996 $737
1988 N/A 1997 $915
1989 N/A
1990 N/A
</TABLE>
- 23 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 30.94 % 1 Year 45.39%
1996 21.18 % 5 Years 20.37%
1995 35.36 % 10 Years N/A
1994 (0.32)% Since Inception 19.94%
1993 8.27 %
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP II Index 500 Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in a broad range
of investment-grade fixed-income securities. The Portfolio may be appropriate
for investors who want high current income from a portfolio of investment-grade
debt securities. A fund's level of risk and potential reward depend on the
quality and maturity of its investments. With its focus on medium-to-high-
quality investments, the Portfolio has a moderate risk level and yield
potential. The graph below is based on a 5.5% AIR and an initial monthly
Annuity Payment of $500.00.
[INVESTMENT GRADE BOND PORTFOLIO GRAPH]
- 24 -
<PAGE>
The fund inception date is June 1989. Payments are determined at each month
end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 $554
1983 N/A 1992 $552
1984 N/A 1993 $573
1985 N/A 1994 $516
1986 N/A 1995 $566
1987 N/A 1996 $546
1988 N/A 1997 $557
1989 $512
1990 $508
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 7.61 % 1 Year 10.08%
1996 1.80 % 5 Years 5.14%
1995 15.76 % 10 Years N/A
1994 (5.04)% Since Inception 6.80%
1993 9.48 %
1992 5.23 %
1991 14.94 %
1990 4.71 %
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP II Investment Grade Bond Portfolio, adjusted to reflect the 1.35%
Separate Account Charge.
- 25 -
<PAGE>
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a broad selection of stocks, bonds, and convertible into common stocks. When
FMR's outlook is neutral, it will invest approximately 60% of the Portfolio's
assets in equity securities and will always invest at least 24% of the
Portfolio's assets in fixed income securities. The value of the Portfolio's
investments and, as applicable, the income they generate will vary from day to
day, and generally reflect changes in market conditions, interest rates, and
other company, political, or economic news. In the short-term, stock prices can
fluctuate dramatically in response to these factors. The graph below is based
on a 5.5% AIR and an initial monthly Annuity Payment of $500.00.
[BALANCED PORTFOLIO GRAPH]
The fund inception date is May 1997. Payments are determined at each month end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 N/A
1984 N/A 1993 N/A
1985 N/A 1994 N/A
1986 N/A 1995 N/A
1987 N/A 1996 N/A
1988 N/A 1997 $553
1989 N/A
1990 N/A
</TABLE>
- 26 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------ --------------------------------------------------
<S> <C> <C> <C>
1997 N/A 1 Year
1996 N/A 5 Years N/A
1995 N/A 10 Years N/A
1994 N/A Since Inception 24.28%
1993 N/A
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP III Balanced Portfolio, adjusted to reflect the 1.35% Separate Account
Charge.
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. The Portfolio may also invest in equity securities that are not
paying dividends, but offer the potential for capital appreciation of future
income. The Portfolio may be appropriate for investors who are willing to ride
out stock market fluctuations in pursuit of potentially high long-term returns.
The Portfolio is designed for those who seek a combination of growth and income
from equity and some bond investment. The graph below is based on a 5.5% AIR
and an initial monthly Annuity Payment of $500.00.
[GROWTH AND INCOME PORTFOLIO GRAPH]
- 27 -
<PAGE>
The fund inception date is May 1997. Payments are determined at each month end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 N/A
1984 N/A 1993 N/A
1985 N/A 1994 N/A
1986 N/A 1995 N/A
1987 N/A 1996 N/A
1988 N/A 1997 $597
1989 N/A
1990 N/A
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------- --------------------------------------------------
<S> <C> <C> <C>
1997 N/A 1 Year
1996 N/A 5 Years N/A
1995 N/A 10 Years N/A
1994 N/A Since Inception 39.19%
1993 N/A
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP III Growth & Income Portfolio, adjusted to reflect the 1.35% Separate
Account Charge.
- 28 -
<PAGE>
VIP III Growth Opportunities Portfolio seeks capital growth by investing in a
wide range of common domestic and foreign stocks, and securities convertible
into common stocks. Although the Portfolio invests primarily in common stock,
it has the ability to purchase securities, such as preferred stock and bonds
that may produce capital growth. The value of the Portfolio's investments and,
as applicable, the income they generate will vary from day to day and generally
reflect changes in market conditions, interest rates, and other company,
political or economic news. In the short-term, stock prices can fluctuate
dramatically in response to these factors. The graph below is based on a 5.5%
AIR and an initial monthly Annuity Payment of $500.00.
[GROWTH OPPORTUNITIES PORTFOLIO GRAPH]
The fund inception date is May 1997. Payments are determined at each month end.
<TABLE>
<CAPTION>
MONTHLY PAYMENT AMOUNTS AT END OF YEAR
---------------------------------------------------------------------------------
<S> <C> <C> <C>
1982 N/A 1991 N/A
1983 N/A 1992 N/A
1984 N/A 1993 N/A
1985 N/A 1994 N/A
1986 N/A 1995 N/A
1987 N/A 1996 N/A
1988 N/A 1997 $593
1989 N/A
1990 N/A
</TABLE>
- 29 -
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED HISTORICAL ANNUAL TOTAL RETURN* ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURN*
(PERIODS ENDED 3/31/98)
- ------------------------------------------- ------------------------------------------------
<S> <C> <C> <C>
1997 N/A 1 Year
1996 N/A 5 Years N/A
1995 N/A 10 Years N/A
1994 N/A Since Inception 34.69%
1993 N/A
1992 N/A
1991 N/A
1990 N/A
1989 N/A
1988 N/A
1987 N/A
</TABLE>
* The Subaccount had not began operations as of the date of this Prospectus.
Historical returns for periods prior to that date are total returns for the
VIP III Growth Opportunities Portfolio, adjusted to reflect the 1.35%
Separate Account Charge.
FMR is the investment advisor for the Funds. FMR is a registered investment
advisor under the Investment Advisors Act of 1940. FMR is the original Fidelity
company and was founded in 1946. It provides numerous mutual funds and other
clients with investment research and portfolio management services. It
maintains a large staff of experienced investment personnel and a full
complement of related support facilities. As of December 31, 1997, it advised
funds having more than 34 million shareholder accounts with a total value of
more than $529 billion. FMR charges the Portfolios an investment management
fee. These fees are part of the Portfolios' operating expenses. See the
attached prospectuses for the Funds for discussions of the Funds' expenses.
THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS INVESTMENT
OBJECTIVE.
PFL may receive expense reimbursements or other revenues from the Funds or FMR.
The amount of these reimbursements or revenues, if any, may be based on the
amount of assets that PFL (or its affiliates) or the Separate Account invests
in the Funds.
The Funds' prospectuses should be read carefully before any decision is made
concerning the allocation of the Premium to a particular Subaccount.
An investment in the Separate Account, or in any Portfolio, including the Money
Market Portfolio, is not insured or guaranteed by the U.S. government or any
government agency.
The investment objectives and policies of certain Portfolios are similar to the
investment objectives and policies of other portfolios that may be managed by
the same investment advisor or manager. The investment results of the
Portfolios, however, may differ from the results of such other portfolios.
There can be no assurance, and no representation is made, that the investment
results of any of the Portfolios will be comparable to the investment results
of any other portfolio, even if the other portfolio has the same investment
advisor or manager.
Addition, Deletion, or Substitution of Investments. We cannot and do not
guarantee that any of the Subaccounts will always be available to receive
Premium allocations or transfers. We retain the right, subject to any
applicable law, to make certain changes in the Separate Account and its
investments. We reserve the right to eliminate the shares of any Portfolio held
by a Subaccount and to substitute shares of another Portfolio of the Funds or
of another registered open-end management investment company for the shares of
any Portfolio, if the shares of the Portfolio are no longer available for
investment or, if in our judgment, investment in any Portfolio would be
inappropriate in view of the purposes of the Separate Account. To the extent
required by the 1940 Act, substitutions of shares attributable to an Owner's
interest in a Subaccount will not be made without prior notice to the Owner and
the prior approval of the SEC. Nothing contained herein shall prevent the
Separate Account
- 30 -
<PAGE>
from purchasing other securities for other series or classes of variable
annuity contracts or from effecting an exchange between series or classes of
variable annuity contracts on the basis of requests made by Owners.
New Subaccounts may be established when, in our sole discretion, marketing,
tax, investment or other conditions warrant. Any new Subaccounts may be made
available to existing Owners on a basis to be determined by us. Each additional
Subaccount will purchase shares in a mutual fund portfolio or other investment
vehicle. We may also eliminate one or more Subaccounts if, in our sole
discretion, marketing, tax, investment or other conditions warrant such change.
In the event any Subaccount is eliminated, we will notify Owners and request a
reallocation of the amounts invested in the eliminated Subaccount. If no such
reallocation is provided by the Owner, we will reinvest the amounts invested in
the eliminated Subaccount in the Subaccount that invests in the Money Market
Portfolio (or in a similar portfolio of money market instruments) or in another
Subaccount, if appropriate.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in the Contracts as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Contracts,
the Separate Account may be (i) operated as a management company under the 1940
Act or any other form permitted by law, (ii) deregistered under the 1940 Act in
the event such registration is no longer required or (iii) combined with one or
more other separate accounts. To the extent permitted by applicable law, we
also may (1) transfer the assets of the Separate Account associated with the
Contracts to another account or accounts, (2) restrict or eliminate any voting
rights of Owners or other persons who have voting rights as to the Separate
Account, (3) create new separate accounts, (4) add new Subaccounts to or remove
existing Subaccounts from the Separate Account or combine Subaccounts, or (5)
add new underlying funds, or substitute a new fund for an existing fund.
Resolving Material Conflicts. The Funds are available to separate accounts
offering variable annuity and variable life products of other participating
insurance companies, as well as to the Separate Account and other separate
accounts we establish. Although we do not anticipate any disadvantages to this,
there is a possibility that a material conflict may arise between the interest
of the Separate Account and one or more of the other separate accounts
participating in a Fund. A conflict may occur due to a change in law affecting
the operations of variable life insurance and variable annuity separate
accounts, differences in the voting instructions we receive and instructions
received by other companies, or some other reason. In the event of a conflict,
it is possible that the Separate Account might be required to withdraw its
investment in the Funds. In the event of any conflict, we will take any steps
necessary to protect Owners, Annuitants, Secondary Annuitants and
Beneficiaries.
THE CONTRACTS
PURCHASE OF A CONTRACT
We offer the Contracts only in states in which it has been approved. You can
purchase a Non-Qualified Contract using money from any source. Qualified
Contracts may also be purchased for use with Individual Retirement Annuities
under Section 408(b) of the Code and by employers to make distributions under
plans established under Section 457 of the Code.
The minimum Premium for a Contract is $25,000. Amounts less than $25,000 may be
accepted with approval from our home office. The Premium may be allocated to
variable, fixed, or to a combination of variable and fixed Annuity Payment
options. The date we credit the Premium and issue the Contract is called the
Contract Issue Date. On the Contract Issue Date, the Premium (net of any
premium tax deduction) will be allocated as you specify in the order form.
For all Contracts, either the Annuitant or the Secondary Annuitant must
generally be no more than 80 years old. Your Premium is applied to the purchase
of a Contract within two business days after receipt at the Administrative and
Service Office, if the Premium is received with a properly completed order
form. Your order form will be considered properly completed as soon as (1) you
have provided all the information requested on the order form (2) we have
received adequate proof of the Annuitant's date of birth (and the date of birth
of the Secondary Annuitant, if any) and (3) the entire amount of your Premium
has been received.
- 31 -
<PAGE>
If the order form is incomplete, we will request the necessary information. If
the information is not provided within five days, we will return the Premium
unless we obtain your specific consent to let us keep it until the order form
is completed.
FREE LOOK PRIVILEGE
You may cancel and return a Contract for a refund within 10 days (or longer
where required by applicable state insurance law) after you receive it. This is
the "free look period." If you choose to cancel the contract within the free
look period, return it to the Administrative and Service Office with a written
request. We will promptly refund the amount of your Premium plus or minus the
investment performance of the Subaccount(s) to which your Premium was
allocated, if any. This provision may vary by state where required by
applicable state insurance law. We will issue the refund within seven days
after we receive written notice of cancellation and the returned Contract. The
Contract will then be deemed void. ONCE THE FREE LOOK PERIOD EXPIRES,
WITHDRAWALS MAY NOT BE MADE FROM THE CONTRACT, AND IT CANNOT BE RETURNED OR
SURRENDERED, UNLESS A CERTAIN ONLY OR LIFE WITH EMERGENCY CASH SM PAYMENT
OPTION IS CHOSEN.
ALLOCATIONS OF YOUR PREMIUM TO THE SEPARATE ACCOUNT
The portion of your Premium that you allocate to the Subaccounts of the
Separate Account will be invested into the designated Subaccount(s) on the
Contract Issue Date. You must allocate percentages that are whole numbers, not
fractions. The minimum allocation to any Subaccount must not be less than 5% of
the total amount allocated to the Subaccounts.
VARIABLE ANNUITY UNITS
Any portion of your Premium allocated to the Subaccounts will be used to
purchase Variable Annuity Units. We will determine the number of Variable
Annuity Units based upon (a) the Premium reduced by any premium taxes, (b) the
annuitant's age and sex (and the age and sex of the Secondary Annuitant, if
any), (c) the Payment Option you choose, (d) the frequency of payments you
choose, (e) the first Payment Date you choose, (f) the AIR you choose and (g)
the Variable Annuity Unit value of the Subaccounts you initially select on the
Contract Issue Date.
The number of Variable Annuity Units allocated to each Subaccount will not
change unless you transfer among the Subaccounts, transfer from variable
Annuity Payments to fixed Annuity Payments or withdraw cash (if allowed). If
you choose a joint and survivor Annuity Payment option and benefits are reduced
due to the death of one of the Annuitants, the number of Variable Annuity Units
will be reduced at that time.
We calculate the amount of your variable Annuity Payment on the Variable
Annuity Payment Calculation Date by taking the number of Variable Annuity Units
in each Subaccount and multiplying them by the Variable Annuity Unit value of
each Subaccount. This calculation is performed for each Subaccount, and the sum
of the Subaccount calculations will equal the amount of your variable Annuity
Payment.
The Variable Annuity Unit value in a particular Subaccount on any Valuation Day
is equal to (a) multiplied by (b) multiplied by (c), where:
(a) is the Variable Annuity Unit value for that Subaccount on the
immediately preceding Valuation Day;
(b) is the Net Investment Factor for that Subaccount for the Valuation
Period; and
(c) is the daily factor for the Valuation Period.
The daily factor for the Valuation Period is a discount factor that reflects
the AIR. Please refer to the Statement for additional information.
The Net Investment Factor used to calculate the Variable Annuity Unit Value for
each Subaccount for the Valuation Period is determined by dividing (a) by (b)
and subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value of a Portfolio share held in that Subaccount
determined as of the end of the current Valuation Period, plus
- 32 -
<PAGE>
(2) the per share amount of any dividend or capital gain distributions
made by the Fund for shares held in that Subaccount if the ex-dividend
date occurs during the Valuation Period; plus or minus
(3) a per share credit or charge for any taxes reserved for, which we
determine to have resulted from the investment operation of the
Subaccount.
(b) is the net asset value of a Portfolio share held in that Subaccount
determined as of the end of the immediately preceding Valuation Period; and
(c) is an amount representing the Separate Account Charge as shown in the
Contract Specifications Section of the Contract.
CHARGES UNDER THE CONTRACTS
The following are all the charges made under the Contract.
Premium Taxes. Some states charge a "premium tax" based on the amount of your
Premium. State premium taxes currently range from 0% to 3.5%. In addition, some
counties, cities or towns may charge additional premium taxes. If you reside in
a place where premium taxes apply, any amount needed to provide for the
applicable premium taxes is deducted from your Premium. The remainder of your
Premium will be allocated to the Subaccounts and/or applied to the purchase of
fixed Annuity Payments.
Separate Account Charge. A daily charge is deducted from the assets of each
Subaccount for our assumption of mortality and expense risks, and our
administration expenses. If the amount you allocate to variable Annuity
Payments is less than $50,000, a daily mortality and expense risk charge will
be deducted at an effective annual rate of 1.20%; otherwise, the mortality and
expense risk charge will be 1.00%.
An administration expense charge will also be deducted daily from the assets of
each Subaccount at an effective annual rate of 0.15%. We guarantee that the
mortality and expense risk and administrative charges will never increase.
The mortality risk arises from our obligation to provide annuity income for
your life (and the life of the Secondary Annuitant, if any) no matter how long
that might be. The expense risk results from our obligation to cover the cost
of issuing and administering the Contracts, no matter how long we may incur
such cost or how large that cost may be. The administration expense charge is
used to cover the costs of administering the Contracts. We may earn a profit
from the Separate Account Charge (and expect to do so).
Expenses of the Funds. The Portfolios are charged management fees and incur
operating expenses. The effect of these fees and expenses is reflected in the
performance of the Portfolios underlying the Subaccounts. See the attached
prospectuses for a description of the Portfolios' fees and expenses.
Other Taxes. We reserve the right to charge for certain taxes (other than
premium taxes) that may be incurred due to the Contracts or the Separate
Account. Currently, no charges for other taxes are being levied. See "PFL's Tax
Status" on page .
Surrender Value. There is no express or calculable surrender charge under the
Contract. For a discussion of surrender value, see "Withdrawals and Surrenders"
on page .
TRANSFERS FROM VARIABLE ANNUITY PAYMENTS TO FIXED ANNUITY PAYMENTS
You may transfer all or a part of the value of variable Annuity Payments to
fixed Annuity Payments by providing us with a notice you have signed or an
electronic notice that gives us the facts that we need. If you transfer from
variable Annuity Payments to fixed Annuity Payments, the fixed Annuity Payments
will be a continuation of the Payment Option under which the variable Annuity
Payments were being made, or a continuation of the fixed Annuity Payment option
that may already exist. For example, if you received variable Annuity Payments
for two years under a 10 Year Certain and Life Option and elect to transfer to
a fixed Annuity Payment, your fixed Annuity Payment would be an 8 Year Certain
and Life Option. If your variable Annuity Payment option is Life with Emergency
CashSM, the fixed Annuity Option will be a Life only or a Life with Period
Certain. The Period Certain cannot be greater than the Annuitant's remaining
life expectancy determined at the Contract Issue Date. (Life with Emergency
CashSM is only available with variable Annuity Payments.) Transfers from
variable Annuity Payments to fixed Annuity Payments may have tax consequences.
You should consult a tax advisor before making a transfer from variable Annuity
Payments to fixed Annuity Payments. You may not transfer from fixed Annuity
Payments to variable Annuity Payments.
- 33 -
<PAGE>
TRANSFERS AMONG SUBACCOUNTS
You may transfer amounts among Subaccounts by telephoning us or by providing us
with a notice you have signed or an electronic notice that gives us the facts
that we need. We have the right to charge a transfer fee of $15 for each
transfer after the first six transfers made in any Contract year (all transfers
made simultaneously will be treated as a single request). Excessive trading
activity can disrupt Portfolio management strategy and increase Portfolio
expenses, which are borne by everyone participating in the Portfolio regardless
of their transfer activity.
In some cases, contracts may be sold to individuals who independently utilize
the services of a firm or individual engaged in market timing. Generally,
market timing services obtain authorization from Contract Owner(s) to make
transfers and exchanges among the Subaccounts on the basis of perceived market
trends. Because the large transfers of assets associated with market timing
services may disrupt the management of the portfolios of the Funds, such
transactions may hurt Contract Owners not utilizing the market timing service.
Therefore, we may restrict or eliminate the right to make transfers among
Subaccounts if such rights are executed by a market timing firm or similar
third party authorized to initiate transfers or exchange transactions on behalf
of a Contract Owner(s). In modifying such rights, we may, among other things,
decline to accept (1) transfer or exchange instructions of any agent acting
under a power of attorney on behalf of more than one Contract Owner, or (2)
transfer or exchange instructions of individual Contract Owners who have
executed pre-authorized transfer or exchange forms which are submitted by
market timing firms or other third parties on behalf of more than one Contract
Owner at the same time. We will impose such restrictions only if we believe (or
FMR believes) that doing so will prevent harm to other Contract Owners.
The percent of the allocation in each Subaccount will change over time with its
investment performance. You should periodically review the allocations in light
of market conditions and financial objectives.
WITHDRAWALS AND SURRENDERS
You may withdraw or surrender all or a portion of a contract if either the
Certain Only or Life with Emergency Cash SM Annuity Payment option is selected.
No other payment option allows withdrawals. If you elect a Certain Only payment
option the withdrawals must be at least 25% of the present value of the
remaining payments. If you select the Life with Emergency CashSM payment
option, we will provide you with a Life with Emergency CashSM Benefit Schedule
that will allow you to determine how much is available to withdraw. If a
partial surrender is made, all future payments will be reduced. You should
consult with your tax advisor before requesting a withdrawal.
Surrender Values. There is no surrender charge applicable to variable Annuity
Payments under the Contract. In the cases when the Contract can be surrendered
(i.e., Certain Only or Life with Emergency CashSM options) the determination of
a surrender value depends on specific individual circumstances such as the
annuitant's age and sex, the number of annuitants, the amount of the last
payment prior to the surrender and the number of payments already made. If you
select a Certain Only payment option with fixed and/or variable Annuity
Payments you may surrender all or a portion of your Contract. For fixed Annuity
Payments the surrender value is 98% of the present value of the remaining
payments using interest rates in effect at the time of the surrender. For
Variable Annuity Payments, the surrender value is the present value of future
payments (which are assumed to be equal to the most recent payment) discounted
at an interest rate no greater than 5% (if you have a 4% AIR) or no greater
than 6.5% (if you have a 5.5% AIR).
If the Life with Emergency CashSM option is selected, please refer to the
Emergency CashSM Benefit Schedule in your contract for the information you need
to determine your surrender value.
ANNUITY PAYMENTS
Annuity Payment Dates. We provide Annuity Payments to the Payee on each Payment
Date. You select either a monthly or quarterly payment frequency when you
purchase the Contract. Payments will generally be made by electronic funds
transfer. Semi-annual or annual payment frequencies and other disbursement
options may be available, if approved by our home office. The first Payment
Date will generally be 30 days after the Contract Issue Date. All subsequent
Payment Dates will be on the same day of the month as the first Payment Date.
- 34 -
<PAGE>
Payments Under the Contract. We generally make payments within seven days of
the Payment Date or receipt of all applicable written notices and/or proofs of
death. However, we may postpone such payments for any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for trading other
than customary holiday or weekend closing or trading on the NYSE is
restricted, as determined by the SEC; or
2. when the SEC by order permits a postponement for the protection of
Owners; or
3. when the SEC determines that an emergency exists that would make the
disposal of securities held in the Separate Account or the determination of
their value not reasonably practicable.
If the postal service or any other delivery service is unable to deliver checks
to the Payee's address of record, no interest will accrue on amounts
represented by uncashed fixed or variable Annuity Payment checks. Amounts
represented by uncashed variable Annuity Payment checks will not participate in
the performance of the Portfolios. It is your responsibility to keep us
informed of the Payee's current address of record.
If a recent check or draft has been submitted as the Premium, we have the right
to defer any payments until the check or draft has been honored.
Fixed, Variable or Combination Annuity Payments. At the time of purchase, you
allocate your Premium between fixed and variable Annuity Payment options. You
may choose all fixed, all variable or a combination of fixed and variable
Annuity Payments. Any portion of your Premium allocated to a fixed Annuity
Payment option will always remain allocated to fixed Annuity Payments. However,
you may transfer at any time from variable Annuity Payments to fixed Annuity
Payments. See "Transfer from variable Annuity Payments to fixed Annuity
Payments," page 27.
If you choose a combination of fixed and variable Annuity Payments, a portion
of your Annuity Payments will be fixed and a portion will vary according to the
investment experience of the Portfolios underlying the Subaccounts. We will
guarantee the dollar amount of any fixed portion of each Annuity Payment;
however, the amount of the variable Annuity Payments will depend upon the
investment experience of the Portfolios underlying the Subaccounts and is not
guaranteed. Both fixed and variable Annuity Payments decrease upon the death of
the Annuitant or Secondary Annuitant as described for Options 5, 6, 8 and 9
under "Types of Annuity Payment Options" on page 30.
Assumed Investment Return (AIR). You choose the AIR used in the calculation of
each variable Annuity Payment. If the performance of the applicable Subaccounts
after all expenses is equal to the AIR on a modal basis, then the variable
Annuity Payments will remain constant. If the performance of the Subaccounts
after all expenses exceeds the AIR on a modal basis, then the variable Annuity
Payments will increase. If the performance of the Subaccounts after all
expenses is less than the AIR on a modal basis, then the variable Annuity
Payments will decrease. A "modal basis" refers to the frequency of payments.
For example, for monthly payments to increase, the performance of the
Subaccounts must exceed the monthly equivalent AIR; for quarterly payments to
increase, the performance of the Subaccounts must exceed the quarterly
equivalent AIR.
You choose either a 4% AIR or a 5.5% AIR. Choosing a 5.5% AIR instead of a 4%
AIR will result in a higher initial payment; however, payments will increase
less during periods of good investment performance (i.e., when investment
performance exceeds the AIR) and decrease more during periods of poor
investment performance (i.e. when investment performance is below the AIR).
Conversely, choosing a 4% AIR instead of a 5.5% AIR will result in a lower
initial payment; however, payments will increase more during periods of good
investment performance (i.e. when investment performance exceeds the AIR) and
decrease less during periods of poor investment performance (i.e. when
investment performance is below the AIR). See page 42 in the Appendix for an
illustration of the difference in the two AIRs.
- 35 -
<PAGE>
TYPES OF ANNUITY PAYMENT OPTIONS
At the time of purchase, you select the Annuity Payment option and the number
of guaranteed years, if any. The Annuity Payment option and guarantee period
cannot be changed once the contract has been issued. The options we currently
offer are described below. Other Annuity Payment options may be made available.
The federal income tax laws may limit your Annuity Payment options where the
Contract is used as a Qualified Contract.
The amount of variable Annuity Payments will depend on the investment
performance of the Portfolio(s) you select. The number of Annuity Payments may
depend on how long the Annuitant or a Secondary Annuitant, if any, lives.
Therefore, the total value of Annuity Payments may be less than the Premium
(except for option 10-Life Annuity with Premium Refund Payments).
1. Certain Only Annuity. Under this option, we guarantee to make payments
for a designated number of years. The number of years cannot be less than
10 nor more than 30. If the Annuitant dies prior to the last guaranteed
Payment Date, we will continue payments as they become due or pay the
present value of the remaining guaranteed payments in a lump sum to the
Beneficiary when we receive due proof of the Annuitant's death. If the
payments under this option are variable, the present value of the remaining
guaranteed payments is calculated as of the date we receive written notice
of the Annuitant's death, using the AIR you chose when the contract was
issued. If the payments under this option are fixed, the present value of
the remaining guaranteed payments is calculated using interest rates
(determined by PFL) in effect on the date we receive due proof of death. No
additional payments will be made under this option after all the guaranteed
payments have been made.
If this option is selected, full or partial surrenders may be made from the
Contract prior to the last guaranteed Payment Date. Any surrender must be
at least 25% of the remaining guaranteed payments. If a partial surrender
is made, all future payments will be reduced. For variable Annuity
Payments, the surrender value is the present value of future payments
(which are assumed to be equal to the most recent payment) at an interest
rate no greater than 5% (if you have a 4% AIR) or not greater than 6.5% (if
you have a 5.5% AIR).For fixed Annuity Payments, the surrender value is 98%
of the present value of remaining payments. The present value of the fixed
Annuity Payments is calculated using interest rates in effect at the time
we receive your surrender request. (See "Surrender Values," p.28).
Surrenders may have adverse tax consequences. You should contact a tax
advisor before making surrenders from the Contract.
2. Single Life Annuity. Under this option, we will make Annuity Payments
for the Annuitant's lifetime, no matter how long that may be. The final
payment will be the payment made immediately prior to the death of the
Annuitant. No additional payments will be made after the Annuitant dies. It
is possible that only one Annuity Payment will be made under this option.
This would happen if the Annuitant died before the second annuity Payment
Date. Due to this risk, this option offers you the highest level of Annuity
Payments. No withdrawals are permitted if this option is selected.
3. Single Life Annuity with Period Certain. Under this option, we will make
Annuity Payments for a specified period (5 to 30 years) or for the life of
the Annuitant, whichever is later. The final payment will be the later of
either the last guaranteed Payment Date or the scheduled Payment Date
immediately prior to the Annuitant's death. If the Annuitant dies prior to
the last guaranteed Payment Date, we will make payments to the Beneficiary
when we receive due proof of the Annuitant's death. No additional payments
will be made if the Annuitant dies after all guaranteed payments have been
made. No withdrawals are permitted if this option is selected.
4. 100% Joint and Survivor Life Annuity. Under this option, we will provide
Annuity Payments for the Annuitant and the Secondary Annuitant's lifetimes.
After the death of either the Annuitant or the Secondary Annuitant, we will
continue to provide the full amount of Annuity Payments to the survivor.
Annuity Payments stop when both the Annuitant and the Secondary Annuitant
are no longer living. As in the case of the single life annuity option
described above, there is the risk that only one Annuity Payment will be
made. No withdrawals are permitted if this option is selected.
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5. Joint and Survivor Life Annuity With Reduced Annuity Payments to the
Secondary Annuitant. This option is similar to option 4 above, except that
Annuity Payments are higher while both the Annuitant and the Secondary
Annuitant are living and lower, if the Annuitant dies before the Secondary
Annuitant. If the Annuitant dies before the Secondary Annuitant, the amount
of the fixed Annuity Payments will be reduced to the percent you select:
either 50%, 66.67% or 75%. For variable Annuity Payments, the number of
Variable Annuity Units will be reduced to 50%, 66.67% or 75%. The final
Annuity Payment will be the one made immediately prior to the Secondary
Annuitant's death.
If the Secondary Annuitant dies before the Annuitant, we will continue to
make Annuity Payments as they are due, and the amount of the Annuity
Payments will not change. The final Annuity Payment will be the one made
immediately prior to the Annuitant's death. No additional Annuity Payments
will be made after the death of both Annuitants. No withdrawals are
permitted if this option is selected.
6. Joint and Last Survivor Life Annuity. Under this option we will provide
Annuity Payments for the Annuitant's and Secondary Annuitant's lifetimes.
Payments are higher while both Annuitant(s) are living and decrease upon
the death of either the Annuitant OR the Secondary Annuitant. Upon the
first death, the amount of the fixed Annuity Payments will be reduced to a
percent you select: either 50%, 66.67% or 75%. For variable Annuity
Payments, the number of Variable Annuity Units will be reduced to 50%,
66.67% or 75%. The final Annuity Payment will be the one made immediately
prior to the death of the remaining annuitant. No additional Annuity
Payments will be made after the death of both Annuitants. No withdrawals
are permitted if this option is selected.
7. 100% Joint and Survivor Life Annuity With Period Certain. Under this
option, we will provide Annuity Payments for a designated period of years
or life, whichever is greater. The number of years cannot be more than 30.
The final Annuity Payment will be the later of the last guaranteed Payment
Date or the Annuity Payment made immediately prior to the last surviving
Annuitant's death. If both Annuitants die prior to the last guaranteed
Payment Date, we will continue to make guaranteed Annuity Payments to the
Beneficiary as they become due for the remainder of the guaranteed period.
No additional payments will be made if both Annuitants die after all
guaranteed Annuity payments have been made. No withdrawals are permitted if
this option is selected.
8. Joint and Survivor Life Annuity With Period Certain and Reduced Annuity
Payments to the Secondary Annuitant. This option is similar to option 7
above, except that Annuity Payments are higher while both the Annuitant and
the Secondary Annuitant are living and lower, if the Annuitant dies before
the Secondary Annuitant and after the guaranteed period. If the Annuitant
dies before the end of the guaranteed period, the amount of the Annuity
payments will not change. However, if the Annuitant dies after the
guaranteed period, the amount of the Annuity Payments will be reduced to
percent you select: either 50%, 66.67% or 75%. For variable Annuity
Payments, the number of Variable Annuity Units will be reduced to 50%,
66.67% or 75%. The final payment will be the one made immediately prior to
the Secondary Annuitant's death. If the Secondary Annuitant dies before the
Annuitant, we will continue to make Annuity Payments as they are due, and
the amount of the Annuity Payments will not change. The final Annuity
Payment will be the one made immediately prior to the Annuitant's death. No
withdrawals are permitted, if this option is selected.
9. Joint and Last Survivor Life Annuity with Period Certain. Under this
option we will provide Annuity Payments for a designated period of years or
for the Annuitants and Joint Annuitants lifetimes, whichever is later. The
number of guaranteed years cannot be more than 30. Payments are higher
while both Annuitant(s) are living and decrease after the guarantee period
upon the death of either the Annuitant OR the Secondary Annuitant. Upon the
first death, the amount of the fixed Annuity Payments will be reduced to a
percent you select: either 50%, 66.67% or 75%. For variable Annuity
Payments, the number of Variable Annuity Units will be reduced to 50%,
66.67% or 75. The final Annuity Payment will be the later of the last
guaranteed Payment Date or the Annuity Payment made immediately prior to
the last surviving Annuitant's death. No additional Annuity Payments will
be made after the death of both Annuitants. No withdrawals are permitted if
this option is selected.
10. Life Annuity with Premium Refund Payment. Under this option, we will
make Annuity Payments for the Annuitant's lifetime. The final Annuity
Payment will be either the payment made immediately prior to the
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Annuitant's death or the Premium Refund benefit. If at the date of the
Annuitant's death the sum of all the Annuity Payments made is less than the
Premium, we will pay a Premium Refund benefit to the Beneficiary. The
Premium Refund benefit will be the Premium less the sum of the previously
distributed variable and fixed Annuity Payments. No withdrawals are
permitted if this option is selected.
11. Single Life Annuity with Emergency Cash(SM). Under this option, we will
make variable Annuity Payments for the Annuitant's lifetime. With the Life
with Emergency Cash(SM) feature, the Owner is able to withdraw all or a
portion of the Life with Emergency Cash(SM) Benefit after the Contract Issue
Date. Partial withdrawals must be for no less than 25% of the Life with
Emergency Cash(SM) Benefit. We will provide you with a Life with Emergency
Cash(SM) Benefit Schedule as a rider to the Contract that will assist you in
determining the amount you have available to withdraw. The amount of the
Life with Emergency Cash(SM) Benefit is also a Death Benefit that is paid
upon the death of the Annuitant. The Life with Emergency Cash(SM) Benefit
will continue through age 100 of the Annuitant. The amount of the Life with
Emergency Cash(SM) Benefit depends on the investment experience of the
Portfolios and the Surrender Factor as set forth in the rider attached to
your policy. For qualified contracts the death benefit ceases at the date
the annuitant reaches the IRS age limitation determined at the Contract
Issue Date. YOU SHOULD CONTACT A TAX ADVISOR BEFORE MAKING WITHDRAWALS FROM
THE CONTRACT.
12. Joint and Survivor Life Annuity with Emergency Cash(SM). Under this
option, we will provide Annuity Payments to the Annuitant and the Secondary
Annuitant while both are living. After the death of either the Annuitant or
the Secondary Annuitant, we will continue to provide the full amount of
Annuity Payments to the survivor. With the Life with Emergency Cash(SM)
feature, the Owner is able to withdraw all or a portion of the Life with
Emergency Cash(SM) Benefit after the Contract Issue Date. The amount of the
Life with Emergency Cash(SM) Benefit is also a Death Benefit that is paid
upon the death of the last annuitant. We will provide a Life with Emergency
Cash(SM) Benefit Schedule as a rider to the Contract. Partial withdrawals
must be for no less than 25% of the Life with Emergency Cash(SM) Benefit. The
Life with Emergency Cash(SM) Benefit will continue through age 100 of the
youngest of the Annuitant and the Secondary Annuitant. The amount of the
Life with Emergency Cash(SM) Benefit depends on the investment experience of
the Portfolios and the Surrender Factor as set forth in the rider attached
to your policy. For qualified contracts the death benefit ceases at the
date of the IRS joint age limitation determined at the Contract Issue Date.
You should contact a tax advisor before making withdrawals from the
Contract.
Death Proceeds. If any Owner, who is an Annuitant, dies before the first
Payment Date, the amount of the death proceeds is the premium plus or minus the
investment performance of the Subaccounts. If any Owner, who is not an
Annuitant, dies before the first Payment Date, the Successor Owner may direct
the Owner's interest in the Contract to be distributed as follows:
(1) one cash lump sum to be distributed within five years of the deceased
owner's death; or
(2) annuitize the value of the Annuity Payments over the lifetime of the
Successor Owner; or
(3) annuitize the value of the Annuity Payments over a period that does not
exceed the life expectancy of the Successor Owner, as defined by the Code.
"Successor Owner" means the person named by the Owner to whom ownership of this
Contract passes upon the Owner's death, unless the deceased Owner was also an
Annuitant, in which case the Annuitant's Beneficiary is entitled to the benefit
described above. If no person is named, the Owner's Estate shall be deemed the
Successor Owner.
Subparagraphs (ii) and (iii) above only apply to individuals, and payments
under those options must start within one year of the date of the deceased
Owner's death. For Qualified Contracts, any option chosen must meet the
requirements of the Code.
If an Owner, who may or may not also be an Annuitant, dies on or after the
Annuity Starting Date (as defined below), the remaining portion of the Annuity
Payments due under the Contract, if any, will be distributed in the same manner
and frequency (at least as rapidly) as under the method of distribution used
before such Owner's death.
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If the deceased Owner's surviving spouse, if any, is the sole Successor Owner,
then on such Owner's death such surviving spouse may elect to become the sole
Owner under the Contract and to continue the Contract as his or her own. If no
such election is made, the rules outlined in the foregoing paragraphs of this
section will apply.
If a non-natural person is named as an Owner, then the primary Annuitant, as
defined in the Code, shall be treated as an Owner solely for the purposes of
the distribution at death rules described in the foregoing paragraphs. The
entire interest in the Contract must be distributed upon the Annuitant's death,
if the Annuitant dies prior to the first Payment Date.
If the deceased Owner was also the Annuitant, then the Annuitant's Beneficiary
is entitled to the proceeds described above in this section (unless the
deceased Owner's surviving spouse is the sole successor Owner). If no person is
named as the Beneficiary, the Owner's estate shall be deemed the Beneficiary.
In all events, distributions upon the death of an Owner will comply with
Section 72(s) of the Code.
FEDERAL TAX CONSIDERATIONS
GENERAL
TAX LAW IS COMPLEX AND TAX CONSEQUENCES WILL VARY ACCORDING TO THE ACTUAL
STATUS OF THE CONTRACT OWNER AND, IF APPLICABLE, THE TYPE OF RETIREMENT PROGRAM
FOR WHICH THE CONTRACT IS PURCHASED. THEREFORE, A PERSON, TRUSTEE OR OTHER
ENTITY CONTEMPLATING THE PURCHASE OF A CONTRACT MAY NEED LEGAL AND TAX ADVICE.
This Prospectus does not provide a detailed description of the federal income
tax consequences of purchasing a Contract. Special tax rules may apply to
certain purchase situations not discussed herein. In addition, no attempt is
made here to consider any applicable state or other tax laws. For detailed
information, a prospective purchaser should always consult a qualified tax
advisor. This discussion is based on PFL's understanding of current federal
income tax laws as they are currently interpreted.
TAXATION OF PURCHASERS OF NON-QUALIFIED CONTRACTS
Corporations, Trusts and other Non-Natural Persons. Under section 72(u) of the
Code, if a non-natural person such as a corporation, trust or partnership owns
an annuity contract, annual net increases in the value of the contract are
generally includable in the non-natural person's gross income currently, unless
the annuity is an immediate annuity. For this purpose, an immediate annuity is
an annuity that is purchased with a single premium payment, that has an annuity
starting date commencing no later than one year from the date of purchase, and
that provides for a series of substantially equal periodic payments to be made
no less frequently than annually during the annuity period. Generally, the
Contract should qualify as an immediate annuity, but corporations, trusts,
partnerships and other entities that are not natural persons should consult a
tax advisor if they seek to rely on the exception from section 72(u) for
immediate annuity contracts.
Natural Persons. Section 72 generally provides that a Contract Owner is not
taxed on increases in the value of the Contract until an amount distributed
from the Contract is received (or deemed received) by the Contract Owner,
either in the form of Annuity Payments, as contemplated by the Contract, or in
some other form (i.e., surrender or Death Proceeds). However, this tax deferral
generally applies only if: (1) the investments in the Separate Account are
"adequately diversified" in accordance with Treasury Department regulations,
(2) PFL, rather than the Contract Owner, is considered the owner of such assets
for federal income tax purposes, and (3) the Contract includes certain
provisions regarding distributions that must occur in the event that a Contract
Owner dies. These requirements are discussed further under the caption "Tax
Status of the Contract" below.
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Distributions Prior to the Annuity Starting Date. If a Contract is surrendered
prior to the "Annuity Starting Date", in the case of a Certain Only or Life
with Emergency Cash(SM) option, amounts received by the Contract Owner are
includable in his or her income to the extent that such amounts exceed the
"investment in the contract." For this purpose, the investment in the contract
at any time equals the Premium (to the extent that such Premium was neither
deductible when made nor excludable from income as, for example, in the case of
certain contributions to Qualified Contracts), less any amounts previously
received from the Contract which were not includable in income. Also, the
surrender value may be subject to a penalty tax, described below. In general,
an assignment of the Contract (or other change of ownership) before the
"Annuity Starting Date" without full and adequate consideration will be treated
as a distribution from the Contract and taxed in the same manner as a surrender
before the "Annuity Starting Date" (except where the Contract is transferred
between spouses or incident to a divorce).
The "Annuity Starting Date" is the latter of the day upon which the obligations
under the Contracts become fixed or the first day of the period which ends on
the first Payment Date. In most cases, the Annuity Starting Date for a Contract
will be the Contract Issue Date.
In certain situations, the Contract provides for a death benefit upon the death
of a Contract Owner; Annuitant or Secondary Annuitant. This distribution is
includable in the recipient's income as follows: (1) if distributed in a lump
sum, it is taxed in the same manner as a surrender, (2) if it is distributed in
the form of Annuity Payments, it is taxed in the same manner as Annuity
Payments (see below).
Distributions On or After the Annuity Starting Date. A portion of the Annuity
Payments received during each taxable year is generally treated as tax-free
recovery of your investment in the Contract and the remainder of such Annuity
Payments is taxable as ordinary income, until all such investment in the
Contract has been recovered. Once the entire amount of the investment in the
Contract has been recovered, all Annuity Payments are fully taxable as ordinary
income. For these purposes, the investment in the Contract will generally be
your Premium, reduced by any previous distributions other than Annuity Payments
from the Contract to the extent such previous distributions were received tax-
free, with certain adjustments to take into account certain payments projected
to occur after the death of the Annuitant.
The formulas for computing the taxable portion of the Annuity Payments prior to
recovery of the investment in the Contract are quite complex and differ
depending on the extent to which your Premium has been allocated to variable or
fixed Annuity Payment options. To the extent your Premium has been allocated to
fixed Annuity Payment options, an "exclusion ratio" is generally computed based
on the ratio of the investment in the Contract allocable to the fixed Annuity
Payment option to the total amount projected to be paid under the Contract, and
the portion of each fixed Annuity Payment that is excludable from tax is equal
to the exclusion ratio multiplied by the fixed Annuity Payment. To the extent
your Premium has been allocated to variable Annuity Payments, the excludable
amount of the variable Annuity Payments for each taxable year is generally
computed by dividing the investment in the Contract allocable to variable
Annuity Payment options by the number of years over which Annuity payments are
expected to be made.
If Annuity Payments cease by reason of death of Annuitant before the entire
amount of the investment in the Contract has been fully recovered tax-free, a
deduction is allowed for the amount of the unrecovered investment in the
Contract for the last taxable year of the Annuitant.
Partial surrenders or withdrawals from the Certain Only or the Life with
Emergency Cash(SM) Benefit may be fully taxable as ordinary income and may not
result in recomputation of the exclusion ratio applicable to fixed Annuity
Payments or the excludable amount applicable to variable Annuity Payments.
A transfer of all or part of the value of variable Annuity Payments to fixed
Annuity Payments may have tax consequences. A tax advisor should be consulted
before making such a transfer.
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A transfer of ownership of the Contract, the designation of an Annuitant or
other Payee who is not an Owner of the Contract or the assignment of the
Contract may result in certain income or gift tax consequences to the Owner
that are beyond the scope of this discussion. A Contract Owner who is
considering any such transfer, designation or assignment should consult a tax
advisor.
Penalty Tax on Certain Distributions. Distributions received (or deemed
received) from an annuity contract (before or after the annuity starting date)
may be subject to a penalty tax equal to 10% of the amount treated as taxable
income. There is an exception for distributions from immediate annuities, and
Annuity Payments under the Contract should therefore generally not be subject
to the 10% penalty tax. However, it is unclear whether Life with Emergency
CashSM Benefit and Certain Only surrenders or withdrawals will be subject to
the 10% penalty tax if such withdrawals are made before the taxpayer reaches
age 59 1/2 or are not attributable to the taxpayer's becoming disabled. In
addition, the 10% penalty tax does not apply to distributions from a Contract
made on or after the death of the Contract Owner and, under certain
circumstances, to distributions made under a Contract issued in connection with
a structured settlement agreement. A tax advisor should be consulted if there
is a question as to whether a distribution will be subject to the 10% penalty
tax.
Aggregation of Two or More Contracts. The Treasury Department has specific
authority to issue regulations that prevent the avoidance of Section 72(e) of
the Code through the serial purchase of annuity contracts or otherwise. There
may be situations in which the Treasury Department may conclude that it would
be appropriate to aggregate two or more deferred or immediate annuity contracts
purchased by the same owner. Accordingly, a Contract Owner should consult a
competent tax advisor before purchasing more than one annuity contract in a
calendar year.
Contracts Obtained through an Exchange. Section 1035 of the Code generally
provides that no gain or loss shall be recognized on the exchange of one
annuity contract for another. A number of special rules and procedures,
however, apply to Section 1035 transactions. Prospective Contract Owners
wishing to take advantage of Section 1035 should therefore consult their tax
advisor.
TAXATION OF PURCHASERS OF QUALIFIED CONTRACTS
The Contracts are designed for use as Individual Retirement Annuities ("IRA")
or in connection with Deferred Compensation Plans established and maintained by
state or local governments or tax-exempt organizations. Important differences
exist between the tax rules which are applicable to IRAs and Deferred
Compensation Plans. These rules are complex and may vary depending on
individual circumstances. Adverse tax consequences may result from
distributions prior to age 59 1/2 (subject to certain exceptions);
distributions that do not conform to applicable commencement and minimum
distribution rules; and in other circumstances. Therefore, no attempt is made
to provide more than general information about the use of Contracts as IRAs or
when owned by eligible employers in connection with Deferred Compensation
Plans. Contract Owners, Annuitants, and Beneficiaries are cautioned that the
rights of the plan itself, regardless of the terms and conditions of the
Contract, but that PFL is not bound by the terms and conditions of such plans
to the extent such terms conflict with the Contract, unless PFL specifically
consents to be bound. A brief description of some of the federal income tax
rules which apply to IRAs and Deferred Compensation Plans is set forth below.
PFL may amend the Contract as necessary to conform it to requirements of
applicable law.
Individual Retirement Annuities. The Contract is designed for the use as an IRA
purchased through a tax-deferred rollover contribution from another IRA, a
retirement plan qualified under Section 401 or Section 403(a) of the Code or
tax sheltered annuity contract under Section 403(b) of the Code. Amounts held
under a Deferred Compensation Plan under Section 457 of the Code cannot be
rolled over or transferred to an IRA.
Distributions From an IRA. In general, payments from an IRA which are not
rolled over must be included in gross income as ordinary taxable income in the
year in which they are received. Required minimum distributions must begin by
April 1 of the calendar year following the calendar year in which the IRA owner
attains the age of 70 1/2. Certain other mandatory distribution rules apply
upon the death of the IRA owner.
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Ten Percent Penalty Tax on Early Distributions. Distributions received (or
deemed received) from an IRA may be subject to a penalty tax equal to ten
percent (10%) of the amount treated as taxable income. In general, however,
there is no such penalty tax on distributions:
1. made on or after the date on which the taxpayer reaches age 59 1/2,
2. made to a beneficiary (or to the estate of the taxpayer) on or after the
death of the taxpayer,
3. attributable to the taxpayer's becoming disabled,
4. which are part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary,
5. made to the taxpayer to the extent such distributions do not exceed the
amount allowable as a deduction for federal income tax purposes allowed to
the taxpayer for amounts paid during the taxable year for medical care,
6. if certain conditions are met, made to an unemployed taxpayer after
separation from employment, for health insurance premiums,
7. made for qualified first time homebuyer expenses for the taxpayer or
certain of the taxpayer's family members, or
8. made for qualifying higher education expenses for the taxpayer or for
certain of the taxpayer's family members (including tuition, fees, books,
supplies, and equipment required for enrollment, attendance, and room and
board at a post-secondary educational institution).
Code Section 457 Deferred Compensation Plans. The Contract may be purchased by
a state or local government or tax-exempt organization that is an employer
sponsoring a Deferred Compensation Plan under Section 457 of the Code in order
to effect distribution of plan benefits to participants under the plan. In
general, distributions from a Deferred Compensation Plan are prohibited unless
made after the participant attains the age specified in the plan, separates
from service, dies, or suffers an unforeseeable financial emergency.
Distributions under plans that meet the requirements of Section 457 of the Code
are taxable as ordinary income in the year paid or made available to the
participant or beneficiary.
Generally, required minimum distributions must begin by April 1 of the calendar
year following the calendar year in which the participating employee attains
the age of 70 1/2. Certain other mandatory distribution rules apply upon the
death of the participating employee.
Amounts held under a Deferred Compensation Plan under Section 457 of the Code
cannot be rolled over or transferred to an IRA.
Life with Emergency Cash(SM) Benefit. The Internal Revenue Service has not
addressed in a ruling of general applicability whether a distribution feature
such as the Life with Emergency Cash(SM) feature comports with the Code's
distribution requirements for IRAs and Deferred Compensation Plans.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution from a Contract that is taxable income to the
recipient is generally subject to withholding for the recipient's federal
income tax liability at rates that vary according to the type of distribution
and the recipient's tax status. Section 3405 of the Code governs withholding
and is summarized below:
Non-Periodic Distributions. The portion of a non-periodic distribution which
constitutes taxable income will be subject to federal income tax withholding
unless the recipient elects not to have taxes withheld. If an election not to
have taxes withheld is not provided, 10% of the taxable distribution will be
withheld as federal income tax. Election forms will be provided at the time
distributions are requested. If the necessary election forms are not submitted
to PFL, PFL will automatically withhold 10% of the taxable distribution.
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Periodic Distributions (distributions payable over a period greater than one
year). The portion of a periodic distribution which constitutes taxable income
will be subject to federal income tax withholding as if the recipient were
married claiming three exemptions. A recipient may elect not to have income
taxes withheld or have income taxes withheld at a different rate by providing a
completed election form. Election forms will be provided at the time
distributions are requested.
Deferred Compensation Plans. Distributions from a non-qualified deferred
compensation plan meeting the requirements of Section 457 of the Code are
generally subject to regular wage withholding rules.
Certain states also require withholding of state income tax whenever federal
income tax is withheld.
CONTRACT OWNERS THAT ARE NONRESIDENT ALIENS OR FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to Contract Owners that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal income tax and withholding on annuity distributions at a 30% rate,
unless a lower treaty rate applies and any required tax forms are submitted to
PFL. In addition, purchasers may be subject to state premium tax, other state
and/or municipal taxes, and taxes that may be imposed by the purchaser's
country of citizenship or residence. Prospective purchasers are advised to
consult with a qualified tax advisor regarding U.S., state, and foreign
taxation with respect to the purchase of a Contract.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. For instance, the President's 1999 Budget Proposal recommended
legislation that, if enacted, would adversely change the federal taxation of
the Contracts. It is also possible that any change could be retroactive (that
is, effective prior to the date of the change). A tax advisor should be
consulted with respect to legislative developments and their effect on the
Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
these Contacts are not exhaustive, and special rules may apply to other tax
situations not discussed in this Prospectus. Further, the federal income tax
consequences discussed herein reflect PFL's understanding of current law and
the law may change. Federal estate and state and local estate, inheritance and
other tax consequences of ownership or receipt of distributions under a
Contract depend on the individual circumstances of each Contract Owner or
recipient of the distribution. In particular, gift and/or estate tax
consequences may result in situations where a Contract Owner is not also the
Annuitant, Payee, and Beneficiary. A competent tax advisor should be consulted
for further information.
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OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
AFSG Securities Corporation (AFSG), an affiliate of PFL, located at 4333
Edgewood Road N.E., Cedar Rapids, IA 52499-0001, is the principal underwriter
of the Contracts. AFSG is registered as a broker/dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. (the "NASD").
Contracts are sold by registered representatives of AFSG or of broker/dealers
who have entered into written sales agreements with AFSG, the principal
underwriter, and who are also licensed through various affiliated or
unaffiliated agencies as insurance agents for PFL. PFL has entered into a
distribution agreement with AFSG and companion sales agreements with agencies
and/or agents through which agreements the Contracts are sold and the
registered representatives are compensated by the agencies and/or AFSG.
Broker/dealers will generally receive sales commissions of up to 6% of Premium.
These commissions are not deducted from Premiums; they are paid by PFL. In
addition, certain production, persistency and managerial bonuses may be paid.
Subject to applicable federal and state laws and regulations, PFL may also pay
compensation to banks and other financial institutions for their services in
connection with the sale and servicing of the Contracts. The level of such
compensation will not exceed that paid to broker/dealers for their sale of the
Contracts. No amounts will be retained by AFSG for acting as principal
underwriter for the Contracts. The offering of Contracts will be made on a
continuing basis.
VOTING RIGHTS
To the extent required by law, we will vote the Fund shares held by the
Separate Account at regular and special shareholder meetings of the Funds in
accordance with instructions received from persons having voting interests in
the Portfolios (although the Funds do not hold regular annual shareholders
meetings). If, however, the 1940 Act or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that it is permitted to vote the Funds' shares in our own right,
we may elect to do so.
The person receiving Annuity Payments has the voting interest, and the number
of votes decreases as Annuity Payments are made and as the reserves for the
Contract decrease. The person's number of votes will be determined by dividing
the reserve for the Contract allocated to the applicable Subaccount by the net
asset value per share of the corresponding Portfolio. Fractional shares will be
counted.
The number of votes that the Owner or person receiving income payments has the
right to instruct will be determined as of the date established by the Funds
for determining shareholders eligible to vote at the meeting of the Funds. We
will solicit voting instructions by sending Owners or other persons entitled to
vote written requests for instructions prior to that meeting in accordance with
procedures established by the Funds. Portfolio shares as to which no timely
instructions are received and shares held by us in which Owners or other
persons entitled to vote have no beneficial interest will be voted in
proportion to the voting instructions that are received with respect to all
Contracts participating in the same Subaccount.
Each person having a voting interest in an Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
PERFORMANCE
Performance information for the Subaccounts may appear in reports and
advertising to current and prospective Owners, Annuitants, Secondary Annuitants
and Beneficiaries. The performance information is based on adjusted historical
investment experience of the Subaccounts and the Funds and does not indicate or
represent future performance.
- 44 -
<PAGE>
Total returns of the Subaccounts may be advertised. Total returns are based on
the overall dollar or percentage change in value of a hypothetical investment.
Total return quotations reflect changes in Portfolio share price, the automatic
reinvestment by the separate account of all distributions and the deduction of
applicable annuity charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the
performance had been constant over the entire period. Because average annual
total returns tend to smooth out variations in an Subaccount's returns, you
should recognize that they are not the same as actual year-by-year results.
Some Subaccounts may also advertise yield. These measures reflect the income
generated by an investment in the Subaccount over a specified period of time.
This income is annualized and shown as a percentage. Yields do not take into
account capital gains or losses.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a 7 day period. Effective yield is calculated in a similar manner except
that income earned is assumed to be reinvested. The VIP II Investment Grade
Bond and the VIP High Income Subaccounts may advertise a 30 day yield which
reflects the income generated by an investment in the Subaccount over a 30 day
period.
IMSA
PFL is a member of the Insurance Marketplace Standards Association ("IMSA") and
as such may include the IMSA logo and information about IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuity products.
YEAR 2000 MATTERS
PFL adopted and presently has in place a Year 2000 Assessment and Planning
Project (the "Plan") to review and analyze existing hardware and software
systems as well as voice and data communications systems to determine if they
are Year 2000 compatible. The Plan provides for a management process, which
ensures that when a particular system or software application is determined to
be "non-compliant" the proper steps are in place to either remedy the "non-
compliance" or cease using the particular system or software. The Plan also
provides that the Chief Information Officer report to the Board of Directors as
to the status of the efforts under the Plan on a regular and routine basis. PFL
has engaged the services of a third-party provider that is specialized in Year
2000 issues to work on the project.
The Plan has four specific objectives: (1) develop an inventory of all
applications; (2) evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3)
estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (4) define testing and deployment
requirements to successfully manage validation and re-deployment of any changed
code. It is anticipated that all compliance issues will be resolved by December
1998.
As of the date of this Prospectus, PFL has identified and made available what
it believes are the appropriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to ensure that the Plan will
be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even
with appropriate and diligent
- 45 -
<PAGE>
pursuit of a well-conceived response plan, including testing procedures, there
is no certainty that any company will achieve complete success. Further,
notwithstanding its efforts or results, PFL's ability to function unaffected to
and through the Year 2000 may be adversely affected by actions (or failure to
act) of third parties beyond its knowledge or control.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. PFL, like other life
insurance companies, is a defendant in lawsuits. In some class action and other
lawsuits involving other insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the outcome of any
litigation cannot be predicted with certainty, PFL believes that at the present
time there are no pending or threatened lawsuits that are reasonably likely to
have a material adverse impact on the Separate Account or PFL.
- 46 -
<PAGE>
The Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus. The
following is the Table of Contents for the Statement of Additional Information:
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
THE CONTRACT--GENERAL PROVISIONS
Delay of Transfers........................................................ 3
Entire Contract........................................................... 3
Assignment................................................................ 3
Beneficiary............................................................... 3
Change of Beneficiary..................................................... 3
Incontestability.......................................................... 4
Misstatement of Age or Sex................................................ 4
Modification of Contract.................................................. 4
Nonparticipating.......................................................... 4
Owner..................................................................... 4
Proof of Death............................................................ 4
Proof of Survival......................................................... 4
Protection of Proceeds.................................................... 4
FEDERAL TAX MATTERS......................................................... 5
Tax Status of the Contract................................................ 5
Diversification Requirements.............................................. 5
Owner Control............................................................. 5
Required Distributions.................................................... 5
Taxation of PFL........................................................... 6
INVESTMENT EXPERIENCE....................................................... 6
STATE REGULATION OF PFL..................................................... 9
ADMINISTRATION.............................................................. 9
RECORDS AND REPORTS......................................................... 9
DISTRIBUTION OF THE CONTRACTS............................................... 9
OTHER PRODUCTS.............................................................. 9
CUSTODY OF ASSETS........................................................... 9
HISTORICAL PERFORMANCE DATA................................................. 10
Money Market Yields....................................................... 10
Other Subaccount Yields................................................... 10
Total Returns............................................................. 11
Other Performance Data.................................................... 12
Hypothetical Performance Data............................................. 12
LEGAL MATTERS............................................................... 12
INDEPENDENT AUDITORS........................................................ 12
OTHER INFORMATION........................................................... 12
FINANCIAL STATEMENTS........................................................ 13
</TABLE>
- 47 -
<PAGE>
APPENDIX
ILLUSTRATIONS OF ANNUITY PAYMENT VALUES
The following graphs have been prepared to show how investment performance
affects your variable Annuity Payments over time. The graphs incorporate
hypothetical rates of return and PFL does not guarantee that you will earn
these returns for any one year or any sustained period of time. PFL did not
sell Contracts prior to the date of this Prospectus, and, therefore, the graphs
represent what Annuity Payments might have been under a Contract had one
existed during the years shown. The graphs are for illustrative purposes only
and do not represent past or future investment returns.
Your variable Annuity Payment may be more or less than the income shown if
the actual returns of the Subaccounts are different than those illustrated.
Since it is very likely that your investment returns will fluctuate over time,
you can expect that the amount of your Annuity Payment will also fluctuate. The
total amount of Annuity Payments ultimately received will, in addition to the
investment performance of the Subaccounts, also depend on how long you live and
whether you choose a guarantee period option.
Another factor which determines the amount of your variable Annuity Payment
is the Assumed Investment Return (the "AIR"). Annuity Payments will increase
from one Variable Annuity Payment Calculation Date to the next if the
Performance of the Portfolio underlying the Subaccounts, net of all charges, is
greater than the AIR and will decrease if the Performance of the Portfolio
underlying the Subaccounts, net of all charges, is less than the AIR.
The "Hypothetical Illustration" graph illustrates differences in monthly
variable Annuity Payments assuming different investment returns. The graph
assumes a single premium of $49,530; the entire premium was allocated to
variable Annuity Payments; the AIR is 5.5%; the payment option is Single Life
Annuity; a 77 year old male, and Separate Account Charges of 1.35% and average
Portfolio expenses of 0.63%. This results in the receipt of an initial Annuity
Payment in the amount of $500. The graph illustrates gross returns of 0.00%,
6.00%, and 10.00% (net returns after expenses are -1.98%, 4.02%, and 8.02%,
respectively).
["HYPOTHETICAL ILLUSTRATION" GRAPH APPEARS HERE]
- 48 -
<PAGE>
<TABLE>
<CAPTION>
MONTHLY PAYMENTS ASSUMING DIFFERENT GROSS PORTFOLIO RETURNS
- --------------------------------------------------------------
MONTHLY PAYMENT AT THE GROSS PORTFOLIO RETURNS*
-------------------------------
END OF POLICY YEAR 0.0% 6.0% 10.0%
- --------------------------------------------------------------
<S> <C> <C> <C>
Assumed First Monthly Payment $500 $500 $500
- --------------------------------------------------------------
1 $465 $493 $512
- --------------------------------------------------------------
2 $432 $486 $524
- --------------------------------------------------------------
3 $401 $479 $537
- --------------------------------------------------------------
4 $373 $473 $550
- --------------------------------------------------------------
5 $346 $466 $563
- --------------------------------------------------------------
6 $322 $459 $576
- --------------------------------------------------------------
7 $299 $453 $590
- --------------------------------------------------------------
8 $278 $447 $604
- --------------------------------------------------------------
9 $258 $440 $618
- --------------------------------------------------------------
10 $240 $434 $633
- --------------------------------------------------------------
11 $223 $428 $648
- --------------------------------------------------------------
12 $207 $422 $664
- --------------------------------------------------------------
13 $192 $416 $680
- --------------------------------------------------------------
14 $179 $410 $696
- --------------------------------------------------------------
15 $166 $405 $712
- --------------------------------------------------------------
16 $154 $399 $729
- --------------------------------------------------------------
17 $143 $393 $747
- --------------------------------------------------------------
18 $133 $388 $765
- --------------------------------------------------------------
19 $124 $382 $783
- --------------------------------------------------------------
20 $115 $377 $802
</TABLE>
*The corresponding net returns are -1.98%, 4.02%, and 8.02%.
The "Monthly Payment Amounts with Different AIRs" graph illustrates the
differences in variable Annuity Payments between selecting the 4% and 5.5% AIR.
The graph assumes a single Premium of $49,530; the entire premium was allocated
to variable Annuity Payments; the Payment Option is a single Life Annuity; 77
year old male; Separate Account Charges of 1.35%; average Portfolio expenses of
0.63%; and an annual return of the portfolios, after all expenses of 10%.
Monthly variable Annuity Payments are shown with the 4% AIR and the 5.5% AIR.
- 49 -
<PAGE>
[MONTHLY PAYMENT GRAPH]
<TABLE>
<CAPTION>
MONTHLY PAYMENTS ASSUMING DIFFERENT AIRS
(NET PORTFOLIO RETURN = 10%, GROSS PORTFOLIO RETURN 11.98%)
--------------------------------------------------------------
MONTHLY PAYMENT AIR
-------------
AT THE END OF YEAR 4.0% 5.5%
-----------------------------------------------
<S> <C> <C>
Assumed First Monthly Payment $ 453 $ 500
-----------------------------------------------
1 $ 479 $ 521
-----------------------------------------------
2 $ 507 $ 544
-----------------------------------------------
3 $ 536 $ 567
-----------------------------------------------
4 $ 567 $ 591
-----------------------------------------------
5 $ 600 $ 616
-----------------------------------------------
6 $ 635 $ 642
-----------------------------------------------
7 $ 671 $ 670
-----------------------------------------------
8 $ 710 $ 698
-----------------------------------------------
9 $ 751 $ 728
-----------------------------------------------
10 $ 794 $ 759
-----------------------------------------------
11 $ 840 $ 792
-----------------------------------------------
12 $ 888 $ 825
-----------------------------------------------
13 $ 940 $ 861
-----------------------------------------------
14 $ 994 $ 897
-----------------------------------------------
15 $1,051 $ 936
-----------------------------------------------
16 $1,112 $ 975
-----------------------------------------------
17 $1,176 $1,017
-----------------------------------------------
18 $1,244 $1,060
-----------------------------------------------
19 $1,316 $1,106
-----------------------------------------------
20 $1,392 $1,153
</TABLE>
- 50 -
<PAGE>
The Annuity Payment amounts shown reflect the deduction of all fees and
expenses. Actual fees and expenses under the Contract may be higher or lower,
will vary from year to year, and will depend on how you allocate among the
Portfolios. The Separate Account charge is assumed to be at an annual rate of
1.35% of the average daily net assets.
Upon request, we will furnish a customized illustration based on your
individual circumstances and choice of annuity options.
- 51 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PFL IMMEDIATE INCOME ANNUITY
ISSUED THROUGH
PFL RETIREMENT BUILDER VARIABLE
ANNUITY ACCOUNT
OFFERED BY
PFL LIFE INSURANCE COMPANY
4333 EDGEWOOD ROAD, N.E.
CEDAR RAPIDS, IOWA 52499-0001
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the PFL Immediate Income Annuity (the "Contract")
offered by PFL Life Insurance Company. You may obtain a copy of the Prospectus
dated , 1998, by calling 1-800-525-6205, or by writing to the
Administrative and Service Office, Financial Markets Division-Variable Annuity
Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. The Prospectus
sets forth information that a prospective investor should know before
investing in a Contract. Terms used in the current Prospectus for the Contract
are incorporated in this Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT AND THE PFL
RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT (THE "SEPARATE ACCOUNT").
Dated: , 1998
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACT--GENERAL PROVISIONS 3
Delay of Transfers 3
Entire Contract 3
Assignment 3
Beneficiary 3
Change of Beneficiary 3
Incontestability 4
Misstatement of Age or Sex 4
Modification of Contract 4
Nonparticipating 4
Owner 4
Proof of Death 4
Proof of Survival 4
Protection of Proceeds 4
FEDERAL TAX MATTERS 5
Tax Status of the Contract 5
Diversification Requirements 5
Owner Control 5
Required Distributions 5
Taxation of PFL 6
INVESTMENT EXPERIENCE 6
STATE REGULATION OF PFL 9
ADMINISTRATION 9
RECORDS AND REPORTS 9
DISTRIBUTION OF THE CONTRACTS 9
OTHER PRODUCTS 9
CUSTODY OF ASSETS 9
HISTORICAL PERFORMANCE DATA 10
Money Market Yields 10
Other Subaccount Yields 10
Total Returns 11
Other Performance Data 12
Hypothetical Performance Data 12
LEGAL MATTERS 12
INDEPENDENT AUDITORS 12
OTHER INFORMATION 12
FINANCIAL STATEMENTS 13
</TABLE>
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Contract which may be of
interest to a prospective purchaser.
THE CONTRACT--GENERAL PROVISIONS
DELAY OF TRANSFERS
When you transfer amounts among the Subaccounts, we will redeem shares of the
appropriate Portfolios at their prices as of the end of the current Valuation
Period. Generally any Subaccount you transfer to is credited at the same time.
However, we may wait to credit the amount to a new Subaccount until a
Subaccount you transfer from becomes liquid. This will happen only if (1) the
Subaccount you transfer to invests in a Portfolio that accrues dividends on a
daily basis and requires federal funds before accepting a purchase order, and
(2) the Subaccount you transfer from is investing in an equity Portfolio in an
illiquid position due to substantial redemptions or transfers that require it
to sell Portfolio securities in order to make funds available. The Subaccount
you transfer from will be liquid when it receives proceeds from sales of
Portfolio securities, the purchase of new Contracts, or otherwise. During any
period that we wait to credit an Subaccount for this reason, the amount you
transfer will be uninvested. After seven days the transfer will be made even
if the Subaccount you transfer from is not liquid.
ENTIRE CONTRACT
The entire Contract is made up of the Contract, and any riders, endorsements,
or application. No change in or waiver of any provision of the Contract is
valid unless the change or waiver is signed by the President or Secretary of
PFL.
ASSIGNMENT
The option to assign is only available for non-tax qualified annuities. Only
you may make an assignment of this contract. You must notify us in writing to
assign this contract. No change will apply to any action taken by us before
the Written Notice was received. We are not responsible for the validity of
the effect of an assignment.
BENEFICIARY
The Beneficiary is named in the Contract Specifications Section of the
Contract or in a subsequent endorsement. More than one beneficiary may be
named. The rights of any Beneficiary will be subject to all the provisions of
the Contract. You may impose other limitations with our consent.
If any primary or contingent Beneficiary dies before the Annuitant, that
Beneficiary's interest in this Contract ends with that Beneficiary's death.
Only those Beneficiaries living at the time of the Annuitant's death will be
eligible to receive their share of the death benefits. In the event no
contingent Beneficiaries have been named and all primary Beneficiaries have
died before the death benefits become payable, the Owner(s) will become the
Beneficiary(ies) unless elected otherwise. If both primary and contingent
Beneficiaries have been named, payment will be made to the named primary
Beneficiaries living at the time the death proceeds become payable. If there
is more than one Beneficiary and you failed to specify their interest, they
will share equally. Payment will be made to the named contingent
Beneficiary(ies) only if all primary Beneficiaries have died before the death
benefits become payable. If any primary Beneficiary is alive at the time the
death benefits become payable, but dies before receiving their payment, their
share will be paid to their estate.
CHANGE OF BENEFICIARY
You may change the Beneficiary while the Annuitant is living, unless an
irrevocable one has been named. Change is made by written notice. The change
takes effect on the date the written notice was signed, and the written notice
must have been postmarked on or before the date of the Annuitant's death. No
change will apply to any
3
<PAGE>
Annuity Payment made before the written notice was received. We may require
return of the Contract for endorsement before making a change.
INCONTESTABILITY
The Contract is incontestable from the Contract Issue Date.
MISSTATEMENT OF SEX OR AGE
If the age or sex of any Annuitant has been misstated, the Annuity Payments
will be those which the premium paid would have purchased for the correct age
and sex. Any underpayment made by us will be paid with the next Annuity
Payment. Any overpayment made by us will be deducted from future Annuity
Payments. Any underpayment or overpayment will include interest at 5% per
year, from the date of the incorrect payment to the date of the adjustment.
MODIFICATION OF CONTRACT
No change in the Contract is valid unless made in writing
NONPARTICIPATING
Your Contract is nonparticipating. This means we do not pay dividends on it.
Your Contract will not share in our profits or surplus earnings.
OWNER
You, the owner, are named in the Contract Specifications Section. You may,
while any Annuitant is living, exercise all rights granted by the Contract.
These rights are subject to the rights of any assignee or living irrevocable
Beneficiary. "Irrevocable" means that you have given up your right to change
the Beneficiary named.
Unless we have been notified of a community or marital property interest in
the Contract, we will rely on our good faith belief that no such interest
exists and will assume no responsibility for inquiry.
PROOF OF DEATH
Any Beneficiary claiming an interest in the Contract must provide us in
writing with due proof of death of the Payee/Annuitant and/or Secondary
Annuitant (if any). We will not be responsible for Annuity Payments made
before we receive due proof of death at the Administrative and Service Office.
PROOF OF SURVIVAL
If Annuity Payments under the Contract depend on a person being alive on a
given date, proof of survival may be required by us prior to making Annuity
Payments.
PROTECTION OF PROCEEDS
Unless you so direct by filing Written Notice with us, no beneficiary may
assign payments under the Contract before the same are due. To the extent
permitted by law, no payments under the Contract will be subject to the claims
of creditors of any beneficiary.
4
<PAGE>
FEDERAL TAX MATTERS
TAX STATUS OF THE CONTRACTS
The discussion in the prospectus assumes that the Contracts qualify as
"annuity contracts" for federal income tax purposes under the Code.
Diversification Requirements. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury Department regulations in order for
the contract to qualify as an annuity contract under Section 72 of the Code.
The Separate Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Sub-Accounts may be
invested. Although PFL does not have direct control over the Funds in which
the Separate Account invests, PFL believes that each Fund will meet the
diversification requirements, and therefore, the Contract will be treated as
an annuity contract under the Code.
Owner Control. In certain circumstances, owners of variable annuity contracts
may be considered the owners, for federal income tax purposes, of the assets
of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contract owner's gross income. The IRS has
stated in published rulings that a variable contract owner will be considered
the owner of separate account assets if the contract owner possessed incidents
of ownership in those assets, such as the ability to exercise investment
control over the assets. The Treasury Department has also announced, in
connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning
the circumstances in which investor control of the investments of a segregated
asset account may cause the investor (i.e., the contract owner), rather than
the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way
of regulations or rulings on the "extent to which policy-holders may direct
their investments to particular Sub-Accounts without being treated as owners
of the underlying assets."
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, the Contract Owner has the choice of several Sub-Accounts in
which to allocate the Premium, and may be able to transfer among Sub-Accounts
more frequently than in such rulings. In addition, the Contract provides for
more Sub-Accounts than did the variable contracts that were the subject of the
such rulings. These differences could result in a Contract Owner being treated
as the owner of the assets of the Separate Account. In addition, PFL does not
know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. PFL therefore
reserves the right to modify the Contract as necessary to attempt to prevent
the Contract Owner from being considered the owner of the Separate Account's
assets.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any Non-
Qualified Contract to provide that: (a) if any Contract Owner dies on or after
the Annuity Starting Date (as defined in the Prospectus) but prior to the time
the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Contract Owner's
death; and (b) if any Contract Owner dies prior to the Annuity Staring Date,
the entire interest in the Contract will be distributed within five years
after the date of the Contract Owner's death. These requirements will be
considered satisfied as to any portion of the Contract Owner's interest that
is payable to or for the benefit of a "designated beneficiary," and that is
distributed over the life of such designated beneficiary or over a period not
extending beyond the life expectancy of that beneficiary, provided that such
distributions begin within one year of that Contract Owner's death. The
"designated beneficiary" for these purposes is the person who becomes the new
owner of the Contract upon a Contract Owner's death and must be a natural
person. However, if the Contract Owner's sole designated beneficiary is the
surviving spouse of the Contract Owner, the Contract may be continued with the
surviving
5
<PAGE>
spouse as the new Contract Owner. The Code further provides that if the
Contract Owner is not an individual, the primary Annuitant shall be treated as
the Contract Owner for purposes of making distributions that are required to
be made upon the death of the Contract Owner. (The Primary Annuitant is the
individual the events in the life of whom are of primary importance in
effecting the timing and amount of the payout under the Contract. If there is
a change in the primary Annuitant, such change shall be treated as the death
of the Contract Owner. The Contract does not permit a change of the
Annuitants, however.
Non-Qualified Contracts contain provisions that are intended to comply with
the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. PFL will review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code Section 72(s) when clarified by regulation or otherwise.
Qualified Contracts are subject to similar provisions.
TAXATION OF PFL
PFL at present is taxed as a life insurance company under part I of Subchapter
L of the Code. The Separate Account is treated as part of PFL and,
accordingly, will not be taxed separately as a "regulated investment company"
under Subchapter M of the Code. We do not expect to incur any federal income
tax liability with respect to investment income and net capital gains arising
from the activities of the Separate Account retained as part of the reserves
under the Contract. Based on this expectation, it is anticipated that no
charges will be made against the Separate Account for federal income taxes.
If, in future years, any federal income taxes are incurred by PFL with respect
to the Separate Account, we may make a charge to the Separate Account.
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of Annuity Units and
to determine the amount of annuity payments as follows:
ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate. Conversely, Annuity Unit Values fall if the
net investment performance of the Subaccount is less than the assumed rate.
The value of a variable Annuity Unit in each Subaccount was established at
$1.00 on the date operations began for that Subaccount. The value of a
variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a)is the variable Annuity Unit Value for that Subaccount on the
immediately preceding Business Day;
(b)is the net investment factor for that Subaccount for the valuation
period; and
(c)is the daily factor for the valuation period.
The daily factor for the valuation period is a discount factor that reflects
the Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
The net investment factor for the Contract used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is
determined by dividing (a) by (b) and subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value of a fund share held in that Subaccount
determined at the end of the current valuation period; plus
6
<PAGE>
(2) the per share amount of any dividend or capital gain distributions
made by the fund for shares held in that Subaccount if the ex-
dividend date occurs during the valuation period; plus or minus
(3) a per share charge or credit for any taxes reserved for, which we
determine to have resulted from the investment operations of the
Subaccount;
(b) is the net asset value of a fund share held in that Subaccount
determined as of the end of the immediately preceding valuation period;
and
(c) is an amount representing the Separate Account Charge as shown in the
specifications section of the Contract.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
ILLUSTRATIONS OF CALCULATIONS FOR ANNUITY UNIT VALUE AND VARIABLE ANNUITY
PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE IN EACH SUBACCOUNT
Annuity Unit Value = V = A x B x C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
C = A daily factor to neutralize the assumed interest rate built into
the Annuity Tables used.
C = (1/(1+AIR)) (1/365) = 0.999892552 (4% AIR) or 0.999853324 (5.5%
AIR)
For example, if the AIR is 6.5% and:
A = $20 on the day prior to the first payment
B = 1.01
C = 1/(1.055) (/1///365/) = .999853
Then, the Annuity Unit Value is equal to V
= A x B x C
= $20 x 1.01 x .999853
= 20.1970
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY VARIABLE
ANNUITY PAYMENT
First Monthly Variable Annuity Payment = P = (D x E)/$1,000
Where: D = The Contract Value as of the Contract Issue Date.
E = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according
to the tables contained in the Contract.
For example if:
D = $100,000
E = 7.00
Then, the first Monthly Variable Annuity Payment = P = (D x E)/$1,000
= ($100,000 x 7.00)/$1,000
= $700
7
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH
MONTHLY VARIABLE ANNUITY PAYMENT (ASSUMING INVESTMENT IN ONLY ONE SUBACCOUNT)
Number of Annuity Units = U = P/V
Where: P = The dollar amount of the first Monthly Variable Annuity
Payment.
V = The Annuity Unit Value for the Valuation Date on which the
first monthly payment is due.
For example if:
P = $700
V = 20.1970
Then, the number of Annuity Units = U = P/V
= $700/20.1970
= 34.6586 units
FORMULA AND ILLUSTRATION FOR DETERMINING A FUTURE MONTHLY VARIABLE ANNUITY
PAYMENT
(ASSUMING INVESTMENT IN ONLY ONE SUBACCOUNT)
Monthly Variable Annuity Payment = P = U x V
Where:
U = The Number of Annuity Units
V = The Annuity Unit Value for the Valuation Date on which the
future monthly payment is due.
For example if:
U = 34.6586
V = 20.6970 (the Annuity Unit Value increased since issue)
Then, the Amount of the Monthly Variable Annuity Payment = U x V
= 34.6589 x 20.6970
= $717.34
If the Annuity Unit Value had actually decreased to V = 19.6970, the resulting
Monthly Variable Annuity Payment would
= U x V
= 34.6589 x 19.6970
= $682.68
Illustration 4 assumes that no transfers or withdrawals are made between
determining the Number of Annuity Units and determining the future Monthly
Variable Annuity Payment; therefore, the Number of Annuity Units in
Illustrations 3 and 4 are the same.
8
<PAGE>
STATE REGULATION OF PFL
We are subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering our
operation for the preceding year and its financial condition as of the end of
such year. Regulation by the Division of Insurance includes periodic
examination to determine our contract liabilities and reserves so that the
Division may determine the items are correct. Our books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, we are subject to
regulation under the insurance laws of other jurisdictions in which we may
operate.
ADMINISTRATION
We perform administrative services for the Contracts. These services include
issuance of the Contracts, maintenance of records concerning the Contracts,
and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be maintained
by us. As presently required by the Investment Company Act of 1940 and
regulations promulgated thereunder, we will mail to all Contract Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law
or regulation. Contract Owners will also receive confirmation of each
financial transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the
Contracts is continuous and we do not anticipate discontinuing the offering of
the Contracts. However, we reserve the right to discontinue the offering of
the Contracts.
AFSG Securities Corporation, our affiliate, is the principal underwriter of
the Contracts and may enter into agreements with broker-dealers for the
distribution of the Contracts. Prior to April 30, 1998, AEGON USA Securities,
Inc. (also our affiliate) was the principal underwriter for other contracts
issued through the Separate Account. During 1997 the amount paid to AEGON USA
Securities, Inc. and/or the broker-dealers for their services was
$2,337,939.76. No fees had been paid to AEGON USA Securities, Inc. and/or the
broker/dealers for their services to the Separate Account during 1996 or prior
years.
OTHER PRODUCTS
We make other variable annuity contracts available that may also be funded
through the Separate Account. These variable annuity contracts may have
different features, such as different investment options or charges.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Separate Account are held by us.
The assets of each of the Subaccounts of the Separate Account are segregated
and held separate and apart from the assets of the other Subaccounts and from
our general account assets. We maintain records of all purchases and
redemptions of shares of the Underlying Funds held by each of the Subaccounts.
Additional protection for the assets of the Separate Account is afforded by
our fidelity bond, presently in the amount of $5,000,000, covering the acts of
our officers and employees.
9
<PAGE>
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
We may from time to time disclose the current annualized yield of the Money
Market Subaccount for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of
securities and unrealized appreciation and depreciation and income other than
investment income) at the end of the 7-day period in the value of a
hypothetical account having a balance of 1 unit at the beginning of the 7-day
period, dividing such net change in account value by the value of the account
at the beginning of the period to determine the base period return, and
annualizing this quotient on a 365-day basis. The net change in account value
reflects (i) net income from the Portfolio attributable to the hypothetical
account; and (ii) charges and deductions imposed under a Contract that are
attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for the Separate Account
Charge. Current Yield will be calculated according to the following formula:
Current Yield = ((NCS x ES)/UV) x (365/7)
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation
and depreciation and income other than investment income) for the 7-
day period attributable to a hypothetical account having a balance of
1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Contract, the yield for
the Money Market Subaccount will be lower than the yield for the Money Market
Portfolio. The yield calculations do not reflect the effect of any premium
taxes or withdrawal charges that may be applicable to a particular Contract.
We may also disclose the effective yield of the Money Market Subaccount for
the same 7-day period, determined on a compounded basis. The effective yield
is calculated by compounding the base period return according to the following
formula:
Effective Yield = (1 + ((NCS-ES)/UV))/365///7/-1
Where:
NCS = The net change in the value of the account (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation and income other than investment income) for the 7-day
period attributable to a hypothetical account having a balance of 1
Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
The yield on amounts held in the Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Subaccount actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Portfolio, the types and quality of portfolio securities held by
the Money Market Portfolio and its operating expenses.
OTHER SUBACCOUNT YIELDS
We may from time to time advertise or disclose the current annualized yield of
one or more of the Subaccounts of the Separate Account (except the Money
Market Subaccount) for 30-day periods. The annualized yield of a
10
<PAGE>
Subaccount refers to income generated by the Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the Subaccount less Subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, compounding that yield for
a 6-month period, and (iv) multiplying that result by 2. Expenses attributable
to the Subaccount include the Separate Account Charge. The 30-day yield is
calculated according to the following formula:
Yield = 2 x ((((NI-ES)/(U x UV)) + 1)/6/-1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES= Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges imposed by the Separate Account, the yield for a
Subaccount of the Separate Account will be lower than the yield for its
corresponding Portfolio. The yield calculations do not reflect the effect of
any premium taxes or withdrawal charges that may be applicable to a particular
Contract.
The yield on amounts held in the Subaccounts of the Separate Account normally
will fluctuate over time. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of
its investments and its operating expenses.
TOTAL RETURNS
We may from time to time also advertise or disclose total returns for one or
more of the Subaccounts of the Separate Account for various periods of time.
One of the periods of time will include the period measured from the date the
Subaccount commenced operations. When a Subaccount has been in operation for
1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also
be disclosed. Total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption
value of that investment as of the last day of each of the periods. The ending
date for each period for which total return quotations are provided will be
for the most recent month end practicable, considering the type and media of
the communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which we
calculate on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deduction for the Separate Account Charge. Total
return calculations will reflect the effect of withdrawal charges that may be
applicable to a particular period. The total return will then be calculated
according to the following formula:
P (1 + T)n = ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of
the period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
11
<PAGE>
OTHER PERFORMANCE DATA
We may from time to time also disclose average annual total returns in a non-
standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that no
withdrawal charge will be reflected.
We may from time to time also disclose cumulative total returns in conjunction
with the standard format described above. The cumulative returns will be
calculated using the following formula assuming that there is no withdrawal
charge.
CTR = (ERV / P)-1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
HYPOTHETICAL PERFORMANCE DATA
From time to time, sales literature or advertisements may quote average annual
total returns for periods prior to the date the Separate Account commenced
operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the
assumption that the Subaccounts were in existence for the same periods as
those indicated for the Portfolios, with the level of Contract charges that
were in effect at the inception of the Subaccounts.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Contracts has been provided to us by
Sutherland, Asbill & Brennan LLP, of Washington D.C.
INDEPENDENT AUDITORS
Our Financial Statements as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, included in this Statement
of Additional Information have been audited by Ernst & Young LLP, Independent
Auditors, Suite 3400, 801 Grand Avenue, Des Moines, Iowa 50309.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration Statement, amendments and
exhibits thereto has been included in the Prospectus or this Statement of
Additional Information. Statements contained in the Prospectus and this
Statement of Additional Information concerning the content of the Contracts
and other legal instruments are intended to be summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the Securities and Exchange Commission.
12
<PAGE>
FINANCIAL STATEMENTS
The values of the interest of Owners in the Separate Account will be affected
solely by the investment results of the selected Subaccount(s). Our Financial
Statements, which are included in this Statement of Additional Information,
should be considered only as bearing on our ability to meet our obligations
under the Contracts. They should not be considered as bearing on the
investment performance of the assets held in the Separate Account.
13
<PAGE>
FINANCIAL STATEMENTS--STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
14
<PAGE>
PFL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS--STATUTORY BASIS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Financial Statements
Balance Sheets--Statutory Basis........................................... 2
Statements of Operations--Statutory Basis................................. 3
Statements of Changes in Capital and Surplus--Statutory Basis............. 4
Statements of Cash Flows--Statutory Basis................................. 5
Notes to Financial Statements--Statutory Basis............................ 6
</TABLE>
15
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1997.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 1998
16
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---------- ----------
ADMITTED ASSETS
---------------
<S> <C> <C>
Cash and invested assets:
Cash and short-term investments............................ $ 23,939 $ 50,737
Bonds...................................................... 4,913,144 4,773,433
Stocks:
Preferred................................................ 2,750 3,097
Common (cost: 1997--$33,058; 1996--$23,212).............. 42,345 32,038
Affiliated entities (cost: 1997--$10,798; 1996--
$14,893)................................................ 8,031 6,934
Mortgage loans on real estate.............................. 935,207 911,705
Real estate, at cost less accumulated depreciation ($8,655
in 1997; $11,338 in 1996):
Home office properties................................... 8,283 10,372
Properties acquired in satisfaction of debt.............. 11,814 12,260
Investment properties.................................... 36,416 35,922
Policy loans............................................... 57,136 54,214
Other invested assets...................................... 29,864 16,343
---------- ----------
Total cash and invested assets......................... 6,068,929 5,907,055
Premiums deferred and uncollected........................... 16,101 16,345
Accrued investment income................................... 69,662 70,401
Short-term notes receivable from affiliate.................. -- 53,900
Federal income taxes recoverable............................ -- 4,018
Transfers from separate accounts............................ 60,193 38,528
Other assets................................................ 37,624 31,215
Separate account assets..................................... 2,517,365 1,844,515
---------- ----------
Total admitted assets.................................. $8,769,874 $7,965,977
========== ==========
<CAPTION>
LIABILITIES AND CAPITAL AND SURPLUS
-----------------------------------
<S> <C> <C>
Liabilities:
Aggregate reserves for policies and contracts:
Life..................................................... $ 884,018 $ 736,100
Annuity.................................................. 4,204,125 4,408,419
Accident and health...................................... 169,328 139,269
Policy and contract claim reserves:
Life..................................................... 8,635 7,369
Accident and health...................................... 57,713 66,988
Other policyholders' funds................................. 143,831 126,672
Remittances and items not allocated........................ 153,745 64,064
Asset valuation reserve.................................... 69,825 54,851
Interest maintenance reserve............................... 30,287 23,745
Federal income taxes payable............................... 1,889 --
Short-term notes payable to affiliates..................... 16,400 --
Other liabilities.......................................... 75,070 70,663
Payable to affiliates...................................... 13,240 4,975
Separate account liabilities............................... 2,512,406 1,844,515
---------- ----------
Total liabilities...................................... 8,340,512 7,547,630
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding.................................... 2,660 2,660
Paid-in surplus............................................ 154,282 154,129
Unassigned surplus......................................... 272,420 261,558
---------- ----------
Total capital and surplus.............................. 429,362 418,347
---------- ----------
Total liabilities and capital and surplus.............. $8,769,874 $7,965,977
========== ==========
</TABLE>
See accompanying notes.
17
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 202,435 $ 204,872 $ 114,704
Annuity............................... 657,695 725,966 921,452
Accident and health................... 207,982 227,862 232,738
Net investment income................... 446,424 428,337 392,685
Amortization of interest maintenance re-
serve.................................. 3,645 2,434 4,341
Commissions and expense allowances on
reinsurance ceded...................... 49,859 73,931 77,071
---------- ---------- ----------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health bene-
fits................................. 146,583 147,024 146,346
Surrender benefits.................... 658,071 512,810 498,626
Other benefits........................ 126,495 101,288 88,607
Increase (decrease) in aggregate re-
serves for
policies and contracts:
Life.................................. 149,575 140,126 50,071
Annuity............................... (203,139) 188,002 528,330
Accident and health................... 30,059 26,790 17,694
Other................................. 16,998 19,969 16,017
---------- ---------- ----------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions............................. 157,300 177,466 200,706
General insurance expenses.............. 57,571 57,282 57,623
Taxes, licenses and fees................ 8,715 13,889 15,700
Net transfers to separate accounts...... 297,480 171,785 42,981
Other expenses.......................... 119 526 760
---------- ---------- ----------
521,185 420,948 317,770
---------- ---------- ----------
1,445,827 1,556,957 1,663,461
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital gains
(losses) on investments.................. 122,213 106,445 79,530
Federal income tax expense................ 43,381 41,177 33,335
---------- ---------- ----------
Gain from operations before net realized
capital gains (losses) on investments.... 78,832 65,268 46,195
Net realized capital gains (losses) on in-
vestments (net of related federal income
taxes and amounts
transferred to interest maintenance re-
serve)................................... 7,159 (3,503) (18,096)
---------- ---------- ----------
Net income................................ $ 85,991 $ 61,765 $ 28,099
========== ========== ==========
</TABLE>
See accompanying notes.
18
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................ $2,660 $114,129 $211,552 $328,341
Capital contribution.................... -- 40,000 -- 40,000
Net income for 1995..................... -- -- 28,099 28,099
Net unrealized capital losses........... -- -- (7,574) (7,574)
Decrease in non-admitted assets......... -- -- 50 50
Increase in asset valuation reserve..... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................... -- -- 35 35
Cancellation of reinsurance agreement... -- -- 585 585
Amendment of reinsurance agreement...... -- -- 419 419
Transfer of subsidiary investment to
stockholder............................ -- -- (3,250) (3,250)
Change in reserve valuation methodolo-
gy..................................... -- -- (501) (501)
Increase in liability for reinsurance in
unauthorized companies................. -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995.............. 2,660 154,129 220,739 377,528
Net income for 1996..................... -- -- 61,765 61,765
Net unrealized capital gains............ -- -- 2,351 2,351
Increase in non-admitted assets......... -- -- (148) (148)
Increase in asset valuation reserve..... -- -- (10,930) (10,930)
Dividend to stockholder................. -- -- (20,000) (20,000)
Prior period adjustment................. -- -- 5,025 5,025
Surplus effect of sale of a division.... -- -- (384) (384)
Surplus effect of ceding commission
associated with the sale of a
division............................... -- -- 29 29
Amendment of reinsurance agreement...... -- -- 421 421
Decrease in liability for reinsurance in
unauthorized companies................. -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996.............. 2,660 154,129 261,558 418,347
Capital contribution.................... -- 153 -- 153
Net income for 1997..................... -- -- 85,991 85,991
Net unrealized capital gains............ -- -- 3,592 3,592
Increase in non-admitted assets......... -- -- (481) (481)
Increase in asset valuation reserve..... -- -- (14,974) (14,974)
Dividend to stockholder................. -- -- (62,000) (62,000)
Surplus effect of sale of a division.... -- -- (161) (161)
Surplus effect of ceding commissions
associated with the sale of a
division............................... -- -- 5 5
Surplus effect of amendment of reinsur-
ance agreement......................... -- -- 389 389
Surplus effect of reinsurance agree-
ment................................... -- -- 402 402
Increase in liability for reinsurance in
unauthorized companies................. -- -- (1,901) (1,901)
------ -------- -------- --------
Balance at December 31, 1997.............. $2,660 $154,282 $272,420 $429,362
====== ======== ======== ========
</TABLE>
See accompanying notes.
19
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net
of reinsurance......................... $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income................... 452,091 431,456 398,051
Life and accident and health claims..... (154,383) (147,556) (140,798)
Surrender benefits and other fund with-
drawals................................ (658,071) (512,810) (498,626)
Other benefits to policyholders......... (126,462) (101,254) (88,519)
Commissions, other expenses and other
taxes.................................. (225,042) (248,321) (278,241)
Net transfers to separate accounts...... (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on
capital gains.......................... (47,909) (35,551) (32,905)
Cash paid in conjunction with an
amendment of a reinsurance agreement... (4,826) (5,812)
Repayment of intercompany notes and re-
ceivables, net......................... -- -- (48,070)
Cash received in connection with a
reinsurance agreement.................. 1,477 -- --
Other, net.............................. 89,693 (41,677) 62,345
----------- ----------- -----------
Net cash provided by operating
activities............................. 127,358 368,911 683,663
INVESTING ACTIVITIES
Proceeds from investment sold, matured
or repaid:
Bonds and preferred stocks............ 3,284,095 2,112,831 1,757,229
Common stocks......................... 34,004 27,214 20,338
Mortgage loans on real estate......... 138,162 74,351 36,550
Real estate........................... 6,897 18,077 23,203
Cash received from ceding commissions
associated with the sale of a
division............................. 8 45 55
Other................................. 57,683 22,568 8,258
----------- ----------- -----------
3,520,849 2,255,086 1,845,633
Cost of investments acquired:
Bonds and preferred stocks............ (3,411,442) (2,270,105) (2,294,195)
Common stocks......................... (37,339) (29,799) (23,284)
Mortgage loans on real estate......... (159,577) (324,381) (192,292)
Real estate........................... (2,013) (222) (10,188)
Policy loans.......................... (2,922) (1,539) (877)
Cash paid in association with the sale
of a division........................ -- (539) --
Cash paid in conjunction with sales of
a division........................... (591) (123) --
Other................................. (15,674) (6,404) (2,670)
----------- ----------- -----------
(3,629,558) (2,633,112) (2,523,506)
----------- ----------- -----------
Net cash used in investing activities... (108,709) (378,026) (677,873)
FINANCING ACTIVITIES
Issuance of short-term intercompany
notes payable.......................... 16,400 -- 40,000
Capital contribution.................... 153 -- --
Dividends to stockholder................ (62,000) (20,000) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (45,447) (20,000) 40,000
----------- ----------- -----------
Increase (decrease) in cash and short-
term investments....................... (26,798) (29,115) 45,790
Cash and short-term investments at be-
ginning of year........................ 50,737 79,852 34,062
----------- ----------- -----------
Cash and short-term investments at end
of year................................ $ 23,939 $ 50,737 $ 79,852
=========== =========== ===========
</TABLE>
See accompanying notes.
20
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale,
during 1996 the Company transferred $123 in assets, substantially all of
which was cash, and $70 of liabilities. The difference between the assets
and liabilities of $(53) plus a tax credit of $19 was charged directly to
unassigned surplus. During 1997, the Company transferred $591 in assets,
substantially all of which was cash and $343 of liabilities. The difference
between the assets and liabilities of $(248) net of a tax credit of $87 was
charged directly to unassigned surplus.
. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a
tax credit of $270 was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer
by novation as state regulatory and policyholder approvals are received.
During 1996, the Company paid $539 in association with this sale; the
payment, net of a tax credit of $189, were charged
21
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
directly to unassigned surplus. In addition, the Company will receive from
the third party administrator a ceding commission of one percent of the
premiums collected between January 1, 1994 and December 31, 1996. As a
result of the sale, in 1995, the Company received $55 for ceding
commissions; the commissions net of the related tax effect of $20 was
credited directly to unassigned surplus. During 1996, the Company received
$45 for ceding commissions; the commissions net of the related tax effect
of $(16) was charged directly to unassigned surplus. In 1997, the Company
received $8 for ceding commissions; the commissions net of the related tax
effect of $3 was credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through the Company's agents and financial institutions.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies based on statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of
22
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
interest rates in the market are deferred and amortized over the remaining
life of the bond or mortgage loan, rather than recognized as gains or losses
in the statement of operations when the sale is completed; (h) potential
declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(reported as a liability) changes to which are charged directly to surplus,
rather than through recognition in the statement of operations for declines in
value, when such declines are judged to be other than temporary; (i) certain
assets designated as "non-admitted assets" have been charged to surplus rather
than being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1998, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates retrospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which includes shares of mutual funds (money market and other), are carried at
market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers
23
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
of certain invested assets. These amounts are determined using a formula
prescribed by the NAIC and are reported as a liability. The formula for the
AVR provides for a corresponding adjustment for realized gains and losses.
Under a formula prescribed by the NAIC, the Company defers, in the Interest
Maintenance Reserve (IMR), the portion of realized gains and losses on sales
of fixed income investments, principally bonds and mortgage loans,
attributable to changes in the general level of interest rates and amortizes
those deferrals over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or on real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1997, 1996 and 1995,
the Company excluded investment income due and accrued of $177, $1,541 and
$2,272, respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall
interest rate risk management strategy for certain life insurance and annuity
products. The Company entered into several interest rate swap contracts to
modify the interest rate characteristics of the underlying liabilities. The
net interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
The Company has entered into interest-rate cap agreements to hedge the
exposure of changing interest rates. The cash flows from the interest rate
caps will help offset losses that might occur from changes in interest rates.
The cost of such agreements is included in interest expense ratably during the
life of the agreement. Income received as a result of the cap agreement will
be recognized in investment income as earned. Unamortized cost of the
agreements is included in other assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
24
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at
market. Income and gains and losses with respect to the assets in the separate
accounts accrue to the benefit of the policyholders and, accordingly, the
operations of the separate accounts are not included in the accompanying
financial statements. The separate accounts do not have any minimum guarantees
and the investment risks associated with market value changes are borne
entirely by the policyholders. The Company received variable contract premiums
of $281,095, $227,864 and $133,386 in 1997, 1996 and 1995, respectively. All
variable account contracts are subject to discretionary withdrawal by the
policyholder at the market value of the underlying assets less the current
surrender charge.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For
25
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
fixed maturity securities not actively traded, fair values are estimated
using values obtained from independent pricing services or, in the case of
private placements, are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are
based on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.............................. $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks................... 2,750 8,029 3,097 7,133
Common stocks...................... 42,345 42,345 32,038 32,038
Affiliated common stock............ 8,031 8,031 6,934 6,934
Mortgage loans on real estate...... 935,207 983,720 911,705 922,010
Policy loans....................... 57,136 57,136 54,214 54,214
Cash and short-term investments.... 23,939 23,939 50,737 50,737
Interest rate cap.................. 5,618 1,513 6,797 6,975
Interest rate swaps................ -- 2,546 -- --
Separate account assets............ 2,517,365 2,517,365 1,844,515 1,844,515
LIABILITIES
Investment contract liabilities.... 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities....... 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>
26
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and
agencies........................ $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other
government...................... 61,532 2,584 (1,774) 62,342
Public utilities................. 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous..... 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities....... 2,586,202 55,382 (5,263) 2,636,321
---------- -------- -------- ----------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks................... 2,750 5,279 -- 8,029
---------- -------- -------- ----------
$4,915,894 $156,424 $(17,762) $5,054,556
========== ======== ======== ==========
DECEMBER 31, 1996
Bonds:
United States Government and
agencies........................ $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government...................... 59,644 1,906 177 61,373
Public utilities................. 147,918 5,616 1,020 152,514
Industrial and miscellaneous..... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities....... 2,470,740 43,896 15,610 2,499,026
---------- -------- -------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks................... 3,097 4,036 -- 7,133
---------- -------- -------- ----------
$4,776,530 $123,465 $ 25,092 $4,874,903
========== ======== ======== ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 132,834 $ 133,608
Due after one year through five years................. 1,036,862 1,066,474
Due after five years through ten years................ 886,542 915,229
Due after ten years................................... 270,704 294,895
---------- ----------
2,326,942 2,410,206
Mortgage and other asset-backed securities............ 2,586,202 2,636,321
---------- ----------
$4,913,144 $5,046,527
========== ==========
</TABLE>
27
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes......................... $373,496 $364,356 $342,182
Dividends on equity investments..................... 1,460 1,436 1,822
Interest on mortgage loans.......................... 80,266 69,418 52,702
Rental income on real estate........................ 7,501 9,526 10,443
Interest on policy loans............................ 3,400 3,273 3,112
Other investment income............................. 613 1,799 1,803
-------- -------- --------
Gross investment income............................. 466,736 449,808 412,064
Investment expenses................................. 20,312 21,471 19,379
-------- -------- --------
Net investment income............................... $446,424 $428,337 $392,685
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................... $3,284,095 $2,112,831 $1,757,229
========== ========== ==========
Gross realized gains....................... $ 30,094 $ 19,876 $ 19,721
Gross realized losses...................... (17,265) (19,634) (34,399)
---------- ---------- ----------
Net realized gains (losses)................ $ 12,829 $ 242 $ (14,678)
========== ========== ==========
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of
$5,944,376 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Debt securities.................................... $ 12,829 $ 242 $(14,678)
Short-term investments............................. (19) (197) 24
Equity securities.................................. 6,972 1,798 504
Mortgage loans on real estate...................... 2,252 (5,530) (1,053)
Real estate........................................ 4,252 1,210 (1,908)
Other invested assets.............................. 1,632 12 (970)
-------- ------- --------
27,918 (2,465) (18,081)
Tax effect......................................... (10,572) (1,235) 7,878
Transfer to interest maintenance reserve........... (10,187) 197 (7,891)
-------- ------- --------
Net realized gains (losses)........................ $ 7,159 $(3,503) $(18,096)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
------- --------- --------
<S> <C> <C> <C>
Debt securities......... $40,289 $(115,867) $355,560
Equity securities....... 5,653 2,929 (16,379)
------- --------- --------
Change in unrealized ap-
preciation (deprecia-
tion).................. $45,942 $(112,938) $339,181
======= ========= ========
</TABLE>
28
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Unrealized gains..................................... $10,356 $ 9,590 $ 6,833
Unrealized losses.................................... (3,836) (8,723) (8,895)
------- ------- -------
Net unrealized gains (losses)........................ $ 6,520 $ 867 $(2,062)
======= ======= =======
</TABLE>
During 1997, the Company issued mortgage loans with interest rates ranging
from 7.32% to 8.62%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 80%. Mortgage loans
with a carrying value of $237 were non-income producing for the previous
twelve months. Accrued interest of $79 related to these mortgage loans was
excluded from investment income. The Company requires all mortgaged properties
to carry fire insurance equal to the value of the underlying property.
During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively,
were foreclosed and transferred to real estate. No mortgage loans were
foreclosed during 1997. At December 31, 1997 and 1996, the Company held a
mortgage loan loss reserve in the asset valuation reserve of $11,985 and
$5,432, respectively. The mortgage loan portfolio is diversified by geographic
region and specific collateral property type as follows:
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
----- -----
<S> <C> <C>
South Atlantic........................................... 29% 26%
Pacific.................................................. 15 13
E. North Central......................................... 12 15
Mountain................................................. 10 10
W. South Central......................................... 9 12
E. South Central......................................... 8 9
Middle Atlantic.......................................... 7 6
W. North Central......................................... 6 6
New England.............................................. 4 3
</TABLE>
PROPERTY TYPE DISTRIBUTION
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
----- -----
<S> <C> <C>
Retail................................................... 35% 37%
Office................................................... 31 34
Apartment................................................ 14 14
Other.................................................... 14 12
Industrial............................................... 6 3
</TABLE>
At December 31, 1997, the Company had the following investments (excluding
U.S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY OR ISSUER VALUE
--------------------------------- --------
<S> <C>
Bonds:
Structured Asset Securities Corporation.......................... $66,650
Countrywide Mortgage Backed Securities, Inc. .................... 94,918
</TABLE>
29
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of
its investment portfolio attributable to changes in general interest rate
levels and to manage duration mismatch of assets and liabilities. Those
instruments include interest rate exchange agreements (swaps and caps),
options, and commitments to extend credit and all involve elements of credit
and market risks in excess of the amounts recognized in the accompanying
financial statements at a given point in time. The contract or notional
amounts of those instruments reflect the extent of involvement in the various
types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty
defaults after the Company has delivered funds or securities under terms of
the contract) that would result in an accounting loss and replacement cost
risk (i.e., the cost to replace the contract at current market rates should
the counterparty default prior to settlement date). Credit loss exposure
resulting from nonperformance by a counterparty for commitments to extend
credit is represented by the contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial
instruments with on and off-balance sheet risks, shown in notional amounts,
are summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------
1997 1996
-------- --------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating................................ $100,000 $ --
Receive floating (uncapped)--pay floating (capped)........ 67,229 --
Interest rate cap agreements.................................. 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums............................. $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed......................... 2,038 1,796 2,356
Reinsurance ceded........................... (246,372) (300,546) (324,993)
---------- ---------- ----------
Net premiums earned......................... $1,068,112 $1,158,700 $1,268,894
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $183,638,
$168,155 and $167,287 during 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $60,437 and
$63,226, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1997 and
1996 of $2,434,130 and $2,737,441, respectively.
30
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $117,686 at December 31, 1997 that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)......... $42,775 $37,256 $27,835
Tax reserve adjustment............................... 2,004 2,211 2,405
Excess tax depreciation.............................. (392) (384) (365)
Deferred acquisition costs--tax basis................ 4,308 5,583 4,581
Prior year over accrual.............................. (1,016) (499) (306)
Dividend received deduction.......................... (941) (454) (56)
Charitable contribution.............................. (848) -- --
Other items--net..................................... (2,509) (2,536) (759)
------- ------- -------
Federal income tax expense........................... $43,381 $41,177 $33,335
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1997). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.
31
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately .9% and 1.0% of ordinary life insurance in force at December 31,
1997 and 1996, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1997 1996
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment................ $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge........ 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value............................ 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments)............................ 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision............................... 203,522 2 174,416 2
---------- --- ---------- ---
9,243,628 100% 9,078,030 100%
Less reinsurance ceded................... 2,372,495 2,677,432
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities................ $6,871,134 $6,400,598
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of operations
of the
separate accounts statement:
Transfers to separate accounts................... $281,095 $227,864 $133,386
Transfers from separate accounts................. 9,819 75,172 104,219
-------- -------- --------
Net transfers to separate accounts................. 271,276 152,692 29,167
Reconciling adjustments charges for investment
management, administration fees and contract
guarantees........................................ 26,204 19,093 13,814
-------- -------- --------
Transfers as reported in the summary of operations
of the life, accident and health annual state-
ment.............................................. $297,480 $171,785 $ 42,981
======== ======== ========
</TABLE>
32
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1997 and 1996, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business................ $ 2,316 $1,698 $ 618
Ordinary direct renewal business................... 22,724 6,834 15,890
Group life direct business......................... 1,523 646 877
Reinsurance ceded.................................. (1,464) (81) (1,383)
------- ------ -------
25,099 9,097 16,002
Accident and health:
Direct............................................. 148 -- 148
Reinsurance ceded.................................. (49) -- (49)
------- ------ -------
Total accident and health............................ 99 -- 99
------- ------ -------
$25,198 $9,097 $16,101
======= ====== =======
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business................ $ 2,657 $1,865 $ 792
Ordinary direct renewal business................... 23,307 7,180 16,127
Group life direct business......................... 1,788 1,195 593
Reinsurance ceded.................................. (1,706) (438) (1,268)
------- ------ -------
26,046 9,802 16,244
Accident and health:
Direct............................................. 104 -- 104
Reinsurance ceded.................................. (3) -- (3)
------- ------ -------
Total accident and health............................ 101 -- 101
------- ------ -------
$26,147 $9,802 $16,345
======= ====== =======
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force
aggregating $69,271 and $69,251, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,128 and $1,252 to cover
these deficiencies at December 31, 1997 and 1996, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.
33
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $226, $297 and $465 for
the years ended December 31, 1997, 1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $62, $184 and $164 for the years ended December 31, 1997,
1996 and 1995, respectively.
34
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997,
1996 and 1995, the Company paid $18,705, $17,028 and $14,214, respectively,
for these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.6% at December 31, 1997. During 1997,
1996 and 1995, the Company paid net interest of $1,188, $174 and $71,
respectively, to affiliates.
During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.
At December 31, 1997, the Company has a $16,400 short-term note payable to
an affiliate. Interest on this note accrues at 5.6%.
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note matured during 1996.
During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations. The
Company has established a reserve of $17,700 and $21,774 and an offsetting
premium tax benefit of $7,984 and $8,752 at December 31, 1997 and 1996,
respectively, for its estimated share of future guaranty fund assessments
related to several major insurer insolvencies. The guaranty fund expense
(benefit) was $(975), $2,617 and $5,859 for December 31, 1997, 1996 and 1995,
respectively.
35
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning
Project (the "Project") to review and analyze its information technology and
systems to determine if they are Year 2000 compatible. The Company has begun
to convert or modify, where necessary, critical data processing systems. It is
contemplated that the plan will be substantially completed by early 1999. The
Company does not expect this project to have a significant effect on
operations. However, to mitigate the effect of outside influences upon the
success of the project, the Company has undertaken communications with its
significant customers, suppliers and other third parties to determine their
Year 2000 compatibility and readiness. Management believes that the issues
associated with the Year 2000 will be resolved with no material financial
impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that systems
or equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including
testing procedures, there is no certainty that any company will achieve
complete success. Notwithstanding the efforts or results of the Company, its
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
36
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- ------------------ ---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions.......................... 136,058 139,110 136,058
Foreign governments.................... 51,407 51,154 51,407
Public utilities....................... 124,013 124,013 121,582
All other corporate bonds.............. 3,275,849 3,377,152 3,278,280
Redeemable preferred stock............... 2,750 8,029 2,750
---------- ---------- ----------
Total fixed maturities................... 4,915,894 5,054,556 4,915,894
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance............. 7,593 9,046 9,046
Industrial, miscellaneous and all oth-
er.................................... 36,263 41,330 41,330
---------- ---------- ----------
Total equity securities.................. 43,856 50,376 50,376
Mortgage loans on real estate............ 935,207 935,207
Real estate.............................. 44,699 44,699
Real estate acquired in satisfaction of
debt.................................... 11,814 11,814
Policy loans............................. 57,136 57,136
Other long-term investments.............. 29,864 29,864
Cash and short-term investments.......... 23,939 23,939
---------- ----------
Total investments........................ $6,062,409 $6,068,929
========== ==========
</TABLE>
- ----------------------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
37
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE BENEFITS,
POLICY CLAIMS
BENEFITS POLICY AND NET LOSSES AND OTHER
AND UNEARNED CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING PREMIUMS
EXPENSES PREMIUMS LIABILITIES REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
---------- -------- ----------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Individual life $ 882,003 $ -- $ 8,550 $ 200,175 $ 75,914 $ 211,921 $ 36,185 --
Individual health....... 62,033 9,207 12,821 63,548 5,934 37,706 29,216 $ 63,383
Group life and health... 88,211 11,892 44,977 146,694 11,888 103,581 91,568 143,580
Annuity................. 4,204,125 -- -- 657,695 352,688 571,434 364,216 --
---------- ------- ------- ---------- -------- ---------- --------
$5,236,372 $21,099 $66,348 $1,068,112 $446,424 $ 924,642 $521,185
========== ======= ======= ========== ======== ========== ========
YEAR ENDED DECEMBER 31,
1996
Individual life......... $ 734,350 $ -- $ 7,240 $ 202,082 $ 66,538 $ 197,526 $ 38,067 --
Individual health....... 39,219 8,680 13,631 55,871 5,263 32,903 29,511 $ 55,678
Group life and health... 78,418 14,702 53,486 174,781 12,877 105,459 122,953 171,320
Annuity................. 4,408,419 -- -- 725,966 343,659 800,121 230,417 --
---------- ------- ------- ---------- -------- ---------- --------
$5,260,406 $23,382 $74,357 $1,158,700 $428,337 $1,136,009 $420,948
========== ======= ======= ========== ======== ========== ========
YEAR ENDED DECEMBER 31,
1995
Individual life......... $ 594,274 $ -- $ 6,066 $ 111,918 $ 49,929 $ 97,065 $ 37,933 --
Individual health....... 24,225 7,768 11,863 47,692 4,091 25,793 26,033 $ 47,690
Group life and health... 67,994 16,662 58,813 187,832 11,665 106,065 139,640 184,545
Annuity................. 4,220,274 -- 921,452 327,000 1,116,768 114,164 --
---------- ------- ------- ---------- -------- ---------- --------
$4,906,767 $24,430 $76,742 $1,268,894 $392,685 $1,345,691 $317,770
========== ======= ======= ========== ======== ========== ========
</TABLE>
- -------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
38
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force.. $5,025,027 $420,519 $35,486 $4,639,994 .8%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health....... 73,593 10,045 -- 63,548 --
Group life and health... 339,269 192,575 -- 146,694 --
Annuity................. 697,893 40,198 -- 657,695 --
---------- -------- ------- ---------- ---
$1,312,446 $246,372 $ 2,038 $1,068,112 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $30,685 $4,416,989 .7%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health....... 68,699 12,828 -- 55,871 --
Group life and health... 390,296 215,515 -- 174,781 --
Annuity................. 794,311 68,345 -- 725,966 --
---------- -------- ------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $22,936 $4,148,559 .6%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health....... 60,309 12,617 -- 47,692 --
Group life and health... 408,097 220,265 -- 187,832 --
Annuity................. 1,009,191 88,270 531 921,452 .05%
---------- -------- ------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======= ========== ===
</TABLE>
39
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits:
(1) (a) Resolution of the Board of Directors of PFL Life Insurance
Company authorizing establishment of the Separate Account.
/1/
(2) Not Applicable.
(3) (a) Principal Underwriting Agreement by and between PFL Life
Insurance Company, on its own behalf and on behalf of the
Separate Account, and AFSG Securities Corporation./4/
(b) Form of Broker/Dealer Supervision and Sales Agreement by
and between AFSG Securities Corporation and the
Broker/Dealer./4/
(4) (a) Form of Contract for the PFL Immediate Income Annuity./7/
(5) (a) Form of Application for the PFL Immediate Income Annuity.
/7/
(6) (a) Articles of Incorporation of PFL Life Insurance Company./1/
(b) ByLaws of PFL Life Insurance Company./1/
(7) Not Applicable.
(8) (a) Participation Agreement by and between Variable Insurance
Product Funds and Variable Insurance Products Fund II,
Fidelity Distributors Corporation, and PFL Life Insurance
Company, and Addendums thereto./2/
(b) Participation Agreement between Variable Insurance Products
Fund III, Fidelity Distributors Corporation, and PFL Life
Insurance Company./3/
(c) Amended Schedule A to Participation Agreement by and
between Variable Insurance Product Funds and Variable
Insurance Products Fund II, Fidelity Distributors
Corporation, and PFL Life Insurance Company./8/
<PAGE>
(d) Amended Schedule A to Participation Agreement between
Variable Insurance Products Fund III, Fidelity Distributors
Corporation, and PFL Life Insurance Company./8/
(9) Opinion and Consent of Counsel./6/
(10) (a) Consent of Independent Auditors./7/
(10) (b) Opinion and Consent of Actuary./7/
(11) Not applicable.
(12) Not applicable.
(13) Performance Data Calculations./8/
(14) Powers of Attorney. (Patrick S. Baird, Craig D. Vermie,
William L. Busler, Douglas C. Kolsrud, Robert J. Kontz)/1/
(Brenda K. Clancy)/2/ (Larry N. Norman)/5/
/1/ Incorporated herein by reference to the Initial filing of Registrants
Form N-4 Registration Statement (File No. 333-7509) on July 3, 1996.
/2/ Incorporated herein by reference to the Registrants filing of Pre-
Effective Amendment No. 1 to Form N-4 Registration Statement (File No.
333-7509) on December 6, 1996.
/3/ Incorporated herein by reference to the Registrant's filing of Post-
Effective Amendment No. 1 to Form N-4 Registration Statement (File No.
333-7509) on April 29, 1997.
/4/ Incorporated herein by reference to the Registrant's filing of Post-
Effective Amendment No. 4 to Form N-4 Registration Statement (File No.
333-7509) on April 30, 1998.
/5/ Incorporated herein by reference to the Registrant's filing of Post-
Effective Amendment No. 5 to Form N-4 Registration Statement (File No.
333-7509) on July 16, 1998.
/6/ Filed with the initial Form N-4 Registration Statement (File No. 333-
61063) on August 10, 1998.
/7/ Filed herewith.
/8/ To be filed by amendment.
<PAGE>
Item 25. Directors and Officers of the Depositor (PFL Life Insurance Company)
<TABLE>
<CAPTION>
Name and Business Address Principal Positions and Offices with
- ------------------------- ------------------------------------
Depositor
---------
<S> <C>
William L. Busler Director, Chairman of the Board and
4333 Edgewood Road, N.E. President
Cedar Rapids, Iowa 52499-0001
Patrick S. Baird Director, Senior Vice President and Chief
4333 Edgewood Road, N.E. Operating Officer
Cedar Rapids, Iowa 52499-0001
Craig D. Vermie Director, Vice President, Secretary and
4333 Edgewood Road, N.E. General Counsel
Cedar Rapids, Iowa 52499-0001
Douglas C. Kolsrud Director, Senior Vice President, Chief
4333 Edgewood Road, N.E. Investment Officer and Corporate Actuary
Cedar Rapids, Iowa 52499-0001
Larry N. Norman Director and Executive Vice President
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Robert J. Kontz Vice President and Corporate Controller
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Brenda K. Clancy Vice President, Treasurer and Chief Financial
4333 Edgewood Road, N.E. Officer
Cedar Rapids, Iowa 52499-0001
</TABLE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name Incorporation Securities Owned Business
- ---- ------------- ----------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands 53.63% of Vereniging Holding company
Corporation AEGON Netherlands
Membership Association
Groninger Financieringen B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
Voting Trust Delaware Voting Trust
Trustees:
K.J. Storm
Donald J. Shepard
H.B. Van Wijk
Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Indiana 100% of AEGON U.S. Holding company
Company Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding company
Holding Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Insurance Maryland 100% AUSA Holding Co. Holding company
Group, Inc.
Trip Mate Insurance Kansas 100% Monumental General Sale/admin. of travel
Agency, Inc. Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management
Administrators, Inc. Insurance Group, Inc. srvcs. to unaffiliated
third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial
Consultant Services, Inc. Administrators, Inc. consulting services
Monumental General Mass Maryland 100% Monumental General Marketing arm for
Marketing, Inc. Insurance Group, Inc. sale of mass marketed
insurance coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment
advisor
Advisors, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diversified Investors Delaware 100% Diversified Broker-Dealer
Securities Corp. Investment Advisors, Inc.
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer
Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance
Division, Inc.
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Insurance agency
Canadian Dealer Network Inc. Resources, Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and
sales
Quantra Software Delaware 100% Quantra Corporation Manufacture and sell
Corporation mortgage loan and security
management software
Landauer Realty Advisors, Inc. Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Associates, Inc. Delaware 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Realty Information Iowa 100% AEGON USA Realty Information Systems for
Systems, Inc. Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Real estate management
Management, Inc Realty Advisors, Inc.
USP Real Estate Investment Iowa 21.89% First AUSA Real estate investment
Life Ins. Co. trust
Trust 13.11% PFL Life Ins. Co.
4.86% Bankers United
Life Assurance Co.
Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Co. Real estate investment
3.77% Bankers United trust
Life Assurance Company
3.38% Life Investors Co.
of America
1.97% AEGON USA Realty
Advisors, Inc.
.18% First AUSA Life
Ins. Co.
RCC Properties Limited Iowa AEGON USA Realty Limited Partnership
Partnership Advisors Inc. is General
Partner and 5% owner.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
AUSA Financial Markets, Inc. Iowa 100% AUSA Holding Co. Marketing
Endeavor Investment Advisors California 49.9% AUSA Financial General Partnership
Markets, Inc.
Universal Benefits Corporation Iowa 100% AUSA Holding Co. Third party administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Trust Co. Iowa 100% AUSA Holding Co. Trust company
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial
counseling for employees
and agents of affiliated
companies
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company,Inc. Insurance agency
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment
advisor
Services, Inc.
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
Associated Mariner Financial Michigan 100% Intersecurities,Inc. Holding co./management
Group, Inc. services
Mariner Financial Services, Inc. Michigan 100% Associated Mariner Broker/Dealer
Financial Group, Inc.
Mariner Planning Corporation Michigan 100% Mariner Financial Financial planning
Services, Inc.
Associated Mariner Agency, Inc. Michigan 100% Associated Mariner Insurance agency
Financial Group, Inc.
Associated Mariner Agency Hawaii 100% Associated Mariner Insurance agency
of Hawaii, Inc. Agency, Inc.
Associated Mariner Ins. Agency Massachusetts 100% Associated Mariner Insurance agency
of Massachusetts, Inc. Agency, Inc.
Associated Mariner Agency Ohio 100% Associated Mariner Insurance agency
Ohio, Inc. Agency, Inc.
Associated Mariner Agency Texas 100% Associated Mariner Insurance agency
Texas, Inc. Agency, Inc.
Associated Mariner Agency New Mexico 100% Associated Mariner Insurance agency
New Mexico, Inc. Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mariner Mortgage origination
Financial Group, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Idex Investor Services, Inc. Florida 100% AUSA Holding Co. Shareholder services
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital Corp.
IDEX Series Fund Massachusetts Various Mutual fund
First AUSA Life Insurance Maryland 100% AEGON USA, Inc. Insurance holding
company
Company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Insurance
Company of America Ins. Co.
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
Life Investors Agency Iowa 100% Life Investors Ins. Marketing
Group, Inc. Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Insurance
Ins. Co.
AEGON Financial Services Minnesota 100% PFL Life Insurance Marketing
Group, Inc. Co.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Insurance
Stock
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Insurance
Stock
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Insurance
Co. of Ohio Ins. Co.
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Inc. Florida 100% Western Reserve Life Provides administration for
Assurance Co. of Ohio affiliated mutual fund
WRL Investment Florida 100% Western Reserve Life Registered investment
advisor
Management, Inc. Assurance Co. of Ohio
ISI Insurance Agency, Inc. California 100% Western Reserve Life Insurance agency
Assurance Co. of Ohio
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
ISI Insurance Agency Ohio 100% ISI Insurance Insurance agency
of Ohio, Inc. Agency Inc.
ISI Insurance Agency Texas 100% ISI Insurance Insurance agency
of Texas, Inc. Agency Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Insurance Agency
of Massachusetts, Inc. Agency Inc.
Monumental Life Insurance Maryland 100% First AUSA Life Insurance
Co. Ins. Co.
AEGON Special Markets Maryland 100% Monumental Life Marketing
Group, Inc. Ins. Co.
Monumental General Maryland 100% First AUSA Life Insurance
Casualty Co. Ins. Co.
United Financial Services, Maryland 100% First AUSA Life General agency
Inc. Ins. Co.
Bankers Financial Life Arizona 100% First AUSA Life Insurance
Ins. Co. Ins. Co.
The Whitestone Corporation Maryland 100% First AUSA Life Insurance agency
Ins. Co.
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Ins. Co.
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to ins.
Inc. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security
Life Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, General agent
Inc.
Commonwealth General Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
Providian Financial Pennsylvania 100% CGC Financial services
Services, Inc.
AFSG Securities Pennsylvania 100% CGC Broker-Dealer
Corporation
PB Investment Advisors, Delaware 100% CGC Registered investment
Inc. advisor
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diversified Financial Delaware 100% CGC Provider of investment,
Products Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage
Services, Inc. Financial holding company
Products Inc.
Capital Real Estate Delaware 100% CGC Furniture and equipment
Development Corporation lessor
Capital General Development Delaware 100% CGC Holding company
Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development Corporation
Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary
Insurance Company
Agency Investments I, Inc. Delaware 100% Agency Holding I, Investment subsidiary
Inc.
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
Ammest Realty Corporation Texas 100% Peoples Security Special purpose
Life Insurance Company subsidiary
Agency Holding II, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance Company
Agency Investments II, Inc. Delaware 100% Agency Holding II, Investment subsidiary
Inc.
Agency Holding III, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance Company
Agency Investments III, Delaware 100% Agency Holding Investment subsidiary
Inc. III, Inc.
JMH Operating Company, Inc. Mississippi 100% Peoples Security Real estate holdings
Life Insurance Company
Capital Security Life Ins. North Carolina 100% Capital General Insurance company
Co. Development Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Delaware 100% CGC Real estate holdings
Corporation
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Capital Broadway Kentucky 100% CGC Real estate holdings
Corporation
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management
Inc. (EIN 23-1720755) support services
National Home Life Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Association Consultants, Illinois 100% Ampac Insurance TPA license-holder
Inc. Agency, Inc.
Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment
Inc. Agency, Inc. lessor
Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administrator of group
Inc. Agency, Inc. insurance programs
Veterans Insurance Delaware 100% Ampac Insurance Special-purpose subsidiary
Services, Inc. Agency, Inc.
Financial Planning Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Services, Inc. Agency, Inc.
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Delaware 100% CGC Holding company
Inc.
Academy Life Insurance Co. Missouri 100% Academy Insurance Insurance company
Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose subsidiary
Inc. Group, Inc.
Ammest Insurance Agency, California 100% Academy Insurance General agent
Inc. Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Inc. (EIN 23-2364438) Group, Inc.
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. services
Group, Inc.
Force Financial Group, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Force Financial Services, Massachusetts 100% Force Fin. Group, Special-purpose subsidiary
Inc. Inc.
Military Associates, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. services
Services, Inc. Group, Inc.
Unicom Administrative Germany 100% Unicom Provider of admin. services
Services, GmbH Administrative Services,
Inc.
Providian Property and Kentucky 100% Providian Auto and Insurance company
Casualty Insurance Company Home Insurance Company
Providian Fire Insurance Kentucky 100% Providian Property Insurance company
Co. and Casualty Insurance
Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company
Insurance Company
19.8% Peoples Security
Life Insurance Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose subsidiary
Caicos Islands
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Providian Life and Health Missouri 3.7% CGC Insurance company
Insurance Company 15.3% Peoples Security
Life Insurance Company
20% Capital Liberty, L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Co. Illinois 100% Providian Life and Insurance company
Health Insurance
Company
Peoples Benefit Services, Pennsylvania 100% Veterans Life Ins. Special-purpose subsidiary
Inc. Co.
First Providian Life and New York 100% Veterans Life Ins. Insurance Company
Health Insurance Company Co.
</TABLE>
Item 27. Number of Contract Owners
As of July 31, 1998, there were no Contract owners.
Item 28. Indemnification
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
--------
indemnification in certain situations, mandatory indemnification in other
situations, and prohibits indemnification in certain situations. The Code also
specifies producers for determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the Securities Act of
933 may be permitted to directors, officers and controlling persons of the
Depositor pursuant to the foregoing provisions, or otherwise, the Depositor has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Depositor of expenses incurred
or paid by a director, officer or controlling person in connection with the
securities being registered), the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29. Principal Underwriters
AFSG Securities Corporation
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
<PAGE>
The directors and officers of AFSG Securities Corporation are as follows:
Larry N. Norman Sarah J. Stange
Director and President Director and Vice President
Harvey E. Willis Brenda K. Clancy
Vice President and Secretary Vice President
Lisa Wachendorf Michael G. Ayers
Compliance Officer Treasurer/Controller
Debra C. Cubero Colleen S. Lyons
Vice President Assistant Secretary
Gregory J. Garvin John F. Reesor
Vice President Assistant Secretary
Michael F. Lane Anne Spaes
Vice President Vice President
The principal business address of each person listed is AFSG Securities
Corporation, 4333 Edgewood Road, N.E., Cedar Rapids, IA 52499-0001.
Commissions and Other Compensation Received by Principal Underwriter.
- --------------------------------------------------------------------
Prior to May 1, 1998, AEGON USA Securities, Inc. served as the principal
underwriter for the PFL Endeavor VA Separate Account, the PFL Retirement Builder
Variable Annuity Account, the PFL Life Variable Annuity Account A, the PFL
Wright Variable Annuity Account and the AUSA Endeavor Variable Annuity Account.
These accounts are separate accounts of PFL Life Insurance Company or AUSA Life
Insurance Company, Inc., life insurance company affiliates of AEGON USA
Securities, Inc. During 1997, the amount paid to AEGON USA Securities, Inc.
and/or broker-dealers for their services was $2,337,939.76. No fees were paid
to AEGON USA Securities, Inc. and/or broker-dealers for services during 1996 or
prior years.
As of May 1, 1998, AFSG Securities Corporation will serve as the principal
underwriter for the above named separate accounts. AFSG Securities Corporation
also serves as principal underwriter for the Separate Account I, Separate
Account II, and Separate Account V of Providian Life and Health Insurance
Company, and for Separate Account C of First Providian Life and Health Insurance
Company.
<PAGE>
Item 30. Location of Accounts and Records
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are maintained by
PFL Life Insurance Company at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499-0001.
Item 31. Management Services.
All management Contracts are discussed in Part A or Part B.
Item 32. Undertakings
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as Premiums under the Contract may be
accepted.
(b) Registrant undertakes that it will include either (i) a postcard or
similar written communication affixed to or included in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information or (ii) a space in the Policy application that an applicant
can check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statements required to be made available under this
Form promptly upon written or oral request to PFL at the address or phone
number listed in the Prospectus.
(d) PFL Life Insurance Company hereby represents that the fees and charges
deducted under the contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by PFL Life Insurance Company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Registration Statement to be signed on its
behalf, in the City of Cedar Rapids and State of Iowa, on this 10th day of
December, 1998.
PFL RETIREMENT BUILDER
VARIABLE ANNUITY ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
/s/ William L. Busler
--------------------------------------------
William L. Busler
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Patrick S. Baird Director December 10, 1998
- ---------------------------- -------------------
Patrick S. Baird
/s/ Craig D. Vermie Director December 10, 1998
- ---------------------------- -------------------
Craig D. Vermie
/s/ William L. Busler Director December 10, 1998
- ---------------------------- (Principal Executive Officer) -------------------
William L. Busler
/s/ Larry N. Norman Director December 10, 1998
- ---------------------------- -------------------
Larry N. Norman
/s/ Douglas C. Kolsrud Director December 10, 1998
- ---------------------------- -------------------
Douglas C. Kolsrud
/s/ Robert J. Kontz Vice President and December 10, 1998
- ---------------------------- Corporate Controller -------------------
Robert J. Kontz
/s/ Brenda K. Clancy Treasurer December 10, 1998
- ---------------------------- -------------------
Brenda K. Clancy
<PAGE>
Registration No.
333-61063
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
PFL IMMEDIATE INCOME ANNUITY
---------------
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page No.*
- ----------- ---------------------- ---------
(4)(a) Form of Contract.
(5)(a) Form of Application.
(10)(a) Consent of Independent Auditors
(10)(b) Opinion and Consent of Actuary
- --------------------------------
* Page numbers included only in manually executed original.
<PAGE>
EXHIBIT (4)
FORM OF CONTRACT
<PAGE>
PFL LIFE INSURANCE COMPANY
(Hereafter, We, Our, Us, the Company)
Administrative Office: 4333 Edgewood Road N. E., Cedar Rapids, Iowa 52499
Telephone (319) 398-8511 (800) 553-5957 ext 8458
OUR ANNUITY AGREEMENT
We will pay, subject to the conditions and limitations of this Contract, the
Annuity Payments to the Payee, if living on the First Payment Date. We will
make these payments in accordance with the Payment Option described in Section
1, Contract Specifications.
Our Company and You, the Owner, are bound by the conditions and provisions of
this Contract. We issue this Contract in consideration of the Single Premium
paid.
RIGHT TO CANCEL YOUR CONTRACT
After You receive this Contract, You have 10 days to examine it. Within that
period, You can return the Contract to the Company or its agent for any reason.
If You return the Contract, it will be canceled and We will consider the
Contract void from the beginning. We will refund Your premium plus or minus the
investment performance of the Subaccounts on the date of cancellation less any
Annuity Payments made.
Signed for the Company at Our Home Office, Cedar Rapids, Iowa.
/s/ Craig D. Vermie /s/ William L. Busler
- ------------------------------- ---------------------------
SECRETARY PRESIDENT
This Contract is a legal Contract between You and the Company.
READ YOUR CONTRACT CAREFULLY
FIXED AND VARIABLE
SINGLE PREMIUM IMMEDIATE INCOME ANNUITY
<PAGE>
CONTRACT CONTENTS
PAGE SECTION DESCRIPTION
---- ------- -----------
3 1 CONTRACT SPECIFICATIONS
4 2 DEFINITIONS
5 3 PAYMENT OF PREMIUM
6 4 ANNUITY PAYMENTS
7 5 TRANSFERS
8 6 SEPARATE ACCOUNT
9 7 GENERAL PROVISIONS
12 8 DEATH PROCEEDS
2
<PAGE>
SECTION 1---CONTRACT SPECIFICATIONS
Contract Number: [ ]
CONTRACT ISSUE DATE: [Mm/Dd/Yy]
PARTIES TO THE CONTRACT:
Owner(s): [ ]
Payee(s): [ ]
Primary Annuitant: [ ]
Primary Annuitant Issue Age and Sex: [Nn, Male, Female]
Secondary Annuitant: [ ]
Secondary Annuitant Issue Age and Sex: [Nn, Male, Female]
Beneficiary(ies): [ ]
SINGLE PREMIUM:
Single Premium Amount: [$N,Nnn,Nnn.Nn]
Initial Allocation to: Fixed Annuity Payments: [ % ] Variable Annuity
Payments: [% ] Premium Tax : [State, %]
ANNUITY PAYMENTS:
First Payment Date: [Mm/Dd/Yy]
Frequency of Payments: [Monthly, Quarterly, Semiannual, Annual]
Fixed Payment Amount on First Payment Date: [$]
Estimated Variable Payment Amount on First Payment Date: [$]
Assumed Investment Return for Variable Payment: [4.0%,5.5% Annually]
The Single Premium allocated to variable Annuity Payments will be invested as
shown below:
VIP: Equity Income [%] VIP II: Contrafund [%]
VIP: Growth [%] VIP II: Index 500 Portfolio [%]
VIP: High Income [%] VIP II: Investment Grade Bond [%]
VIP: Money Market [%] VIP III: Balanced [%]
VIP: Overseas [%] VIP III: Growth & Income [%]
VIP II: Asset Manager [%] VIP III: Growth Opportunities [%]
VIP II: Asset Manager Growth [%]
CHARGES APPLICABLE TO VARIABLE PAYMENTS:
Separate Account Charge: [%]
PAYMENT OPTION:
[Life Only Payment Option:
We will make payments for the Annuitant's lifetime beginning on the First
Payment Date. The final payment will be the one made immediately prior to
the Annuitant's death.
No additional payments will be made after the Annuitant dies.]
3
<PAGE>
SECTION 2---DEFINITIONS
This section contains the standard meaning of terms used in Your Contract.
ALLOCATION DATE
The date on which a transfer is made from one Subaccount to another.
ANNUITANT
The person upon whose life the Annuity Payments are based. For joint options,
Annuity Payments are based upon the lives of both the Primary and Secondary
Annuitant.
ANNUITY PAYMENTS
Payments made by Us pursuant to the Payment Option chosen. We may require
evidence that any Annuitant and/or Payee are alive on the due date of each
Annuity Payment. Annuity Payments may be either fixed or variable, or a
combination of both. We guarantee fixed Annuity Payments to be a specific
amount. Variable Annuity Payments fluctuate in amount based on the investment
performance of the Subaccount relative to the Assumed Investment Return. Your
fixed and variable Annuity Payment options are explained in Section 1, Contract
Specifications.
ANNUITY PAYMENT FREQUENCY
The payment frequency is either monthly or quarterly. Semiannual or annual
payments are available with Our approval.
ASSUMED INVESTMENT RETURN (AIR)
The annual effective rate shown in Section 1, Contract Specifications, that is
used in the calculation of each variable Annuity Payment. If the performance
(minus all expenses) of the Subaccount(s) matches the AIR, the variable Annuity
Payments will remain constant. If the performance exceeds the AIR, the variable
Annuity Payments will increase. If the performance falls below the AIR, the
variable Annuity Payments will decrease.
BENEFICIARY
The person(s) to whom We will pay a death benefit or other guaranteed payments,
if any, when the Annuitant (or last Annuitant for joint options) dies.
CONTRACT ISSUE DATE
The date, as shown on the Contract Specifications Page, on which the Single
Premium is allocated to the Subaccounts and the Contract becomes effective.
CONTRACT YEAR
The 12-month period following the Contract Issue Date shown in Section 1,
Contract Specifications. The first Contract Year starts on the Contract Issue
Date. Each subsequent Contract Year starts on the anniversary of the Contract
Issue Date.
ISSUE AGE
The Annuitant's age at the nearest birthday on the Contract Issue Date.
NET INVESTMENT FACTOR
The unit of measure used to reflect the change in Variable Annuity Unit values
in a Subaccount from one Valuation Period to the next.
4
<PAGE>
OWNER
"You", "Your", and "Yours". The person or entity, as named in Section 1,
Contract Specifications, who may, while any Annuitant is living, exercise all
rights granted by this Contract.
PAYEE
The person or entity to whom We will pay the Annuity Payments.
SECTION 2---DEFINITIONS (CONTINUED)
- -----------------------------------
Right to Cancel Period
The period during which this Contract can be canceled by the Owner.
SEPARATE ACCOUNT CHARGE
An expense that is deducted from each subaccount for Our assumption of mortality
and expense risk, and for Our administration and distribution expenses. (This
charge is commonly referred to as M&E, or mortality and expense charge.)
SUBACCOUNTS
The portfolios of the Separate Account, as described in Section 6, Separate
Account. Section 1, Contract Specifications, lists the allocation to the
Subaccounts You selected.
VALUATION DAY
Each day the New York Stock Exchange is open for trading and any other day when
the Securities and Exchange Commission requires mutual funds or unit investment
trusts to be valued.
VALUATION PERIOD
The period of time beginning at the close of business each Valuation Day and
ending at the close of business on the next Valuation Day.
VARIABLE ANNUITY UNIT
Variable Annuity Payments are expressed in terms of Variable Annuity Units, the
value of which fluctuates in relation to the selected Subaccounts. The value of
Variable Annuity Units is determined at the end of each Valuation Day.
VARIABLE ANNUITY PAYMENT CALCULATION DATE
The day when the amount of the variable Annuity Payment is determined. Payments
will be determined no greater than seven business days before the date of Your
Annuity Payment.
WRITTEN REQUEST
A request in a form suitable to Us, signed by You and delivered to Us.
5
<PAGE>
SECTION 3---PAYMENT OF PREMIUM
SINGLE PREMIUM
You purchase this Contract with a Single Premium. You may not make additional
premium payments.
The Single Premium will be reduced by any applicable Premium Taxes required by
federal, state or local authorities.
ALLOCATION OF YOUR SINGLE PREMIUM
The amount of the Single Premium You allocated to fixed and/or variable Annuity
Payments is shown in Section 1, Contract Specifications. The initial allocation
of Your premium for variable Annuity Payments to the Subaccounts is also shown
in Section 1, Contract Specifications. The minimum allocation to any Subaccount
must not be less than 5% of the total amount allocated to the Subaccounts.
6
<PAGE>
SECTION 4---ANNUITY PAYMENTS
GENERAL PAYMENT PROVISIONS
Annuity Payments may be fixed, variable or a combination of both. Your elections
are shown in Section 1, Contract Specifications. Your Annuity Payments will be
made according to the provisions detailed in Section 1, Contract Specifications.
Your First Payment Date is shown in Section 1, Contract Specifications.
If at any time the amount of a payment to a Payee is less than $100 (Our minimum
payment), We may change the Frequency of Payment so that the payment is at least
equal to the minimum.
DETERMINATION OF THE VARIABLE ANNUITY PAYMENTS
The portion of the Single Premium allocated to variable Annuity Payments will
initially purchase Variable Annuity Units in the Subaccount(s) which You elect.
We determine the number of Variable Annuity Units based upon:
a. the Single Premium reduced by any Premium Taxes shown in Section 1,
Contract Specifications;
b. the age and sex of the Annuitant and Secondary Annuitant, if any;
c. the Payment Option You chose;
d. the Frequency of Payment You chose;
e. the First Payment Date You chose;
f. the Assumed Investment Return You chose; and
g. the Variable Annuity Unit value of the Subaccount(s) on the Contract Issue
Date.
DETERMINATION OF THE VARIABLE ANNUITY PAYMENTS (CONTINUED)
On each Variable Annuity Payment Calculation Date, the number of Variable
Annuity Units in each Subaccount is multiplied by the Variable Annuity Unit
value of each Subaccount to determine the variable Annuity Payment from that
Subaccount. Your total variable Annuity Payment will be the sum of the payments
from each Subaccount.
The number of Variable Annuity Units allocated to each Subaccount will not
change unless You request:
1. A transfer from one Subaccount to another;
2. A transfer from variable Annuity Payments to fixed Annuity Payments;
3. A partial or full surrender that may be available under Your Payment
Option.
Also, if You chose a joint life payment option, We will reduce the number of
Variable Annuity Units if payments are to be reduced upon the death of either
joint Annuitant.
VARIABLE ANNUITY UNITS
7
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The number of Variable Annuity Units in each selected Subaccount is determined
by dividing the Estimated Variable Annuity Payment Amount on the First Payment
Date by the Variable Annuity Unit value of that Subaccount on the Contract Issue
Date. The value of the Variable Annuity Unit in Your chosen Subaccounts will
increase or decrease reflecting the investment experience of those Subaccounts.
SECTION 4---ANNUITY PAYMENTS (CONTINUED)
- ----------------------------------------
VARIABLE ANNUITY UNITS (CONTINUED)
- ----------------------------------
Amounts transferred to the Subaccounts will be applied to provide Variable
Annuity Units in Your chosen Subaccounts. The number of Variable Annuity Units
purchased in a Subaccount will be determined by dividing any amount transferred
to that Subaccount, by the Variable Annuity Unit value for that Subaccount on
the applicable Allocation Date.
The number of Variable Annuity Units withdrawn or transferred from the
Subaccounts will be determined by dividing the amount withdrawn or transferred
by the Variable Annuity Unit value for that Subaccount on the applicable
withdrawal or Allocation Date.
The Variable Annuity Unit value in a particular Subaccount on any Valuation Day
is equal to (a) multiplied by (b) multiplied by (c), where:
(a) is the Variable Annuity Unit value for that Subaccount on the immediately
preceding Valuation Day;
(b) is the Net Investment Factor for that Subaccount for the Valuation Period;
and
(c) is the daily factor for the Valuation Period.
The daily factor for the Valuation Period is a discount factor that reflects the
Assumed Investment Return.
8
<PAGE>
The Net Investment Factor used to calculate the Variable Annuity Unit value in
each Subaccount for the Valuation Period is determined by dividing (a) by (b)
and subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value of a fund share held in that Subaccount determined
as of the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distributions made
by the fund for shares held in that Subaccount if the ex-dividend date
occurs during the Valuation Period; plus or minus
(3) a per share credit or charge for any taxes reserved for, which We
determine to have resulted from the investment operation of the
Subaccount.
(b) is the net asset value of a fund share held in that Subaccount as
determined at the end of the immediately preceding Valuation Period.
(c) is an amount representing the Separate Account Charge. The percentages are
shown in Section 1, Contract Specifications.
SECTION 5---TRANSFERS
Transfers Among Subaccounts
You may transfer the value of the Variable Annuity Units from one Subaccount to
another. If You want to transfer the value of the Variable Annuity Units, You
must tell Us in a Written Request or by an electronic notice that gives Us the
information that We need.
SECTION 5---TRANSFERS (CONTINUED)
Transfers Among Subaccounts (Continued)
You may currently transfer among Subaccounts as often as You wish without
charge. We have the right to charge an administrative fee of $15 for each
transfer after the first six transfers made in any Contract Year. All transfers
made simultaneously will be treated as a single request.
Transfers From Variable Annuity Payments to Fixed Annuity Payments
You may transfer all or a part of the value of variable Annuity Payments to
fixed Annuity Payments.
If You transfer variable Annuity Payments to fixed Annuity Payments, the fixed
Annuity Payments will be a continuation of the Payment Option under which the
variable Annuity Payments were being made. For example, if You were receiving
variable Annuity Payments for two years under a 10-Year Period Certain and Life
Option and elect to transfer to a fixed Annuity Payment, Your fixed Annuity
Payment would be an 8-Year Period Certain and Life Option.
The amount of the fixed Annuity Payment will be based on Our fixed annuity rates
at the time of the transfer.
You may not transfer from fixed Annuity Payments to variable Annuity Payments.
9
<PAGE>
SECTION 6---SEPARATE ACCOUNT
The Separate Account
We have established, and will maintain, a Separate Account under the laws of the
state of Iowa. Any realized or unrealized income, net gains or losses from the
assets of the Separate Account are credited to or charged against it without
regard to Our other income, gains or losses. Assets are put in the Separate
Account for this Contract, as well as for other variable annuity policies and
life insurance. The Separate Account may invest assets in shares of one or more
mutual funds. Fund shares are purchased, redeemed and valued on behalf of the
Separate Account.
The Separate Account is divided into Subaccounts. Each Subaccount invests
exclusively in shares of one of the portfolios of an underlying fund. We
reserve the right to add or remove any Subaccount of the Separate Account.
The assets of the Separate Account are Our property. These Assets will equal or
exceed the reserves and other Contract liabilities of the Separate Account.
These assets will not be chargeable with liabilities arising out of any other
business We conduct. We reserve the right to transfer assets of a Subaccount,
in excess of the reserves and other Contract liabilities with respect to that
Subaccount, to another Subaccount or to Our General Account.
We will determine the fair market value of the assets of the Separate Account in
accordance with a method of valuation, which We establish in good faith.
Valuation Period means the period of time from one determination of the value of
each Subaccount to the next. Such determinations are made when the value of the
assets and liabilities of each Subaccount is calculated. This is generally each
day on which the New York Stock Exchange is open.
We also reserve the right to transfer assets of the Separate Account, which We
determine to be associated with the class of policies to which this Contract
belongs, to another Separate Account. If this type of transfer is made, the term
"Separate Account," as used in this Contract, shall then mean the Separate
Account to which the assets were transferred.
10
<PAGE>
SECTION 6---SEPARATE ACCOUNT (CONTINUED)
The Separate Account (Continued)
We also reserve the right, when permitted by law, to:
(a) deregister the Separate Account under the Investment Company Act of 1940;
(b) manage the Separate Account under the direction of a committee at any time;
(c) restrict or eliminate any voting rights of Contract Owners or other persons
who have voting rights as to the Separate Account; and
(d) combine the Separate Account with one or more other Separate Accounts;
(e) create new Separate Accounts;
(f) add new Subaccounts to, or remove existing Subaccounts from, the Separate
Account, or combine Subaccounts;
(g) add new underlying mutual funds, remove existing mutual funds, or
substitute a new fund for an existing fund.
11
<PAGE>
Change in Investment Objective or Policy of the Separate Account
If required by law or regulation, an investment policy of the Separate Account
will only be changed if approved by the appropriate insurance official of the
state of Iowa or deemed approved in accordance with such law or regulation. If
so required, the process for obtaining such approval is filed with the insurance
official of the state or district in which this Contract is delivered.
SECTION 7---GENERAL PROVISIONS
Entire Contract
The entire Contract is made up of this Contract, and any riders, endorsements,
or application. No change in or waiver of any provision of this Contract is
valid unless the change or waiver is signed by the President or Secretary of the
Company.
Assignment
Only You may make an assignment of this contract. You must notify Us by Written
Request to assign this Contract. No change will apply to any action taken by Us
before the Written Request was received by Us. We are not responsible for the
validity or the effect of an assignment. You should consult Your tax advisor
prior to making an assignment.
Beneficiary
The Beneficiary is named in Section 1, Contract Specifications, or if
applicable, in a subsequent endorsement. More than one Beneficiary may be named.
The rights of any Beneficiary will be subject to all the provisions of this
Contract.
12
<PAGE>
SECTION 7---GENERAL PROVISIONS (CONTINUED)
Beneficiary (Continued)
If any primary or contingent Beneficiary dies before the Annuitant, that
Beneficiary's interest in this Contract ends with that Beneficiary's death.
Only those Beneficiaries living at the time of the Annuitant's death will be
eligible to receive their share of the death benefits. Payment will be made to
the named contingent Beneficiary(ies) only if all primary Beneficiaries have
died before the death benefits become payable. In the event no contingent
Beneficiaries have been named and all primary Beneficiaries have died when the
death benefits become payable, the Owner(s) or Estate of the Owner(s) will
become the Beneficiary(ies) unless elected otherwise. If both primary and
contingent Beneficiaries have been named, payment will be made to the named
primary Beneficiaries living at the time the death benefits become payable. If
there is more than one Beneficiary and You failed to specify their interest,
they will share equally. If any primary Beneficiary is alive at the time the
death benefits become payable, but dies before receiving their payment, their
share will be paid to their estate.
Change of Beneficiary
You may change the Beneficiary while the Annuitant is living, unless an
irrevocable one has been named. Change is made by Written Notice. The change
takes effect on the date the Written Request was signed, and the Written Request
must have been postmarked on or before the date of the Annuitant's death.
Annuity Payment(s) made before the Written Request was received will not be
reissued. We may require return of this Contract for endorsement before making
a change.
Incontestability
This Contract is incontestable from the Contract Issue Date.
13
<PAGE>
Misstatement of Age or Sex
If the age or sex of any Annuitant has been misstated, the Annuity Payments will
be those which the Single Premium paid would have purchased for the correct age
and sex. Any underpayment made by Us will be paid with the next Annuity
Payment. Any overpayment made by Us will be deducted from future Annuity
Payments. Any underpayment or overpayment will include interest at 5% per year,
from the date of the incorrect payment to the date of the adjustment.
Modification of Contract
No change in this Contract is valid unless made in writing by Us and approved by
one of Our officers. No agent has authority to change or waive any provision of
Your Contract.
Nonparticipating
Your Contract is nonparticipating. This means We do not pay dividends on it.
Your Contract will not share in Our profits or surplus earnings.
Owner
You, the Owner, are named in Section 1,Contract Specifications. You may, while
any Annuitant is living, exercise all rights granted by this Contract. These
rights are subject to the rights of any assignee or living irrevocable
Beneficiary. "Irrevocable" means that You have given up Your right to change
the Beneficiary named.
If You die, the rights of Ownership will vest in the executors, administrators
or assigns of the Owner.
14
<PAGE>
SECTION 7---GENERAL PROVISIONS (Continued)
Owner (Continued)
Unless We have been notified of a community or marital property interest in this
Contract, We will rely on Our good faith belief that no such interest exists and
will assume no responsibility for inquiry.
Annuity Payments are generally taxable to the Owner.
Proof of Death
Any Beneficiary claiming an interest in the Contract must provide the Company in
writing with due proof of death of the Payee/Annuitant and/or Secondary
Annuitant (if any). If payments have been paid prior to receiving due proof of
death, We will deduct the payment(s) from the calculated death benefit.
PROOF OF SURVIVAL
If Annuity Payments under this Contract depend on a person being alive on a
given date, proof of survival may be required by the Company prior to making the
payments.
Protection Of Proceeds
Unless You so direct by filing Written Request with Us, no Beneficiary may
assign payments under this Contract before the same are due. To the extent
permitted by law, no payments under this Contract will be subject to the claims
of creditors of any Beneficiary.
Reserves
The reserves held by Us for this Contract shall not be less than the minimum
required by the laws and regulations of the state in which this Contract is
delivered.
Reports To Owner
You will receive a confirmation statement each time You transfer Annuity Units
among the Subaccounts or make transfers from variable Annuity Payments to fixed
Annuity Payments.
We will also send you reports containing financial statements for the Funds, and
a list of portfolio securities of the Funds, as required by the Investment
Company Act of 1940.
Successor Owner
The person named by the Owner to whom ownership of this Contract passes upon the
Owner's death, unless the Owner was also the Annuitant, in which case the
Annuitant's Beneficiary is entitled to benefits described in Section 8, Death
Proceeds.
Tax Qualification
This Contract is intended to qualify as an annuity Contract for federal income
tax purposes. The provisions of this Contract are to be interpreted to maintain
such qualification, notwithstanding any other provisions to the contrary. To
maintain such tax qualification, We reserve the right to amend this Contract to
reflect any clarifications that may be needed or are appropriate to maintain
such tax qualification or to conform this Contract to any applicable changes in
the tax qualification requirements. We will send a copy to You in the event of
any such amendment. If You refuse such an amendment, it must be by giving Us
Written Request, and Your refusal may result in adverse tax consequences.
15
<PAGE>
SECTION 8---DEATH PROCEEDS
If an Owner, who is also an Annuitant, dies before the First Payment Date, the
amount of the death proceeds is the premium plus or minus the investment
performance of the Subaccounts. If an Owner, who is not an Annuitant, dies
before the First Payment Date, the Successor Owner may direct the Owner's
interest in the Contract to be distributed as follows:
(i) one cash lump sum to be distributed within five years of the deceased
owner's death;
(ii) annuitize the death proceeds over the lifetime of the Successor Owner;
or
(iii) annuitize the death proceeds over a period that does not exceed the
life expectancy of the Successor Owner as defined by the Code.
Subparagraphs (ii) and (iii) apply only to individuals, and such payments must
start within one year of the date of the Owner's death.
If the owner, who may or may not also be an Annuitant, dies, on or after the
First Payment Date, the remaining portion of the Annuity Payments due under the
Contract, if any, will be distributed to the Beneficiary in the same manner and
frequency (at least as rapidly) as under the method of distribution used before
the Owner's death.
If the Owner's surviving spouse, if any, is the Successor Owner, then on the
Owner's death he or she may elect to become the Owner under the Contract and to
continue the Contract as his or her own. If no such election is made, the rules
outlined in the foregoing paragraphs of this section will apply.
If the Owner, who is also the Annuitant, dies and no Beneficiary is named or the
Beneficiary has predeceased the Owner/Annuitant, the Owner's estate shall be
deemed the Beneficiary.
If at any time the Annuitant, or last Annuitant for a joint contract, dies, the
Beneficiary will receive the remaining portion of the Annuity Payments due under
the contract, if any. Payments will be made in the same manner and frequency
(at least as rapidly) as under the method of distribution used before the
Annuitant's death.
If a non-natural person is named as an Owner, then the primary Annuitant shall
be treated as an Owner solely for the purposes of this Section 8. The entire
interest in the Contract must be distributed upon the Annuitant's death, if the
Annuitant dies prior to the First Payment Date.
In all events, notwithstanding anything to the contrary in this Contract,
distributions on the death of an Owner shall conform to the requirements of
Section 72(s) of the Code.
16
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PFL LIFE INSURANCE COMPANY
Administrative Office: 4333 Edgewood Road N. E., Cedar Rapids, Iowa 52499
FIXED AND VARIABLE
SINGLE PREMIUM IMMEDIATE INCOME ANNUITY
17
<PAGE>
EXHIBIT (5)
FORM OF APPLICATION
<PAGE>
Immediate Income Builder
THE SUCCESSFUL
RETIREMENT
SERIES
PFL Life
Insurance Company
---------------------------------------------------------------------------
Variable Immediate Annuity
Customer Order Form
Providing:
. Flexibility and control
. Tax advantages after retirement
. Performance of Fidelity funds
WARNING NOTICE:Any person who knowingly,and with
intent to injure, defraud or deceive any insurance company,
files a statement of claim or submits an application
containing any false, incomplete or misleading information
commits a fraudulent act, which is a crime and may be
subject to criminal and civil penalties.
PFL LIFE INSURANCE COMPANY
Cedar Rapids, Iowa
[LOGO OF AEGON APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
Who will Own the Contract? (This person has the right to decide who receives
payments.Complete this section if the Owner is not the Annuitant.)
Social Security/Tax ID No.:
- ----------------------------------------- -----------
First Middle Last
Resident Address: Telephone: ( )
----------------------------- -----------------
City/State: Zip: Date of birth: (Mo/Day/Yr.) / /
---------------- ------------ -- -- --
- --------------------------------------------------------------------------------
Whose Life is this Contract Based On? (This person is called the"Annuitant"or
"primary annuitant".)
Female Male Social Security No.:
- ----------------------------- -----------
First Middle Last
Resident Address: Telephone: ( )
----------------------------- -----------------
City/State: Zip: Date of birth: (Mo/Day/Yr.) / /
---------------- ------------ -- -- --
If you wish a joint life contract, who is the joint annuitant?
Female Male Social Security No.:
- ----------------------------- -----------
First Middle Last
Resident Address: Telephone: ( )
----------------------------- -----------------
City/State: Zip: Date of birth: (Mo/Day/Yr.) / /
---------------- ------------ -- -- --
- --------------------------------------------------------------------------------
Who will receive any death benefits if all Annuitants die? (This is called
the"Beneficiary".)
Primary Beneficiary Designation:
Name: Relationship:
----------------------------------------------- --------------
First Middle Last
Name: Relationship:
----------------------------------------------- --------------
First Middle Last
Secondary Beneficiary Designation (The person who will receive remaining
payments if the Primary Beneficiary dies):
Name: Relationship:
----------------------------------------------- --------------
First Middle Last
- --------------------------------------------------------------------------------
Who will receive the Annuity payments? (This person is called the"Payee".)
Name: Social Security No.:
----------------------------------------------- -------
First Middle Last
Resident Address: Telephone: ( )
----------------------------- -----------------
City/State: Zip:
----------------------------------- -----------
<PAGE>
- --------------------------------------------------------------------------------
Single Premium
Amount of Single Premium: $ (Make check payable to PFL Life
---------------
Insurance Company.)
Type of Funds: [_] Non-qualified [_] IRA [_] Other
(Complete Insurance Contract Replacement section if 1035 or direct rollover)
- --------------------------------------------------------------------------------
Payment Selection
Fixed Payments Variable Payments
[_] 0% [_] 100%
[_] 25% [_] 75%
[_] 50% [_] 50%
[_] 75% [_] 25%
[_] __% [_] __%
Payment Frequency: [_] Monthly [_] Quarterly [_]
-------------------
(First payment will be 30 days from date of purchase unless otherwise
specified .)
---------------------------------
Assumed Investment Return: [_] 4.0 [_] 5.5%
Annuity Payment Options:
[_] Life
[_] Life with Period Certain ____Years guaranteed
[_] Certain Only ____Years guaranteed
[_] Life with Premium Refund
[_] Single Life with Emergency Cash
[_] Joint Life with Emergency Cash
If you elected either of the Life with Emergency Cash options for your variable
annuity payments, you may also select any life contingent option for your fixed
payments.
[_] Single or [_] Joint
If Joint, survivorship payments reduce upon death of
[_] primary annuitant
[_] secondary annuitant
[_] either annuitant
[_] no reduction in payments
Payments reduced to
[_] 50% [_] 67% [_] 75%
- --------------------------------------------------------------------------------
Fund Selection (Minimum fund allocation is 5%)
[_] VIP: Overseas ___% [_] VIP II: Asset Manager Growth ___%
[_] VIP: High Income ___% [_] VIP II: Index 500 ___%
[_] VIP: Equity-Income ___% [_] VIP II: Contrafund ___%
[_] VIP: Growth ___% [_] VIP III: Growth & Income ___%
[_] VIP: Money Market ___% [_] VIP III: Growth Opportunities ___%
[_] VIP II: Investment Grade Bond ___% [_] VIP III: Balanced ___%
[_] VIP II: Asset Manager ___% [_] Total Must Equal 100%
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Electronic Funds Transfer (EFT) Instructions and Agreement (To be completed by
Payee.)
- --------------------------------------------------------------------------------
EFT is requested on all monthly and quarterly payments. Complete this section to
receive your payments by electronic transfer to your bank. The ABA
transit/routing number may be obtained from your banking institution. For your
protection, our bank may refuse any direct deposit request if written
instructions are not on file.
Send Funds to: ABA/Routing Number:
----------------------
Institution Name: Account Number:
-------------------- --------------------------
Street Address: Name of Account:
---------------------- -------------------------
City, State, ZIP: Institution Phone Number:
-------------------- ----------------
I/we hereby authorize the Company to post credit entries, and if necessary,debit
entries or adjustments for any credit entries in error to my/our (select only
one) checking or savings account indicated above and further authorize the
depository named above to credit and/or debit the same entries to my/our
account.
Payee's Signature: Date:
------------------- ------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Application Signatures
- --------------------------------------------------------------------------------
To the best of my knowledge, the statements made in this application are true
and accurate.
I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE
FOR MY NEEDS.
Owner: Signed at Date:
----------------- ------------------- --------------------
Annuitant: Signed at Date:
------------- ------------------- --------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To Be Filled Out By Agent
- --------------------------------------------------------------------------------
To the best of my knowledge, the annuity requested here [_] does [_] does not
replace any life or health insurance or annuity in this or any other company.
I HAVE REVIEWED THE APPLICANT'S EXISTING ANNUITY COVERAGE AND FIND THIS POLICY
SUITABLE FOR HIS/HER NEEDS.
Agent Signature: Printed Name:
----------------- ---------------------------------
First Middle Last
Date: Phone: ( ) Agent License#:
----------- -------------- -------------------
Agency Name & Address:
----------------------------------------------------------
Broker Dealer:
------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Taxpayer Identification Number (Required by the Internal Revenue Service.)
Social Security Number or Taxpayer ID Number:
-----------------------------------
This number belongs to:
---------------------------------------------------------
(Name of person, organization, or trust)
CERTIFICATION: Under penalties of perjury, I hereby certify (1) that the Social
Security or TX ID Number listed above is correct and (2) that I am currently not
subject to backup withholding (cross out (2) if not correct (see next page). The
Internal Revenue Service does not require your consent to any provision of this
application other than the certifications required to avoid backup
withholding.(**)
- --------------------------------------------------------------------------------
Tax Reporting (Please complete if applicable.)
In complying with the Internal Revenue Service regulation requirements, we will
assume, unless you otherwise advise us, that all amounts used to purchase an
annuity were from amounts on which you have not been required to pay income tax.
Please provide the portion of the single premium on which you were taxed.
$________
- --------------------------------------------------------------------------------
Notice of Withholding on Periodic Annuity Payments
The annuity payments may be subject to federal income tax withholding. If so,
withholding will only apply to the portion of the payment that has not been
taxed. Thus, there will be no withholding on the return of already taxed
contributions to the contract.
Your election will remain in effect until you revoke it. You may revoke it at
any time by completing and returning a new W-4P form to the Company.
If you elect not to have withholding apply to your payments, or if you do not
have enough federal income tax withheld from your payments, you may be
responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
- --------------------------------------------------------------------------------
Election For Recipients of Periodic Annuity Payments
Instructions: Complete section A if you do not want any federal income tax
withheld. Complete section B to elect withholding based on marital status and
number of allowances. Complete section C if you want a specific dollar amount
withheld.
Please indicate your withholding preference by completing A, B, or C:
A. Do not withhold federal income tax [_] or
B. Withhold federal income tax based on the information shown.
(You may also designate an additional amount on line C.)
(Number of Allowances)
-------------
Marital status: [_] Single [_] Married
[_] Married, but withhold a higher Single rate
C. Withhold federal income tax in the amount of $
---------------------------
Signed: Date:
---------------------------------- ------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Insurance Contract Replacement
- --------------------------------------------------------------------------------
Will the annuity here replace any life or health insurance or annuity with this
or any other company?
[_] Yes [_] No If Yes, complete information below:
Company Name: Policy No.: Issue Date:
------------ -------------- -----------------
Company Name: Policy No.: Issue Date:
------------ -------------- -----------------
Check the following box to transfer your cash value without tax withholding (a
special form will be provided):
[_] I wish to transfer the cash value from the above named contracts directly as
a non-taxable exchange of contracts. In accordance with IRC Section 1035(a), I
hereby absolutely assign the proceeds of this transfer to the Company to be
deposited in the annuity requested here.
Note: The company does not give legal or tax advice. It is recommended that you
always consult with your personal tax advisor requiring annuity taxation as it
applies to you.
- --------------------------------------------------------------------------------
**Purpose of Statement. This statement is for the payor (Insurance Company) of
interest, dividends, and certain other payments so that you will not be subject
to the 31% backup withholding that became effective January 1, 1984. This
statement is used to report and certify your taxpayer identification number
(TIN) to the payor, to certify that you are not subject to backup withholding if
you an exempt payee. If you do not certify your TIN, the payor may be required
to withhold 31% of payments made to you.
What is Backup Withholding. The Interest and Dividend Tax Compliance Act of 1983
requires payors to withhold and pay to IRS 31% of payments of interest,
dividends, and certain other payments under certain conditions. This is called
"backup withholding." If you give your correct TIN, certify your TIN when
required, and report all your taxable interest and dividends on your tax return,
your payments will not be subject to backup withholding.
Payments you receive will be subject to backup withholding if:
(1) You do not furnish your TIN to the payor, or; (2) IRS notifies the payor
that you furnished an incorrect TIN, or; (3) You are notified by IRS that you
are subject to backup withholding because you failed to report all your interest
and dividends on your tax return (for interest and dividend accounts only), or;
(4) You fail to certify to the payor that you are not subject to backup
withholding under (3) above (for interest and dividend accounts opened after
1983), or; (5) You fail to certify your TIN. This applies only to interest,
dividend broker, or barter exchange accounts opened after 1983, or broker
accounts considered inactive in 1983.
For other payments, you are subject to backup withholding only if (1) or (2)
above applies.
Mail to: PFL Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, IA 52499-0001
Attn: Variable Annuity Department
PFL LIFE INSURANCE COMPANY
Cedar Rapids, Iowa
[LOGO OF AEGON APPEARS HERE]
4333 Edgewood Road NE * Cedar Rapids, Iowa 52499-0001
<PAGE>
EXHIBIT (10)(a)
---------------
Consent of Independent Auditors
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information and to the use of our report dated
February 27, 1998 with respect to the statutory-basis financial statements and
schedules of PFL Life Insurance Company, included in Pre-Effective Amendment
No. 1 to the Registration Statement (Form N-4 No. 333-61063) and related
Prospectus of PFL Retirement Builder Variable Annuity Account.
/s/ Ernst & Young, LLP
Des Moines, Iowa
December 10, 1998
<PAGE>
EXHIBIT (10)(b)
---------------
OPINION AND CONSENT OF ACTUARY
<PAGE>
December 1, 1998
PFL Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-0001
Re: PFL Retirement Builder Variable Annuity Account Registration on Form N-4
SEC File No. 333-61063
Dear Sir/Madam:
With regard to the above registration statement, I have examined such documents
and made such inquiries as I have deemed necessary and appropriate, and on the
basis of such examination, have the following opinions:
Fees and charges deducted under the PFL Immediate Income Annuity policies are
those deemed necessary to appropriately reflect:
(1) the expenses incurred in the acquisition and distribution of the Policies,
(2) the expenses associated with the development and servicing of the
policies,
(3) the assumption of certain risks arising from the operation and management
of the Policies and that provides for a reasonable margin of profit.
Fees and charges assessed include:
(i) Separate Account Charge
(ii) Taxes (including Premium and other Taxes if applicable)
The magnitude of each of the individual charges listed above in (i) through (ii)
is established in the pricing of the PFL Immediate Income Annuity, to achieve a
reasonable Return on Investment (ROI), which is within the range of industry
practice with respect to comparable variable immediate annuity products.
<PAGE>
PFL Life Insurance Company
Page 2
December 1, 1998
In the process of determining the reasonable ROI, each individual charge is also
established within the reasonable range of industry practice. For example, in
conjunction with the pricing process the company has analyzed publicly available
information pertaining to similar industry products, taking into consideration
such factors as current charge levels, the existence of charge level guarantees,
and guaranteed annuity rates. The methodology and results of the comparative
surveys included in this analysis are maintained at the company's administrative
offices.
Except by coincidence, it is not expected that actual charges assessed in a
given year would exactly offset actual expenses incurred. Acquisition expenses
(as well as major product and/or systems development expenses) are incurred "up
front" and recovered, with a reasonable profit margin, through future years'
charges. In addition, the company cannot increase certain charges under the
Policies in the pricing process.
Therefore, in my opinion, the fees and charges deducted under the Policies, in
the aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the company.
I hereby consent to the use of this opinion, which is included as an Exhibit to
the Registration Statement.
/s/ Calvin R. Birkey
- ---------------------------------
Calvin R. Birkey, FSA, MAAA
Managing Actuary
PFL Life Insurance Company
