<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1998.
Registration No. 333 - 7509
811 - 7689
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
---
Post-Effective Amendment No. 4
---
and
REGISTRATION STATEMENT UNDER THE [X]
INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
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PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
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(Exact Name of Registrant)
PFL LIFE INSURANCE COMPANY
--------------------------
(Name of Depositor)
4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code
(319) 297-8468
Frank A. Camp, Esquire
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esquire
Sutherland, Asbill and Brennan L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
<PAGE>
Title of Securities Being Registered:
Flexible Premium Variable Annuity Policies
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------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485.
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X on May 1, 1998 pursuant to paragraph (b)(1)(iii) of Rule 485.
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60 days after filing pursuant to paragraph (a)(i) of Rule 485
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on pursuant to paragraph (a)(i) of Rule 485
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If appropriate, check the following box:
X This post-effective amendment designates a new effective date
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for a previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus) and
Part B (Statement of Additional Information)
of Registration Statement of Information Required by Form N-4
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PART A
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<TABLE>
<CAPTION>
Item of Form N-4 Prospectus Caption
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<S> <C>
1. Cover Page................................ Cover Page
2. Definitions............................... Definitions
3. Synopsis.................................. Summary; Historical Performance Data
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 Retirement Builder Accounts
(c) Portfolio Company.................... The Mutual Fund Account
(d) Fund Prospectus...................... Underlying Funds
(e) Voting Rights........................ Underlying Funds
6. Deductions and Expenses
(a) General.............................. Charges and Deductions
(b) Sales Load %......................... Surrender Charge
(c) Special Purchase Plan................ N/A
(d) Commissions.......................... Distributor of the Policies
(e) Expenses - Registrant................ N/A
(f) Fund Expenses........................ Other Expenses including Investment
Advisory Fees
(g) Organizational Expenses.............. N/A
7. Policies
(a) Persons with Rights.................. The Policy; Election of Payment Option;
Annuity Payments; Annuity Commencement
Date; Voting Rights
(b) (i) Allocation of Premium
Payments....................... Allocation of Premium Payments
(ii) Transfers...................... Transfers
(iii) Exchanges...................... N/A
(c) Changes.............................. The Policy; Annuity Payment Options;
Premium Payments; Possible changes in
taxation; Addition, Deletion, or
Substitution of Investments
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(d) Inquiries............................ Summary
8. Annuity Period............................ Annuity Payment Options;
...................................... Annuity Commencement Date
9. Death Benefit............................. Death Benefit
10. Purchases and Contract Value
(a) Purchases............................ Policy Application and Issuance of
..................................... Policies; Premium Payments
(b) Valuation............................ Policy Value; The Mutual Fund
..................................... Policy Value
(c) Daily Calculation.................... The Mutual Fund Policy Value
(d) Underwriter.......................... Distributor of the Policies
11. Redemptions
(a) By Owners............................ Surrenders
By Annuitant......................... N/A
(b) Texas ORP............................ Restrictions Under the Texas Optional
..................................... Retirement Program
(c) Check Delay.......................... Payment Not Honored by Bank
(d) Lapse................................ N/A
(e) Free Look............................ Summary
12. Taxes..................................... Certain Federal Income Tax Consequences
13. Legal Proceedings......................... Legal Proceedings
14. Table of Contents for the
Statement of Additional Information....... Statement of Additional Information
<CAPTION>
PART B
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Item of Form N-4 Statement of Additional
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<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
Independent
Auditors............................. Independent Auditors
(d) Assets of Registrant................. Custody of Assets
(e) Affiliated Person.................... N/A
(f) Principal Underwriter................ Distribution of the Policies
19. Purchase of Securities Being Offered...... Distribution of the Policies
Offering Sales Load....................... N/A
20. Underwriters.............................. Distribution of the Policies;
(Prospectus) Distributor of the
Policies
21. Calculation of Performance Data........... Historical Performance Data
22. Annuity Payments.......................... (Prospectus) Annuity Payment Options
23. Financial Statements...................... Financial Statements
<CAPTION>
PART C -- OTHER INFORMATION
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Item of Form N-4 Part C Caption
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<S> <C>
24. Financial Statements
and Exhibits
(a) Financial Statements................. Financial Statements
(b) Exhibits............................. Exhibits
25. Directors and Officers of
the Depositor............................. Directors and Officers of the Depositor
26. Persons Controlled By or
Under Common Control with the
Depositor or Registrant................... Persons Controlled By or Under Common Control
with the Depositor or Registrant
27. Number of Contractowners.................. Number of Contractowners
28. Indemnification........................... Indemnification
29. Principal Underwriters.................... Principal Underwriters
30. Location of Accounts and Records.......... Location of Accounts and Records
31. Management Services....................... Management Services
32. Undertakings.............................. Undertakings
Signature Page............................ Signature Page
</TABLE>
<PAGE>
PROSPECTUS
MAY 1, 1998
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY
ISSUED THROUGH
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
BY
PFL LIFE INSURANCE COMPANY
The Flexible Premium Individual Deferred Variable Annuity Policy ("Policy")
offered by this Prospectus is offered by PFL Life Insurance Company ("PFL")
through First Union Brokerage Services, Inc. ("FUBS"). FUBS is a corporate
affiliate of First Union National Bank of North Carolina ("FUNB"), which in
turn is a subsidiary of First Union Corporation, the sixth largest bank
holding company in the United States. You can use the Policy to accumulate
funds for retirement or other long-term financial planning purposes. You are
generally not taxed on any earnings on amounts you invest until you withdraw
them or begin to receive Annuity Payments. The Policy is a "variable" annuity
because the value of your investments can go up or down based on the
performance of mutual fund portfolios that you select. It is a flexible
premium policy because after you purchase it you can generally make additional
investments of any amount of $50 or more, until the Annuity Commencement Date
when PFL begins making Annuity Payments to you.
You have several investment options to choose from through the Policy. They
include the following variable investment options:
AIM VARIABLE INSURANCE
FUNDS, INC. EVERGREEN VARIABLE FEDERATED INSURANCE
-------------------- TRUST SERIES
AIM V.I. Growth and
Income Fund Evergreen VA Fund Federated High Income
AIM V.I. International Evergreen VA Foundation Bond Fund II
Equity Fund Fund
AIM V.I. Value Fund Evergreen VA Growth
and Income Fund
OPPENHEIMER VARIABLE
ACCOUNT FUNDS
MFS VARIABLE INSURANCE ------------------- PUTNAM VARIABLE TRUST
TRUST
Oppenheimer Growth
Fund
Putnam VT Global Growth
MFS Emerging Growth Oppenheimer Multiple Fund
Series Strategies Fund Putnam VT Money Market
MFS Research Series Oppenheimer Strategic Fund
MFS Total Return Series Bond Fund Putnam VT New Value Fund
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU
COULD LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.
The Fixed Account is an additional investment option. If you invest in one
of the alternatives offered in the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
age 59 1/2 there may also be a tax penalty. Finally, there may be an interest
penalty if you make a premature withdrawal from the Fixed Account (this is
called an "Excess Interest Adjustment," and it could also result in your
earning extra interest). PFL has the right to postpone withdrawals from the
Fixed Account.
Prospectuses for the mutual fund portfolios are attached to the back of this
Prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY,
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Please Read This Prospectus Carefully.
Keep It For Future Reference.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................ 5
SUMMARY OF THE POLICY...................................................... 8
ANNUITY POLICY FEE TABLE................................................... 13
CONDENSED FINANCIAL INFORMATION............................................ 19
FINANCIAL STATEMENTS....................................................... 19
HISTORICAL PERFORMANCE DATA................................................ 19
Standardized Performance Data............................................ 19
Non-Standardized Performance Data........................................ 20
PUBLISHED RATINGS.......................................................... 23
PFL LIFE INSURANCE COMPANY................................................. 23
THE ACCOUNTS............................................................... 23
The Mutual Fund Account.................................................. 23
The Underlying Funds................................................... 24
Addition, Deletion or Substitution of Investments...................... 26
The Fixed Account........................................................ 27
Guaranteed Periods..................................................... 27
Dollar Cost Averaging Fixed Account Option............................. 28
Current Interest Rates................................................. 28
Transfers................................................................ 29
Reinstatements........................................................... 30
Telephone Transactions................................................... 30
Dollar Cost Averaging (DCA).............................................. 30
Asset Rebalancing........................................................ 31
THE POLICY................................................................. 31
Policy Application and Issuance of Policies--Premium Payments............ 31
Additional Premium Payments............................................ 32
Maximum Total Premium Payments......................................... 32
Allocation of Premium Payments......................................... 32
Payment Not Honored by Bank............................................ 32
Policy Value............................................................. 32
The Mutual Fund Policy Value........................................... 33
Adjusted Policy Value (APV).............................................. 33
Amendments............................................................... 33
Non-participating Policy................................................. 33
DISTRIBUTIONS UNDER THE POLICY............................................. 33
Surrenders............................................................... 33
Nursing Care and Terminal Condition Withdrawal Option.................... 35
Unemployment Waiver...................................................... 35
Excess Interest Adjustment (EIA)......................................... 35
Systematic Payout Option................................................. 36
Annuity Payments......................................................... 36
Annuity Commencement Date.............................................. 36
Election of Payment Option............................................. 36
Premium Tax............................................................ 37
Supplementary Contract................................................. 37
Annuity Payment Options.................................................. 37
Guaranteed Values...................................................... 38
Variable Payment Options............................................... 38
Determination of First Variable Payment................................ 39
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Determination of Additional Variable Payments.......................... 39
Tax Withholding........................................................ 40
Adjustment of Annuity Payments......................................... 40
Death Benefit............................................................ 40
Death of Annuitant Prior to Annuity Commencement Date.................. 40
Adjusted Partial Withdrawal............................................ 41
Death On or After Annuity Commencement Date............................ 41
Beneficiary............................................................ 42
Death of Owner........................................................... 42
Restrictions Under the Texas Optional Retirement Program................. 42
Restrictions Under Section 403(b) Plans.................................. 42
Restrictions Under Qualified Policies.................................... 42
CHARGES AND DEDUCTIONS..................................................... 42
Surrender Charge......................................................... 43
Mortality and Expense Risk Fee........................................... 43
Administrative Charges................................................... 44
Premium Taxes............................................................ 44
Federal, State and Local Taxes........................................... 44
Transfer Fee............................................................. 45
Other Expenses Including Investment Advisory Fees........................ 45
Employee and Agent Purchases............................................. 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 45
Tax Status of Policy..................................................... 46
Taxation of Annuities.................................................... 46
DISTRIBUTOR OF THE POLICIES................................................ 50
VOTING RIGHTS.............................................................. 51
YEAR 2000 MATTERS.......................................................... 51
LEGAL PROCEEDINGS.......................................................... 52
STATEMENT OF ADDITIONAL INFORMATION........................................ 53
APPENDIX A................................................................. 54
</TABLE>
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<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustments applied at the time of surrender
or on the Annuity Commencement Date.
Administrative and Service Office--Financial Markets Division Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date the Owner begins having Annuity Payments
come from the Policy. The Annuity Commencement Date may not be later than the
last day of the policy month starting after the Annuitant attains age 85,
except as expressly allowed by PFL. In no event will this date be later than
the last day of the Policy month following the month in which the Annuitant
attains age 95. The Annuity Commencement Date may be required to be earlier
for Qualified Policies.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each additional Variable Annuity Payment.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--A day when the New York Stock Exchange is open for trading.
Cash Value--The Adjusted Policy Value, less the Surrender Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Cumulative Free Percentage--The percentage (as applied to the Policy Value)
which is available to the Owner free of any Surrender Charge.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts allocated to one or more options in the Fixed Account.
This interest rate will always be equal to or greater than 3%.
Dollar Cost Averaging--The process by which the Owner may elect to liquidate
a specified Dollar Cost Averaging Fixed Account Option in order to purchase
Mutual Fund Account Accumulation Units on a systematic basis.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL, will constitute Due Proof of Death.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial or full surrenders by the Owner from the Fixed Account
Guaranteed Period Options, or to amounts applied to Annuity Payment Options.
The adjustment reflects changes in the interest rates declared by PFL since
the date any payment was received by or an amount was transferred to the
Guaranteed Period Option. The Excess Interest Adjustment ("EIA") can either
decrease or increase the amount to be received by the Owner upon full
surrender or commencement of Annuity Payments, depending upon whether
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<PAGE>
there has been an increase or decrease in interest rates, respectively.
"Excess Interest" is the additional interest paid by the Company over the
minimum guaranteed amount stated in the policy.
Excess Partial Withdrawal--The portion of a partial withdrawal (surrender)
that can be subject to a Surrender Charge.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods of
the Fixed Account which may be offered by PFL and into which Premium Payments
may be paid or amounts transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.
Mutual Fund Account--That portion of the PFL Retirement Builder Variable
Annuity Account, a separate account established and registered as a unit
investment trust under the Investment Company Act of 1940, (the "1940 Act"),
as amended, which is dedicated to the Policy and to which Premium Payments
under the Policies may be allocated.
Nonqualified Policy--A Policy other than a Qualified Policy.
Owner or Owners--The person who may exercise all rights and privileges under
the Policy. The Owner during the lifetime of the Annuitant and prior to the
Annuity Commencement Date is the person designated as the Owner or a Successor
Owner in the application.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The Policy Date as shown on the Policy Data Page attached to
the Policy.
Policy Value--On or before the Annuity Commencement Date, the Policy Value
is equal to the Owner's:
(1) Premium Payments; minus
(2) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus
(3) interest credited in the Fixed Account; plus
(4) accumulated gains or losses in the Mutual Fund Account; minus
(5) Service Charges, premium taxes and transfer fees, if any.
Policy Year--A Policy Year begins on the Policy Date and on each Policy
Anniversary.
Premium Payment--An amount paid to PFL by the Owner or on the Owner's behalf
as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--There is an annual Service Charge on each Policy Anniversary
(and a charge at the time of surrender during any Policy Year) for Policy
maintenance and related administrative expenses. This annual charge is the
lesser of 2% of the Policy Value or $30.
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<PAGE>
Subaccount--A subdivision within the Mutual Fund Account available under the
Policies, the assets of which are invested in a specified Portfolio of the
Underlying Funds.
Successor Owner--A person appointed by the Owner to succeed to ownership of
the Policy in the event of the death of the Owner who is not the Annuitant
before the Annuity Commencement Date.
Surrender Charge--The applicable contingent deferred sales charge, assessed
on certain full surrenders or partial withdrawals of Premium Payments to cover
expenses relating to the sale of the Policies.
Underlying Funds--The designated portfolios of AIM Variable Insurance Funds,
Inc., managed by A I M Advisors, Inc. ("AIM"); Evergreen Variable Trust,
managed by Evergreen Asset Management Corp.; Federated Insurance Series,
managed by Federated Advisers; MFS Variable Insurance Trust, managed by
Massachusetts Financial Services Company; Oppenheimer Variable Account Funds,
managed by OppenheimerFunds, Inc.; and Putnam Variable Trust, managed by
Putnam Investment Management, Inc.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determinations shall be made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.
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<PAGE>
SUMMARY OF THE POLICY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Policy is a tax-deferred flexible premium variable annuity policy which
can be purchased on a non-tax qualified basis or with the proceeds from
certain plans qualifying for favorable federal income tax treatment. The
Policy provides the Owner with the ability to accumulate funds on a tax-
deferred basis and to receive periodic annuity payments on a variable basis, a
fixed basis, or a combination of both. The Owner allocates the Premium
Payments among the various options available under the Mutual Fund Account and
the Fixed Account. The Policy is intended for long-term purposes, such as
retirement, and for persons who may have maximized their use of other
retirement savings methods, such as 401(k) plans and individual retirement
accounts ("IRAs").
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which has a number of subaccounts for the Policy that invest exclusively
in shares of the designated portfolios of the AIM Variable Insurance Funds,
Inc., Evergreen Variable Trust, Federated Insurance Series, MFS Variable
Insurance Trust, Oppenheimer Variable Account Funds, and Putnam Variable
Trust, (collectively, the "Underlying Funds"). The following portfolios are
available, as shown under the names of the various managers or subadvisers to
the portfolios:
Managed by A I M Advisors, Inc.:
. AIM V.I. Growth and Income Fund
. AIM V.I. International Equity Fund
. AIM V.I. Value Fund
Managed by Evergreen Asset Management Corp.:
. Evergreen VA Fund
. Evergreen VA Foundation Fund
. Evergreen VA Growth and Income Fund
Managed by Federated Advisers:
. Federated High Income Bond Fund II
Managed by Massachusetts Financial Services Company:
. MFS Emerging Growth Series
. MFS Research Series
. MFS Total Return Series
Managed by OppenheimerFunds, Inc.:
. Oppenheimer Growth Fund
. Oppenheimer Multiple Strategies Fund
. Oppenheimer Strategic Bond Fund
Managed by Putnam Investment Management, Inc.:
. Putnam VT Global Growth Fund
. Putnam VT Money Market Fund
. Putnam VT New Value Fund
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<PAGE>
Each of the Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value will
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE ACCOUNTS--
The Mutual Fund Account," p. 23.)
The Fixed Account. PFL guarantees a minimum effective annual interest rate
of at least 3% on Premium Payments and transfers to, less partial withdrawals
and transfers from the Fixed Account. Upon Surrender, PFL guarantees return of
at least the Premium Payments made to, less prior partial withdrawals and
transfers from, the Fixed Account. PFL will always offer a Current Interest
Rate which will be guaranteed for at least one year from the date of the
Premium Payment or transfer, although certain Dollar Cost Averaging programs
may run for shorter periods. PFL may, in its sole discretion, declare a higher
Current Interest Rate from time-to-time. PFL may offer optional guaranteed
interest rate periods into which Premium Payments may be made or amounts
transferred. PFL may also offer a Dollar Cost Averaging Fixed Account Option
which will have a one-year interest rate guarantee and which will require
automatic periodic transfers to the Mutual Fund Account. (See "THE ACCOUNTS--
The Fixed Account," p. 27.)
PREMIUM PAYMENTS
A Nonqualified or Qualified Policy may be purchased with an initial Premium
Payment of at least $2,000, but there is no minimum initial Premium Payment
required for a Policy purchased and used in connection with a tax deferred
403(b) Annuity. An Owner may make additional Premium Payments of at least $50
each at any time before the Annuity Commencement Date. The maximum total
Premium Payments allowed without prior approval of PFL is $1,000,000. At the
time of each Premium Payment no charges or fees are deducted, so the entire
Premium Payment is invested immediately, subject to the restrictions below
regarding the "Right to Cancel" period. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 43 and "CHARGES AND DEDUCTIONS--Premium Taxes," p. 44.)
The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account and/or
the Subaccounts of the Mutual Fund Account) according to allocation
percentages in the Policy application or transmittal form. Any allocation must
be in whole percents, and the total allocation must equal 100%. However, any
amounts allocated to Subaccounts of the Mutual Fund Account will be allocated
entirely to the Putnam VT Money Market Subaccount of the Mutual Fund Account
for the first 14 days after the date the Policy is issued or a longer period
if the laws of the state where issued require more than a 10 day "right-to-
cancel" period (See "Right to Cancel Period," below.) At the end of this
period, the amount in the Putnam VT Money Market Subaccount will then be
allocated to the Subaccount(s) of the Mutual Fund Account in accordance with
the allocation percentages specified by the Owner. Allocations specified by
the Owner will be used for Additional Premium Payments unless the Owner
requests a change in allocation. Allocations for additional Premium Payments
may be changed by sending Written Notice to PFL's Administrative and Service
Office. (See "THE POLICY--Policy Application and Issuance of Policies--Premium
Payments," p. 31.)
RIGHT TO CANCEL PERIOD
When the Owner receives the Policy, it should be reviewed carefully to make
sure it is what the Owner intended to purchase. The Owner may, until the end
of the period of time specified in the Policy (the Right to Cancel period),
examine the Policy and return it for a refund. The applicable period will
depend on the state in which the Policy is issued. In many states the period
is 10 days after the Policy is delivered to the Owner. Some states may allow
for a longer period to return the Policy. The amount of the refund will be the
greater of the Premium Payments made under the Policy or the Policy Value. PFL
will pay the refund within 7 days after it receives Written Notice of
cancellation and the returned Policy. The Policy will then be deemed void.
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<PAGE>
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner can transfer values from one Subaccount to another within the
Mutual Fund Account or from the Mutual Fund Account to the Fixed Account, or
from the Fixed Account to the Mutual Fund Account, within limits established
by PFL. Transfers of Policy Values from any of the Guaranteed Period Options
of the Fixed Account to any of the Subaccounts of the Mutual Fund Account are
allowed only at the end of the applicable Guaranteed Periods, and will not be
subject to an Excess Interest Adjustment at that time. The Owner may, however,
transfer an amount from $50 up to an amount equal to all of the interest
credited in any of the Guaranteed Period Options to any Subaccount(s) of the
Mutual Fund Account prior to the end of a specified Guaranteed Period. (See
"THE ACCOUNTS--Transfers," p. 29.) Any such "Interest Transfers" from a
Guaranteed Period Option prior to the end of a Guaranteed Period will not be
subject to any Excess Interest Adjustment. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustments," p. 35.) Transfers from the Dollar Cost
Averaging Fixed Account Option, except through a Dollar Cost Averaging
program, are not allowed. (See "THE ACCOUNTS--Dollar Cost Averaging Fixed
Account Option," p. 30.) Transfers currently may be made either by telephone
or by sending Written Notice to PFL's Administrative and Service Office. (See
"THE ACCOUNTS--Telephone Transactions," p. 30.)
PFL reserves the right to impose a $10 fee for each transfer in excess of 12
transfers per Policy Year. At the present time, PFL does not charge for
transfers. (See "THE ACCOUNTS--Transfers," p. 29.)
SURRENDERS
The Owner may elect to surrender all or withdraw a portion of the Cash Value
($500 minimum) in exchange for a payment from PFL at any time prior to the
earlier of the Annuitant's death or the Annuity Commencement Date. The Cash
Value equals the Policy Value increased or decreased by any Excess Interest
Adjustment, less any applicable Surrender Charge (described below). A
surrender request must be made by Written Request, and a request for a partial
withdrawal must specify the Subaccounts or Guaranteed Period Options from
which the withdrawal is requested. There is currently no limit on the
frequency or timing of Policy withdrawals, although for Qualified Policies the
retirement plan or applicable law may restrict and/or penalize withdrawals.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 33.) In addition to any
applicable Surrender Charge, Service Charge, Excess Interest Adjustment, and
premium tax, surrenders and partial withdrawals may be subject to income taxes
and a 10% Federal penalty tax.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person): (1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally, a life expectancy of twelve months or less), then the Surrender
Charge and Excess Interest Adjustment (See "DISTRIBUTIONS UNDER THE POLICY--
Death Benefit," p. 40.) are not imposed on surrenders or partial withdrawals.
(Since this benefit may not be available in all states, see the Policy or
endorsement for details.) (See DISTRIBUTIONS UNDER THE POLICY--Nursing Care
and Terminal Condition Withdrawal Option," p. 35.)
UNEMPLOYMENT WAIVER
The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual must
provide proof of unemployment to PFL and (1) must have been employed full time
for at least two years prior to becoming unemployed, (2) must have been
employed full time on the Policy Date, (3) must have been unemployed for at
least 60 consecutive days at the time of withdrawal, and (4) must have a
minimum
- 10 -
<PAGE>
Cash Value at the time of withdrawal of $5,000. Proof of unemployment will
consist of providing PFL with a determination letter from the applicable
State's Department of Labor which verifies that the individual qualifies for
and is receiving unemployment benefits at the time of withdrawal. Therefore,
this benefit may not be available if the unemployed person (a) quit
voluntarily, (b) retired due to age, (c) ceased employment due to disability,
or (d) was terminated for cause, or terminated for other reasons that would
prevent the person from receiving unemployment benefits under state or federal
law. The determination letter must be received by PFL no later than 15 days
after the date of the withdrawal request. This benefit may not be available in
all states, see the Policy or endorsement for details.
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time of investment,
(although in some states, a premium tax charge may be deducted). However, a
Surrender Charge, which is a contingent deferred sales charge, of up to 6% of
the Premium Payment is imposed on certain full surrenders or partial
withdrawals of Premium Payments in order to partially cover expenses relating
to the distribution of the Policies. A Surrender Charge will only be applied
to withdrawals that exceed the amount available under certain listed
exceptions. The applicable Surrender Charge is based on the period of time
elapsed since payment of the Premium Payment(s) being withdrawn. There will be
no Surrender Charge imposed five or more years after a Premium Payment was
paid. In any event, Surrender Charges will be waived after the tenth Policy
Year. For purposes of determining the applicable Surrender Charge, Premium
Payments are considered to be withdrawn on a "first-in, first-out" basis. (See
"CHARGES AND DEDUCTIONS--Surrender Charge," p. 43.)
In each Policy Year the Owner may request partial withdrawals ($500 minimum)
of up to 10% of the Policy Value (calculated at the time of the partial
withdrawal) free of Surrender Charges. The percentage that may be taken free
of Surrender Charges each Policy Year is cumulative. This is referred to as
the "Cumulative Free Percentage." That is, Cumulative Free Percentages which
are not taken are carried forward and are available to be taken in the
following Policy Year free of Surrender Charges. Cumulative Free Percentage
withdrawals previously taken reduce the Cumulative Free Percentage that is
available. (See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 33.)
Withdrawals in excess of the available Cumulative Free Percentage will be
subject to a Surrender Charge of up to 6% of the Premium Payment withdrawn.
Excess Interest Adjustment. Full surrenders, partial withdrawals from the
Guaranteed Period Options of the Fixed Account prior to the end of the
Guaranteed Period, and amounts applied to an Annuity Payment Option (prior to
the end of the Guaranteed Period) and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal, are subject to
an Excess Interest Adjustment. Depending upon declared rates of interest, the
effect of an Excess Interest Adjustment could eliminate all interest in excess
of the minimum guaranteed effective annual interest rate of 3%, or it could
result in the crediting of additional interest. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustments," p. 35.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. For Guaranteed Minimum Death Benefit Option "A" (Return of Premium
Death Benefit), the effective annual rate of this charge is 1.10% of the value
of the Mutual Fund Account's net assets. For Guaranteed Minimum Death Benefit
Options "B" (5% Annually Compounding Death Benefit) and "C" (Annual Step-Up
Death Benefit), the effective annual rate of this charge is 1.25% of the value
of the Mutual Fund Account's net assets. (See "CHARGES AND DEDUCTIONS--
Mortality and Expense Risk Fee," p. 43, and "DISTRIBUTIONS UNDER THE POLICY--
Death Benefit," p. 40.)
- 11 -
<PAGE>
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the value of the Mutual Fund Account's net
assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges," p. 44.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.25% for the Return of
Premium Death Benefit, and 1.40% for the 5% Annually Compounding Death Benefit
or the Annual Step Up Benefit Death Benefit.
Service Charge. There is also an annual Service Charge on each Policy
Anniversary (and a charge at the time of surrender during any Policy Year) for
Policy maintenance and related administrative expenses. This annual charge is
the lesser of 2% of the Policy Value or $30 and is deducted from each
Investment Option in proportion to each Investment Option's percentage of the
Policy Value in the Investment Option just prior to such charge. This charge
is waived if either the Policy Value or the sum of all Premium Payments less
the sum of all partial withdrawals equals or exceeds $50,000 on a Policy
Anniversary (or date of surrender). PFL GUARANTEES THAT THIS CHARGE WILL NOT
BE INCREASED IN THE FUTURE. (See "CHARGES AND DEDUCTIONS--Administrative
Charges," p. 44.)
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to particular
Policy from the Policy Value until surrender of the Policy, payment of the
Death Benefit or until the Annuity Commencement Date. Premium taxes currently
range from 0% to 3.50% of Premium Payments. (See "CHARGES AND DEDUCTIONS--
Premium Taxes," p. 44.)
No charges are currently made against any of the Accounts for federal,
state, or local income taxes. However, PFL reserves the right to deduct
charges in the future for federal, state and local taxes or the economic
burden resulting from the application of any tax laws that PFL determines to
be attributable to the Policies. (See "CHARGES AND DEDUCTIONS--Federal, State
and Local Taxes," p. 44.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fees and other expenses incurred by the Underlying Funds.
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.
- 12 -
<PAGE>
ANNUITY POLICY FEE TABLE
<TABLE>
<S> <C>
POLICY OWNER TRANSACTION EXPENSES
Sales Load On Purchase
Payments................... 0
Maximum Surrender Charge
(as a % of Premium Payment
Surrendered)(/1/)(/2/)..... 6%
Surrender Fees.............. 0
Annual Service Charge(/2/).. Lesser of 2%
of Policy
Value or $30
Per Policy
Transfer Fee(/2/)........... Currently
No Fee
</TABLE>
<TABLE>
<S> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of account value)
Mortality and Expense Risk Fee(/3/).............. 1.25%
Administrative Charge............................ 0.15%
----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES................................. 1.40%
</TABLE>
PORTFOLIO ANNUAL EXPENSES(/4/)
(as a percentage of average net assets, after waivers and reimbursements)
<TABLE>
<CAPTION>
TOTAL
RULE UNDERLYING
MANAGEMENT OTHER 12B-1 FUNDS ANNUAL
FEES EXPENSES FEES EXPENSES
---------- -------- ------- ------------
<S> <C> <C> <C> <C>
AIM V.I. Growth and Income Fund...... 0.63% 0.06% -- 0.69%
AIM V.I. International Equity Fund... 0.75% 0.18% -- 0.93%
AIM V.I. Value Fund.................. 0.62% 0.08% -- 0.70%
Evergreen VA Fund(/5/)............... 0.84% 0.16% -- 1.00%
Evergreen VA Foundation Fund(/5/).... 0.47% 0.53% -- 1.00%
Evergreen VA Growth and Income
Fund(/5/)........................... 0.95% 0.05% -- 1.00%
Federated High Income Bond Fund II... 0.51% 0.29% -- 0.80%
MFS Emerging Growth Series(/6/)...... 0.75% 0.12% -- 0.87%
MFS Research Series(/6/)............. 0.75% 0.13% -- 0.88%
MFS Total Return Series(/6/)......... 0.75% 0.25% -- 1.00%
Oppenheimer Growth Fund(/7/)......... 0.73% 0.02% -- 0.75%
Oppenheimer Multiple Strategies
Fund................................ 0.72% 0.03% -- 0.75%
Oppenheimer Strategic Bond Fund...... 0.75% 0.08% -- 0.83%
Putnam VT Global Growth Fund......... 0.60% 0.15% 0.15% 0.90%
Putnam VT Money Market Fund.......... 0.45% 0.09% 0.15% 0.69%
Putnam VT New Value Fund............. 0.70% 0.15% 0.15% 1.00%
</TABLE>
- -------------------------
(/1/The)Surrender Charge is decreased based on the number of years since the
Premium Payment was made, from 6% in the year in which the Premium Payment
was made to 0% in the sixth year after the Premium Payment was made. If
applicable, a Surrender Charge will only be applied to withdrawals that
exceed the amount available under certain listed exceptions. (See
"DISTRIBUTIONS UNDER THE POLICIES--Surrenders," p.33.)
(/2/The)Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how Policy Value is allocated among the Mutual Fund
Account and the Fixed Account. The Service Charge applies to both the
Fixed Account and the Mutual Fund Account, and is assessed on a prorata
basis relative to each Account's Policy Value as a percentage of the
Policy's total Policy Value. Mutual Fund Account Annual Expenses do not
apply to the Fixed Account. There is no Transfer Fee for the first 12
transfers per year. For additional transfer PFL may charge a fee of $10
per transfer but currently PFL does not charge for any transfers. (See
"CHARGES AND DEDUCTIONS--Other Expenses Including Investment Advisory
Fees," p.45.)
(/3/Mortality)and Expense Risk Fees shown (1.25%) are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fee for the "Return of Premium Death Benefit" is 1.10% for
each Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit,"
p.40.)
- 13 -
<PAGE>
(/4/The)fee table information relating to the Underlying Funds was provided to
PFL by the Underlying Funds, relative to the year ended December 31, 1997,
and PFL has not independently verified such information.
(/5/Annual)results for the Evergreen VA Funds for the year ended December 31,
1997, net of expense waivers and reimbursements. If the underlying funds
had borne all expenses that were assumed or waived by the investment
advisor, the ratios for Other Expenses and Total Underlying Fund Annual
Expenses respectively would have been as follows: Evergreen VA Fund:
0.16%, 1.00%; Evergreen VA Foundation Fund: 0.53%, 1.00%; and Evergreen VA
Growth and Income Fund: 0.05%, 1.00%.
(/6/Each)MFS Series has an expense offset arrangement which reduces the
Series' custodian fee based upon the amount of cash maintained by the
Series with its custodian and dividend disbursing agent, and may enter
into other such arrangements and directed brokerage arrangements (which
would also have the effect of reducing the Series' expenses). Any such fee
reductions are not reflected under "Other Expenses." The Adviser has
agreed to bear expenses for each Series, subject to reimbursement by each
Series, such that each Series' "Other Expenses" shall not exceed 0.25% of
the average daily net assets of each Series during the current fiscal
year. Otherwise, "Other Expenses" and "Total Operating Expenses" for the
MFS Total Return Series for 1997 would be: 0.27%, 1.02%, respectively.
(/7/Before)voluntary reimbursement by the manager, other expenses for 1997 for
the Oppenheimer Growth Fund were 0.02% and Total Underlying Fund Annual
Expenses were 0.75%.
- 14 -
<PAGE>
EXAMPLES
I. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option A, (Return of Premium Death Benefit) a
hypothetical 5% annual return on assets and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $74 $103 $116 $233
AIM V.I. International
Equity Subaccount...... $77 $111 $129 $258
AIM V.I. Value
Subaccount............. $74 $104 $117 $234
Evergreen VA
Subaccount............. $77 $113 $132 $265
Evergreen VA Foundation
Subaccount............. $77 $113 $132 $265
Evergreen VA Growth and
Income Subaccount...... $77 $113 $132 $265
Federated High Income
Bond Fund II
Subaccount............. $75 $107 $122 $245
MFS Emerging Growth
Subaccount............. $76 $109 $126 $252
MFS Research
Subaccount............. $76 $109 $126 $253
MFS Total Return
Subaccount............. $77 $113 $132 $265
Oppenheimer Growth
Subaccount............. $75 $105 $120 $240
Oppenheimer Multiple
Strategies Subaccount.. $75 $105 $120 $240
Oppenheimer Strategic
Bond Subaccount........ $76 $108 $124 $248
Putnam VT Global Growth
Fund Subaccount........ $76 $110 $127 $255
Putnam VT Money Market
Fund Subaccount........ $74 $103 $116 $233
Putnam VT New Value Fund
Subaccount............. $77 $113 $132 $265
2. If the Policy is annuitized at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $20 $63 $108 $233
AIM V.I. International
Equity Subaccount...... $23 $70 $120 $258
AIM V.I. Value
Subaccount............. $20 $63 $109 $234
Evergreen VA
Subaccount............. $23 $72 $124 $265
Evergreen VA Foundation
Subaccount............. $23 $72 $124 $265
Evergreen VA Growth and
Income Subaccount...... $23 $72 $124 $265
Federated High Income
Bond Fund II
Subaccount............. $21 $66 $114 $245
MFS Emerging Growth
Subaccount............. $22 $68 $117 $252
MFS Research
Subaccount............. $22 $69 $118 $253
MFS Total Return
Subaccount............. $23 $72 $124 $265
Oppenheimer Growth
Subaccount............. $21 $65 $111 $240
Oppenheimer Multiple
Strategies Subaccount.. $21 $65 $111 $240
Oppenheimer Strategic
Bond Subaccount........ $22 $67 $115 $248
Putnam VT Global Growth
Fund Subaccount........ $22 $69 $119 $255
Putnam VT Money Market
Fund Subaccount........ $20 $63 $108 $233
Putnam VT New Value Fund
Subaccount............. $23 $72 $124 $265
</TABLE>
- 15 -
<PAGE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $20 $63 $108 $233
AIM V.I. International
Equity Subaccount...... $23 $70 $120 $258
AIM V.I. Value
Subaccount............. $20 $63 $109 $234
Evergreen VA
Subaccount............. $23 $72 $124 $265
Evergreen VA Foundation
Subaccount............. $23 $72 $124 $265
Evergreen VA Growth and
Income Subaccount...... $23 $72 $124 $265
Federated High Income
Bond Fund II
Subaccount............. $21 $66 $114 $245
MFS Emerging Growth
Subaccount............. $22 $68 $117 $252
MFS Research
Subaccount............. $22 $69 $118 $253
MFS Total Return
Subaccount............. $23 $72 $124 $265
Oppenheimer Growth
Subaccount............. $21 $65 $111 $240
Oppenheimer Multiple
Strategies Subaccount.. $21 $65 $111 $240
Oppenheimer Strategic
Bond Subaccount........ $22 $67 $115 $248
Putnam VT Global Growth
Fund Subaccount........ $22 $69 $119 $255
Putnam VT Money Market
Fund Subaccount........ $20 $63 $108 $233
Putnam VT New Value Fund
Subaccount............. $23 $72 $124 $265
II. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option B, (5% Annually Compounding Death Benefit) or
Death Benefit Option C, (Annual Step-Up Death Benefit) a hypothetical 5%
annual return on assets and assuming the entire Policy Value is in the
applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $76 $108 $124 $249
AIM V.I. International
Equity Subaccount...... $78 $115 $136 $273
AIM V.I. Value
Subaccount............. $76 $108 $125 $250
Evergreen VA
Subaccount............. $79 $117 $140 $280
Evergreen VA Foundation
Subaccount............. $79 $117 $140 $280
Evergreen VA Growth and
Income Subaccount...... $79 $117 $140 $280
Federated High Income
Bond Fund II
Subaccount............. $77 $111 $130 $260
MFS Emerging Growth
Subaccount............. $78 $113 $133 $267
MFS Research
Subaccount............. $78 $114 $134 $268
MFS Total Return
Subaccount............. $79 $117 $140 $280
Oppenheimer Growth
Subaccount............. $76 $110 $127 $255
Oppenheimer Multiple
Strategies Subaccount.. $76 $110 $127 $255
Oppenheimer Strategic
Bond Subaccount........ $77 $112 $131 $263
Putnam VT Global Growth
Fund Subaccount........ $78 $114 $135 $270
Putnam VT Money Market
Fund Subaccount........ $76 $108 $124 $249
Putnam VT New Value Fund
Subaccount............. $79 $117 $140 $280
</TABLE>
- 16 -
<PAGE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $22 $67 $116 $249
AIM V.I. International
Equity Subaccount...... $24 $75 $128 $273
AIM V.I. Value
Subaccount............. $22 $68 $116 $250
Evergreen VA
Subaccount............. $25 $77 $131 $280
Evergreen VA Foundation
Subaccount............. $25 $77 $131 $280
Evergreen VA Growth and
Income Subaccount...... $25 $77 $131 $280
Federated High Income
Bond Fund II
Subaccount............. $23 $71 $121 $260
MFS Emerging Growth
Subaccount............. $24 $73 $125 $267
MFS Research
Subaccount............. $24 $73 $125 $268
MFS Total Return
Subaccount............. $25 $77 $131 $280
Oppenheimer Growth
Subaccount............. $22 $69 $119 $255
Oppenheimer Multiple
Strategies Subaccount.. $22 $69 $119 $255
Oppenheimer Strategic
Bond Subaccount........ $23 $72 $123 $263
Putnam VT Global Growth
Fund Subaccount........ $24 $74 $126 $270
Putnam VT Money Market
Fund Subaccount........ $22 $67 $116 $249
Putnam VT New Value Fund
Subaccount............. $25 $77 $131 $280
3. If the Policy is not surrendered or annuitized:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Growth and
Income Subaccount...... $22 $67 $116 $249
AIM V.I. International
Equity Subaccount...... $24 $75 $128 $273
AIM V.I. Value
Subaccount............. $22 $68 $116 $250
Evergreen VA
Subaccount............. $25 $77 $131 $280
Evergreen VA Foundation
Subaccount............. $25 $77 $131 $280
Evergreen VA Growth and
Income Subaccount...... $25 $77 $131 $280
Federated High Income
Bond Fund II
Subaccount............. $23 $71 $121 $260
MFS Emerging Growth
Subaccount............. $24 $73 $125 $267
MFS Research
Subaccount............. $24 $73 $125 $268
MFS Total Return
Subaccount............. $25 $77 $131 $280
Oppenheimer Growth
Subaccount............. $22 $69 $119 $255
Oppenheimer Multiple
Strategies Subaccount.. $22 $69 $119 $255
Oppenheimer Strategic
Bond Subaccount........ $23 $72 $123 $263
Putnam VT Global Growth
Fund Subaccount........ $24 $74 $126 $270
Putnam VT Money Market
Fund Subaccount........ $22 $67 $116 $249
Putnam VT New Value Fund
Subaccount............. $25 $77 $131 $280
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses of the Mutual Fund Account and the Underlying Funds that the
Owner will bear, directly or indirectly. These include the 1997 expenses of
the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 42, and the Underlying
Funds' prospectuses.) In addition to the expenses listed above, premium taxes,
currently ranging from 0% to 3.50% of Premium Payments may be applicable.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED RATE. THE FIGURES AND DATA FOR UNDERLYING FUND ANNUAL
EXPENSES HAVE BEEN PROVIDED BY THE UNDERLYING FUNDS FOR 1997 AND PFL HAS NOT
INDEPENDENTLY VERIFIED THEIR ACCURACY.
- 17 -
<PAGE>
In these examples, the $30 Service Charge is reflected as a charge of .0100%
based on an anticipated average Policy Value of $30,000.
DEATH BENEFIT
In the event that the Annuitant who is not the Owner dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant unless the
Owner specifically requests on the application or in a Written Request that
the Death Benefit be paid upon the Annuitant's death and PFL agrees to such an
election. If the Annuitant is also the Owner, upon receipt of proof that the
Annuitant has died before the Annuity Commencement Date, the Death Benefit is
calculated and is payable to the Beneficiary when we receive an election of
the method of settlement and return of the Policy.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and the Death Benefit option elected by the Owner. However, the
Death Benefit will always be at least equal to the greater of the Policy Value
or the Cash Value on the date due proof of death and election of the method of
settlement are received by PFL.
The Owner has the "one-time" option of choosing a "Return of Premium Death
Benefit," (Death Benefit Option "A"), a "5% Annually Compounding Death
Benefit," (Death Benefit Option "B"), or an "Annual Step-Up Death Benefit,"
(Death Benefit Option "C"). The Return of Premium Death Benefit is the return
of all Premium Payments less any Partial Withdrawals, as of the date of death.
The 5% Annually Compounding Death Benefit is the total Premium Payments less
an adjustment for any Partial Withdrawals, accumulated at 5% until the earlier
of any Owner's date of death or any Owner's 81st birthday. The Annual Step-Up
Death Benefit is the largest Policy Value on the issue date or on any Policy
Anniversary prior to the earlier of any Owner's date of death or prior to any
Owner's 81st birthday, plus any premiums paid, less an adjustment for any
Partial Withdrawals taken, subsequent to the date of the largest anniversary
Policy Value. If no election is made by the Owner, the Return of Premium Death
Benefit will be used upon death of the Annuitant.
The Death Benefit provisions may vary depending on the state where the
Policy is issued. The Death Benefit may be paid as either a lump sum cash
benefit or as an annuity as permitted by federal or state law. (See
"DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 40.)
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Policy Value increased or decreased by an Excess Interest Adjustment.
VARIATIONS IN POLICY PROVISIONS
Certain provisions of the Policies may vary from the descriptions in this
Prospectus in order to comply with different state laws. See the Policy itself
for variations. Any such state variations will be included in the Policy
itself or in riders or endorsements attached to the Policy.
New Jersey residents: Annuity Payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the Policy itself for details regarding these and other terms applicable to
Policies sold in New Jersey.
- 18 -
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to occur
(e.g., a pledge or assignment of a Policy). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, a penalty tax may apply to
certain distributions or deemed distributions under the Policy. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 45.)
Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus and in the Statement of
Additional Information and in the prospectuses for the Underlying Funds and in
the Policy, all of which should be referred to for more detailed information.
This Prospectus generally describes only the Policy and the Mutual Fund
Account. Separate prospectuses describe the Underlying Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are
deemed not to be securities. See "THE ACCOUNTS--The Fixed Account," p. 27.)
REQUESTS FOR INFORMATION
Any telephone requests and inquiries
may be made to 1-800-525-6205.
Any Written Notices or Written Requests
must be sent to the following address:
PFL Life Insurance Company
Administrative and Service Office:
Financial Markets Division-Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
CONDENSED FINANCIAL INFORMATION
As of December 31, 1997, the Subaccounts had not commenced operations;
therefore, there is no condensed financial information for the year ended
December 31, 1997.
FINANCIAL STATEMENTS
The financial statements of PFL and the independent auditors' report thereon
are contained in the Statement of Additional Information which is available
free upon request to PFL's Administrative and Service Office.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. These figures will be calculated
according to standardized methods prescribed by the SEC. These yields and
total returns will be based on historical returns only and are not intended to
indicate future performance.
- 19 -
<PAGE>
The Putnam VT Money Market Subaccount. The yield of the Putnam VT Money
Market Subaccount for a Policy refers to the annualized income generated by an
investment under a Policy in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment under a
Policy in the Subaccount is assumed to be reinvested. The effective yield will
be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Other Subaccounts. The yield of a Subaccount of the Mutual Fund Account
(other than the Money Market Subaccount) for a Policy refers to the annualized
income generated by an investment under a Policy in the Subaccount over a
specified 30-day period. The yield is calculated by assuming that the income
generated by the investment during that 30-day period is generated each 30-day
period over a 12-month period and is shown as a percentage of the investment.
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including a 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. The total return quotations for a Subaccount will
represent the average annual compounded rates of return that equate an initial
investment of $1,000 in the Subaccount to the redemption value of that
investment as of the last day of each of the periods for which total return
quotations are provided. In addition to the Standard data discussed above,
similar performance data for other periods may also be shown.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Surrender Charge that
may be applicable to a particular Policy. To the extent that any or all of a
premium tax and/or Surrender Charge is applicable to a particular Policy, the
yield and/or total return of that Policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from PFL's Administrative and
Service Office upon request.
The Subaccounts had not commenced operations as of December 31, 1997;
therefore, no standardized performance data is shown in this Prospectus.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
The following performance data is historic performance data for the
underlying Portfolios since their inception reduced by some or all of the fees
and charges under the Policy. Such adjusted historic performance includes data
that precedes the inception dates of the Subaccounts. This data is designed to
show the performance that would have resulted if the Policy had been in
existence during that time, based on the performance of the applicable
Portfolio and the assumption that the applicable Subaccount was in existence
for the same period as the Portfolio with a level of charges equal to those
currently assessed under the Policies. This data is not intended to indicate
future performance.
For instance, as shown in the table below, PFL Life may disclose average
annual total returns for the Portfolios reduced by all fees and charges under
the Policy, as if the Policy had been in existence since the inception of the
Portfolio. Such fees and charges include the Mortality and Expense Risk Fee,
Administrative Charge and Surrender Charges. Such data assumes a complete
surrender of the Policy at the end of the period; THEREFORE THE SURRENDER
CHARGE IS DEDUCTED.
- 20 -
<PAGE>
The following information is also based on the method of calculation
described in the Statement of Additional Information. The adjusted historical
average annual total returns for periods ended December 31, 1997, were as
follows:
ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURNS
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.25%)
<TABLE>
<CAPTION>
10 YEAR CORRESPONDING
OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ --------- ----------------
<S> <C> <C> <C> <C>
AIM V.I. Growth and Income
Subaccount........................ 19.69% N/A 19.45% May 2, 1994
AIM V.I. International Equity
Subaccount........................ 0.81% N/A 11.41% May 5, 1993
AIM V.I. Value Subaccount.......... 17.65% N/A 18.28% May 5, 1993
Evergreen VA Subaccount............ 31.19% N/A 24.62% March 1, 1996
Evergreen VA Foundation
Subaccount........................ 21.78% N/A 19.96% March 1, 1996
Evergreen VA Growth and Income
Subaccount........................ 28.67% N/A 25.85% March 1, 1996
Federated High Income Bond Fund II
Subaccount........................ 7.74% N/A 9.57% February 2, 1994
MFS Emerging Growth Subaccount..... 15.85% N/A 20.65% July 24, 1995
MFS Research Subaccount............ 14.20% N/A 19.22% July 26, 1995
MFS Total Return Subaccount........ 15.24% N/A 17.99% January 3, 1995
Oppenheimer Growth Subaccount...... 20.65% 17.13% 13.97% April 3, 1985
Oppenheimer Multiple Strategies
Subaccount........................ 11.14% 11.86% 10.60% February 9, 1987
Oppenheimer Strategic Bond
Subaccount........................ 2.59% N/A 6.11% May 3, 1993
Putnam VT Global Growth Fund
Subaccount........................ 8.24% 13.78% 9.20% May 1, 1990
Putnam VT New Value Fund
Subaccount........................ N/A N/A 10.74% January 1, 1997
</TABLE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
10 YEAR CORRESPONDING
OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ --------- ----------------
<S> <C> <C> <C> <C>
AIM V.I. Growth and Income
Subaccount........................ 19.52% N/A 19.28% May 2, 1994
AIM V.I. International Equity
Subaccount........................ 0.65% N/A 11.25% May 5, 1993
AIM V.I. Value Subaccount.......... 17.48% N/A 18.12% May 5, 1993
Evergreen VA Subaccount............ 31.01% N/A 24.45% March 1, 1996
Evergreen VA Foundation
Subaccount........................ 21.60% N/A 19.79% March 1, 1996
Evergreen VA Growth and Income
Subaccount........................ 28.49% N/A 25.65% March 1, 1996
Federated High Income Bond Fund II
Subaccount........................ 7.57% N/A 9.40% February 2, 1994
MFS Emerging Growth Subaccount..... 15.68% N/A 20.48% July 24, 1995
MFS Research Subaccount............ 14.03% N/A 19.05% July 26, 1995
MFS Total Return Subaccount........ 15.08% N/A 17.81% January 3, 1995
Oppenheimer Growth Subaccount...... 20.48% 16.96% 13.80% April 3, 1985
Oppenheimer Multiple Strategies
Subaccount........................ 10.98% 11.70% 10.44% February 9, 1987
Oppenheimer Strategic Bond
Subaccount........................ 2.43% N/A 5.95% May 3, 1993
Putnam VT Global Growth Fund
Subaccount........................ 8.08% 13.62% 9.04% May 1, 1990
Putnam VT New Value Fund
Subaccount........................ N/A N/A 10.58% January 1, 1997
</TABLE>
For purposes of this calculation, the deductions for the Mortality and
Expense Risk Fee and Administrative Charge are made on a monthly basis, rather
than a daily basis. The monthly deduction is made at the beginning of each
month and generally approximates the performance which would have resulted if
the Subaccount had been in existence since the inception of the Portfolio.
Accumulation Unit values and yields will fluctuate and there is no guarantee
the Owner will receive back the Owner's original principal. Average Annual
Total Returns and Yield include all insurance contract charges.
- 21 -
<PAGE>
The following non-standardized adjusted historical average annual total
return figures are based on the assumption that the Policy is not surrendered,
and therefore THE FOLLOWING FIGURES ASSUME THAT THE SURRENDER CHARGE IS NOT
IMPOSED.
ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURNS
(Assuming No Surrender Charge)
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.25%)
<TABLE>
<CAPTION>
10 YEAR CORRESPONDING
OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ --------- ----------------
<S> <C> <C> <C> <C>
AIM V.I. Growth and Income
Subaccount........................ 24.20% N/A 19.60% May 2, 1994
AIM V.I. International Equity
Subaccount........................ 5.54% N/A 11.46% May 5, 1993
AIM V.I. Value Subaccount.......... 22.18% N/A 18.26% May 5, 1993
Evergreen VA Subaccount............ 35.56% N/A 26.49% March 1, 1996
Evergreen VA Foundation
Subaccount........................ 26.26% N/A 21.95% March 1, 1996
Evergreen VA Growth and Income
Subaccount........................ 33.08% N/A 27.67% March 1, 1996
Federated High Income Bond Fund II
Subaccount........................ 12.39% N/A 9.90% February 2, 1994
MFS Emerging Growth Subaccount..... 20.40% N/A 22.02% July 24, 1995
MFS Research Subaccount............ 18.77% N/A 20.63% July 26, 1995
MFS Total Return Subaccount........ 19.81% N/A 19.43% January 3, 1995
Oppenheimer Growth Subaccount...... 25.15% 17.13% 13.97% April 3, 1985
Oppenheimer Multiple Strategies
Subaccount........................ 15.75% 11.86% 10.60% February 9, 1987
Oppenheimer Strategic Bond
Subaccount........................ 7.30% N/A 6.23% May 3, 1993
Putnam VT Global Growth Fund
Subaccount........................ 12.88% 13.78% 9.20% May 1, 1990
Putnam VT New Value Fund
Subaccount........................ N/A N/A 16.04% January 1, 1997
</TABLE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
10 YEAR CORRESPONDING
OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ --------- ----------------
<S> <C> <C> <C> <C>
AIM V.I. Growth and Income
Subaccount........................ 24.03% N/A 19.43% May 2, 1994
AIM V.I. International Equity
Subaccount........................ 5.39% N/A 11.30% May 5, 1993
AIM V.I. Value Subaccount.......... 22.01% N/A 18.10% May 5, 1993
Evergreen VA Subaccount............ 35.38% N/A 26.32% March 1, 1996
Evergreen VA Foundation
Subaccount........................ 26.09% N/A 21.78% March 1, 1996
Evergreen VA Growth and Income
Subaccount........................ 32.90% N/A 27.49% March 1, 1996
Federated High Income Bond Fund II
Subaccount........................ 12.23% N/A 9.74% February 2, 1994
MFS Emerging Growth Subaccount..... 20.24% N/A 21.85% July 24, 1995
MFS Research Subaccount............ 18.61% N/A 20.46% July 26, 1995
MFS Total Return Subaccount........ 19.64% N/A 19.26% January 3, 1995
Oppenheimer Growth Subaccount...... 24.98% 16.96% 13.80% April 3, 1985
Oppenheimer Multiple Strategies
Subaccount........................ 15.59% 11.70% 10.44% February 9, 1987
Oppenheimer Strategic Bond
Subaccount........................ 7.14% N/A 6.07% May 3, 1993
Putnam VT Global Growth Fund
Subaccount........................ 12.72% 13.62% 9.04% May 1, 1990
Putnam VT New Value Fund
Subaccount........................ N/A N/A 15.88% January 1, 1997
</TABLE>
For purposes of this calculation, the deductions for the Mortality and
Expense Risk Fee and Administrative Charge are made on a monthly basis, rather
than a daily basis. The monthly deduction is made at the beginning of each
month and generally approximates the performance which would have resulted if
the Subaccount had been in existence since the inception of the Portfolio.
Accumulation Unit values and yields will fluctuate and there is no guarantee
the Owner will receive back the Owner's original principal. Average Annual
Total Returns and Yield include all insurance contract charges.
- 22 -
<PAGE>
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained free from PFL's
Administrative and Service office upon request.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and they should not be considered
as bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations such as debt or commercial paper obligations.
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 ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The Mutual Fund Account was established as a separate investment account of
PFL under the laws of the State of Iowa on March 29, 1996. The Mutual Fund
Account is registered with the SEC under the 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 Mutual Fund Account or PFL.
The Mutual Fund Account receives and currently invests the Premium Payments
under the Policies that are allocated to it for investment only in shares of
certain management investment companies. The
- 23 -
<PAGE>
shares available under the Policy are those of the AIM Variable Insurance
Funds, Inc., (managed by A I M Advisors, Inc.), Evergreen Variable Trust
(managed by Evergreen Asset Management Corp.), Federated Insurance Series
(managed by Federated Advisers), MFS Variable Insurance Trust (managed by
Massachusetts Financial Services Company), Oppenheimer Variable Account Funds
(managed by OppenheimerFunds, Inc.), and Putnam Variable Trust (managed by
Putnam Investment Management, Inc.).
The Mutual Fund Account currently has dedicated sixteen Subaccounts to the
Policy. Other or additional Subaccounts may be established at the discretion
of PFL. The Mutual Fund Account also includes other subaccounts which are not
available under the Policy. Each Subaccount invests exclusively in shares of
one of the Portfolios of the Underlying Funds. Under Iowa law, the assets of
the Mutual Fund Account are owned by PFL but they are held separately from the
other assets of PFL. To the extent that these assets are attributable to the
Cash Value of the Policies (or other variable annuity policies), 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 Subaccounts of
the Mutual Fund Account, whether or not realized, are credited to or charged
against that Subaccount without regard to other income, gains or losses of any
other Account or Subaccount of PFL. Therefore, the investment performance of
any Subaccount should be entirely independent of the investment performance of
PFL's general account assets or any other Account or Subaccount maintained by
PFL.
The Underlying Funds. The available Subaccounts of the Mutual Fund Account
currently invest exclusively in shares of the Underlying Funds. The Underlying
Funds are diversified, open-end management investment companies.
Certain information concerning the Underlying Funds is set forth below. More
detailed information may be found in the Underlying Funds' current
prospectuses, which are included with or accompany this Prospectus, and the
Underlying 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.
The Portfolios offered by the Underlying Funds provide a range of investment
alternatives that vary according to the different investment objectives and
policies described in the Underlying 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.
AIM V.I. GROWTH AND INCOME FUND seeks to provide growth of capital, with
current income as a secondary objective by investing primarily in dividend
paying common stocks which have prospects for both growth of capital and
dividend income.
AIM V.I. INTERNATIONAL EQUITY FUND seeks to provided long-term growth of
capital by investing in international equity securities, the issuers of which
are considered by AIM to have strong earnings momentum.
AIM V.I. VALUE FUND seeks to achieve long-term growth of capital by
investing primarily in equity securities judged by AIM to be undervalued
relative to the current or projected earnings of the companies issuing the
securities, or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity markets generally.
Income is a secondary objective.
EVERGREEN VA FUND seeks to achieve capital appreciation by investing in the
securities of little-known or relatively small companies, or companies
undergoing changes which the Fund's investment
- 24 -
<PAGE>
adviser believes will have favorable consequences. Income will not be a factor
in the selection of the portfolio investments.
EVERGREEN VA FOUNDATION FUND seeks, in order of priority, reasonable income,
conservation of capital and capital appreciation. The Fund invests principally
in income-producing common and preferred stocks, securities convertible into
or exchangeable for common stocks, and fixed income securities.
EVERGREEN VA GROWTH AND INCOME FUND seeks to achieve a return composed of
capital appreciation in the value of its shares and current income. The Fund
will attempt to meet its objective by investing in the securities of companies
which are undervalued in the marketplace relative to those companies' assets,
breakup value, earnings, or potential earnings growth.
FEDERATED HIGH INCOME BOND FUND II FUND seeks high current income. The
portfolio endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of fixed income securities. The
fixed income securities in which the Fund intends to invest are lower-rated
corporate debt obligations, which are commonly referred to as "junk bonds."
Some of these fixed income securities may involve equity features. Capital
growth will be considered, but only when consistent with the investment
objective of high current income. Such securities may be subject to greater
risk of loss of principal and non payment of interest than higher rated
securities. See the Fund's prospectus for additional information, including
risk factors.
MFS EMERGING GROWTH SERIES seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental
to the Series' investment objective.
MFS RESEARCH SERIES seeks to provide long-term growth of capital and future
income.
MFS TOTAL RETURN SERIES seeks to provide above-average income (compared to a
portfolio invested entirely in equity securities) consistent with the prudent
employment of capital, and secondarily to provide a reasonable opportunity for
growth of capital and income.
OPPENHEIMER GROWTH FUND seeks to achieve capital appreciation by investing
in securities of well-known established companies.
OPPENHEIMER MULTIPLE STRATEGIES FUND seeks a total investment return (which
includes current income and capital appreciation in the value of its shares)
from investments in common stocks and other equity securities, bonds and other
debt securities, and "money market" securities.
OPPENHEIMER STRATEGIC BOND FUND seeks a high level of current income
principally derived from interest on debt securities and seeks to enhance such
income by writing covered call options on debt securities. The Fund intends to
invest principally in: (i) foreign government and corporate debt securities,
(ii) U.S. Government securities, and (iii) lower-rated high yield domestic
debt securities, commonly known as "junk bonds", which are subject to a
greater risk of loss of principal and nonpayment of interest than higher-rated
securities. Current income is not an objective. Such securities may be subject
to greater risk of loss of principal and non payment of interest than higher
rated securities. See the Fund's prospectus for additional information,
including risk factors.
PUTNAM VT GLOBAL GROWTH FUND seeks capital appreciation through a globally
diversified portfolio of common stocks.
PUTNAM VT MONEY MARKET FUND seeks as high a level of current income as
Putnam Management believes is consistent preservation of capital and
maintenance of liquidity by investing high-quality money market instruments.
- 25 -
<PAGE>
PUTNAM VT NEW VALUE FUND seeks long-term capital appreciation by investing
primarily in common stocks that Putnam Management believes are undervalued at
the time of purchase and have the potential for long-term capital
appreciation.
THERE IS NO ASSURANCE THAT ANY OF THE UNDERLYING FUNDS' PORTFOLIOS WILL
ACHIEVE ITS INVESTMENT OBJECTIVE.
PFL may receive expense reimbursements or other revenues from the Underlying
Funds or their investment advisors. The amount of these reimbursement or
revenues, if any, may be based on the amount of assets that PFL or the Mutual
Fund Account invests in the Underlying Funds.
The Underlying Funds' prospectuses should be read carefully before any
decision is made concerning the allocation of Premium Payments to a particular
Subaccount. The Underlying Funds are not limited to selling their shares to
the Mutual Fund Account and are permitted to accept investments from any
separate account of an insurance company and perhaps qualified retirement
plans. Since the Portfolios of the Underlying Funds are available to
registered separate accounts offering variable annuity products of PFL, as
well as variable annuity and variable life products of other insurance
companies and perhaps qualified retirement plans, there is a possibility that
a material conflict may arise between the interests of the Mutual Fund Account
and one or more of the separate accounts of another participating insurance
company. In the event of a material conflict, the affected insurance
companies, including PFL, agree to take any necessary steps, including
removing their separate accounts from the Underlying Funds, to resolve the
matter. See the Underlying Funds' prospectuses for further details.
An investment in the Mutual Fund Account, or in any Portfolio, including the
Putnam VT Money Market Fund is not insured or guaranteed by the U.S.
government or any government agency.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Subaccounts will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying 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 PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
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 Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change. In the event any Subaccount is eliminated, PFL will notify Owners
and request a reallocation of the amounts invested in the eliminated
Subaccount. If no such reallocation is provided by the Owner, PFL 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, PFL may, by appropriate
endorsement, make such changes in the Policies 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 Policies,
the
- 26 -
<PAGE>
Mutual Fund 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, PFL also may (1) transfer the assets of the Mutual Fund Account
associated with the Policies to another account or accounts, (2) restrict or
eliminate any voting rights of Owners or other persons who have voting rights
as to the Mutual Fund Account, (3) create new mutual fund accounts, (4) add
new Subaccounts to or remove existing Subaccounts from the Mutual Fund
Account, or combine Subaccounts, or (5) add new underlying funds, or
substitute a new fund for an existing fund.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For complete details regarding the
Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts. PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the fixed portion.
The Fixed Account is part of the general assets of PFL, other than those in
the Mutual Fund Account or in any other segregated asset account. The Owner
may allocate Premium Payments to the Fixed Account at the time of Premium
Payment or by additional transfers from the Mutual Fund Account. Rather than
the Owner bearing the investment risk, as is the case for Policy Value
allocated to the Mutual Fund Account, PFL bears the full investment risk for
all Policy Value allocated to the Fixed Account. PFL has sole discretion to
invest the assets of its general account, including the Fixed Account, subject
to applicable law. While PFL bears the full investment risk for all Policy
Value in the Fixed Account, all guaranteed rates or benefits are subject to
PFL's claims-paying ability.
Premium Payments applied to, and any amounts transferred to, the Fixed
Account will reflect a fixed interest rate. The interest rates PFL sets will
be credited for increments of at least one year measured from each Premium
Payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%.
Upon full surrender, the Owner will always receive at least the Premium
Payments applied to, less prior partial withdrawals and transfers from, the
Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options") into which Premium Payments may be paid or
amounts transferred. For example, PFL may offer Guaranteed Period Options for
1, 3, 5, or 7 years duration from time to time. The Current Interest Rate PFL
sets for funds placed in each Guaranteed Period Option will be guaranteed
until the end of the applicable Guaranteed Period. At the end of the
Guaranteed Period, the Policy Value for the Guaranteed Period Option will be
rolled into a new Guaranteed Period Option(s) or may be transferred to any
Subaccount(s) within the Mutual Fund Account.
The Owner may choose the Guaranteed Period Option(s) in which to place the
Policy Value by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period Option will be the same as the expiring Guaranteed Period
Option unless that Guaranteed Period Option is no longer offered, in which
case, the next shorter Guaranteed Period Option offered will be used. PFL
reserves the right, for new Premium Payments, transfers, or rollovers, to
offer or not to offer any Guaranteed Period Option. PFL will, however, always
offer at least a one-year Guaranteed Period Option.
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<PAGE>
Surrenders or partial withdrawals from a Guaranteed Period Option prior to
the end of the Guaranteed Period and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal are subject to
an Excess Interest Adjustment on the amount withdrawn. An Excess Interest
Adjustment may result in a loss of interest credited, or a credit of
additional interest, but the Owner's Fixed Account Policy Values will always
be credited with an effective annual interest rate of at least 3%. Surrender
charges, if any, are applied after the Excess Interest Adjustment. However,
upon full surrender the Owner is guaranteed return of Premium Payments to the
Fixed Account, less partial withdrawals and transfers from the Fixed Account.
See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 35.) No
transfers from any Guaranteed Period Option to any other Investment Option
will be allowed prior to the end of the Guaranteed Period. (See "Transfers,"
p. 29.)
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
first; the next oldest Premium Payment or transfer plus interest is considered
to be withdrawn next, and so on (this is a "first-in, first-out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will generally have a one-year interest rate guarantee for amounts
in the DCA Fixed Account and will only be available under a Dollar Cost
Averaging (DCA) program. If the Owner, for any reason, discontinues the DCA
program before its completion, then the interest credited on amounts in the
DCA account may be adjusted downward, but not below the minimum guaranteed
effective annual interest rate of 3%. PFL may credit different interest rates
for DCA programs of varying time periods. Interest credited on the amounts in
the DCA Fixed Account will always be at least an annual effective rate of 3%.
Prior to the Annuity Commencement Date, no transfers, except through a
Dollar Cost Averaging program, will be allowed from the Dollar Cost Averaging
Fixed Account. Dollar Cost Averaging transfers to Subaccounts of the Mutual
Fund Account must begin within 30 days after the Premium Payment or transfer
to the Dollar Cost Averaging Fixed Account. Transfers must be scheduled for at
least six but not more than 24 months, or for at least four, but not more than
eight calendar quarters. Transfers will continue until the elected Subaccount
or DCA Fixed Account value is depleted. The amount transferred each time must
be at least $500. All transfers from the DCA account will be the same amount
as the initial transfer unless subsequently changed. Changes to the amount
transferred will only be allowed after the minimums are satisfied or when
additional premium is allocated or a new amount is transferred into the DCA
account. If the amount transferred is changed, the minimums must be met again
(that is, transfers must be scheduled for at least six more but not more than
24 months, or for at least four more, but not more than eight quarters).
Changes can be made to the Subaccounts to which these transfers are allocated.
Dollar Cost Averaging transfers from the Dollar Cost Averaging Fixed Account
will not be subject to an Excess Interest Adjustment. (See "THE ACCOUNTS--
Dollar Cost Averaging," p. 30.)
Dollar cost averaging requires regular investment regardless of fluctuating
prices and does not guarantee profits nor prevent losses in a declining
market. Before electing this option, individuals should consider their
financial ability to continue transfers through periods of both high and low
price levels.
Current Interest Rates. PFL periodically will establish an applicable
Current Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Interest Rates may be changed by PFL frequently or infrequently depending on
interest rates on investments available to PFL and other factors as described
below, but once established, the rate will be guaranteed for the entire
duration of the Guaranteed Period. However, except for limited situations, any
amount withdrawn will be subject to an Excess Interest Adjustment, except
those at the end of the Guaranteed Period Option. (See "Excess Interest
Adjustment," p. 35.)
The Current Interest Rate will not be less than 3% per year regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Current
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt
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<PAGE>
instruments in which PFL intends to invest amounts allocated to the Fixed
Account. In addition, PFL's management may consider other factors in
determining Current Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; the Policy Owner assumes the risk that declared rates will not
exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE CURRENT
INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE CURRENT
INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE CURRENT EFFECTIVE
INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
An Owner can transfer Policy Value from one Investment Option to another
within certain limits.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Owner, to the
Administrative and Service Office. The minimum amount of Policy Value which
may be transferred from a Subaccount of the Mutual Fund Account is the lesser
of $500 or the entire Subaccount value. If the Subaccount value remaining
after a transfer is less than $500, PFL reserves the right, at its discretion,
to include that amount as part of the transfer.
Subject to the limitations and restrictions described below, transfers
currently may be made without charge as often as the Owner wishes, subject to
the minimum dollar amounts specified above. PFL reserves the right to limit
these transfers to no more than 12 per Policy Year in the future, or as may be
required by the trustees of underlying funds to protect investors in those
funds, or to charge up to $10 per transfer in excess of 12 per Policy Year. If
a transfer charge is assessed in the future, the amount of the charge will be
deducted from the balance in the remaining subaccount, if sufficient,
otherwise, from the account to which the transfer is made.
Transfers of Policy Values from any of the Guaranteed Period Option(s) of
the Fixed Account to any Subaccount(s) of the Mutual Fund Account are allowed
only at the end of the Guaranteed Period(s), and will not be subject to an
Excess Interest Adjustment at that time. The Owner must notify PFL within 30
days prior to the end of any expiring Guaranteed Period Option to instruct PFL
regarding any transfers to be performed at that time. The Owner may, however,
transfer amounts equal to the interest credited in any of the Guaranteed
Period Option(s) to any Subaccount(s) of the Mutual Fund Account prior to the
end of the Guaranteed Period. Each such Interest Transfer must be at least
$50. The maximum Interest Transfer permitted from any Guaranteed Period Option
before the end of the Guaranteed Period will be the cumulative amount of
interest credited for the Guaranteed Period Option at the time of, but prior
to, the transfer. No Excess Interest Adjustment will apply to such Interest
Transfers. Interest Transfers may affect the interest crediting rates on
amounts remaining in the Guaranteed Period Option, since for purposes of
crediting interest, PFL considers the oldest Premium Payment or transfer into
the Guaranteed Period Option, plus interest allocable to that particular
Premium Payment or transfer, to be withdrawn first.
Transfers out of the Dollar Cost Averaging Fixed Account, except through a
Dollar Cost Averaging program, are not allowed. (See "Dollar Cost Averaging,"
p. 30.)
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted. (See "DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options,"
p. 37.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
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<PAGE>
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another life insurance company pursuant to a Code Section 1035
exchange or trustee-to-trustee transfer. In this situation PFL will require
the Owner to replace the same total dollar amount of funds as was taken from
the Policy to effect the exchange. The total dollar amount of funds reapplied
to the Mutual Fund Account will be used to purchase a number of Accumulation
Units available for each Subaccount based on the Accumulation Unit values at
the date of reinstatement (within two days of the date the funds are received
by PFL). It should be noted that the number of Accumulation Units available on
the Reinstatement date may be more or less than the number surrendered for the
exchange. Amounts reapplied to the Fixed Account will be entitled to receive
the interest rate they would otherwise have received had they not been
withdrawn. However, an adjustment will be made to the amount reapplied to
compensate PFL for the additional interest credited during the period of time
between the withdrawal and the reapplication of the funds. Owners should
consult a qualified personal tax adviser concerning the tax consequences of
any Code Section 1035 exchanges or reinstatements.
TELEPHONE TRANSACTIONS
Owners (or their designated registered representative) may make transfers
and/or change the allocation of additional Premium Payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the Policy
application has been initialed or telephone transfers have been subsequently
authorized by the Owner by appropriate Written Request. PFL will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. However, PFL will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, it may be liable for any losses due to unauthorized or fraudulent
instructions. All telephone requests will be recorded on voice recorder
equipment for the protection of the Owner. The Owner, when making telephone
requests, will be required to provide the Owner's social security number,
and/or other information for identification purposes.
Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same-day pricing of
the transaction.
The telephone transaction privilege may be discontinued at any time as to
some or all Owners and PFL may require written confirmation of a telephone
transaction request at its discretion.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a dollar amount
specified by the Owner from the DCA Fixed Account Option to any other
Subaccount or Subaccounts of the Mutual Fund Account. The automatic transfers
can occur monthly or quarterly and will occur on the 28th day of the month. If
the DCA request is received prior to the 28th day of any month, the first
transfer will occur on the 28th day of that month. If the DCA request is
received on or after the 28th day of any month, the first transfer will occur
on the 28th day of the following month. The amount transferred each time must
be at least $500. A minimum of six monthly or four quarterly transfers are
required and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account.
Dollar Cost Averaging results in the purchase of more Accumulation Units
when the Accumulation Unit value is low, and fewer Accumulation Units when the
Accumulation Unit value is high. However, there is no guarantee that the
Dollar Cost Averaging program will result in higher Policy Values or will
otherwise be successful.
The Policy Owner may request Dollar Cost Averaging when purchasing the
Policy or later. The program will terminate when the amount in the DCA Fixed
Account is insufficient for the next transfer, at which time the entire
remaining balance is transferred.
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<PAGE>
The Owner may discontinue the program after satisfying the required minimum
number of transfers at any time by sending a Written Notice to the
Administrative and Service Office. The required minimum number of transfers
(six monthly or four quarterly) must be satisfied each time the DCA program is
restarted following termination of the program for any reason. Discontinuance
of a DCA program may result in PFL reducing interest rates credited to amounts
remaining in the DCA Fixed Account if the conditions established for a
particular DCA program are not met. There is no charge for participation in
this program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis based on the Policy Date, and
beginning on a date selected by the Owner. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing. Rebalancing may be started, stopped, or changed
at any time, except that rebalancing will not be available when:
(1) a Dollar Cost Averaging program is in effect; or
(2) any other transfer is requested.
There is no charge for participation in this program.
THE POLICY
The Policy is a flexible premium variable annuity policy. The rights and
benefits under the Policy are summarized below; however, the description of
the Policy contained in this Prospectus is qualified in its entirety by
reference to the Policy itself, a copy of which is available upon request from
PFL. The Policy may be purchased on a non-tax qualified basis ("Nonqualified
Policy"). The Policy may also be purchased and used in connection with
retirement plans or individual retirement accounts that qualify for favorable
federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$2,000 for a Nonqualified or Qualified Policy. There is no minimum initial
Premium Payment required for tax deferred 403(b) annuity purchases; any amount
selected by the Owner in such case, up to the maximum total premium payment
allowed by PFL, may be used to start a Policy. The initial Premium Payment for
tax deferred 403(b) purchases must be received within 90 days following the
Policy Date, otherwise the Policy will be canceled. PFL reserves the right to
increase or decrease this amount for a class of Policies issued after some
future date. The initial Premium Payment is the only Premium Payment required
to be paid under a Policy. A Policy ordinarily will be issued only in respect
of Annuitants Age 0 through 80. Acceptance or declination of an application
shall be based on PFL's underwriting standards, and PFL reserves the right to
reject any application or Premium Payment based on those underwriting
standards.
If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
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<PAGE>
PFL may, if the application or transmittal form can be accepted in the form
received, credit the initial Premium Payment to the Policy Value within one
Business Day after the later of receipt by PFL's agent of the information
needed or the Premium Payment.
The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the check or draft for the Premium Payment
is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make Additional Premium Payments at
any time, and in any frequency. The minimum Additional Premium Payment under
both a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Policy Value as of
the Business Day when the premium and required information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application or transmittal form. This allocation will
be used for Additional Premium Payments unless the Owner requests a change of
allocation. All allocations must be made in whole percentages and must total
100%. However, the portion of the initial Premium Payment which is allocated
to the Mutual Fund Account will be temporarily allocated entirely to the Money
Market Portfolio of the Mutual Fund Account only for a period of time equal to
the greater of the Policy's Right to Cancel Period, or fourteen (14) days
following the Policy Date. Based on current state laws, the maximum right to
cancel period, and therefore maximum period of time the funds are expected to
be allocated to the money market account, is 30 days from the date the policy
is issued. At the end of that period, the Policy Value in the Putnam VT Money
Market Portfolio will then be allocated to the Subaccount(s) of the Mutual
Fund Account in accordance with the allocation percentages specified by the
Owner. If Premium Payments are allocated to the Dollar Cost Averaging Fixed
Account, directions regarding the Subaccount(s) to which transfers are to be
made must be specified on the application or other proper Written Request. If
the Owner fails to specify how Premium Payments are to be allocated, the
Premium Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future Additional
Premium Payments by sending a Written Notice, signed by the Owner, to PFL's
Administrative and Service Office, or by telephone (subject to the provisions
described under "THE ACCOUNTS--Telephone Transactions," p. 30). The allocation
change will apply to Premium Payments received after the date the Written
Notice or telephone request is received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
POLICY VALUE
On or before the Annuity Commencement Date, the Policy Value is equal to the
Owner's:
(1) Premium Payments; minus
(2) partial withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus
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<PAGE>
(3) interest credited in the Fixed Account; plus or minus
(4) accumulated gains or losses in the Mutual Fund Account; minus
(5) Service Charges, premium taxes and transfer fees, if any.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is the period between
successive Business Days. It begins at the close of business on each Business
Day and ends at the close of business on the next succeeding Business Day. A
Business Day is each day that the New York Stock Exchange is open for trading.
Holidays are generally not Business Days.
The Mutual Fund Policy Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Policy Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value.
The number of units credited is determined by dividing the Premium Payment or
amount transferred to the Subaccount by the Accumulation Unit value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or fully surrendered or
partially withdrawn from a Subaccount, Accumulation Units are canceled or
redeemed in a similar manner.
For each Subaccount, the Accumulation Unit Value for a given Business Day is
based on the net asset value of a share of the corresponding Portfolio of the
Underlying Funds less any applicable charges or fees. Therefore, the
Accumulation Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Accumulation Unit Values is described in detail in the Statement of
Additional Information.
ADJUSTED POLICY VALUE (APV)
The Adjusted Policy Value is the Policy Value increased or decreased by any
Excess Interest Adjustment applied at the time of surrender or on the Annuity
Commencement Date.
The Adjusted Policy Value will be used on the Annuity Commencement Date to
provide the amount of annuity payments under a Policy.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a payment from PFL. The Cash Value
is the Adjusted Policy Value, less the Surrender Charge, if any. (See
"DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options," p. 37.) The Policy
cannot be surrendered after the Annuity Commencement Date. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payments," p. 36.)
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<PAGE>
When requesting a partial withdrawal ($500 minimum), the Owner must instruct
PFL how the amount withdrawn is to be allocated among various Investment
Options. If the Owner's request for a partial withdrawal from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Owner's interest in each Investment Option bears to the total Policy
Value. PFL reserves the right to defer payment of the Cash Value from the
Fixed Account for up to six months.
In each Policy Year the Owner may request partial withdrawals ($500 minimum)
of up to 10% of the Policy Value (calculated at the time of the partial
surrender) free of Surrender Charges. The percentage that may be taken free of
Surrender Charges each Policy Year is cumulative. This is referred to as the
Cumulative Free Percentage. That is, Cumulative Free Percentages which are not
taken are carried forward and are available to be taken in the following
Policy Year free of Surrender Charges. Cumulative Free percentage withdrawals
previously taken (that is, lump sums, systematic payouts, nursing care and
terminal condition withdrawals, minimum required distributions, and
unemployment withdrawals) reduce the Cumulative Free Percentage that is
available. For example, 10% Cumulative Free Percentage is available at the
beginning of the first Policy Year. If no partial withdrawals are taken in the
first Policy Year, the first year unused Cumulative Free Percentage of 10% is
carried forward to the second Policy Year. The unused 10% from year one plus
10% additional Cumulative Free Percentage available at the beginning of Policy
Year two accumulates to a 20% Cumulative Free Percentage as of the beginning
of Policy Year two. Assume only 5% is used in Policy Year two. Thus the
Cumulative Free Percentage available as of the beginning of Policy Year three
would be 25% (that is, 20%-5% = 15% unused from Policy Year two, plus an
additional 10% available at the beginning of Policy Year three). Amounts
withdrawn in excess of the available Cumulative Free Percentage will be
subject to a Surrender Charge (up to 6%). Neither a Surrender Charge nor an
Excess Interest Adjustment will be assessed if the withdrawal is necessary to
meet the minimum distribution requirements for that Policy specified by the
IRS for tax qualified plans.
Upon full surrender or partial withdrawal, the cumulative interest credited
at the time of, but prior to, the surrender or withdrawal will not be subject
to an Excess Interest Adjustment.
Surrenders or partial withdrawals that are allowed free of Surrender Charges
will reduce the Policy Value by the amount withdrawn. Surrendered or partially
withdrawn amounts in excess of the portion that is free of Surrender Charges
are Excess Partial Withdrawals. Excess Partial Withdrawals will reduce the
Policy Value by an amount equal to (X-Y + Z) where:
X = Excess Partial Withdrawal
Y = Excess Interest Adjustment, which is applicable to the Excess Partial
Withdrawal
Z = Surrender Charge on X minus Y.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 43. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 35 and
Appendix "A".
Since the Owner assumes the investment risk with respect to all Premium
Payments allocated to the Mutual Fund Account, and because withdrawals may be
subject to an Excess Interest Adjustment and to a Surrender Charge, and
possibly premium taxes, the total amount paid upon total surrender of the Cash
Value (taking any prior surrenders into account) may be more or less than the
total Premium Payments made. Following a surrender of the total Cash Value, or
at any time the Policy Value is zero, all rights of the Owner and Annuitant
will terminate.
In addition to any applicable Excess Interest Adjustment, Surrender Charge,
and premium tax, surrenders and partial withdrawals may be subject to income
taxes and, if taken prior to age 59 1/2, a ten percent Federal penalty tax.
(See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 45.)
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<PAGE>
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person)--(1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally a life expectancy of 12 months or less), then the Surrender Charge
and Excess Interest Adjustment are not imposed on surrenders or partial
withdrawals. (Since this benefit may not be available in all states, see the
Policy or endorsement for details.)
UNEMPLOYMENT WAIVER
The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual must
provide proof of unemployment to PFL and (1) must have been employed full time
for at least two years prior to becoming unemployed, (2) must have been
employed full time on the Policy Date, (3) must have been unemployed for at
least 60 consecutive days at the time of withdrawal, and (4) must have a
minimum Cash Value at the time of withdrawal of $5,000. Proof of unemployment
will consist of providing PFL with a determination letter from the applicable
State's Department of Labor which verifies that the individual qualifies for
and is receiving unemployment benefits at the time of withdrawal. Therefore,
this benefit may not be available if the unemployed person (a) quit
voluntarily, (b) retired due to age, (c) ceased employment due to disability,
or (d) was terminated for cause, or terminated for other reasons that would
prevent the person from receiving unemployment benefits under state or federal
law. The determination letter must be received by PFL no later than fifteen
(15) days following the date PFL receives the withdrawal request. (This
benefit may not be available in all states--see the Policy or endorsement for
details.)
EXCESS INTEREST ADJUSTMENT (EIA)
Full surrenders, partial withdrawals, and amounts applied to an Annuity
Payment Option (prior to the end of any Guaranteed Period) from the Fixed
Account Guaranteed Period Options will be subject to an Excess Interest
Adjustment except as provided for under "Surrenders" or "Nursing Care and
Terminal Condition Withdrawal Option," or "Unemployment Waiver" above or
"Systematic Payout Option," below.
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower Cash Value
upon surrender. Conversely, if interest rates have fallen since the date of
the guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher Cash Value
upon surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value at the
time of full surrender for a Guaranteed Period Option below the amount paid
into, less any prior partial withdrawals and transfers from that Guaranteed
Period Option, plus interest at the Policy's minimum guaranteed effective
annual interest rate of 3%.
The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.
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<PAGE>
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
specified Investment Options (except the DCA account). Monthly and quarterly
payments can only be accomplished by electronic funds transfer directly to a
checking or savings account. The minimum payment is $50. The maximum payment
is 10% of the Policy Value at the time the Systematic Payout is made divided
by the number of payments made per year (for example, 12 for monthly). If this
requested amount is below the minimum distribution requirements for that
Policy specified by the IRS for tax qualified plans, the maximum payment will
be increased to this minimum required distribution amount. Only partial
withdrawal requests which are in excess of the minimum required distribution
will be subject to any applicable Surrender Charge and/or Excess Interest
Adjustment. The "Request for Systematic Payout" form must specify a date for
the first payment, which must be at least 30 days but not more than one year
after the form is submitted (that is, Systematic Payouts will start at the end
of the payment mode selected, but not earlier than 30 days from the date of
request). There is no additional fee imposed for participation in a Systematic
Payout program.
The Surrender Charge and Excess Interest Adjustment will be waived for
Owners under age 59 1/2 on Qualified Policies if they take Systematic Payouts
using one of the payout methods described in I.R.S. Notice 89-25, Q&A-12 (the
Life Expectancy Recalculation Option, Amortization, or Annuity Factor) which
generally requires payments for life or life expectancy. These payments must
be continued until the later of age 59 1/2 or five years from commencement of
the payments. No additional withdrawals may be taken during the time these
payments are made. For Qualified Policies, Owners age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge will not be imposed on Systematic Payouts. Only Systematic Payouts in
excess of the cumulative interest credited at the time of, but prior to, the
payout will be subject to an Excess Interest Adjustment.
Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty
taxes. In addition, the tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
penalty tax. Therefore, the Owner should consult a qualified tax adviser
before requesting a Systematic Payout. In certain circumstances withdrawn
amounts may be included in the Owner's gross income. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 45.)
ANNUITY PAYMENTS
Annuity Commencement Date. Annuity Payments under a Policy will begin on the
Annuity Commencement Date which initially is selected by the Owner at the time
the Policy is applied for. The Annuity Commencement Date may be changed from
time to time by the Owner by Written Notice to PFL, provided that notice of
each change is received by PFL at its Administrative and Service Office at
least thirty (30) days prior to the then current Annuity Commencement Date.
Except as otherwise permitted by PFL, a new Annuity Commencement Date must be
a date which is: (1) at least thirty (30) days after the date notice of the
change is received by PFL and (2) not later than the last day of the Policy
month starting after the Annuitant's 85th birthday. In no event will an
Annuity Commencement Date be permitted to be later than the last day of the
Policy month following the month of the Annuitant's 95th birthday. The laws of
some states may require earlier Annuity Commencement Dates. The Annuity
Commencement Date may also be changed by the Beneficiary's election of the
Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose a Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service
- 36 -
<PAGE>
Office at least 30 days prior to the Annuity Commencement Date. If no election
is made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Payment Option 3, life income with level payments for 10 years
certain, using the existing Adjusted Policy Value of the Fixed Account, or
(ii) under Payment Option 3-V, life income with variable payments for 10 years
certain using the existing Policy Value of the Mutual Fund Account, or (iii)
in a combination of (i) and (ii). If the Adjusted Policy Value on the Annuity
Commencement Date is less than $2,000, PFL reserves the right to pay it in one
lump sum in lieu of applying it under a Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 40.) Annuity Payments will be made on either a fixed
basis or a variable basis as selected by the Owner (or the Beneficiary, after
the Annuitant's death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless the Owner specifies otherwise, the payee shall be the Annuitant, or,
after the Annuitant's death, the Beneficiary. PFL may require written proof of
the age of any person who has selected Annuity Payments under Payment Option
3, 3-V, 5 or 5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option or upon withdrawal. If so, PFL will deduct
the premium tax before applying or paying the proceeds.
Supplementary Contract. Once proceeds become payable and a Payment Option
has been selected, the Policy will terminate and PFL will issue a
Supplementary Contract to reflect the terms of the option selected. The
Supplementary Contract will name the payees and will describe the payment
schedule.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Two of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and three are only available as Fixed Payment Options. The Owner may
elect a Fixed Payment Option, a Variable Payment Option, or a combination of
both. If the Owner elects a combination, he must specify what part of the
Policy proceeds are to be applied to the Fixed and Variable Payment Options
(and he must also specify which Subaccounts for the Variable Payment Options).
NOTE CAREFULLY: Under Payment Options 3(l) and 5 (including 3-V(l) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second Annuity Payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third Annuity Payment; and so forth.
On the Annuity Commencement Date, the Adjusted Policy Value will be applied
to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value for the Valuation
Period which ends immediately preceding the Annuity Commencement Date,
including the effect of any applicable Excess Interest Adjustment.
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<PAGE>
The effect of choosing a Fixed Payment Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Payment Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed) of the Annuitant. For further
information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Payment Options. Payment Options 1,
2 and 4 are based on a guaranteed interest rate of 3%. Payment Options 3 and 5
are based on a guaranteed interest rate of 3% using the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.)
Payment Option 1--Interest Payments. The Adjusted Policy Value may be left
with PFL for any agreed-upon term. PFL will pay the interest in equal payments
or it may be left to accumulate. Withdrawal rights will be agreed upon by the
Owner and PFL when the option is elected.
Payment Option 2--Income for a Specified Period. Level payments of the
proceeds with interest are made for the fixed period elected, at which time
the funds are exhausted.
Payment Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the lifetime
of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of the
Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be made
for the longer of the Annuitant's lifetime or until the total dollar amount
of payments made equals the proceeds applied to the income option.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the proceeds with interest are exhausted.
Payment Option 5--Joint and Survivor Annuity. Payments are made during the
joint lifetime of the payee and a joint payee of the Owner's selection.
Payments will be made as long as either person is living.
For Payment Options 2, 3, and 4, in the event of the death of the person
receiving payments prior to the end of the Guaranteed Period, payments will be
continued to that person's beneficiary or their present value may be paid in a
single sum.
Other Payment Options may be arranged by agreement with PFL. Certain options
may not be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed rates (guaranteed rates are based upon the
mortality tables and/or guaranteed interest rates specified in the Policy
under the section entitled "Annuity Payments"). Current amounts may be
obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983
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<PAGE>
to more appropriately reflect increased longevity. This is accomplished using
a set of improvement factors referred to as projection scale G.) The dollar
amount of additional Variable Annuity Payments will vary based on the
investment performance of the Subaccount(s) of the Mutual Fund Account
selected by the Annuitant or Beneficiary. If the actual investment performance
exactly matched the Assumed Investment Return of 5% at all times, the amount
of each Variable Annuity Payment would remain equal. If actual investment
performance exceeds the Assumed Investment Return, the amount of the Variable
Annuity Payments would increase. Conversely, if actual investment performance
is lower than the Assumed Investment Return, the amount of the Variable
Annuity Payments would decrease.
Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed
under state law) and adjusted age of the Annuitant. The adjusted age is the
Annuitant's actual age nearest birthday, on the Annuity Commencement Date,
adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- ------------
<S> <C>
Before
2001 Actual Age
2001-
2010 Actual Age minus 1
2011-
2020 Actual Age minus 2
2021-
2030 Actual Age minus 3
2031-
2040 Actual Age minus 4
After
2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Payment Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of the
Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Payment Option 5-V--Joint and Survivor Annuity. Payments are made as long as
either the payee or the joint payee is living.
Certain options may not be available in some states.
Determination of Additional Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount on the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed, assuming no transfers to or from that Subaccount occur. The
dollar value of variable Annuity Units in the chosen Subaccount will increase
or decrease reflecting the investment experience of the chosen Subaccount. The
dollar amount of each Variable Annuity Payment after the first may increase,
decrease or remain constant, and is equal to the sum of the amounts determined
by multiplying the number of Annuity Units of each particular Subaccount
credited to the Policy by the Annuity Unit value for the particular Subaccount
on the date the payment is made.
Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of monthly income or the entire
monthly
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<PAGE>
income of the variable Annuity Units in the Subaccount from which the transfer
is being made. The remaining Annuity Units in the Subaccount must provide at
least $10 of monthly income. If, after a transfer, the monthly income of the
remaining Annuity Units in a Subaccount would be less than $10, PFL reserves
the right to include those Annuity Units as part of the transfer. PFL reserves
the right to limit transfers between Subaccounts or from the Mutual Fund
Account to the Guaranteed Period Options of the Fixed Account after the
Annuity Commencement Date to once per Policy Year.
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Owner has not provided PFL with a written election not to have federal income
taxes withheld, PFL must by law withhold such taxes from the taxable portion
of such annuity payments and remit that amount to the federal government.
Withholding is mandatory for certain qualified Policies. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 45)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Owner is the Annuitant and dies prior to the
Annuity Commencement Date. The amount of the Death Benefit will be the
greatest of a) the Policy Value on the date proof of the Owner's death and an
election of the method of settlement are received by PFL's Administrative and
Service Office, b) the Cash Value on the date PFL receives due proof of death
and an election of a method of settlement, and c) the Guaranteed Minimum Death
Benefit ("GMDB") described below, plus Premium Payments less Partial
Withdrawals, from the date of death to the date the death proceeds are paid.
There are three Guaranteed Minimum Death Benefit options available, (A) the
"Return of Premium Death Benefit", (B) the "5% Annually Compounding Death
Benefit," and (C) the "Annual Step-Up Death Benefit."
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below), as of the date of death.
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals (defined below) plus interest at an
effective annual rate of 5% from the payment or withdrawal date up to the
earlier of the date of death or the Owner's 81st birthday. There is an extra
charge for this Death Benefit (See "CHARGES AND DEDUCTIONS--Mortality and
Expense Risk Fee," p. 43.)
The "Annual Step-Up Death Benefit" is the largest Policy Value on the issue
date or on any Policy Anniversary prior to the earlier of the date of death or
the Owner's 81st birthday, plus any premiums paid, less any partial
withdrawals taken, subsequent to the date of the largest anniversary Policy
Value. There is an extra charge for this Death Benefit. (See "CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Fee," p. 43.)
Under all three Death Benefit Options, if the surviving spouse elects to
continue the Policy in lieu of receiving the Death Benefit, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit (i.e., the Return
of Premium Death Benefit, the 5% Annually Compounding Death Benefit, or the
Annual Step-Up Death Benefit) over the Policy Value, will then be added to the
Policy Value. This amount will be added only once, at the time of such
election.
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<PAGE>
If no choice of Guaranteed Minimum Death Benefit is made in the Policy
application, the "Return of Premium Death Benefit" will apply. After the
Policy Date, an election cannot be made and the Death Benefit option cannot be
changed.
Adjusted Partial Withdrawal. To determine the Guaranteed Minimum Death
Benefit for each partial withdrawal, the Adjusted Partial Withdrawal is the
sum of (1) and (2), where
(1) The Surrender-charge-free withdrawal amount taken and,
(2) The amount that an Excess Partial Withdrawal reduces the Policy Value
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 33.) times [(a)
divided by (b)] where:
(a) is the amount of the Death Benefit prior to the Excess Partial
Withdrawal; and
(b) is the Policy Value prior to the Excess Partial Withdrawal.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the partial withdrawal amount used to determine
the Guaranteed Minimum Death Benefit will exceed the amount of the partial
withdrawal. In that case, the total proceeds of a partial withdrawal followed
by a Death Benefit could be less than total Premium Payments.
If the Annuitant who is not the Owner dies, the Owner will become the
Annuitant and no Death Benefits are payable unless the Owner specifically
requests on the Policy application or in writing that the Death Benefit be
paid upon the Annuitant's death and PFL agrees to such election. See your
Policy's provisions.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof and an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as PFL has sufficient information about the Beneficiary to make the payment.
The Beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation,
under one of the Payment Options described above, unless a settlement
agreement is effective at the death of the Owner preventing such election.
If the Annuitant was the Owner, and the Beneficiary was not the Annuitant's
spouse, the Death Benefit must (1) be distributed within five years of the
date of the deceased Owner's death, or (2) payments under a Payment Option
must begin no later than one year after the deceased Owner's death and must be
made for the Beneficiary's lifetime or for a period certain (so long as any
certain period does not exceed the Beneficiary's life expectancy). Death
Proceeds which are not paid to or for the benefit of a natural person must be
distributed within five years of the date of the deceased Owner's death. If
the sole Beneficiary is the deceased Owner's surviving spouse, such spouse may
elect to continue the Policy as the new Annuitant and Owner instead of
receiving the Death Benefit. (See "Federal Tax Matters" in the Statement of
Additional Information.)
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the amount of the Adjusted Policy Value. If the successor owner is not the
deceased Owner's spouse, however, the Adjusted Policy Value must be
distributed: (1) within five years after the date of the deceased Owner's
death, or (2) payments under a Payment Option must begin no later than one
year after the deceased Owner's death and must be made for the successor
Owner's lifetime or for a period certain (so long as any period certain does
not exceed the successor Owner's life expectancy).
Death On or After Annuity Commencement Date. The Death Benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining
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<PAGE>
portion of such interest in the Policy will be distributed at least as rapidly
as under the method of distribution being used as of the date of that Owner's
death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Owner may change the designated Beneficiary by
sending Written Notice to PFL. The Beneficiary's consent to such change is not
required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Owner may then
designate a new Beneficiary.) The change will take effect as of the date the
Owner signs the Written Notice, whether or not the Owner is living when the
Notice is received by PFL. PFL will not be liable for any payment made before
the Written Notice is received. If more than one Beneficiary is designated,
and the Owner fails to specify their interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if any Owner (including any joint Owner or any
Successor Owner who has become a current Owner) dies before the Annuity
Commencement Date, then the entire value of the Policy must generally be
distributed within five years of the date of death of such Owner. Certain
rules apply where 1) the spouse of the deceased Owner is the sole beneficiary,
2) the Owner is not a natural person and the primary Annuitant dies or is
changed, or 3) any Owner dies after the Annuity Commencement Date. See
"Federal Tax Matters" in the Statement of Additional Information for a
detailed description of these rules. Other rules may apply to Qualified
Policies. (See also "Death Benefit" p. 40.)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.
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<PAGE>
SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may apply a Surrender Charge, which is a contingent deferred sales charge, to
any amount surrendered (i.e., withdrawn) in connection with a full or partial
Policy surrender in order to cover distribution expenses. A Surrender Charge,
if applicable, will only be applied to withdrawals which exceed the Cumulative
Free Percentage at the time of, but prior to, the withdrawal. (See
"DISTRIBUTIONS UNDER THE POLICY--Surrenders" p. 33.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Withdrawal Option or the Unemployment Waiver. These
features may not be available in all states. (See "DISTRIBUTIONS UNDER THE
POLICY--Nursing Care and Terminal Condition Withdrawal Option," p. 35, and
"Unemployment Waiver," p. 35.) The Surrender Charge is also waived upon
certain Systematic Payouts. (See "DISTRIBUTIONS UNDER THE POLICY--Systematic
Payout Option," p. 36)
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payment withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first-in, first-out" basis, i.e., first to the oldest Premium
Payment, then to the next oldest Premium Payment and so on. Premium Payments
are deemed to be withdrawn before earnings, and after all Premium Payments
have been withdrawn, the remaining Adjusted Policy Value may be withdrawn
without any Surrender Charge. The following is the table of Surrender Charge
Percentages:
<TABLE>
<CAPTION>
APPLICABLE SURRENDER CHARGE
NUMBER OF YEARS SINCE PERCENTAGE (AS PERCENTAGE OF
PREMIUM PAYMENT PREMIUM PAYMENT WITHDRAWN)
---------------------------- ----------------------------
<S> <C>
Less than 1................. 6%
At least 1 and less than 2.. 6%
At least 2 and less than 3.. 6%
At least 3 and less than 4.. 4%
At least 4 and less than 5.. 2%
5 or more................... 0%
</TABLE>
No Surrender Charge will be applied after the tenth Policy Year.
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. For Guaranteed Minimum Death
Benefit Option A (Return of Premium Death Benefit), this charge is equal to an
effective annual rate of 1.10% of the daily net asset value in the Mutual Fund
Account for each Subaccount. For Guaranteed Minimum Death Benefit Options B
(5% Annually Compounding Death Benefit), and C (Annual Step-Up Death Benefit),
the corresponding charge is equal to 1.25% of the net assets in the Mutual
Fund Account. The Mortality and Expense Risk Fee is reflected in the
Accumulation or Annuity Unit Values for the Policy for each Subaccount.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
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<PAGE>
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the periodic Annuity payments that the
Annuitant will receive under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit (that is, Return of Premium Death Benefit, 5% Annually
Compounding Death Benefit, or Annual Step-Up Death Benefit) if that amount is
higher than the greater of the Policy Value or the Cash Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative and Service Charges.
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Mortality and Expense Risk Fee. A Mortality and Expense
Risk Fee is assessed during the accumulation phase and during the annuity
phase for all Variable Annuity Options.
ADMINISTRATIVE CHARGES
In order to cover the costs of administering the Policies, PFL deducts an
annual Service Charge from the Policy Value of each Policy.
The Service Charge is deducted from the Policy Value of each Policy on each
Policy Anniversary prior to the Annuity Commencement Date. PFL also reserves
the right to charge up to $30 at the time of surrender during any Policy Year.
After the Annuity Commencement Date, the charge is not deducted. This annual
Service Charge is the lesser of 2% of the Policy Value or $30 and it will not
be increased in the future. This charge is waived if either the Policy Value
or the sum of all Premium Payments less the sum of all partial surrenders
equals or exceeds $50,000 on a Policy Anniversary (or date of surrender).
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the net assets in the Mutual Fund Account.
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments it receives under
the Policies. However, PFL will deduct the aggregate premium taxes that it
pays on behalf of a particular Policy from the Policy Value on (i) the Annuity
Commencement Date (thus reducing the Policy Value), (ii) the total surrender
of a Policy, or (iii) payment of the death proceeds of a Policy. Premium taxes
currently range from 0% to 3.50% of Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
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TRANSFER FEE
There is no charge for the first 12 allowable transfers among Investment
Options in each Policy Year. PFL reserves the right to impose a $10 charge for
the thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a Transfer Fee is
payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
Transfer Fee will be imposed for any transfer which is not at the Owner's
request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
a case, PFL may credit an amount equal to a percentage of each Premium Payment
to the Policy due to lower acquisition costs PFL experiences on those
purchases. The credit will be reported to the Internal Revenue Service as
taxable income to the employee or registered representative. PFL may offer
certain employer sponsored savings plans, in its discretion reduced fees and
charges including, but not limited to, the Surrender Charges, the Mortality
and Expense Risk Fee and the Administrative Charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which PFL is not presently aware
which could result in reduced sales or distribution expenses. Credits to the
Policy or reductions in these fees and charges will not be unfairly
discriminatory against any Owner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code'), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Additional Premium Payments under a
Policy must qualify for the same
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federal income tax treatment as the initial Premium Payment under the Policy;
PFL will not accept a Additional Premium Payment under a Policy if the federal
income tax treatment of such Premium Payment would be different from that of
the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a), 408A or 457 of the Code
and individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a partial or full surrender,
assignment, or as Annuity Payments under the Annuity Option selected.
Generally, any amount received or deemed received under a Nonqualified Annuity
Contract prior to the Annuity Commencement Date is deemed to come first from
any "Income on the Contract" and then from the "Investment in the Contract."
The "Investment in the Contract" generally equals total premium payments less
amounts received which were not includable in gross income. To the extent that
the Policy Value (ignoring any surrender charges except on a full surrender)
exceeds the "Investment in the Contract," such excess constitutes the "Income
on the Contract." For these purposes such "Income on the Contract" shall be
computed by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or deemed received there is no "Income on the
Contract" (e.g., because the Policy Value does not exceed the "Investment in
the Contract" and no aggregation rule applies), then such amount received or
deemed received will not be includable in gross income, and will simply reduce
the "Investment in the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a
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distribution under the Policy in an amount equal to the Policy Value. A
transfer of ownership or an assignment of a Policy, or designation of an
Annuitant or Beneficiary who is not also the Owner, as well as the selection
of certain Annuity Commencement Dates, may result in certain tax consequences
to the Owner that are not discussed herein. An Owner contemplating any such
transfer, designation, selection or assignment of a Policy should contact a
competent tax adviser with respect to the potential tax effects of such a
transaction.
Aggregation Rules. Generally all Nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year. The same aggregation rules apply
to Roth individual retirement annuities and accounts. The Roth IRAs and
Traditional IRAs shall be treated separately for distribution purposes.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract" which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous full
surrender, and may need further adjustments if the aggregation rules apply.
There is, however, no definitive guidance on the proper tax treatment of
Excess Interest Adjustments, and the Owner should contact a competent tax
adviser with respect to the potential tax consequences of an Excess Interest
Adjustment that may apply in the case of a Non-Qualified Policy or a Qualified
Policy. In the case of a partial surrender (including systematic payouts)
under a Qualified Policy (other than one qualified under Section 457 of the
Code), a ratable portion of the amount received is generally excludable from
gross income, based on the ratio of the "Investment in the Contract" to the
individual's total account balance or accrued benefit under the retirement
plan at the time of each such payment. For a Qualified Policy, the "Investment
in the Contract" can be zero, and generally any distribution would therefore
be fully taxable. Special tax rules may be available for certain distributions
from a Qualified Policy. In the case of a surrender under a Nonqualified
Policy or a Qualified Policy, the amount received generally will be taxable
only to the extent it exceeds the "Investment in the Contract," unless the
aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general, for Nonqualified
and certain Qualified Policies, only a portion of the Annuity Payments
received after the Annuity Commencement Date will be includable in the gross
income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. The remainder of each Annuity Payment is
includable in gross income. Once the "Investment in the Contract" has been
fully recovered, the full amount of any additional Annuity Payments is
includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
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Where an Owner allocates a portion of the Adjusted Policy Value on the
Annuity Commencement Date to more than one Annuity Payment Option (fixed or
variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of Annuity Payment Options. Instead, any Owner is
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Policy Value to any particular Annuity
Payment Option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (2) if distributed under an Annuity Payment
Option, they are taxed in the same manner as Annuity Payments, as described
above. For these purposes, the "Investment in the Contract" is not affected by
the Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic payouts)
or a deemed distribution under a Policy resulting from a pledge, assignment or
agreement to pledge or assign or an Annuity Payment with respect to a Policy,
there may be imposed on the recipient a federal penalty tax equal to 10% of
the amount includable in gross income. The penalty tax generally will not
apply to any distribution: (i) made on or after the date on which the taxpayer
attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer,
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into PFL's Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Policies comply with applicable law.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
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Individual Retirement Annuities. In order to qualify as a Traditional
individual retirement annuity under Section 408(b) of the Code, a Policy must
contain certain provisions: (i) the Owner must be the Annuitant; (ii) the
Policy generally is not transferable by the Owner, e.g., the Owner may not
designate a new Owner, designate a Contingent Owner or assign the Policy as
collateral security; (iii) the total Premium Payments for any calendar year on
behalf of any individual may not exceed $2,000, except in the case of a
rollover amount or contribution under Sections 402(c), 403(a)(4), 403(b)(8) or
408(d)(3) of the Code; (iv) Annuity Payments or partial withdrawals must begin
no later than April 1 of the calendar year following the calendar year in
which the Annuitant attains age 70 1/2; (v) an Annuity Payment Option with a
Period Certain that will guarantee Annuity Payments beyond the life expectancy
of the Annuitant and the Beneficiary may not be selected; (vi) certain
payments of Death Benefits must be made in the event the Annuitant dies prior
to the distribution of the Policy Value; and (vii) the entire interest of the
Owner is non-forfeitable. Policies intended to qualify as Traditional
individual retirement annuities under Section 408(b) of the Code contain such
provisions.
Section 408 of the Code also indicates that no part of the funds for a
Traditional individual retirement account or annuity ("IRA") may be invested
in a life insurance contract, but the regulations thereunder allow such funds
to be invested in an annuity policy that provides a death benefit that equals
the greater of the premiums paid or the Cash Value for the contract. The
Policy provides an enhanced death benefit that could exceed the amount of such
a permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a Traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply. You should consult a
tax adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
The Roth IRA is available to individuals with earned income and whose adjusted
gross income is under $110,000 for single filers, $160,000 for married filing
jointly, and $10,000 for married filing separately. The amount per individual
that may be contributed to all IRAs (Roth and Traditional) is $2,000.
Secondly, the distributions are taxed differently. The Roth IRA offers tax-
free distributions when made from assets which have been held in the account
for 5 tax years and are made after attaining age 59 1/2, to pay for qualified
first time homebuyer expenses (lifetime maximum of $10,000) or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the Traditional IRA, there are no minimum required
distributions during lifetime; however, required distributions at death are
the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.
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Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is not used in the Code),
provides for certain deferred compensation plans with respect to service for
state governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Cash Value as of the close of the taxable year
and all previous distributions under the Policy over (ii) the sum of the
Premium Payments paid for the taxable year and any prior taxable year and the
amounts includable in gross income for any prior taxable year with respect to
the Policy. For these purposes, the Policy Value at year end may have to be
increased by any positive Excess Interest Adjustment which could result from a
full surrender at such time. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments and the Owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment. Notwithstanding the preceding sentences in
that paragraph, Section 72(u) of the Code does not apply to (i) a Policy the
nominal Owner of which is not a natural person but the beneficial Owner of
which is a natural person, (ii) a Policy acquired by the estate of a decedent
by reason of such decedent's death, (iii) a Qualified Policy (other than one
qualifying under Section 457) or (iv) a single-payment annuity the
Commencement Date for which is no later than one year from the date of the
single Premium Payment; such Policies are taxed as described above under the
heading "Taxation of Annuities."
Possible Changes in Taxation. Although the likelihood of legislative change
in uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted,
would adversely modify the federal taxation of the Policies. It is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). A tax adviser should be consulted with respect to
legislative developments and their effect on the Policy.
DISTRIBUTOR OF THE POLICIES
AFSG Securities Corporation, 4333 Edgewood Road N.E., Cedar Rapids, IA
52499-0001, an affiliate of PFL, is the principal underwriter of the Policies.
AFSG Securities Corporation was incorporated as a Pennsylvania corporation on
March 12, 1986, is registered as a broker/dealer under the Securities Exchange
Act of 1934, and is a member of the NASD.
Policies are sold by registered representatives of AFSG Securities
Corporation or of broker/dealers who have entered into written sales
agreements with the principal underwriter, who are also licensed through
various affiliated or unaffiliated agencies as insurance agents for PFL. PFL
has entered into a
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distribution agreement with AFSG Securities Corporation and companion sales
agreements with agencies and/or agents through which agreements the Policies
are sold and the registered representatives are compensated by the agencies
and/or AFSG Securities Corporation. Broker/dealers will generally receive
sales commissions of up to 5% of Premium Payments. These commissions are not
deducted from Premium Payments, 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 Policies. The level of such
compensation will not exceed that paid to broker/dealers for their sale of the
Policies. No amounts will be retained by AFSG Securities Corporation for
acting as principal underwriter for the Policies. The offering of Policies
will be made on a continuing basis.
VOTING RIGHTS
To the extent required by law, PFL will vote the Underlying Fund shares held
by the Mutual Fund Account at regular and special shareholder meetings of the
Underlying Funds in accordance with instructions received from persons having
voting interests in the portfolios, (although the Underlying 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 PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Owner holds voting interest in the
selected Portfolios. The number of votes that an Owner has the right to
instruct will be calculated separately for each Subaccount. The number of
votes that an Owner has the right to instruct for a particular Subaccount will
be determined by dividing the Owner's Policy Value in the Subaccount by the
net asset value per share of the corresponding Portfolio in which the
Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, 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 Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy 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
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL 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
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL 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 Policies participating in
the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
YEAR 2000 MATTERS
In October, 1996, 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
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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 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 Mutual Fund Account is a party
or to which the assets of the 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 Mutual Fund Account or PFL.
- 52 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A 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 that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non-Participating........................................................ 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
Historical Performance Data................................................ 10
Money Market Yields...................................................... 10
Other Subaccount Yields.................................................. 11
Total Returns............................................................ 11
Other Performance Data................................................... 12
Adjusted Historical Fund Performance Data................................ 12
State Regulation of PFL.................................................... 12
Administration............................................................. 13
Records and Reports........................................................ 13
Distribution of the Policies............................................... 13
Other Products............................................................. 13
Custody of Assets.......................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 14
Other Information.......................................................... 14
Financial Statements....................................................... 14
</TABLE>
- 53 -
<PAGE>
APPENDIX A(1)
EXCESS INTEREST ADJUSTMENT
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S*(G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate applicable to S.
C= Current Guaranteed Interest Rate then being offered on new Premium
Payments for the next longer Guaranteed Period than "M". If this policy
form or such a Guaranteed period is no longer offered, "C" will be the
U.S. Treasury rate for the next longer maturity (in whole years) than "M"
on the 25th day of the previous calendar month, plus up to 2%.
M= Number of months remaining in the current Guaranteed Period, rounded up to
the next higher whole number of months.
EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):
<TABLE>
<S> <C>
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Policy Value ("PV") at middle of = 50,000* (1.055)^ 2.5 = 57,161.18
Contract Year 3
Surrender Charge Free Amount at middle = 57,161.18* .30 = 17,148.35
of Policy Year 3
EIA Free Amount at middle of Policy Year = 57,161.18 - 50,000 = 7,161.18
3
Amount Subject to EIA = 57,161.18 - 7,161.18 = 50,000.00
EIA Floor = 50,000* (1.03)^ 2.5 = 53,834.80
Excess Interest Adjustment
G=.055
C=.085
M=30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 50,000.00* (.055 - .085)* (30/12)
= -3,750.00, but Excess Interest
Adjustment cannot cause the Adjusted
Policy Value to fall below the floor,
so the adjustment is limited to
53,834.80 -57,161.18 = -3,326.38
Adjusted Policy Value = PV + EIA = 57,161.18 - 3,326.38
= 53,834.80
Surrender Charge = (50,000 - 17,148.35)* .06 =
1,971.10
Cash Value at middle of Policy Year 3 = PV + EIA - Surrender Charge
= 57,161.18 - 3,326.38 - 1,971.10
= 51,863.70
</TABLE>
- -------------------------
(1) *represents multiplication;
^represents exponentiation.
- 54 -
<PAGE>
<TABLE>
<S> <C>
EXAMPLE 2 (FULL SURRENDER, RATES DECREASE
BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Policy Value at middle of Policy Year 3 = 50,000* (1.055)^ 2.5 = 57,161.18
Surrender Charge Free Amount at middle of = 57,161.18* .30 = 17,148.35
Policy Year 3
EIA Free Amount at middle of Policy Year 3 = 57,161.18 - 50,000 = 7,161.18
Amount Subject to EIA = 57,161.18 - 7,161.18 = 50,000.00
EIA Floor = 50,000* (1.03)^ 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .045
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12) = 50,000*
(.055 - .045)* (30/12) = 1,250.00
Adjusted Policy Value = PV + EIA = 57,161.18 + 1,250.00
= 58,411.18
Surrender Charge = (50,000 - 17,148.35)* .06 =
1,971.10
Cash Value at middle of Policy Year 3 = PV + EIA - Surrender Charge
= 57,161.18 + (1,250) - 1,971.10
= 56,440.08
</TABLE>
On a partial withdrawal, PFL will pay the Owner the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge--Free withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts withdrawn in excess of the Surrender Charge--Free amount will reduce
the Policy Value by an amount equal to:
X - Y + Z
X= Excess Partial Withdrawal = Requested withdrawal less Surrender Charge--
Free amount
A= Amount of Partial Withdrawal which is subject to Excess Interest
Adjustment = Requested withdrawal-EIA--Free Amount, where EIA--Free Amount
= Cumulative interest credited at time of, but prior to, withdrawal.
Y= Excess Interest Adjustment = (A)*(G-C)*(M/12) where G, C, and M are
defined above, with "A" substituted for "S" in the definition of G and M.
Z= Surrender Charge on X minus Y.
- 55 -
<PAGE>
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
<TABLE>
<S> <C>
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3
Policy Value at middle of Policy Year 3 = 50,000* (1.055) ^ 2.5 = 57,161.18
Surrender Charge Free Amount at middle of = 57,161.18* .30 = 17,148.35
Policy Year 3
EIA Free Amount at middle of Policy Year 3 = 57,161.18 - 50,000 = 7,161.18
Excess Interest Adjustment/Surrender
Charge
</TABLE>
X= 30,000 - 17,148.35 = 12,851.65
A= 30,000 - 7,161.18 = 22,838.82
G= .055
C= .065
M= 30
Y= 22,838.82* (.055 - .065)* (30/12) = - 570.97
Z= .06* [12,851.65 - (- 570.97)] = 805.36
<TABLE>
<S> <C>
Reduction to Policy Value due to Surrender
Charge--Free Withdrawal = 17,148.35
Reduction to Policy Value due to Excess = X - Y + Z
Withdrawal = 12,851.65 - (- 570.97) + 805.36
= 14,227.98
</TABLE>
<TABLE>
<S> <C>
Policy Value after withdrawal at middle = 57,161.18 - [17,148.35 + 14,227.98]
of Policy Year 3 = 57,161.18 - [17,148.35 + 12,851.65
- (-570.97) + 805.36]
= 57,161.18 - [30,000 - (-570.97)
+ 805.36]
= 57,161.18 - 31,376.33 = 25,784.85
</TABLE>
- 56 -
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
<TABLE>
<S> <C>
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3
Policy Value at middle of Policy Year 3 = 50,000* (1.055)^ ^ 2.5 = 57,161.18
Surrender Charge Free Amount at middle of = 57,161.18* .30 = 17,148.35
Policy Year 3
EIA Free Amount at middle of Policy Year = 57,161.18 - 50,000 = 7,161.18
3
</TABLE>
Excess Interest Adjustment/Surrender Charge
X= 30,000 - 17,148.35 = 12,851.65
A= 30,000 - 7,161.18 = 22,838.82
G= .055
C= .045
M= 30
Y= 22,838.82* (.055 - .045)* (30/12) = 570.97
Z= .06* [12,851.65 - (570.97)] = 736.84
<TABLE>
<S> <C>
Reduction to Policy Value due to
Surrender Charge--Free Withdrawal = 17,148.35
Reduction to Policy Value due to Excess = X - Y + Z
Withdrawal = 12,851.65 - (570.97) + 736.84
= 13,017.52
Policy Value after withdrawal at middle = 57,161.18 - [17,148.35 + 13,017.52]
of Policy Year 3 = 57,161.18 - [17,148.35 + 12,851.65
- (570.97) + 736.84]
= 57,161.18 - [30,000 - (570.97)
+ 736.84]
= 57,161.18 - 30,165.87 = 26,995.31
</TABLE>
- 57 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE 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 Flexible Premium Individual Deferred Variable
Annuity (the "Policy") offered by PFL Life Insurance Company. You may obtain a
copy of the Prospectus dated May 1, 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 Policy. Terms used in the current Prospectus for
the Policy 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 POLICY AND THE FLEXIBLE
PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY.
Dated: May 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non-Participating........................................................ 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
Historical Performance Data................................................ 10
Money Market Yields...................................................... 10
Other Subaccount Yields.................................................. 11
Total Returns............................................................ 11
Other Performance Data................................................... 12
Adjusted Historical Fund Performance Data................................ 12
State Regulation of PFL.................................................... 12
Administration............................................................. 13
Records and Reports........................................................ 13
Distribution of the Policies............................................... 13
Other Products............................................................. 13
Custody of Assets.......................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 14
Other Information.......................................................... 14
Financial Statements....................................................... 14
</TABLE>
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to a prospective purchaser.
THE POLICY--GENERAL PROVISIONS
OWNER
The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment.
While the Annuitant is living, the Owner may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary; and of the Owner's spouse in a community
or marital property state.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death,
if the Owner predeceases the Annuitant. If no Successor Owner survives the
Owner and the Owner predeceases the Annuitant, the Owner's estate will become
the Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to
the new Owner. A change of ownership may have tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.
If ownership is transferred (except to the Owner's spouse) because the Owner
dies before the Annuitant, the Adjusted Policy Value generally must be
distributed to the Successor Owner within five years of the Owner's death, or
if the first payment begins within one year of the Owner's death, payments
must be made for a period certain which does not exceed that Successor Owner's
life expectancy.
ENTIRE POLICY
The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in
the application are representations and not warranties. No statement will
cause the Policy to be void or to be used in defense of a claim unless
contained in the application.
DELAY OF PAYMENT AND TRANSFERS
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified
Policy generally will occur within seven business days from the date the
Written Notice (and any other required documentation or information) is
received, except that PFL may be permitted to defer such payment from the
Mutual Fund Account if: (1) the New York Stock Exchange is closed for other
than usual weekends or holidays or trading on the Exchange is otherwise
restricted; or (2) an emergency exists as defined by the SEC or the SEC
requires that trading be restricted; or (3) the SEC permits a delay for the
protection of Owners. In addition, transfers of amounts from the Subaccounts
may be deferred under these circumstances.
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See p. 27 of the Policy Prospectus.
3
<PAGE>
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have
purchased for the correct age or sex. The dollar amount of any underpayment
made by PFL shall be paid in full with the next payment due such person or the
Beneficiary. The dollar amount of any overpayment made by PFL due to any
misstatement shall be deducted from payments subsequently accruing to such
person or Beneficiary. Any underpayment or overpayment will include interest
at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the Annuitant may be established at any time by the
submission of proof satisfactory to PFL.
REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, the Owner may reallocate the value of a
designated number of Annuity Units of a Subaccount of the Mutual Fund Account
then credited to a Policy into an equal value of Annuity Units of one or more
other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number
of times a reallocation of Policy Value may be made in any given Policy Year.
After the Annuity Commencement Date, no transfers may be made from the Fixed
Account to the Mutual Fund Account.
ASSIGNMENT
During the lifetime of the Annuitant the Owner may assign any rights or
benefits provided by a Nonqualified Policy. An assignment will not be binding
on PFL until a copy has been filed at its Administrative and Service Office.
The rights and benefits of the Owner and Beneficiary are subject to the rights
of the assignee. PFL assumes no responsibility for the validity or effect of
any assignment. Any claim made under an assignment shall be subject to proof
of interest and the extent of the assignment. An assignment may have tax
consequences.
Unless the Owner so directs by filing Written Notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
Ownership under Qualified Policies is restricted to comply with the Internal
Revenue Code.
EVIDENCE OF SURVIVAL
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be
made until PFL receives such evidence.
NON-PARTICIPATING
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
4
<PAGE>
FEDERAL TAX MATTERS
TAX STATUS OF THE POLICY
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
(S) 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intends to comply with the diversification requirements
of the Treasury. PFL has entered into agreements regarding participation in
the Policy that require the Underlying Funds and their Portfolios to be
operated in compliance with the Treasury regulations.
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 contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
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, 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 policyholders may direct their investments
to particular subaccounts without being treated as owners of underlying
assets."
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer
among these accounts more frequently than in such rulings. These differences
could result in policyowners being treated as the owners of the assets of the
Mutual Fund Account. In addition, PFL does not know what standards will be set
forth, if any, in the regulations or rulings with the Treasury Department has
stated it expects to issue. PFL therefore reserves the right to modify the
Policies as necessary to attempt to prevent the policyowners from being
considered the owners of a pro rata share of the assets of the Mutual Fund
Account.
Distribution Requirements. The Code also requires that Nonqualified Policies
contain specific provisions for distribution of Policy proceeds upon the death
of the Owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such Policies provide that if any Owner
dies on or after the Annuity Commencement Date and before the entire interest
in the Policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owners death. If any
Owner dies before the Annuity Commencement Date, the entire interest in the
Policy must generally be distributed within 5 years after such Owner's date of
death or be applied to provide an immediate annuity under which payments will
begin within one year of such Owner's death and will be made for the life of
the Beneficiary or for a period not extending beyond the life expectancy of
the Beneficiary. However, if such Owner's death occurs prior to the Annuity
Commencement Death, and such Owner's surviving spouse is named beneficiary,
then the Policy may be continued with the surviving spouse as the new Owner.
If any Owner is not a natural person, then for purposes of these distribution
requirements, the primary Annuitant shall be treated as the Owner and any
death or change of such primary Annuitant shall be treated as the Death of the
Owner. The Policy contains provisions intended to comply with these
requirements of the Code. No regulations interpreting these
5
<PAGE>
requirements of the Code have yet been issued and thus no assurance can be
given that the provisions contained in the Policies satisfy all such Code
requirements. The provisions contained in the Policies will be reviewed and
modified if necessary to maintain their compliance with the Code requirements
when clarified by regulation or otherwise.
TAXATION OF PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund 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. PFL does not expect to incur any
federal income tax liability with respect to investment income and net capital
gains arising from the activities of the Mutual Fund Account retained as part
of the reserves under the Policy. Based on this expectation, it is anticipated
that no charges will be made against the Mutual Fund Account for federal
income taxes. If, in future years, any federal income taxes are incurred by
PFL with respect to the Mutual Fund Account, PFL may make a charge to the
Mutual Fund Account.
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of Accumulation
Units and Annuity Units, and to determine annuity payment rates.
ACCUMULATION UNITS
Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the
dollar amount allocated to each Subaccount by the value of an Accumulation
Unit for that Subaccount as next determined after the Premium Payment is
received at the Administrative and Service Office or, in the case of the
initial Premium Payment, when the Policy application is completed, whichever
is later. The value of an Accumulation Unit was arbitrarily established at
$1.000000 at the inception of each Subaccount. Thereafter, the value of an
Accumulation Unit is determined as of the close of trading on each day the New
York Stock Exchange and PFL's Administrative and Service Office are open for
business.
An index (the "Net Investment Factor") which measures the investment
performance of a Subaccount during a Valuation Period, is used to determine
the value of an Accumulation Unit for the next subsequent Valuation Period.
The Net Investment Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Owner bears this
investment risk. The net investment performance of a Subaccount and deduction
of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Subaccount for any 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 per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by PFL to
have resulted from the investment operations of the Subaccount;
6
<PAGE>
(b) the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period; and
(c) is the charge for mortality and expense risk during the Valuation
Period (equal on an annual basis to 1.10% for the Return of Premium Death
Benefit and 1.25% for both the 5% Annually Compounding Death Benefit or the
Annual Step-Up Death Benefit) of the daily net asset value of the
Subaccount, plus the .15% administrative charge for all three Death Benefit
Options.
ILLUSTRATION OF ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING
THE NET INVESTMENT FACTOR
ASSUME EITHER THE 5% ANNUALLY COMPOUNDING DEATH BENEFIT
OR THE ANNUAL STEP-UP DEATH BENEFIT IS IN EFFECT.
Investment Experience Factor = A + B - C - E
D
Where:
A = The Net Asset Value of an Underlying Fund share as of the end of
the current Valuation Period.
Assume..........................................A = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding Valuation Period.
Assume...............................................B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume...............................................C = 0
D = The Net Asset Value of an Underlying Fund share at the end of the
immediately preceding Valuation Period.
Assume..........................................D = $11.40
E = The daily deduction for Mortality and Expense Risk Fee and
Administrative Charges, which totals 1.40% on an annual basis.
On a daily basis............................ = .0000380909
Then, the Investment Experience Factor = 11.57 + 0 - 0 -
.0000380909 = Z = 1.0148741898
11.40
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A X B
Where:
A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.............................................. = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume................................................ = Y
Then, the Accumulation Unit Value = $ X * Y = $ Z
7
<PAGE>
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 of 5% annually. 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 investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual 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 Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is
determined by dividing (i) by (ii) and subtracting (iii) from the result,
where:
(i) is the 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
(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
PFL determines to have resulted from the investment operations of the
Subaccount.
(ii) is the net asset value of a fund share held in that Subaccount
determined as of the end of the immediately preceding valuation period.
(iii) is a factor representing the Mortality and Expense Risk Fee and
Administrative Charge. This factor is equal, on an annual basis, to 1.25%
(for Death Benefit Option A) or 1.40% (for Death Benefit Options B and C)
of the daily net asset value of a fund share held in that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Policy also contains a table for determining the adjusted age of the
Annuitant.
8
<PAGE>
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A * B * C
Where:
A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume.............................................. = $ X
B = Investment Experience Factor for the Valuation Period for which
the Annuity Unit Value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z
Then, the Annuity Unit Value is: $ X * Y * Z = $ Q
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY
VARIABLE ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A * B
$1,000
Where:
A = The Policy Value as of the Annuity Commencement Date.
Assume.............................................. = $ X
B = 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 Policy.
Assume.............................................. = $ Y
Then, the first Monthly Variable Annuity Payment = $ X * $ Y = $ Z
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY
UNITS REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
B
Where:
A = The dollar amount of the first monthly Variable Annuity Payment.
Assume.............................................. = $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume.............................................. = $ Y
Then, the number of Annuity Units = $ X = Z
$ Y
9
<PAGE>
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
PFL 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 Policy that are
attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for (i) the Administrative
Charges; and (ii) the Mortality and Expense Risk Fee. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) ^ (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 Policy, 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 Surrender Charges that may be applicable to a particular Policy.
Surrender Charges range from 6% to 0% of the amount of Premium Payments
withdrawn based on the number of years since the Premium Payment was made.
However, Surrender Charges will not be assessed after the tenth Policy Year.
PFL 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)) /3//6//5///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.
10
<PAGE>
OTHER SUBACCOUNT YIELDS
PFL may from time to time advertise or disclose the current annualized yield
of one or more of the Subaccounts of the Mutual Fund Account (except the Money
Market Subaccount) for 30-day periods. The annualized yield of a 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 (i) the Administrative Charge and (ii) the Mortality
and Expense Risk Fee. The 30-day yield is calculated according to the
following formula:
Yield = 2 X ((((NI - ES)/(U /\ 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 and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect
the effect of any premium taxes or Surrender Charges that may be applicable to
a particular Policy. Surrender Charges range from 6% to 0% of the amount of
Premium Payments withdrawn based on the number of years since the Premium
Payment was made. However, Surrender Charges will not be assessed after the
tenth Policy Year.
The yield on amounts held in the Subaccounts of the Mutual Fund 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
PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund 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 PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Fee and the Administrative Charges. Total return calculations will reflect the
11
<PAGE>
effect of Surrender 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.
OTHER PERFORMANCE DATA
PFL may from time to time also disclose average annual total returns in a
nonstandard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that
the Surrender Charge percentage will be assumed to be 0%.
PFL 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 the Surrender
Charge percentage will be 0%.
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 nonstandard 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.
ADJUSTED HISTORICAL FUND PERFORMANCE DATA
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund 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 Policy charges that were
in effect at the inception of the Subaccounts.
STATE REGULATION OF PFL
PFL is 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 the
operation of PFL 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 PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's 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, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
12
<PAGE>
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy 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. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AFSG Securities Corporation, an affiliate of PFL, is be the principal
underwriter of the Policies. AFSG Securities Corporation may enter into
agreements with broker-dealers for the distribution of the Policies.
OTHER PRODUCTS
PFL makes other variable annuity policies available that may also be funded
through the Mutual Fund Account. These variable annuity policies may have
different features, such as different investment options or charges.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held by
PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other
Subaccounts and from PFL's general account assets. PFL maintains 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 Mutual Fund
Account is afforded by PFL's fidelity bond, presently in the amount of
$5,000,000, covering the acts of officers and employees of PFL.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan LLP, of Washington D.C.
13
<PAGE>
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and the
Financial Statements of the PFL Retirement Builder Variable Annuity Account at
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
Policies 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 Policies 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.
FINANCIAL STATEMENTS
The values of the interest of Owners in the Mutual Fund Account will be
affected solely by the investment results of the selected Subaccount(s). The
Financial Statements of PFL, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
PFL to meet its obligations under the Policies. They should not be considered
as bearing on the investment performance of the assets held in the Mutual Fund
Account.
14
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<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.
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
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
2
<PAGE>
PFL Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
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
================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
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.
4
<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 reserve 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 benefits 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 reserves 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 investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)
--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND 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 methodology - - (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 reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 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.
6
<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 withdrawals (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 receivables, 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)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
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 beginning 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.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
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.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. 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 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.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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;
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES 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>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (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.
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
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)
=======================================
<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 appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>
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)
=======================================
19
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 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>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (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.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
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.
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.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
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.
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.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
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
AMOUNT OF TOTAL AMOUNT OF 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
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
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
manage-ment, 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 statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (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.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
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.
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.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
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.
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%.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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.
29
<PAGE>
PFL Life Insurance Company
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
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 other 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.
30
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================
YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================
$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 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.
32
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO 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>
33
<PAGE>
PROSPECTUS__________________________________________________________MAY 1, 1998
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
Issued Through
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
The Retirement Income Builder Variable Annuity Policy is a Flexible Premium
Variable Annuity that is offered by PFL Life Insurance Company ("PFL"). You
can use the Policy to accumulate funds for retirement or other long-term
financial planning purposes. You are generally not taxed on any earnings on
amounts you invest until you withdraw them or begin to receive Annuity
Payments. The Policy is a "variable" annuity because the value of your
investments can go up or down based on the performance of mutual fund
portfolios that you select. It is a flexible premium policy because after you
purchase it you can generally make additional investments of any amount of $50
or more, until the Annuity Commencement Date when PFL begins making Annuity
Payments to you.
You have several investment options to choose from offered through the
Variable Insurance Products Fund ("VIP"), the Variable Insurance Products Fund
II ("VIP II"), and the Variable Insurance Products Fund III ("VIP III") which
are managed by Fidelity Management & Research Company (FMR). They include the
following variable investment options:
VIP Money Market VIP II Investment Grade Bond VIP III Balanced
VIP High Income VIP II Asset Manager VIP III Growth & Income
VIP Equity-Income VIP II Asset Manager: Growth VIP III Growth
VIP Growth VIP II Index 500 Opportunities
VIP Overseas VIP II Contrafund
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU
COULD LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.
The Fixed Account is an additional investment option. If you invest in one
of the alternatives available under the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
age 59 1/2 there may also be a tax penalty. Finally, there may be an interest
penalty if you make a premature withdrawal from the Fixed Account (this is
called an "Excess Interest Adjustment," and it could also result in your
earning extra interest). PFL has the right to postpone withdrawals from the
Fixed Account.
Prospectuses for the mutual fund portfolios are attached to the back of this
prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Please Read This Prospectus Carefully.
Keep It For Future Reference.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
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TABLE OF CONTENTS
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DEFINITIONS................................................................ 5
SUMMARY OF THE POLICY...................................................... 8
ANNUITY POLICY FEE TABLE................................................... 13
CONDENSED FINANCIAL INFORMATION............................................ 19
FINANCIAL STATEMENTS....................................................... 20
HISTORICAL PERFORMANCE DATA................................................ 20
Standardized Performance Data............................................ 20
VIP Money Market Subaccount............................................ 20
Other Subaccounts...................................................... 21
Non-Standardized Performance Data........................................ 22
Adjusted Historical Performance Data................................... 24
PUBLISHED RATINGS.......................................................... 26
PFL LIFE INSURANCE COMPANY................................................. 27
THE RETIREMENT BUILDER ACCOUNTS............................................ 27
The Mutual Fund Account.................................................. 27
The Underlying Funds................................................... 28
Addition, Deletion, or Substitution of Investments..................... 30
The Fixed Account........................................................ 31
Guaranteed Periods..................................................... 32
Dollar Cost Averaging Fixed Account Option............................. 33
Guaranteed Interest Rates.............................................. 33
Transfers................................................................ 34
Reinstatements........................................................... 35
Telephone Transactions................................................... 35
Dollar Cost Averaging (DCA).............................................. 36
Asset Rebalancing........................................................ 36
THE POLICY................................................................. 37
Policy Application and Issuance of Policies--Premium Payments............ 37
Additional Premium Payments............................................ 38
Maximum Total Premium Payments......................................... 38
Allocation of Premium Payments......................................... 38
Payment Not Honored by Bank............................................ 38
Policy Value............................................................. 39
The Mutual Fund Policy Value........................................... 39
Adjusted Policy Value (APV).............................................. 39
Amendments............................................................... 39
Non-participating Policy................................................. 40
DISTRIBUTIONS UNDER THE POLICY............................................. 40
Surrenders............................................................... 40
Nursing Care and Terminal Condition Withdrawal Option.................... 41
Unemployment Waiver...................................................... 42
Excess Interest Adjustment (EIA)......................................... 42
Systematic Payout Option................................................. 42
Annuity Payments......................................................... 43
Annuity Commencement Date.............................................. 43
Election of Payment Option............................................. 44
Premium Tax............................................................ 44
Supplementary Contract................................................. 44
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Annuity Payment Options.................................................. 45
Guaranteed Values...................................................... 45
Variable Payment Options............................................... 46
Determination of the First Variable Payment............................ 46
Determination of Additional Variable Payments.......................... 47
Transfers.............................................................. 47
Tax Withholding........................................................ 48
Adjustment of Annuity Payments......................................... 48
Death Benefit............................................................ 48
Death of Annuitant Prior to Annuity Commencement Date.................. 48
Adjusted Partial Withdrawal............................................ 49
Death On or After Annuity Commencement Date............................ 50
Beneficiary............................................................ 50
Death of Owner........................................................... 50
Restrictions Under the Texas Optional Retirement Program................. 50
Restrictions Under Section 403(b) Plans.................................. 51
Restrictions Under Qualified Policies.................................... 51
CHARGES AND DEDUCTIONS..................................................... 51
Surrender Charge......................................................... 51
Mortality and Expense Risk Fee........................................... 52
Administrative Charges................................................... 53
Premium Taxes............................................................ 53
Federal, State and Local Taxes........................................... 53
Transfer Fee............................................................. 53
Other Expenses Including Investment Advisory Fees........................ 54
Employee and Agent Purchases............................................. 54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 54
Tax Status of the Policy................................................. 55
Taxation of Annuities.................................................... 55
DISTRIBUTOR OF THE POLICIES................................................ 61
VOTING RIGHTS.............................................................. 62
YEAR 2000 MATTERS.......................................................... 63
LEGAL PROCEEDINGS.......................................................... 63
STATEMENT OF ADDITIONAL INFORMATION........................................ 64
APPENDIX A................................................................. 65
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DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustments applied at the time of surrender
or on the Annuity Commencement Date.
Administrative and Service Office--Financial Markets Division Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. The Annuity Commencement Date may not be later than the last day of
the policy month starting after the Annuitant attains age 85, except as
expressly allowed by PFL, but in no event later than the last day of the
Policy month following the month in which the Annuitant attains age 95. The
Annuity Commencement Date may be required to be earlier for Qualified
Policies.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--A day when the New York Stock Exchange is open for business.
Cash Value--The Adjusted Policy Value, less the Surrender Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Cumulative Free Percentage--The percentage (as applied to the Policy Value)
which is available to the Owner free of any Surrender Charge.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts allocated to one or more options in the Fixed Account.
This interest rate will always be equal to or greater than 3%.
Dollar Cost Averaging--The process by which the Owner may elect to liquidate
a specified Dollar Cost Averaging Fixed Account Option in order to purchase
Mutual Fund Account Accumulation Units on a systematic basis.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written
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statement by the attending physician, or any other proof satisfactory to PFL,
will constitute Due Proof of Death.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial or full surrenders by the Owner from the Fixed Account
Guaranteed Period Options, or to amounts applied to Annuity Payment Options.
The adjustment reflects changes in the interest rates declared by PFL since
the date any payment was received by or an amount was transferred to the
Guaranteed Period Option. The Excess Interest Adjustment ("EIA") can either
decrease or increase the amount to be received by the Owner upon full
surrender or commencement of Annuity Payments, depending upon whether there
has been an increase or decrease in interest rates, respectively.
Excess Partial Withdrawal--The portion of a partial withdrawal (surrender)
that can be subject to a Surrender Charge.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods of
the Fixed Account which may be offered by PFL and into which Premium Payments
may be paid or amounts transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.
Mutual Fund Account--The PFL Retirement Builder Variable Annuity Account, a
separate account established and registered as a unit investment trust under
the Investment Company Act of 1940, (the "1940 Act"), as amended, to which
Premium Payments under the Policies may be allocated.
Nonqualified Policy--A Policy other than a Qualified Policy.
Owner or Owners--The person who may exercise all rights and privileges under
the Policy. The Owner during the lifetime of the Annuitant and prior to the
Annuity Commencement Date is the person designated as the Owner or a Successor
Owner in the application.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The Policy Date as shown on the Policy Data Page attached to
the Policy.
Policy Value--On or before the Annuity Commencement Date, the Policy Value
is equal to the Owner's:
(1) Premium Payments; minus
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(2) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus
(3) interest credited in the Fixed Account; plus
(4) accumulated gains or losses in the Mutual Fund Account; minus
(5) Service Charges, premium taxes and transfer fees, if any.
Policy Year--A Policy Year begins on the Policy Date and on each Policy
Anniversary.
Premium Payment--An amount paid to PFL by the Owner or on the Owner's behalf
as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--There is an annual Service Charge on each Policy Anniversary
(and a charge at the time of surrender during any Policy Year) for Policy
maintenance and related administrative expenses. This annual charge is the
lesser of 2% of the Policy Value or $30.
Subaccount--A subdivision within the Mutual Fund Account, the assets of
which are invested in a specified Portfolio of the Underlying Funds.
Successor Owner--A person appointed by the Owner to succeed to ownership of
the Policy in the event of the death of the Owner who is not the Annuitant
before the Annuity Commencement Date.
Surrender Charge--The applicable contingent deferred sales charge, assessed
on certain full surrenders or partial withdrawals of Premium Payments to cover
expenses relating to the sale of the Policies.
Underlying Funds--The portfolios of the Variable Insurance Products Fund
("VIP"), the Variable Insurance Products Fund II ("VIP II"), and the Variable
Insurance Products Fund III ("VIP III"), managed by Fidelity Management &
Research Company.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determinations shall be made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.
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SUMMARY OF THE POLICY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Retirement Income Builder Variable Annuity is a tax-deferred flexible
premium variable annuity policy which can be purchased on a non-tax qualified
basis or with the proceeds from certain plans qualifying for favorable federal
income tax treatment. The Policy provides the Owner with the ability to
accumulate funds on a tax-deferred basis and to receive periodic annuity
payments on a variable basis, a fixed basis, or a combination of both. The
Owner allocates the Premium Payments among the various options available under
the Mutual Fund Account and the Fixed Account. The Policy is intended for
long-term purposes, such as retirement, and for persons who have maximized
their use of other retirement savings methods, such as 401(k) plans and
individual retirement accounts ("IRAs").
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which has dedicated a number of subaccounts to the Policy that invest
exclusively in shares of the designated portfolios of the VIP, the VIP II, and
the VIP III (collectively, the "Underlying Funds"). Fidelity Management &
Research Company ("FMR") provides investment advice and administrative
services to the Underlying Funds.
The Portfolios of the Underlying Funds currently offered are as follows:
VIP Money Market VIP II Investment Grade VIP III Balanced
Bond
VIP High Income VIP II Asset Manager VIP III Growth & Income
VIP Equity-Income VIP II Asset Manager: VIP III Growth
Growth Opportunities
VIP Growth VIP II Index 500
VIP Overseas VIP II Contrafund
Each of the Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value may
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE RETIREMENT
BUILDER ACCOUNTS--The Mutual Fund Account," p. 27.)
The Fixed Account. PFL guarantees an annual credited rate of at least 3% on
Premium Payments and transfers to, less partial withdrawals and transfers
from, the Fixed Account. Upon Surrender, PFL guarantees return of at least the
Premium Payments made to, less prior Partial Withdrawals and transfers from,
the Fixed Account. PFL will always offer a Current Interest Rate which will be
guaranteed for at least one year from the date of the Premium Payment or
transfer, although certain Dollar Cost Averaging programs may run for shorter
periods. PFL may, in its sole discretion, declare a higher Current Interest
Rate from time-to-time. PFL
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may offer optional guaranteed interest rate periods into which Premium
Payments may be made or amounts transferred. PFL may also offer a Dollar Cost
Averaging Fixed Account Option which will have a one-year interest rate
guarantee and which will require automatic periodic transfers to the Mutual
Fund Account. (See "THE RETIREMENT BUILDER ACCOUNTS--The Fixed Account," p.
31.)
PREMIUM PAYMENTS
A Nonqualified or Qualified Policy may be purchased with an initial Premium
Payment of at least $2,000, but there is no minimum initial Premium Payment
required for a Policy purchased and used in connection with a tax deferred
403(b) Annuity. An Owner may make additional Premium Payments of at least $50
each at any time before the Annuity Commencement Date. The maximum total
Premium Payments allowed without prior approval of PFL is $1,000,000. At the
time of each Premium Payment no charges or fees are deducted, so the entire
Premium Payment is invested immediately, subject to the restrictions below
regarding the "Right to Cancel" period. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 51 and "CHARGES AND DEDUCTIONS--Premium Taxes," p. 53.)
The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account and/or
the Subaccounts of the Mutual Fund Account) according to allocation
percentages in the Policy application or transmittal form. Any allocation must
be in whole percents, and the total allocation must equal 100%. However, any
amounts allocated to Subaccounts of the Mutual Fund Account will be allocated
entirely to the Money Market Subaccount of the Mutual Fund Account for the
first 14 days after the date the Policy is issued or a longer period if the
laws of the state where issued require more than a 10 day "right-to-cancel"
period (See "Right to Cancel Period," below.) At the end of this period, the
amount in the Money Market Subaccount will then be allocated to the
Subaccount(s) of the Mutual Fund Account in accordance with the allocation
percentages specified by the Owner. Allocations specified by the Owner will be
used for Additional Premium Payments unless the Owner requests a change in
allocation. Allocations for additional Premium Payments may be changed by
sending Written Notice to PFL's Administrative and Service Office. (See "THE
POLICY--Premium Payments," p. 37.)
RIGHT TO CANCEL PERIOD
When the Owner receives the Policy, it should be reviewed carefully to make
sure it is what the Owner intended to purchase. The Owner may, until the end
of the period of time specified in the Policy (the Right to Cancel period),
examine the Policy and return it for a refund. The applicable period will
depend on the state in which the Policy is issued. In many states the period
is 10 days after the Policy is delivered to the Owner. Some states may allow
for a longer period to return the Policy. The amount of the refund will be the
greater of the Premium Payments made under the Policy or the Policy Value. PFL
will pay the refund within 7 days after it receives Written Notice of
cancellation and the returned Policy. The Policy will then be deemed void.
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TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner can transfer values from one Subaccount to another within the
Mutual Fund Account or from the Mutual Fund Account to the Fixed Account, or
from the Fixed Account to the Mutual Fund Account within limits established by
PFL. Transfers of Policy Values from any of the Guaranteed Period Options of
the Fixed Account to any of the Subaccounts of the Mutual Fund Account are
allowed only at the end of the applicable Guaranteed Periods, and will not be
subject to an Excess Interest Adjustment at that time. The Owner may, however,
transfer an amount equal to any or all of the interest credited in any of the
Guaranteed Period Options to any Subaccount(s) of the Mutual Fund Account
prior to the end of a specified Guaranteed Period. (See "THE RETIREMENT
BUILDER ACCOUNTS-- Transfers," p. 34.) Any such "Interest Transfers" from a
Guaranteed Period Option prior to the end of a Guaranteed Period will not be
subject to any Excess Interest Adjustment. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustment," p. 42.) Transfers from the Dollar Cost
Averaging Fixed Account Option, except through a Dollar Cost Averaging
program, are not allowed. (See "THE RETIREMENT BUILDER ACCOUNTS--Dollar Cost
Averaging Fixed Account Option," p. 33.) Transfers currently may be made
either by telephone or by sending Written Notice to PFL's Administrative and
Service Office. (See "THE RETIREMENT BUILDER ACCOUNTS--Telephone
Transactions," p. 35.)
PFL reserves the right to impose a $10 fee for each transfer in excess of 12
transfers per Policy Year. At the present time, PFL does not charge for
transfers. (See "THE RETIREMENT BUILDER ACCOUNTS--Transfers," p. 34.)
SURRENDERS
The Owner may elect to surrender all or withdraw a portion of the Cash Value
($500 minimum) in exchange for a payment from PFL at any time prior to the
earlier of the Annuitant's death or the Annuity Commencement Date. The Cash
Value equals the Policy Value increased or decreased by any Excess Interest
Adjustment, less any applicable Surrender Charge (described below). A
surrender request must be made by Written Request, and a request for a partial
withdrawal must specify the Subaccounts or Guaranteed Period Options from
which the withdrawal is requested. There is currently no limit on the
frequency or timing of Policy withdrawals, although for Qualified Policies the
retirement plan or applicable law may restrict and/or penalize withdrawals.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 40.) In addition to any
applicable Surrender Charge, Service Charge, Excess Interest Adjustment, and
premium tax, surrenders and partial withdrawals may be subject to income taxes
and a 10% Federal penalty tax.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person): (1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally, a life expectancy of twelve months or less), then the Surrender
Charge and Excess Interest Adjustment (See "DISTRIBUTIONS UNDER THE POLICY--
Death
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Benefit," p. 48.) are not imposed on surrenders or partial withdrawals. (Since
this benefit may not be available in all states, see the Policy or endorsement
for details.) (See DISTRIBUTIONS UNDER THE POLICY--Nursing Care and Terminal
Condition Withdrawal Option," p. 41.)
UNEMPLOYMENT WAIVER
The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual 1)
must have been employed full time for at least two years prior to becoming
unemployed, 2) must have been employed full time on the Policy Date, 3) must
have been unemployed for at least 60 consecutive days at the time of
withdrawal, and 4) must have a minimum Cash Value at the time of withdrawal of
$5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than 15 days after the date of the withdrawal request. This
benefit may not be available in all states, see the Policy or endorsement for
details.
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL generally does not deduct sales or other charges at the time of
investment, (although in some states, a premium tax charge may be deducted).
However, a Surrender Charge, which is a contingent deferred sales charge, of
up to 6% of the Premium Payment is imposed on certain full surrenders or
partial withdrawals of Premium Payments in order to cover expenses relating to
the distribution of the Policies. A Surrender Charge will only be applied to
withdrawals that exceed the amount available under certain listed exceptions.
The applicable Surrender Charge is based on the period of time elapsed since
payment of the Premium Payment(s) being withdrawn. There will be no Surrender
Charge imposed five or more years after a Premium Payment was paid. In any
event, Surrender Charges will be waived after the tenth Policy Year. For
purposes of determining the applicable Surrender Charge, Premium Payments are
considered to be withdrawn on a "first-in, first-out" basis. (See "CHARGES AND
DEDUCTIONS-- Surrender Charge," p. 51.)
In each Policy Year the Owner may request partial withdrawals ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the "Cumulative Free Percentage." That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free Percentage withdrawals previously taken reduce the Cumulative Free
Percentage that is available. (See "DISTRIBUTIONS UNDER THE POLICY--
Surrenders," p. 40.) Withdrawals in excess of the available Cumulative Free
Percentage will be subject to a Surrender Charge of up to 6% of the Premium
Payment withdrawn.
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Excess Interest Adjustment. Full surrenders, partial withdrawals from the
Guaranteed Period Options of the Fixed Account prior to the end of the
Guaranteed Period, and amounts applied to an Annuity Payment Option (prior to
the end of the Guaranteed Period) and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal, are subject to
an Excess Interest Adjustment. Depending upon market rates of interest, the
effect of an Excess Interest Adjustment could eliminate all interest in excess
of the minimum guaranteed effective annual interest rate of 3%, or it could
result in the crediting of additional interest. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustment," p. 42.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. For Guaranteed Minimum Death Benefit Option "A" (Return of Premium
Death Benefit), the effective annual rate of this charge is 1.10% of the value
of the Mutual Fund Account's net assets. For Guaranteed Minimum Death Benefit
Options "B" (5% Annually Compounding Death Benefit) and "C" (Annual Step-Up
Death Benefit), the effective annual rate of this charge is 1.25% of the value
of the Mutual Fund Account's net assets. (See "CHARGES AND DEDUCTIONS--
Mortality and Expense Risk Fee," p. 52, and "DISTRIBUTIONS UNDER THE POLICY--
Death Benefit," p. 48.)
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the value of the Mutual Fund Account's net
assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges," p. 53.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.25% for the Return of
Premium Death Benefit, and 1.40% for the 5% Annually Compounding Death Benefit
or the Annual Step Up Benefit Death Benefit.
Service Charge. There is also an annual Service Charge on each Policy
Anniversary (and a charge at the time of surrender during any Policy Year) for
Policy maintenance and related administrative expenses. This annual charge is
the lesser of 2% of the Policy Value or $30 and is deducted from each
Investment Option in proportion to each Investment Option's percentage of the
Policy Value in the Investment Option just prior to such charge. This charge
is waived if either the Policy Value or the sum of all Premium Payments less
the sum of all partial withdrawals equals or exceeds $50,000 on a Policy
Anniversary (or date of surrender). PFL GUARANTEES THAT THIS CHARGE WILL NOT
BE INCREASED IN THE FUTURE. (See "CHARGES AND DEDUCTIONS--Administrative
Charges," p. 53.)
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to particular
Policy from the Policy Value until surrender of the Policy, payment of the
Death Benefit or until the Annuity Commencement Date. Premium taxes currently
range from 0% to 3.50% of Premium Payments. (See "CHARGES AND DEDUCTIONS--
Premium Taxes," p. 53.)
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No charges are currently made against any of the Accounts for federal,
state, or local income taxes. Should PFL determine that any such taxes be
imposed with respect to any of the Accounts, PFL may deduct such taxes from
amounts held in the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal,
State and Local Taxes," p. 53.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fees and other expenses incurred by the Underlying Funds.
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.
ANNUITY POLICY FEE TABLE
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POLICY OWNER TRANSACTION EXPENSES
Sales Load On Purchase Payments........................................................ 0
Maximum Surrender Charge (as a % of Premium Payments Surrendered)(/1/)(/2/)............ 6%
Surrender Fees......................................................................... 0
Service Charge(/2/)....................................................... $30 Per Policy
Transfer Fee(/2/)....................................................... Currently No Fee
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SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF ACCOUNT VALUE)
Mortality and Expense Risk Fees(/3/)................................................ 1.25%
Administrative Charge............................................................... 0.15%
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES.............................................. 1.40%
</TABLE>
PORTFOLIO ANNUAL EXPENSES(/4/)
(as a percentage of average net assets and after expense reimbursements)
<TABLE>
<CAPTION>
TOTAL PORTFOLIO
MANAGEMENT OTHER RULE 12B-1 ANNUAL
FEES EXPENSES FEES EXPENSES
---------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
VIP Money Market................ 0.21% 0.10% -- 0.31%
VIP High Income(/5/)............ 0.59% 0.12% -- 0.71%
VIP Equity-Income............... 0.50% 0.08% -- 0.58%
VIP Growth(/5/)................. 0.60% 0.09% -- 0.69%
VIP Overseas(/5/)............... 0.75% 0.17% -- 0.92%
VIP II Investment Grade Bond.... 0.44% 0.14% -- 0.58%
VIP II Asset Manager(/5/)....... 0.55% 0.10% -- 0.65%
VIP II Contrafund(/5/).......... 0.60% 0.11% -- 0.71%
VIP II Asset Manager:
Growth(/5/)................... 0.60% 0.17% -- 0.77%
VIP II Index 500(/6/)........... 0.24% 0.04% -- 0.28%
VIP III Balanced(/5/)........... 0.45% 0.16% -- 0.61%
VIP III Growth Opportuni-
ties(/5/)..................... 0.60% 0.14% -- 0.74%
VIP III Growth & Income......... 0.49% 0.21% -- 0.70%
</TABLE>
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(/1/The)Surrender Charge is decreased based on the number of years since the
Premium Payment was made, from 6% in the year in which the Premium Payment
was made to 0% in the sixth year after the Premium Payment was made. If
applicable, a Surrender Charge will only be applied to withdrawals that
exceed the amount available under certain listed exceptions. (See
"DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 40.)
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(/2/) The Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how Policy Value is allocated among the Mutual Fund
Account and the Fixed Account. The Service Charge applies to both the
Fixed Account and the Mutual Fund Account, and is assessed on a prorata
basis relative to each Account's Policy Value as a percentage of the
Policy's total Policy Value. There is no fee for the first 12 transfers
per year. For additional transfers, PFL may charge a fee of $10 per
transfer, but currently does not charge for any transfers. Mutual Fund
Account Annual Expenses do not apply to the Fixed Account (See "CHARGES
AND DEDUCTIONS--Other Expenses Including Investment Advisory Fees," p.
54.)
(/3/) Mortality and Expense Risk Fees (1.25%) shown are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fees for the "Return of Premium Death Benefit" is 1.10% for
each Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p.
48.)
(/4/) The fee table information relating to the Underlying Funds is for 1997
and was provided to PFL by the Underlying Funds, and PFL has not
independently verified such information.
(/5/) A portion of the brokerage commissions that certain funds pay is 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 operating expenses for 1997
presented in the table would have been: 0.57% for VIP Equity-Income
Portfolio, 0.67% for VIP Growth Portfolio, 0.90% for VIP Overseas
Portfolio, 0.64% for VIP II Asset Manager Portfolio, 0.68% for VIP II
Contrafund Portfolio, 0.76% for VIP II Asset Manager: Growth Portfolio,
0.73 for VIP III Growth Opportunities Portfolio, 0.60% for VIP III
Balanced Portfolio, and 0.71% for VIP High Income Portfolio.
(/6/) FMR agreed to reimburse a portion of Index 500 Portfolio's expenses
during 1997. Without this reimbursement, the Portfolio's management fee,
other expenses and total expenses would have been 0.27%, 0.13% and 0.40%
respectively.
- 14 -
<PAGE>
EXAMPLES
I. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option A, (Return of Premium Death Benefit) a
hypothetical 5% annual return on assets and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $70 $ 91 $ 97 $193
VIP High Income Subaccount...................... $74 $104 $117 $235
VIP Equity-Income Subaccount.................... $73 $100 $111 $222
VIP Growth Subaccount........................... $74 $103 $116 $233
VIP Overseas Subaccount......................... $76 $110 $128 $257
VIP II Investment Grade Bond Subaccount......... $73 $100 $111 $222
VIP II Asset Manager Subaccount................. $74 $102 $114 $229
VIP II Asset Manager: Growth Subaccount......... $75 $106 $121 $242
VIP II Contrafund Subaccount.................... $74 $104 $117 $235
VIP II Index 500 Subaccount..................... $70 $ 90 $ 95 $190
VIP III Balanced................................ $73 $101 $112 $225
VIP III Growth Opportunities.................... $75 $105 $119 $238
VIP III Growth & Income......................... $74 $104 $117 $234
2. If the Policy is annuitized at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $17 $51 $ 88 $193
VIP High Income Subaccount...................... $21 $64 $109 $235
VIP Equity-Income Subaccount.................... $19 $60 $102 $222
VIP Growth Subaccount........................... $20 $63 $108 $233
VIP Overseas Subaccount......................... $23 $70 $120 $257
VIP II Investment Grade Bond Subaccount......... $19 $60 $102 $222
VIP II Asset Manager Subaccount................. $20 $62 $106 $229
VIP II Asset Manager: Growth Subaccount......... $21 $65 $112 $242
VIP II Contrafund Subaccount.................... $21 $64 $109 $235
VIP II Index 500 Subaccount..................... $16 $50 $ 87 $190
VIP III Balanced................................ $20 $60 $104 $225
VIP III Growth Opportunities.................... $21 $64 $111 $238
VIP III Growth & Income......................... $20 $63 $109 $234
3. If the Policy is not surrendered or annuitized:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $17 $51 $ 88 $193
VIP High Income Subaccount...................... $21 $64 $109 $235
VIP Equity-Income Subaccount.................... $19 $60 $102 $222
VIP Growth Subaccount........................... $20 $63 $108 $233
VIP Overseas Subaccount......................... $23 $70 $120 $257
VIP II Investment Grade Bond Subaccount......... $19 $60 $102 $222
VIP II Asset Manager Subaccount................. $20 $62 $106 $229
VIP II Asset Manager: Growth Subaccount......... $21 $65 $112 $242
VIP II Contrafund Subaccount.................... $21 $64 $109 $235
VIP II Index 500 Subaccount..................... $16 $50 $ 87 $190
VIP III Balanced................................ $20 $60 $104 $225
VIP III Growth Opportunities.................... $21 $64 $111 $238
VIP III Growth & Income......................... $20 $63 $109 $234
</TABLE>
- 15 -
<PAGE>
II. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option B, (5% Annually Compounding Death Benefit) or
Death Benefit Option C, (Annual Step-Up Death Benefit) a hypothetical 5%
annual return on assets and assuming the entire Policy Value is in the
applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $72 $ 96 $105 $209
VIP High Income Subaccount...................... $76 $108 $125 $251
VIP Equity-Income Subaccount.................... $75 $104 $119 $237
VIP Growth Subaccount........................... $76 $108 $124 $249
VIP Overseas Subaccount......................... $78 $115 $136 $272
VIP II Investment Grade Bond Subaccount......... $75 $104 $119 $237
VIP II Asset Manager Subaccount................. $75 $107 $122 $245
VIP II Asset Manager: Growth Subaccount......... $76 $110 $128 $257
VIP II Contrafund Subaccount.................... $76 $108 $125 $251
VIP II Index 500 Subaccount..................... $72 $ 95 $103 $206
VIP III Balanced................................ $75 $105 $120 $241
VIP III Growth Opportunities.................... $76 $109 $127 $254
VIP III Growth & Income......................... $76 $108 $125 $250
2. If the Policy is annuitized at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $18 $56 $ 96 $209
VIP High Income Subaccount...................... $22 $68 $117 $251
VIP Equity-Income Subaccount.................... $21 $64 $110 $237
VIP Growth Subaccount........................... $22 $67 $116 $249
VIP Overseas Subaccount......................... $24 $74 $127 $272
VIP II Investment Grade Bond Subaccount......... $21 $64 $110 $237
VIP II Asset Manager Subaccount................. $21 $66 $114 $245
VIP II Asset Manager: Growth Subaccount......... $23 $70 $120 $257
VIP II Contrafund Subaccount.................... $22 $68 $117 $251
VIP II Index 500 Subaccount..................... $18 $55 $ 95 $206
VIP III Balanced................................ $21 $65 $112 $241
VIP III Growth Opportunities.................... $22 $69 $118 $254
VIP III Growth & Income......................... $22 $68 $116 $250
3. If the Policy is not surrendered or annuitized:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $18 $56 $ 96 $209
VIP High Income Subaccount...................... $22 $68 $117 $251
VIP Equity-Income Subaccount.................... $21 $64 $110 $237
VIP Growth Subaccount........................... $22 $67 $116 $249
VIP Overseas Subaccount......................... $24 $74 $127 $272
VIP II Investment Grade Bond Subaccount......... $21 $64 $110 $237
VIP II Asset Manager Subaccount................. $21 $66 $114 $245
VIP II Asset Manager: Growth Subaccount......... $23 $70 $120 $257
VIP II Contrafund Subaccount.................... $22 $68 $117 $251
VIP II Index 500 Subaccount..................... $18 $55 $ 95 $206
VIP III Balanced................................ $21 $65 $112 $241
VIP III Growth Opportunities.................... $22 $69 $118 $254
VIP III Growth & Income......................... $22 $68 $116 $250
</TABLE>
- 16 -
<PAGE>
The above tables are intended to assist the Owner in understanding the costs
and expenses of the Mutual Fund Account and the Underlying Funds that the
Owner will bear, directly or indirectly. These include the 1997 expenses of
the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 51, and the Underlying
Funds' prospectuses.) In addition to the expenses listed above, premium taxes,
currently ranging from 0% to 3.50% of Premium Payments may be applicable.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED RATE. THE FIGURES AND DATA FOR UNDERLYING FUND ANNUAL
EXPENSES HAVE BEEN PROVIDED BY FMR FOR 1997 AND PFL HAS NOT INDEPENDENTLY
VERIFIED THEIR ACCURACY.
In these examples, the $30 Service Charge is reflected as a charge of .0644%
based on an average Policy Value of $46,590.
DEATH BENEFIT
In the event that the Annuitant who is not the Owner dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant unless the
Owner specifically requests on the application or in a Written Request that
the Death Benefit be paid upon the Annuitant's death and PFL agrees to such an
election. If the Annuitant is also the Owner, upon receipt of proof that the
Annuitant has died before the Annuity Commencement Date, the Death Benefit is
calculated and is payable to the Beneficiary when we receive an election of
the method of settlement and return of the Policy.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and may depend on the Death Benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date due proof of death and election of
the method of settlement are received by PFL.
The Owner has the "one-time" option of choosing a "Return of Premium Death
Benefit," (Death Benefit Option "A"), a "5% Annually Compounding Death
Benefit," (Death Benefit Option "B"), or an "Annual Step-Up Death Benefit,"
(Death Benefit Option "C"). The Return of Premium Death Benefit is the return
of all Premium Payments less any Partial Withdrawals, as of the date of death.
The 5% Annually Compounding Death Benefit is the total Premium Payments less
any Partial Withdrawals, accumulated at 5% until the earlier of the date of
death or the Owner's 81st birthday. The Annual Step-Up Death Benefit is the
largest Policy Value on the issue date or on any Policy Anniversary prior to
the earlier of the date of death or prior to the Owner's 81st birthday, plus
any premiums paid, less any premium withdrawals taken, subsequent to the date
of the largest anniversary Policy Value. If no election is made by the
Policyholder, the Return of Premium Death Benefit will be used upon death of
the Annuitant.
- 17 -
<PAGE>
The Death Benefit provisions may vary depending on the state where the
Policy is issued. The Death Benefit may be paid as either a lump sum cash
benefit or as an annuity as permitted by federal or state law. (See
"DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 48.)
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement date, the amount payable under the Policy upon surrender will be
the Policy Value increased or decreased by an Excess Interest Adjustment.
VARIATIONS IN POLICY PROVISIONS
Certain provisions of the Policies may vary from the descriptions in this
Prospectus in order to comply with different state laws. See the Policy itself
for variations. Any such state variations will be included in the Policy
itself or in riders or endorsements attached to the Policy.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the policy form itself for details regarding these and other terms applicable
to policies sold in New Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to occur
(e.g., a pledge or assignment of a Policy). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, a penalty tax may apply to
certain distributions or deemed distributions under the Policy. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 54.)
Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus and in the Statement of
Additional Information and in the prospectuses for the Underlying Funds and in
the Policy, all of which should be referred to for more detailed information.
This Prospectus generally describes only the Policy and the Mutual Fund
Account. Separate prospectuses describe the Underlying Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are
deemed not to be securities. See "THE RETIREMENT BUILDER ACCOUNTS--The Fixed
Account," p. 31.)
- 18 -
<PAGE>
REQUESTS FOR INFORMATION
Any telephone requests and inquiries
may be made to 1-800-525-6205.
Any Written Notices or Written Requests
must be sent to the following address:
PFL Life Insurance Company
Administrative and Service Office:
Financial Markets Division-Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Mutual Fund Subaccount from the date of inception are shown in the
following tables.
5% Annually Compounding Death Benefit on Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT END UNITS AT END OF
YEAR OF YEAR YEAR
------------- ----------------- ---------------
<S> <C> <C> <C>
VIP Money Market Subaccount
1997(/1/).................... $1.000000 $1.040117 1,504,396.531
VIP High Income Subaccount
1997(/1/).................... $1.000000 $1.163294 713,496.095
VIP Equity-Income Subaccount
1997(/1/).................... $1.000000 $1.272579 2,325,232.286
VIP Growth Subaccount
1997(/1/).................... $1.000000 $1.230106 1,450,130.335
VIP Overseas Subaccount
1997(/1/).................... $1.000000 $1.111441 702,293.009
VIP II Investment Grade Bond
Subaccount
1997(/1/).................... $1.000000 $1.080052 1,020,909.375
VIP II Asset Manager Subaccount
1997(/1/).................... $1.000000 $1.193482 1,048,640.321
VIP II Asset Manager: Growth
Subaccount
1997(/1/).................... $1.000000 $1.237304 937,197.160
VIP II Index 500 Subaccount
1997(/1/).................... $1.000000 $1.315713 3,420,336.530
VIP II Contrafund Subaccount
1997(/1/).................... $1.000000 $1.237079 1,948,498.226
VIP III Balanced Subaccount
1997(/2/).................... $1.000000 $1.145544 280,038.882
VIP III Growth & Income
Subaccount
1997(/2/).................... $1.000000 $1.236456 479,129.254
VIP III Growth Opportunities
Subaccount
1997(/2/).................... $1.000000 $1.227778 791,157.687
</TABLE>
- 19 -
<PAGE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.25%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT UNITS AT END OF
YEAR END OF YEAR YEAR
------------- ------------- ---------------
<S> <C> <C> <C>
VIP Money Market Subaccount
1997(/1/)........................ $1.000000 $1.041652 1,538,095.590
VIP High Income Subaccount
1997(/1/)........................ $1.000000 $1.165012 790,218.659
VIP Equity-Income Subaccount
1997(/1/)........................ $1.000000 $1.274458 1,955,419.658
VIP Growth Subaccount
1997(/1/)........................ $1.000000 $1.231921 1,653,392.152
VIP Overseas Subaccount
1997(/1/)........................ $1.000000 $1.113081 560,955.405
VIP II Investment Grade Bond
Subaccount
1997(/1/)........................ $1.000000 $1.081642 894,679.948
VIP II Asset Manager Subaccount
1997(/1/)........................ $1.000000 $1.195229 713,379.802
VIP II Asset Manager: Growth
Subaccount
1997(/1/)........................ $1.000000 $1.239118 465,131.055
VIP II Index 500 Subaccount
1997(/1/)........................ $1.000000 $1.317652 2,083,207.545
VIP II Contrafund Subaccount
1997(/1/)........................ $1.000000 $1.238907 1,157,189.672
VIP III Balanced Subaccount
1997(/2/)........................ $1.000000 $1.146670 184,894.892
VIP III Growth & Income Subaccount
1997(/2/)........................ $1.000000 $1.237676 295,288.778
VIP III Growth Opportunities
Subaccount
1997(/2/)........................ $1.000000 $1.228996 856,473.567
</TABLE>
- ----------------------------------
(/1/) Period from January 2, 1997 through December 31, 1997.
(/2/) Period from May 1, 1997 through December 31, 1997.
FINANCIAL STATEMENTS
The financial statements of PFL and the Mutual Fund Account and the
independent auditors' report thereon are contained in the Statement of
Additional Information which is available free upon request to PFL's
Administrative and Service Office.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. These figures will be calculated
according to standardized methods prescribed by the SEC. They will be based on
historical earnings and are not intended to indicate future performance.
VIP Money Market Subaccount. The yield of the VIP Money Market Subaccount
for a Policy refers to the annualized income generated by an investment under
a Policy in the Subaccount over a specified seven-day period. The yield is
calculated by assuming that the income generated for that seven-day period
- 20 -
<PAGE>
is generated each seven-day period over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment under a Policy in the
Subaccount is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. For the seven days ended December 31, 1997, the yield of the VIP
Money Market Subaccount was 4.257%, and the effective yield was 4.347% for the
Return of Premium Death Benefit. For the seven days ended December 31, 1997,
the yield of the VIP Money Market Subaccount was 4.102%, and the effective
yield was 4.186% for the 5% Annually Compounding Death Benefit or Annual Step-
Up Death Benefit.
Other Subaccounts. The yield of a Subaccount of the Mutual Fund Account
(other than the VIP Money Market Subaccount) for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified 30-day period. The yield is calculated by assuming that the
income generated by the investment during that 30-day period is generated each
30-day period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including a 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. The total return quotations for a Subaccount will
represent the average annual compounded rates of return that equate an initial
investment of $1,000 in the Subaccount to the redemption value of that
investment as of the last day of each of the periods for which total return
quotations are provided. In addition to the Standard data discussed above,
similar performance data for other periods may also be shown.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Surrender Charge that
may be applicable to a particular Policy. To the extent that any or all of a
premium tax and/or Surrender Charge is applicable to a particular Policy, the
yield and/or total return of that Policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from PFL's Administrative and
Service Office upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1997, and for the one and five year periods
ended December 31, 1997 are shown below. Total returns shown reflect
deductions for the Mortality and Expense Risk Fee and the Administrative
Charges. Total return calculations will relect the effect of surrender charges
that may be applicable to a particular period.
- 21 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
5% ANNUALLY COMPOUNDING DEATH BENEFIT OR ANNUAL STEP-UP DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.40%)
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR FIVE YEAR OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT INCEPTION
SUBACCOUNT 12/31/97 12/31/97 TO 12/31/97 DATE
- ---------- -------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
VIP High Income.................. N/A N/A 10.95% January 2, 1997
VIP Equity-Income................ N/A N/A 21.94% January 2, 1997
VIP Growth....................... N/A N/A 17.67% January 2, 1997
VIP Overseas..................... N/A N/A 5.74% January 2, 1997
VIP II Investment Grade Bond..... N/A N/A 2.58% January 2, 1997
VIP II Asset Manager............. N/A N/A 13.99% January 2, 1997
VIP II Asset Manager: Growth..... N/A N/A 18.40% January 2, 1997
VIP II Contrafund................ N/A N/A 18.37% January 2, 1997
VIP II Index 500................. N/A N/A 26.28% January 2, 1997
VIP III Balanced................. N/A N/A 9.19% May 1, 1997
VIP III Growth Opportunities..... N/A N/A 17.46% May 1, 1997
VIP III Growth & Income.......... N/A N/A 18.34% May 1, 1997
</TABLE>
RETURN OF PREMIUM DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.25%)
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR FIVE YEAR OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT INCEPTION
SUBACCOUNT 12/31/97 12/31/97 TO 12/31/97 DATE
- ---------- -------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
VIP High Income.................. N/A N/A 11.13% January 2, 1997
VIP Equity-Income................ N/A N/A 22.13% January 2, 1997
VIP Growth....................... N/A N/A 17.85% January 2, 1997
VIP Overseas..................... N/A N/A 5.91% January 2, 1997
VIP II Investment Grade Bond..... N/A N/A 2.74% January 2, 1997
VIP II Asset Manager............. N/A N/A 14.16% January 2, 1997
VIP II Asset Manager: Growth..... N/A N/A 18.58% January 2, 1997
VIP II Contrafund................ N/A N/A 18.56% January 2, 1997
VIP II Index 500................. N/A N/A 26.47% January 2, 1997
VIP III Balanced................. N/A N/A 9.31% May 1, 1997
VIP III Growth Opportunities..... N/A N/A 17.59% May 1, 1997
VIP III Growth & Income.......... N/A N/A 18.46% May 1, 1997
</TABLE>
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
- 22 -
<PAGE>
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service Office upon request.
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
Surrender Charge is not imposed.
AVERAGE ANNUAL TOTAL RETURNS
(ASSUMING NO SURRENDER CHARGE)
5% ANNUALLY COMPOUNDING DEATH BENEFIT OR ANNUAL STEP-UP DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.40%)
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR FIVE YEAR OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT INCEPTION
SUBACCOUNT 12/31/97 12/31/97 TO 12/31/97 DATE
- ---------- -------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
VIP High Income.................. N/A N/A 16.26% January 2, 1997
VIP Equity-Income................ N/A N/A 27.18% January 2, 1997
VIP Growth....................... N/A N/A 22.93% January 2, 1997
VIP Overseas..................... N/A N/A 11.07% January 2, 1997
VIP II Investment Grade Bond..... N/A N/A 7.94% January 2, 1997
VIP II Asset Manager............. N/A N/A 19.27% January 2, 1997
VIP II Asset Manager: Growth..... N/A N/A 23.65% January 2, 1997
VIP II Contrafund................ N/A N/A 23.63% January 2, 1997
VIP II Index 500................. N/A N/A 31.49% January 2, 1997
VIP III Balanced................. N/A N/A 14.51% May 1, 1997
VIP III Growth Opportunities..... N/A N/A 22.73% May 1, 1997
VIP III Growth & Income.......... N/A N/A 23.59% May 1, 1997
</TABLE>
RETURN OF PREMIUM DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.25%)
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR FIVE YEAR OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT INCEPTION
SUBACCOUNT 12/31/97 12/31/97 TO 12/31/97 DATE
- ---------- -------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
VIP High Income.................. N/A N/A 16.43% January 2, 1997
VIP Equity-Income................ N/A N/A 27.37% January 2, 1997
VIP Growth....................... N/A N/A 23.12% January 2, 1997
VIP Overseas..................... N/A N/A 11.24% January 2, 1997
VIP II Investment Grade Bond..... N/A N/A 8.10% January 2, 1997
VIP II Asset Manager............. N/A N/A 19.45% January 2, 1997
VIP II Asset Manager: Growth..... N/A N/A 23.83% January 2, 1997
VIP II Contrafund................ N/A N/A 23.81% January 2, 1997
VIP II Index 500................. N/A N/A 31.68% January 2, 1997
VIP III Balanced................. N/A N/A 14.62% May 1, 1997
VIP III Growth Opportunities..... N/A N/A 22.85% May 1, 1997
VIP III Growth & Income.......... N/A N/A 23.72% May 1, 1997
</TABLE>
- 23 -
<PAGE>
Adjusted Historical Performance Data. The following performance data is
historic performance data for the underlying Portfolios since their inception
reduced by some or all of the fees and charges under the Policy. Such adjusted
historic performance includes data that precedes the inception dates of the
Subaccounts. This data is designed to show the performance that would have
resulted if the Policy had been in existence during that time, based on the
performance of the applicable Portfolio and the assumption that the applicable
Subaccount was in existence for the same period as the Portfolio with a level
of charges equal to those currently assessed under the Policies. This data is
not intended to indicate future performance.
For instance, as shown in the table below, PFL Life may disclose average
annual total returns for the Portfolios reduced by all fees and charges under
the Policy, as if the Policy had been in existence since the inception of the
Portfolio. Such fees and charges include the Mortality and Expense Risk Fee,
Administrative Charge and Surrender Charges. Such data assumes a complete
surrender of the Policy at the end of the period; therefore the Surrender
Charge is deducted.
The following information is also based on the method of calculation
described in the Statement of Additional Information. The adjusted historical
average annual total returns for periods ended December 31, 1997, were as
follows:
ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURNS(/1/)
5% ANNUALLY COMPOUNDING DEATH BENEFIT OR ANNUAL STEP-UP DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.40%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ ---------- ------------------
<S> <C> <C> <C> <C>
VIP High Income.................. 11.65% 12.34% 11.20%(/2/) September 11, 1985
VIP Equity-Income................ 22.71% 18.57% 15.13%(/2/) October 8, 1986
VIP Growth....................... 18.41% 16.53% 15.61%(/2/) October 8, 1986
VIP Overseas..................... 6.41% 12.67% 8.14%(/2/) January 27, 1987
VIP II Investment Grade Bond..... 3.23% 5.65% 6.77% June 5, 1989
VIP II Asset Manager............. 14.70% 11.38% 12.01% May 29, 1990
VIP II Asset Manager: Growth..... 19.14% N/A 20.91% January 3, 1995
VIP II Contrafund................ 19.11% N/A 26.41% January 3, 1995
VIP II Index 500................. 27.07% 18.29% 18.11% August 27, 1992
VIP III Balanced................. 13.64% N/A 12.44% January 3, 1995
VIP III Growth Opportunities..... 20.35% N/A 23.66% January 3, 1995
VIP III Growth & Income.......... 20.37% N/A 20.37% December 31, 1996
</TABLE>
- 24 -
<PAGE>
RETURN OF PREMIUM DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.25%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ ---------- ------------------
<S> <C> <C> <C> <C>
VIP High Income.................. 11.83% 12.51% 11.36%(/2/) September 11, 1985
VIP Equity-Income................ 22.90% 18.75% 15.30%(/2/) October 8, 1986
VIP Growth....................... 18.59% 16.70% 15.78%(/2/) October 8, 1986
VIP Overseas..................... 6.57% 12.84% 8.30%(/2/) January 27, 1987
VIP II Investment Grade Bond..... 3.39% 5.81% 6.93% June 5, 1989
VIP II Asset Manager............. 14.88% 11.54% 12.18% May 29, 1990
VIP II Asset Manager: Growth..... 19.32% N/A 20.68% January 3, 1995
VIP II Contrafund................ 19.30% N/A 26.60% January 3, 1995
VIP II Index 500................. 27.26% 18.47% 18.28% August 27, 1992
VIP III Balanced................. 13.82% N/A 12.61% January 3, 1995
VIP III Growth Opportunities..... 20.53% N/A 23.84% January 3, 1995
VIP III Growth & Income.......... 21.32% N/A 21.32% December 31, 1996
</TABLE>
- ----------------------------------
(/1/) The calculation of total return performance for periods prior to
inception of the Subaccounts reflects deductions for the Mortality and
Expense Risk Fee and Administrative Charge on a monthly basis, rather
than a daily basis. The monthly deduction is made at the beginning of
each month and generally approximates the performance that would have
resulted if the Subaccounts had actually been in existence since the
inception of the Portfolio.
(/2/) Ten Year return.
The following non-standardized adjusted historical average annual total
return figures are based on the assumption that the Policy is not surrendered,
and therefore the following figures assume that the Surrender Charge is not
imposed.
ADJUSTED HISTORICAL AVERAGE ANNUAL TOTAL RETURNS(/1/)
(ASSUMING NO SURRENDER CHARGE)
5% ANNUALLY COMPOUNDING DEATH BENEFIT OR ANNUAL STEP-UP DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.40%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ ---------- ------------------
<S> <C> <C> <C> <C>
VIP High Income.................. 16.26% 12.34% 11.20%(/2/) September 11, 1985
VIP Equity-Income................ 27.18% 18.57% 15.13%(/2/) October 8, 1986
VIP Growth....................... 22.93% 16.53% 15.61%(/2/) October 8, 1986
VIP Overseas..................... 11.07% 12.67% 8.14%(/2/) January 27, 1987
VIP II Investment Grade Bond..... 7.94% 5.65% 6.77% June 5, 1989
VIP II Asset Manager............. 19.27% 11.38% 12.01% May 29, 1990
VIP II Asset Manager: Growth..... 23.65% N/A 21.54% January 3, 1995
VIP II Contrafund................ 23.63% N/A 26.89% January 3, 1995
VIP II Index 500................. 31.49% 18.29% 18.11% August 27, 1992
VIP III Balanced................. 18.22% N/A 12.89% January 3, 1995
VIP III Growth Opportunities..... 24.85% N/A 23.87% January 3, 1995
VIP III Growth & Income.......... 25.62% N/A 25.62% December 31, 1996
</TABLE>
- 25 -
<PAGE>
RETURN OF PREMIUM DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.25%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR OR PORTFOLIO
1 YEAR 5 YEAR INCEPTION INCEPTION DATE
------ ------ ---------- ------------------
<S> <C> <C> <C> <C>
VIP High Income.................. 16.43% 12.51% 11.36%(/2/) September 11, 1985
VIP Equity-Income................ 27.37% 18.75% 15.30%(/2/) October 8, 1986
VIP Growth....................... 23.12% 16.70% 15.78%(/2/) October 8, 1986
VIP Overseas..................... 11.24% 12.84% 8.30%(/2/) January 27, 1987
VIP II Investment Grade Bond..... 8.10% 5.81% 6.93% June 5, 1989
VIP II Asset Manager............. 19.45% 11.54% 12.18% May 29, 1990
VIP II Asset Manager: Growth..... 23.83% N/A 21.32% January 3, 1995
VIP II Contrafund................ 23.81% N/A 27.08% January 3, 1995
VIP II Index 500................. 31.68% 18.47% 18.28% August 27, 1992
VIP III Balanced................. 18.40% N/A 13.05% January 3, 1995
VIP III Growth Opportunities..... 25.03% N/A 24.05% January 3, 1995
VIP III Growth & Income.......... 25.81% N/A 25.81% December 31, 1996
</TABLE>
- ----------------------------------
(/1/) The calculation of total return performance for periods prior to
inception of the Subaccounts reflects deductions for the Mortality and
Expense Risk Fee and Administrative Charge on a monthly basis, rather
than a daily basis. The monthly deduction is made at the beginning of
each month and generally approximates the performance that would have
resulted if the Subaccounts had actually been in existence since the
Inception of the Portfolio.
(/2/) Ten Year return.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and they should not be considered
as bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations such as debt or commercial paper obligations.
- 26 -
<PAGE>
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 RETIREMENT BUILDER ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The Mutual Fund Account is registered with the SEC under the 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 Mutual Fund Account or PFL
The Mutual Fund Account was established as a separate investment account of
PFL under the laws of the State of Iowa on March 29, 1996. The Mutual Fund
Account receives and currently invests the Premium Payments under the Policies
that are allocated to it for investment only in shares of the Variable
Insurance Products Fund, the Variable Insurance Products Fund II, and the
Variable Insurance Products Fund III, managed by Fidelity Management and
Research Company ("FMR").
The Mutual Fund Account currently has dedicated thirteen Subaccounts.
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. Under Iowa law, the assets of the Mutual Fund Account
are owned by PFL but they are held separately from the other assets of PFL. To
the extent that these assets are attributable to the Cash Value of the
Policies, 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 Subaccounts of the Mutual Fund Account, whether or not realized,
are credited to or charged against that Subaccount without regard to other
income, gains or losses of any other Account or Subaccount of PFL. Therefore,
the investment performance of any Subaccount should be entirely independent of
the investment performance of PFL's general account assets or any other
Account or Subaccount maintained by PFL.
- 27 -
<PAGE>
The Underlying Funds. The available Subaccounts of the Mutual Fund Account
currently invest exclusively in shares of the Underlying Funds. The Underlying
Funds are diversified, open-end management investment companies organized as
Massachusetts Business Trusts. They are the type of investment company
commonly known as a series mutual fund. The Variable Insurance Product Fund
was established on November 13, 1981, and was formerly known as Fidelity Cash
Reserves II. The Variable Insurance Products Fund II was established on March
21, 1988. The Variable Insurance Products Fund III was established on July 14,
1994, and prior to December 30, 1996 was known as the Fidelity Advisor Annuity
Fund.
Certain information concerning the Underlying Funds is set forth below. More
detailed information may be found in the Underlying Funds' current
prospectuses, which accompany or precede this Prospectus, and the Underlying
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. VIP currently offers five Portfolios: VIP Money Market; VIP High Income;
VIP Equity-Income; VIP Growth; and VIP Overseas. VIP II currently offers five
Portfolios that are available under the Policies: VIP II Investment Grade
Bond; VIP II Asset Manager; VIP II Index 500, VIP II Asset Manager: Growth;
and VIP II Contrafund. VIP III currently offers three Portfolios: VIP III
Balanced; VIP III Growth Opportunities, and VIP III Growth & Income. The
thirteen Portfolios offered by the Underlying Funds provide a range of
investment alternatives that vary according to the different investment
objectives described in the Underlying 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.
VIP MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income
as is consistent with preserving capital and providing liquidity. The
Portfolio will invest only in high-quality short-term U.S. dollar-denominated
money market instruments of domestic and foreign issuers. The Portfolio seeks
to maintain a constant net asset value of $1.00 per share, although no
assurances can be given that such constant net asset value will be maintained.
The Portfolio's shares are neither insured nor guaranteed by the U.S.
Government.
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 also will be considered. The fund
can also invest in common stocks, other equity securities, and debt securities
not currently paying interest but which are expected to do so in the future.
The Portfolio may invest without limitation in lower-quality debt securities,
sometimes called "junk bonds" which carry greater risk than other debt
securities. See the Fund's prospectus for a description of these risks.
- 28 -
<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 seeks to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's Composite Index of 500 Stocks.
VIP GROWTH PORTFOLIO seeks to achieve capital appreciation 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.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio seeks to achieve its
investment objective by investing at least 65% of the Portfolio's assets in
securities of companies whose principal location is outside the United States.
The fund normally diversifies its investments across different countries and
regions. The Overseas Portfolio expects to invest a majority of its assets in
equity securities, but may also invest in debt securities of any quality.
Generally, the investment in securities of foreign companies will involve
greater risks than are present in domestic investments.
VIP II INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital by investing
primarily in a broad range of fixed-income securities. FMR normally invests at
least 65% of the Portfolio's total assets in investment-grade, fixed income
securities. Its dollar weighted average maturity will be generally five to ten
years.
VIP II ASSET MANAGER PORTFOLIO seeks high total return with reduced risk
over the long-term by allocating its assets among the following classes, or
types of investments: domestic and foreign stocks, bonds, and short-term and
money market instruments. The Portfolio's "neutral" mix is expected to be 50%
stocks, 40% bonds and 10% short-term/money market instruments. FMR may change
the neutral mix from time to time within specified ranges as set forth in the
Fund's prospectus.
VIP II INDEX 500 PORTFOLIO seeks to match the total return of the Standard &
Poor's Composite Index of 500 Stocks, while keeping transaction costs and
other expenses low.
VIP II ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among the following classes, or types, of investments:
domestic and foreign stocks, bonds, and short-term and money market
instruments. The Portfolio's "neutral" mix is expected to be 70% stocks, 25%
bonds and 5% short-term/money market instruments. FMR may change the neutral
mix from time to time within specified ranges as set forth in the Fund's
prospectus.
VIP II CONTRAFUND PORTFOLIO seeks capital appreciation by investing in
securities of companies whose value FMR believes is not fully recognized by
the public.
VIP III BALANCED PORTFOLIO seeks both income and growth of capital by
investing in a diversified portfolio of equity and fixed-income securities.
When
- 29 -
<PAGE>
FMR's outlook is neutral, it will invest approximately 60% of the fund's
assets in stocks and other equity securities, and will always invest at least
25% of the fund's assets in fixed-income senior securities.
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks capital growth by investing in
common stocks, convertible and foreign securities and bonds that may offer
long-term growth potential.
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 fund may also invest in equity securities that are not
paying current dividends, but offer potential for capital appreciation of
future income.
THERE IS NO ASSURANCE THAT ANY OF THE UNDERLYING FUNDS' PORTFOLIOS WILL
ACHIEVE ITS INVESTMENT OBJECTIVE.
PFL may receive expense reimbursements or other revenues from the Underlying
Funds or their investment advisors. The amount of these reimbursements or
revenues, if any, may be based on the amount of assets that PFL or the Mutual
Fund Account invests in the Underlying Funds.
The Underlying Funds' prospectuses should be read carefully before any
decision is made concerning the allocation of Premium Payments to a particular
Subaccount. The Underlying Funds are not limited to selling their shares to
the Mutual Fund Account and are permitted to accept investments from any
separate account of an insurance company. Since the Portfolios of the
Underlying Funds are available to registered separate accounts offering
variable annuity products of PFL, as well as variable annuity and variable
life products of other insurance companies, there is a possibility that a
material conflict may arise between the interests of the Mutual Fund Account
and one or more of the separate accounts of another participating insurance
company. In the event of a material conflict, the affected insurance
companies, including PFL, agree to take any necessary steps, including
removing their separate accounts from the Underlying Funds, to resolve the
matter. See the Underlying Funds' prospectuses for further details.
An investment in the Mutual Fund Account, or in any Portfolio, including the
Money Market Portfolio is not insured or guaranteed by the U.S. government or
any government agency.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Subaccounts will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying 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 PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
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.
- 30 -
<PAGE>
Nothing contained herein shall prevent the Mutual Fund Account from purchasing
other securities for other series or classes of variable annuity policies, or
from effecting an exchange between series or classes of variable annuity
policies on the basis of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change. In the event any Subaccount is eliminated, PFL will notify Owners
and request a reallocation of the amounts invested in the eliminated
Subaccount. If no such reallocation is provided by the Owner, PFL 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, PFL may, by appropriate
endorsement, make such changes in the Policies 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 Policies,
the Mutual Fund 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, PFL also may (1) transfer the assets of the Mutual Fund
Account associated with the Policies to another account or accounts, (2)
restrict or eliminate any voting rights of Owners or other persons who have
voting rights as to the Mutual Fund Account, (3) create new mutual fund
accounts, (4) add new Subaccounts to or remove existing Subaccounts from the
Mutual Fund Account, or combine Subaccounts, or (5) add new underlying funds,
or substitute a new fund for an existing fund.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For complete details regarding the
Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts. PFL has been advised that while the staff
of the SEC has not reviewed the disclosures in this Prospectus which relate to
the fixed portion, the disclosures may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of the statements made in the prospectus.
The Fixed Account is made up of all the general assets of PFL, other than
those in the Mutual Fund Account or in any other segregated asset account. The
Owner
- 31 -
<PAGE>
may allocate Premium Payments to the Fixed Account at the time of Premium
Payment or by subsequent transfers from the Mutual Fund Account. Rather than
the Owner bearing the investment risk, as is the case for Policy Value
allocated to the Mutual Fund Account, PFL bears the full investment risk for
all Policy Value allocated to the Fixed Account. PFL has sole discretion to
invest the assets of its general account, including the Fixed Account, subject
to applicable law.
Premium Payments applied to, and any amounts transferred to, the Fixed
Account will reflect a fixed interest rate. The interest rates PFL sets will
be credited for increments of at least one year measured from each Premium
Payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%.
Upon full surrender, the Owner will always receive at least the Premium
Payments applied to, less prior partial withdrawals and transfers from, the
Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options") into which Premium Payments may be paid or
amounts transferred. For example, PFL may offer Guaranteed Period Options for
1, 3, 5, or 7 years duration from time to time. The Current Interest Rate PFL
sets for funds placed in each Guaranteed Period Option will be guaranteed
until the end of the applicable Guaranteed Period. At the end of the
Guaranteed Period, the Policy Value for the Guaranteed Period Option will be
rolled into a new Guaranteed Period Option(s) or may be transferred to any
Subaccount(s) within the Mutual Fund Account.
The Owner may choose the Guaranteed Period Option(s) in which to place the
Policy Value by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period Option will be the same as the expiring Guaranteed Period
Option unless that Guaranteed Period Option is no longer offered, in which
case, the next shorter Guaranteed Period Option offered will be used. PFL
reserves the right, for new Premium Payments, transfers, or rollovers, to
offer or not to offer any Guaranteed Period Option. PFL will, however, always
offer at least a one-year Guaranteed Period Option.
Surrenders or partial withdrawals from a Guaranteed Period Option prior to
the end of the Guaranteed Period and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal are subject to
an Excess Interest Adjustment on the amount withdrawn. An Excess Interest
Adjustment may result in a loss of interest credited, or again of additional
interest, but the Owner's Fixed Account Policy Values will always be credited
with an effective annual interest rate of at least 3%. Surrender charges, if
any, are applied after the Excess Interest Adjustment. However, upon full
surrender the Owner is guaranteed return of Premium Payments to the Fixed
Account, less partial withdrawals and transfers from the Fixed Account. See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 42.) No
transfers from any Guaranteed Period Option to any other Investment Option
will be allowed prior to the end of the Guaranteed Period. (See "Transfers,"
below.)
- 32 -
<PAGE>
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
first; the next oldest Premium Payment or transfer plus interest is considered
to be withdrawn next, and so on (this is a "first-in, first-out" procedure).
The Owner bears the risk that PFL will not credit interest in excess of 3% per
year.
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will have a one-year interest rate guarantee for amounts in the
DCA Fixed Account and will only be available under a Dollar Cost Averaging
(DCA) program. If the Owner, for any reason, discontinues the DCA program
before its completion, then the interest credited on amounts in the DCA
account may be adjusted downward, but not below the minimum guaranteed
effective annual interest rate of 3%. PFL may credit different interest rates
for DCA programs of varying time periods. Interest credited on the amounts in
the DCA Fixed Account will always be at least an annual effective rate of 3%.
Prior to the Annuity Commencement Date, no transfers, except through a
Dollar Cost Averaging program, will be allowed from the Dollar Cost Averaging
Fixed Account. Dollar Cost Averaging transfers to Subaccounts of the Mutual
Fund Account must begin within 30 days after the Premium Payment or transfer
to the Dollar Cost Averaging Fixed Account. Transfers must be scheduled for at
least six but not more than 24 months, or for at least four, but not more than
eight calendar quarters. Transfers will continue until the elected Subaccount
or DCA Fixed Account value is depleted. The amount transferred each time must
be at least $500. All transfers from the DCA account will be the same amount
as the initial transfer unless subsequently changed. Changes to the amount
transferred will only be allowed after the minimums are satisfied or when
additional premium is allocated or a new amount is transferred into the DCA
account. If the amount transferred is changed, the minimums must be met again
(that is, transfers must be scheduled for at least six more but not more than
24 months, or for at least four more, but not more than eight quarters).
Changes can be made to the Subaccounts to which these transfers are allocated.
Dollar Cost Averaging transfers from the Dollar Cost Averaging Fixed Account
will not be subject to an Excess Interest Adjustment. (See "THE RETIREMENT
BUILDER ACCOUNTS--Dollar Cost Averaging," p. 36.)
Dollar cost averaging requires regular investment regardless of fluctuating
prices and does not guarantee profits nor prevent losses in a declining
market. Before electing this option, individuals should consider their
financial ability to continue purchases through periods of both high and low
price levels.
Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rates may be changed by PFL frequently or infrequently
depending on interest rates on investments available to PFL and other factors
as described below, but once established, the rate will be guaranteed for the
entire duration of the Guaranteed Period. However, except for limited
situations, any amount withdrawn or transferred will be subject to an Excess
Interest Adjustment, except those at the end of the Guaranteed Period Option.
(See "Excess Interest Adjustment," p. 42.)
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The Guaranteed Interest Rate will not be less than 3% per year regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Guaranteed
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Guaranteed Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; the Policy Owner assumes the risk that declared rates will not
exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE GUARANTEED
EFFECTIVE INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
An Owner can transfer Policy Value from one Investment Option to another
within certain limits.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Owner, to the
Administrative and Service Office. The minimum amount of Policy Value which
may be transferred from a Subaccount of the Mutual Fund Account is the lesser
of $500 or the entire Subaccount value. If the Subaccount value remaining
after a transfer is less than $500, PFL reserves the right, at its discretion,
to include that amount as part of the transfer.
Subject to the limitations and restrictions described below, transfers
currently may be made without charge as often as the Owner wishes, subject to
the minimum dollar amounts specified above. PFL reserves the right to limit
these transfers to no more than 12 per Policy Year in the future or to charge
up to $10 per transfer in excess of 12 per Policy Year.
Transfers of Policy Values from any of the Guaranteed Period Option(s) of
the Fixed Account to any Subaccount(s) of the Mutual Fund Account are allowed
only at the end of the Guaranteed Period(s), and will not be subject to an
Excess Interest Adjustment at that time. The Owner must notify PFL within 30
days prior to the end of any expiring Guaranteed Period Option to instruct PFL
regarding any transfers to be performed at that time. The Owner may, however,
transfer amounts equal to the interest credited in any of the Guaranteed
Period Option(s) to any Subaccount(s) of the Mutual Fund Account prior to the
end of the Guaranteed Period. Each such Interest Transfer must be at least
$50. The maximum Interest Transfer permitted from any Guaranteed Period Option
before the end of the
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Guaranteed Period will be the cumulative amount of interest credited for the
Guaranteed Period Option at the time of, but prior to, the transfer. No Excess
Interest Adjustment will apply to such Interest Transfers. Interest Transfers
may affect the interest crediting rates on amounts remaining in the Guaranteed
Period Option, since for purposes of crediting interest, PFL considers the
oldest Premium Payment or transfer into the Guaranteed Period Option, plus
interest allocable to that particular Premium Payment or transfer, to be
withdrawn first.
Transfers out of the Dollar Cost Averaging Fixed Account, except through a
Dollar Cost Averaging program, are not allowed. (See "Dollar Cost Averaging,"
p. 36.)
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted. (See "DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options,"
p. 45.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another life insurance company pursuant to a Code Section 1035
exchange or trustee-to-trustee transfer. In this situation PFL will require
the Owner to replace the same total dollar amount of funds in the applicable
Subaccounts and/or Fixed Accounts as was taken from them to effect the
exchange. The total dollar amount of funds reapplied to the Mutual Fund
Account will be used to purchase a number of Accumulation Units available for
each Subaccount based on the Accumulation Unit values at the date of
reinstatement (within two days of the date the funds are received by PFL). It
should be noted that the number of Accumulation Units available on the
Reinstatement date may be more or less than the number surrendered for the
exchange. Amounts reapplied to the Fixed Account will be entitled to receive
the interest rate they would otherwise have received had they not been
withdrawn. However, an adjustment will be made to the amount reapplied to
compensate PFL for the additional interest credited during the period of time
between the withdrawal and the reapplication of the funds. Owners should
consult a qualified personal tax adviser concerning the tax consequences of
any Code Section 1035 exchanges or reinstatements.
TELEPHONE TRANSACTIONS
Owners (or their designated registered representative) may make transfers
and/or change the allocation of Additional Premium Payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the Policy
application has been initialed or telephone transfers have been subsequently
authorized by the Owner by appropriate Written Request. PFL will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. However, PFL will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, it may be liable for any losses due to unauthorized or fraudulent
instructions. All telephone requests will be recorded on voice recorder
equipment for the protection of the Owner. The Owner, when making telephone
requests, will be required to provide the Owner's social security number,
and/or other information for identification purposes.
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Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same-day pricing of
the transaction.
The telephone transaction privilege may be discontinued at any time as to
some or all Owners and PFL may require written confirmation of a telephone
transaction request at its discretion.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a dollar amount
specified by the Owner from the DCA Fixed Account Option to any other
Subaccount or Subaccounts of the Mutual Fund Account. The automatic transfers
can occur monthly or quarterly and will occur on the 28th day of the month. If
the DCA request is received prior to the 28th day of any month, the first
transfer will occur on the 28th day of that month. If the DCA request is
received on or after the 28th day of any month, the first transfer will occur
on the 28th day of the following month. The amount transferred each time must
be at least $500. A minimum of six monthly or four quarterly transfers are
required and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account.
Dollar Cost Averaging results in the purchase of more Accumulation Units
when the Accumulation Unit value is low, and fewer Accumulation Units when the
Accumulation Unit value is high. However, there is no guarantee that the
Dollar Cost Averaging program will result in higher Policy Values or will
otherwise be successful.
The Policy Owner may request Dollar Cost Averaging when purchasing the
Policy or later. The program will terminate when the amount in the DCA Fixed
Account is insufficient for the next transfer, at which time the entire
remaining balance is transferred.
The Owner may discontinue the program after satisfying the required minimum
number of transfers at any time by sending a Written Notice to the
Administrative and Service Office. The required minimum number of transfers
(six monthly or four quarterly) must be satisfied each time the DCA program is
restarted following termination of the program for any reason. Discontinuance
of a DCA program may result in PFL reducing interest rates credited to amounts
remaining in the DCA Fixed Account if the conditions established for a
particular DCA program are not met. There is no charge for participation in
this program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis based on the Policy Date, and
beginning on a date selected by the Owner. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing.
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Rebalancing may be started, stopped, or changed at any time, except that
rebalancing will not be available when:
(1) a Dollar Cost Averaging program is in effect; or
(2) any other transfer is requested.
There is no charge for participation in this program.
THE POLICY
The Retirement Income Builder Variable Annuity Policy is a flexible premium
variable annuity policy. The rights and benefits under the Policy are
summarized below; however, the description of the Policy contained in this
Prospectus is qualified in its entirety by reference to the Policy itself, a
copy of which is available upon request from PFL. The Policy may be purchased
on a non-tax qualified basis ("Nonqualified Policy"). The Policy may also be
purchased and used in connection with retirement plans or individual
retirement accounts that qualify for favorable federal income tax treatment
("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$2,000 for a Nonqualified or Qualified Policy. There is no minimum initial
Premium Payment required for tax deferred 403(b) annuity purchases; any amount
selected by the Owner in such case, up to the maximum total premium payment
allowed by PFL, may be used to start a Policy. The initial Premium Payment for
tax deferred 403(b) purchases must be received within 90 days following the
Policy Date, otherwise the Policy will be canceled. PFL reserves the right to
increase or decrease this amount for a class of Policies issued after some
future date. The initial Premium Payment is the only Premium Payment required
to be paid under a Policy. A Policy ordinarily will be issued only in respect
of Annuitants Age 0 through 80. Acceptance or declination of an application
shall be based on PFL's underwriting standards, and PFL reserves the right to
reject any application or Premium Payment based on those underwriting
standards.
If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
PFL may, if the application or transmittal form can be accepted in the form
received, credit the initial Premium Payment to the Policy Value within one
Business Day after the later of receipt by PFL's agent of the information
needed or the Premium Payment.
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The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the check or draft for the Premium Payment
is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make Additional Premium Payments at
any time, and in any frequency. The minimum Additional Premium Payment under
both a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Policy Value as of
the Business Day when the premium and required information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application or transmittal form. This allocation will
be used for Additional Premium Payments unless the Owner requests a change of
allocation. All allocations must be made in whole percentages and must total
100%. However, the portion of the initial Premium Payment which is allocated
to the Mutual Fund Account will be temporarily allocated entirely to the Money
Market Portfolio of the Mutual Fund Account only for a period of time equal to
the greater of the Policy's Right to Cancel Period, or fourteen (14) days
following the Policy Date. (See "SUMMARY OF THE POLICY--Right to Cancel
Period," p. 9.) Based on current state laws, the maximum right to cancel
period, and therefore maximum period of time the funds are expected to be
allocated to the money market account, is 30 days from the date the policy is
issued. At the end of that period, the Policy Value in the Money Market
Portfolio will then be allocated to the Subaccount(s) of the Mutual Fund
Account in accordance with the allocation percentages specified by the Owner.
If Premium Payments are allocated to the Dollar Cost Averaging Fixed Account,
directions regarding the Subaccount(s) to which transfers are to be made must
be specified on the application or other proper Written Request. If the Owner
fails to specify how Premium Payments are to be allocated, the Premium
Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future Additional
Premium Payments by sending a Written Notice, signed by the Owner, to PFL's
Administrative and Service Office, or by telephone (subject to the provisions
described under "THE RETIREMENT BUILDER ACCOUNTS--Telephone Transactions," p.
35). The allocation change will apply to Premium Payments received after the
date the Written Notice or telephone request is received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
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POLICY VALUE
On or before the Annuity Commencement Date, the Policy Value is equal to the
Owner's:
(1) Premium Payments; minus
(2) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus
(3) interest credited in the Fixed Account; plus or minus
(4) accumulated gains or losses in the Mutual Fund Account; minus
(5) Service Charges, premium taxes and transfer fees, if any.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is the period between
successive Business Days. It begins at the close of business on each Business
Day and ends at the close of business on the next succeeding Business Day. A
Business Day is each day that the New York Stock Exchange is open for trading.
Holidays are generally not Business Days.
The Mutual Fund Policy Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Policy Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value.
The number of units credited is determined by dividing the Premium Payment or
amount transferred to the Subaccount by the Accumulation Unit value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or fully surrendered or
partially withdrawn from a Subaccount, Accumulation Units are canceled or
redeemed in a similar manner.
For each Subaccount, the Accumulation Unit Value for a given Business Day is
based on the net asset value of a share of the corresponding Portfolio of the
Underlying Funds less any applicable charges or fees. Therefore, the
Accumulation Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Accumulation Unit Values is described in detail in the Statement of
Additional Information.
ADJUSTED POLICY VALUE (APV)
The Adjusted Policy Value is the Policy Value increased or decreased by any
Excess Interest Adjustment applied at the time of surrender or on the Annuity
Commencement Date.
The Adjusted Policy Value will be used on the Annuity Commencement Date to
provide the amount of annuity payments under a Policy.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
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<PAGE>
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a payment from PFL. The Cash Value
is the Adjusted Policy Value, less the Surrender Charge, if any. (See
"DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options," p. 45.) The Policy
cannot be surrendered after the Annuity Commencement Date. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payments," p. 43.)
When requesting a partial surrender ($500 minimum), the Owner must instruct
PFL how the amount withdrawn is to be allocated among various Investment
Options. If the Owner's request for a partial surrender from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Owner's interest in each Investment Option bears to the total Policy
Value. PFL reserves the right to defer payment of the Cash Value from the
Fixed Account for up to six months.
In each Policy Year the Owner may request partial surrenders ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the Cumulative Free Percentage. That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free percentage withdrawals previously taken (that is, lump sums, systematic
payouts, nursing care and terminal condition withdrawals, minimum required
distributions, and unemployment withdrawals) reduce the Cumulative Free
Percentage that is available. For example, 10% Cumulative Free Percentage is
available at the beginning of the first Policy Year. If no partial withdrawals
are taken in the first Policy Year, the first year unused Cumulative Free
Percentage of 10% is carried forward to the second Policy Year. The unused 10%
from year one plus 10% additional Cumulative Free Percentage available at the
beginning of Policy Year two accumulates to a 20% Cumulative Free Percentage
as of the beginning of Policy Year two. Assume only 5% is used in Policy Year
two. Thus the Cumulative Free Percentage available as of the beginning of
Policy Year three would be 25% (that is, 20% - 5% = 15% unused from Policy
Year two, plus an additional 10% available at the beginning of Policy Year
three). Amounts withdrawn in excess of
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the available Cumulative Free Percentage will be subject to a Surrender Charge
(up to 6%). Neither a Surrender Charge nor an Excess Interest Adjustment will
be assessed if the withdrawal is necessary to meet the minimum distribution
requirements for that Policy specified by the IRS for tax qualified plans.
Upon full surrender or partial withdrawal, the cumulative interest credited
at the time of, but prior to, the surrender or withdrawal will not be subject
to an Excess Interest Adjustment.
Surrenders or partial withdrawals that are allowed free of Surrender Charges
will reduce the Policy Value by the amount withdrawn. Surrendered or partially
withdrawn amounts in excess of the portion that is free of Surrender Charges
are Excess Partial Withdrawals. Excess Partial Withdrawals will reduce the
Policy Value by an amount equal to (X - Y + Z) where:
X= Excess Partial Withdrawal
Y= Excess Interest Adjustment, which is applicable to the Excess Partial
Withdrawal
Z= Surrender Charge on X minus Y.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 51. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 42 and
Appendix "A".
Since the Owner assumes the investment risk with respect to all Premium
Payments allocated to the Mutual Fund Account, and because withdrawals may be
subject to an Excess Interest Adjustment and to a Surrender Charge, and
possibly premium taxes, the total amount paid upon total surrender of the Cash
Value (taking any prior surrenders into account) may be more or less than the
total Premium Payments made. Following a surrender of the total Cash Value, or
at any time the Policy Value is zero, all rights of the Owner and Annuitant
will terminate.
In addition to any applicable Excess Interest Adjustment, Surrender Charge,
and premium tax, surrenders and partial withdrawals may be subject to income
taxes and, if taken prior to age 59 1/2, a ten percent Federal penalty tax.
(See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 54.)
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person)--(1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally a life expectancy of 12 months or less), then the Surrender Charge
and Excess Interest Adjustment are not imposed on surrenders or partial
withdrawals. (Since this benefit may not be available in all states, see the
Policy or endorsement for details.) (See DISTRIBUTIONS UNDER THE POLICY--
Nursing Care and Terminal Condition Withdrawal Option," p. 41.)
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<PAGE>
UNEMPLOYMENT WAIVER
The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual 1)
must have been employed full time for at least two years prior to becoming
unemployed, 2) must have been employed full time on the Policy Date, 3) must
have been unemployed for at least 60 consecutive days at the time of
withdrawal, and 4) must have a minimum Cash Value at the time of withdrawal of
$5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than fifteen (15) days following the date PFL receives the
withdrawal request. (This benefit may not be available in all states--see the
Policy or endorsement for details.)
EXCESS INTEREST ADJUSTMENT (EIA)
Full surrenders, partial withdrawals, and amounts applied to an Annuity
Payment Option (prior to the end of any Guaranteed Period) from the Fixed
Account Guaranteed Period Options will be subject to an Excess Interest
Adjustment except as provided for under "Surrenders" or "Nursing Care and
Terminal Condition Withdrawal Option" above or "Systematic Payout Option,"
p. 42.
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower Cash Value
upon surrender. Conversely, if interest rates have fallen since the date of
the guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher Cash Value
upon surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value at the
time of full surrender for a Guaranteed Period Option below the amount paid
into, less any prior partial withdrawals and transfers from that Guaranteed
Period Option, plus interest at the Policy's minimum guaranteed effective
annual interest rate of 3%.
The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
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specified Investment Options (except the DCA account). Monthly and quarterly
payments can only be accomplished by electronic funds transfer directly to a
checking or savings account. The minimum payment is $50. The maximum payment
is 10% of the Policy Value at the time the Systematic Payout is made divided
by the number of payments made per year (for example, 12 for monthly). If this
requested amount is below the minimum distribution requirements for that
Policy specified by the IRS for tax qualified plans, the maximum payment will
be increased to this minimum required distribution amount. Only partial
withdrawal requests which are in excess of the minimum required distribution
will be subject to any applicable Surrender Charge and/or Excess Interest
Adjustment. The "Request for Systematic Payout" form must specify a date for
the first payment, which must be at least 30 days but not more than one year
after the form is submitted (that is, Systematic Payouts will start at the end
of the payment mode selected, but not earlier than 30 days from the date of
request).
The Surrender Charge and Excess Interest Adjustment will be waived for
Owners under age 59 1/2 on Qualified Policies if they take Systematic Payouts
using one of the payout methods described in I.R.S. Notice 89-25, Q&A-12 (the
Life Expectancy Recalculation Option, Amortization, or Annuity Factor) which
generally requires payments for life or life expectancy. These payments must
be continued until the later of age 59 1/2 or five years from commencement of
the payments. No additional withdrawals may be taken during the time these
payments are made. For Qualified Policies, Owners age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge will not be imposed on Systematic Payouts. Only Systematic Payouts in
excess of the cumulative interest credited at the time of, but prior to, the
payout will be subject to an Excess Interest Adjustment.
In certain circumstances amounts withdrawn pursuant to a Systematic Payout
may be included in the Owner's gross income and may be subject to penalty
taxes. In addition, Qualified Policies are subject to complex rules with
respect to restrictions on and taxation of distributions, including the
applicability of penalty taxes. Therefore, the Owner should consult a
qualified tax adviser before requesting a Systematic Payout. In certain
circumstances withdrawn amounts may be included in the Owner's gross income.
(See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 54.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
which is selected by the Owner at the time the Policy is applied for. The
Annuity Commencement Date may be changed from time to time by the Owner by
Written Notice to PFL, provided that notice of each change is received by PFL
at its Administrative and Service Office at least thirty (30) days prior to
the then current Annuity Commencement Date. Except as otherwise permitted by
PFL, a new Annuity Commencement Date must be a date which is:
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(1) at least thirty (30) days after the date notice of the change is received
by PFL and (2) not later than the last day of the Policy month starting after
the Annuitant attains age 85. In no event will an Annuity Commencement Date be
permitted to be later than the last day of the Policy month following the
month in which the Annuitant attains age 95. The laws of some states may
require earlier Annuity Commencement Dates. The Annuity Commencement Date may
also be changed by the Beneficiary's election of the Annuity Option after the
Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose a Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the Annuity Commencement Date. If no election is
made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Option 3, life income with level payments for 10 years certain,
using the existing Adjusted Policy Value of the Fixed Account, or (ii) under
Option 3-V, life income with variable payments for 10 years certain using the
existing Policy Value of the Mutual Fund Account, or (iii) in a combination of
(i) and (ii). If the Adjusted Policy Value on the Annuity Commencement Date is
less than $2,000, PFL reserves the right to pay it in one lump sum in lieu of
applying it under a Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 48.) Annuity Payments will be made on either a fixed
basis or a variable basis as selected by the Owner (or the Beneficiary, after
the Annuitant's death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless the Owner specifies otherwise, the payee shall be the Annuitant, or,
after the Annuitant's death, the Beneficiary. PFL may require written proof of
the age of any person who has an annuity purchased under Option 3, 3-V, 5 or
5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a payment option or upon withdrawal. If so, PFL will deduct
the premium tax before applying or paying the proceeds.
Supplementary Contract. Once proceeds become payable and a Payment Option
has been selected, the Policy will terminate and PFL will issue a
Supplementary Contract to reflect the terms of the option selected. The
Supplementary Contract will name the payees and will describe the payment
schedule.
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<PAGE>
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Two of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and three are only available as Fixed Payment Options. The Owner may
elect a Fixed Payment Option, a Variable Payment Option, or a combination of
both. If the Owner elects a combination, he must specify what part of the
Policy proceeds are to be applied to the Fixed and Variable Payment Options
(and he must also specify which Subaccounts for the Variable Payment Options).
NOTE CAREFULLY: Under Payment Options 3(l) and 5 (including 3-V(l) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second Annuity Payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third Annuity Payment; and so forth.
On the Annuity Commencement Date, the Adjusted Policy Value will be applied
to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value for the Valuation
Period which ends immediately preceding the Annuity Commencement Date,
including the effect of any applicable Excess Interest Adjustment.
The effect of choosing a Fixed Payment Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Payment Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed) of the Annuitant. For further
information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Payment Options. Payment Options 1,
2 and 4 are based on a guaranteed interest rate of 3%. Payment Options 3 and 5
are based on a guaranteed interest rate of 3% using the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.)
Payment Option 1--Interest Payments. The Adjusted Policy Value may be left
with PFL for any agreed-upon term. PFL will pay the interest in equal payments
or it may be left to accumulate. Withdrawal rights will be agreed upon by the
Owner and PFL when the option is elected.
Payment Option 2--Income for a Specified Period. Level payments of the
proceeds with interest are made for the fixed period elected, at which time
the funds are exhausted.
Payment Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.
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<PAGE>
2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be made
for the longer of the Annuitant's lifetime or until the total
dollar amount of payments made equals the proceeds applied to the
income option.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the proceeds with interest are exhausted.
Payment Option 5--Joint and Survivor Annuity. Payments are made during the
joint lifetime of the payee and a joint payee of the Owner's selection.
Payments will be made as long as either person is living.
For Payment Options 2, 3, and 4, in the event of the death of the person
receiving payments prior to the end of the Guaranteed Period, payments will be
continued to that person's beneficiary or their present value may be paid in a
single sum.
Other Payment Options may be arranged by agreement with PFL. Certain options
may not be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed rates (guaranteed rates are based upon the
mortality tables and/or guaranteed interest rates specified in the Policy
under the section entitled "Annuity Payments"). Current amounts may be
obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of additional Variable
Annuity Payments will vary based on the investment performance of the
Subaccount(s) of the Mutual Fund Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the Variable Annuity Payments would
increase. Conversely, if actual investment performance is lower than the
Assumed Investment Return, the amount of the Variable Annuity Payments would
decrease.
Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed
under state law) and adjusted age of the Annuitant. The adjusted age is the
Annuitant's actual age nearest birthday, on the Annuity Commencement Date,
adjusted as follows:
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<PAGE>
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- ------------
<S> <C>
Before
2001 Actual Age
2001-
2010 Actual Age minus 1
2011-
2020 Actual Age minus 2
2021-
2030 Actual Age minus 3
2031-
2040 Actual Age minus 4
After
2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Payment Option 3-V--Life Income. An election may be made between:
l. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Payment Option 5-V--Joint and Survivor Annuity. Payments are made as long as
either the payee or the joint payee is living.
Certain Payment Options may not be available in some states.
Determination of Additional Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount on the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed, assuming no transfers to or from that Subaccount occur. The
dollar value of variable Annuity Units in the chosen Subaccount will increase
or decrease reflecting the investment experience of the chosen Subaccount. The
dollar amount of each Variable Annuity Payment after the first may increase,
decrease or remain constant, and is equal to the sum of the amounts determined
by multiplying the number of Annuity Units of each particular Subaccount
credited to the Policy by the Annuity Unit value for the particular Subaccount
on the date the payment is made.
Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of monthly income or the entire
monthly income of the variable Annuity Units in the Subaccount from which the
transfer is being made. The remaining Annuity Units in the Subaccount must
provide at least $10 of monthly income. If, after a transfer, the monthly
income of the remaining Annuity Units in a Subaccount would be less than $10,
PFL reserves the right to include those Annuity Units as part of the transfer.
PFL reserves the right to limit transfers between Subaccounts or from the
Mutual Fund Account to the Guaranteed Period Options of the Fixed Account
after the Annuity Commencement Date to once per Policy Year.
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<PAGE>
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Owner has not provided PFL with a written election not to have federal income
taxes withheld, PFL must by law withhold such taxes from the taxable portion
of such annuity payments and remit that amount to the federal government.
Withholding is mandatory for certain qualified Policies. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 54)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior to
the Annuity Commencement Date. The amount of the Death Benefit will be the
greatest of a) the Policy Value on the date proof of the Owner's death and an
election of the method of settlement are received by PFL's Administrative and
Service Office, b) the Cash Value on the date PFL receives due proof of death
and an election of a method of settlement, and c) the Guaranteed Minimum Death
Benefit ("GMDB") described below, plus Premium Payments less Partial
Withdrawals, from the date of death to the date the death proceeds are paid.
There are three Guaranteed Minimum Death Benefit options available, (A) the
"Return of Premium Death Benefit", (B) the "5% Annually Compounding Death
Benefit," and (C) the "Annual Step-Up Death Benefit."
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below), as of the date of death.
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals (defined below) plus interest at an
effective annual rate of 5% from the payment or withdrawal date up to the
earlier of the date of death or the Owner's 81st birthday. There is an extra
charge for this Death Benefit (See "CHARGES AND DEDUCTIONS--Mortality and
Expense Risk Fee," p. 52.)
The "Annual Step-Up Death Benefit" is the largest Policy Value on the issue
date or on any Policy Anniversary prior to the earlier of the date of death or
the Owner's 81st birthday, plus any premiums paid, less any partial
withdrawals taken, subsequent to the date of the largest anniversary Policy
Value. There is an extra charge for this Death Benefit. (See CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Fee, p. 52.)
Under all three Death Benefit Options, if the surviving spouse elects to
continue the Policy in lieu of receiving the Death Benefit, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit (i.e., the Return
of
- 48 -
<PAGE>
Premium Death Benefit, the 5% Annually Compounding Death Benefit, or the
Annual Step-Up Death Benefit) over the Policy Value, will then be added to the
Policy Value. This amount will be added only once, at the time of such
election.
If no choice of Guaranteed Minimum Death Benefit is made in the Policy
application, the "Return of Premium Death Benefit" will apply. After the
Policy Date, an election cannot be made and the Death Benefit option cannot be
changed.
Adjusted Partial Withdrawal. To determine the Guaranteed Minimum Death
Benefit for each partial withdrawal, the Adjusted Partial Withdrawal is the
sum of (1) and (2), where
(1) The Surrender-charge-free withdrawal amount taken and,
(2) The amount that an Excess Partial Withdrawal reduces the Policy Value
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 40.) times [(a)
divided by (b)] where:
(a)is the amount of the Death Benefit prior to the Excess Partial
Withdrawal; and
(b) is the Policy Value prior to the Excess Partial Withdrawal.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the partial withdrawal amount used to determine
the Guaranteed Minimum Death Benefit will exceed the amount of the partial
withdrawal. In that case, the total proceeds of a partial withdrawal followed
by a Death Benefit could be less than total Premium Payments.
If the Annuitant who is not the Owner dies, the Owner will become the
Annuitant and no Death Benefits are payable unless the Owner specifically
requests on the Policy application or in writing that the Death Benefit be
paid upon the Annuitant's death and PFL agrees to such election. See your
Policy's provisions.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof and an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as PFL has sufficient information about the Beneficiary to make the payment.
The Beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation,
under one of the Payment Options described above, unless a settlement
agreement is effective at the death of the Owner preventing such election.
If the Annuitant was the Owner, and the Beneficiary was not the Annuitant's
spouse, the Death Benefit must (1) be distributed within five years of the
date of the deceased Owner's death, or (2) payments under a Payment Option
must begin no later than one year after the deceased Owner's death and must be
made for the Beneficiary's lifetime or for a period certain (so long as any
certain period does not exceed the Beneficiary's life expectancy). Death
Proceeds which are not paid to or for the benefit of a natural person must be
distributed within five years of the date of the deceased Owner's death. If
the sole Beneficiary is the deceased Owner's surviving spouse, such spouse may
elect to continue the Policy as the new Annuitant and Owner instead of
receiving the Death Benefit. (See "Federal Tax Matters" in the Statement of
Additional Information.)
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<PAGE>
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the amount of the Adjusted Policy Value. If the successor owner is not the
deceased Owner's spouse, however, the Adjusted Policy Value must be
distributed: (1) within five years after the date of the deceased Owner's
death, or (2) payments under a Payment Option must begin no later than one
year after the deceased Owner's death and must be made for the successor
Owner's lifetime or for a period certain (so long as any period certain does
not exceed the successor Owner's life expectancy).
Death On or After Annuity Commencement Date. The Death Benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Owner may change the designated Beneficiary by
sending Written Notice to PFL. The Beneficiary's consent to such change is not
required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Owner may then
designate a new Beneficiary.) The change will take effect as of the date the
Owner signs the Written Notice, whether or not the Owner is living when the
Notice is received by PFL. PFL will not be liable for any payment made before
the Written Notice is received. If more than one Beneficiary is designated,
and the Owner fails to specify their interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if any Owner (including any joint Owner or any
Successor Owner who has become a current Owner) dies before the Annuity
Commencement Date, then the entire value of the Policy must generally be
distributed within five years of the date of death of such Owner. Certain
rules apply where 1) the spouse of the deceased Owner is the sole beneficiary,
2) the Owner is not a natural person and the primary Annuitant dies or is
changed, or 3) any Owner dies after the Annuity Commencement Date. See
"Federal Tax Matters" in the Statement of Additional Information for a
detailed description of these rules. Other rules may apply to Qualified
Policies. (See also "Death Benefit" p. 48.)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
- 50 -
<PAGE>
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.
SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may apply a Surrender Charge, which is a contingent deferred sales charge, to
any amount surrendered (i.e., withdrawn) in connection with a full or partial
Policy surrender in order to cover distribution expenses. A Surrender Charge,
if applicable, will only be applied to withdrawals which exceed the Cumulative
Free Percentage at the time of, but prior to, the withdrawal. (See
"DISTRIBUTIONS UNDER THE POLICY-- Surrenders" p. 40.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Withdrawal Option. This feature may not be available in all
states. (See "DISTRIBUTIONS UNDER THE POLICY--Nursing Care and Terminal
Condition Withdrawal Option," p. 41.) The Surrender Charge is also waived upon
certain Systematic Payouts. (See "DISTRIBUTIONS UNDER THE POLICY--Systematic
Payout Option," p. 42.).
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payment withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
- 51 -
<PAGE>
Payments on a "first-in, first-out" basis, i.e., first to the oldest Premium
Payment, then to the next oldest Premium Payment and so on. Premium Payments
are deemed to be withdrawn before earnings, and after all Premium Payments
have been withdrawn, the remaining Adjusted Policy Value may be withdrawn
without any Surrender Charge. The following is the table of Surrender Charge
Percentages:
<TABLE>
<CAPTION>
APPLICABLE SURRENDER CHARGE
NUMBER OF YEARS SINCE PERCENTAGE (AS PERCENTAGE OF
PREMIUM PAYMENT PREMIUM PAYMENT WITHDRAWN)
--------------------- ----------------------------
<S> <C>
Less than 1........................................ 6%
At least 1 and less than 2......................... 6%
At least 2 and less than 3......................... 6%
At least 3 and less than 4......................... 4%
At least 4 and less than 5......................... 2%
5 or more.......................................... 0%
</TABLE>
No Surrender Charge will be applied after the tenth Policy Year.
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. For Guaranteed Minimum Death
Benefit Option A (Return of Premium Death Benefit), this charge is equal to an
effective annual rate of 1.10% of the daily net asset value in the Mutual Fund
Account for each Subaccount. For Guaranteed Minimum Death Benefit Options B
(5% Annually Compounding Death Benefit), and C (Annual Step-Up Death Benefit),
the corresponding charge is equal to 1.25% of the net assets in the Mutual
Fund Account. The Mortality and Expense Risk Fee is reflected in the
Accumulation or Annuity Unit Values for the Policy for each Subaccount.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the periodic Annuity payments that the
Annuitant will receive under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit (that is, Return of Premium Death Benefit, 5% Annually
Compounding Death Benefit, or Annual Step-Up Death Benefit) if that amount is
higher than the greater of the Policy Value or the Cash Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative and Service Charges.
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<PAGE>
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Mortality and Expense Risk Fee. A Mortality and Expense
Risk Fee is assessed during the accumulation phase and during the annuity
phase for all Variable Annuity Options.
ADMINISTRATIVE CHARGES
In order to cover the costs of administering the Policies, PFL deducts an
annual Service Charge from the Policy Value of each Policy.
The Service Charge is deducted from the Policy Value of each Policy on each
Policy Anniversary prior to the Annuity Commencement Date. PFL also reserves
the right to charge an amount up to $30 at the time of surrender during any
Policy Year. After the Annuity Commencement Date, the charge is not deducted.
This annual Service Charge is the lesser of 2% of the Policy Value or $30 and
it will not be increased in the future. This charge is waived if either the
Policy Value or the sum of all Premium Payments less the sum of all partial
surrenders equals or exceeds $50,000 on a Policy Anniversary (or date of
surrender).
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the net assets in the Mutual Fund Account.
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments it receives under
the Policies. However, PFL will deduct the aggregate premium taxes that it
pays on behalf of a particular Policy from the Policy Value on (i) the Annuity
Commencement Date (thus reducing the Policy Value), (ii) the total surrender
of a Policy, or (iii) payment of the death proceeds of a Policy. Premium taxes
currently range from 0% to 3.50% of Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
TRANSFER FEE
There is no charge for the first 12 allowable transfers among Investment
Options in each Policy Year. PFL reserves the right to impose a $10 charge for
the thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a Transfer Fee is
payable,
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<PAGE>
Premium Payment allocations are not considered transfers. All transfer
requests made simultaneously will be treated as a single request. No Transfer
Fee will be imposed for any transfer which is not at the Owner's request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
a case, PFL may credit an amount equal to a percentage of each Premium Payment
to the Policy due to lower acquisition costs PFL experiences on those
purchases. The credit will be reported to the Internal Revenue Service as
taxable income to the employee or registered representative. PFL may offer
certain employer sponsored savings plans, in its discretion reduced fees and
charges including, but not limited to, the Surrender Charges, the Mortality
and Expense Risk Fee and the Administrative Charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which PFL is not presently aware
which could result in reduced sales or distribution expenses. Credits to the
Policy or reductions in these fees and charges will not be unfairly
discriminatory against any Owner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will
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require that persons purchase separate Policies if they desire to invest
monies qualifying for different annuity tax treatment under the Code. Each
such separate Policy would require the minimum initial Premium Payment stated
above. Additional Premium Payments under a Policy must qualify for the same
federal income tax treatment as the initial Premium Payment under the Policy;
PFL will not accept an Additional Premium Payment under a Policy if the
federal income tax treatment of such Premium Payment would be different from
that of the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), 408(a), 408A or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a partial or full surrender,
assignment, or as Annuity Payments under the Annuity Option selected.
Generally, any amount received or deemed received under a Nonqualified Annuity
Contract prior to the Annuity Commencement Date is deemed to come first from
any "Income on the Contract" and then from the "Investment in the Contract."
The "Investment in the Contract" generally equals total premium payments less
amounts received which were not
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includable in gross income. To the extent that the Policy Value (ignoring any
surrender charges except on a full surrender) exceeds the "Investment in the
Contract," such excess constitutes the "Income on the Contract." For these
purposes such "Income on the Contract" shall be computed by reference to the
aggregation rules described below, and the amount includable in gross income
will be taxable as ordinary income. If at the time that any amount is received
or deemed received there is no "Income on the Contract" (e.g., because the
gross Policy Value does not exceed the "Investment in the Contract" and no
aggregation rule applies), then such amount received or deemed received will
not be includable in gross income, and will simply reduce the "Investment in
the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Aggregation Rules. Generally all Nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year. The same aggregation rules apply
to Roth individual retirement annuities and accounts. The Roth IRAs and
Traditional IRAs shall be treated separately for distribution purposes.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract" which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous full
surrender, and may need further adjustments if the aggregation rules apply.
There is, however, no definitive guidance on the proper tax treatment of
Excess Interest Adjustments, and the Owner should contact a competent tax
adviser with respect to the potential tax consequences of an Excess Interest
Adjustment that may apply in the case of a Non-Qualified Policy or a Qualified
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Policy. In the case of a partial surrender (including systematic payouts)
under a Qualified Policy (other than one qualified under Section 457 of the
Code), a ratable portion of the amount received is generally excludable from
gross income, based on the ratio of the "Investment in the Contract" to the
individual's total account balance or accrued benefit under the retirement
plan at the time of each such payment. For a Qualified Policy, the "Investment
in the Contract" can be zero, and generally any distribution would therefore
be fully taxable. Special tax rules may be available for certain distributions
from a Qualified Policy. In the case of a surrender under a Nonqualified
Policy or a Qualified Policy, the amount received generally will be taxable
only to the extent it exceeds the "Investment in the Contract, unless the
aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general, for Nonqualified
and certain Qualified Policies, only a portion of the Annuity Payments
received after the Annuity Commencement Date will be includable in the gross
income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. The remainder of each Annuity Payment is
includable in gross income. Once the "Investment in the Contract" has been
fully recovered, the full amount of any additional Annuity Payments is
includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where an Owner allocates a portion of the Adjusted Annuity Purchase Value on
the Annuity Commencement Date to more than one Annuity Payment Option (fixed
or variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of Annuity Payment Options. Instead, any Owner is
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Annuity Purchase Value to any particular
Annuity Payment Option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
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Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (2) if distributed under an Annuity Payment
Option, they are taxed in the same manner as Annuity Payments, as described
above. For these purposes, the "Investment in the Contract" is not affected by
the Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic payouts)
or a deemed distribution under a Policy resulting from a pledge, assignment or
agreement to pledge or assign or an Annuity Payment with respect to a Policy,
there may be imposed on the recipient a federal penalty tax equal to 10% of
the amount includable in gross income. The penalty tax generally will not
apply to any distribution: (i) made on or after the date on which the taxpayer
attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer,
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding. The withholding rate varies according to the
type of distribution and the Owner's tax status. For qualified policies,
"eligible rollover distributions" from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion
of any distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity
form. The 20% withholding does not apply, however, if the Owner chooses a
"direct rollover" from the plan to another tax-qualified plan or IRA.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; and in other specified
circumstances. Some retirement plans are subject to distribution and other
requirements that are not incorporated into PFL's Policy administration
procedures. Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Policies comply with applicable law.
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For qualified plans under section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the Owner
(or plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made
in a specified form or manner. If the plan participant is a "5 percent owner"
(as defined in the Code), distributions generally must begin no later than
April 1 of the calendar year in which the Owner (or plan participant) reaches
age 70 1/2. Each Owner is responsible for requesting distributions under the
Policy that satisfy applicable tax rules.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as a Traditional
individual retirement annuity under Section 408(b) of the Code, a Policy must
contain certain provisions: (i) the Owner must be the Annuitant; (ii) the
Policy generally is not transferable by the Owner, e.g., the Owner may not
designate a new Owner, designate a Contingent Owner or assign the Policy as
collateral security; (iii) the total Premium Payments for any calendar year on
behalf of any individual may not exceed $2,000, except in the case of a
rollover amount or contribution under Sections 402(c), 403(a)(4), 403(b)(8) or
408(d)(3) of the Code; (iv) Annuity Payments or partial withdrawals must begin
no later than April 1 of the calendar year following the calendar year in
which the Annuitant attains age 70 1/2; (v) an Annuity Payment Option with a
Period Certain that will guarantee Annuity Payments beyond the life expectancy
of the Annuitant and the Beneficiary may not be selected; (vi) certain
payments of Death Benefits must be made in the event the Annuitant dies prior
to the distribution of the Policy Value; and (vii) the entire interest of the
Owner is non-forfeitable. Policies intended to qualify as Traditional
individual retirement annuities under Section 408(b) of the Code contain such
provisions. Amounts in the IRA (other than nondeductible contributions) are
taxed when distributed from the IRA. Distributions prior to age 59 1/2 (unless
certain exceptions apply) are subject to a 10% penalty tax.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") may be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity policy that provides a death benefit that equals the
greater of the premiums paid or the Cash Value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a Traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other
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IRA. A rollover from or conversion of an IRA to a Roth IRA may be subject to
tax and other special rules may apply. You should consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions,
including any other conversion amounts from other tax years. The Roth IRA is
available to individuals with earned income and whose adjusted gross income is
under $110,000 for single filers, $160,000 for married filing jointly, and
$10,000 for married filing separately. The amount per individual that may be
contributed to all IRAs (Roth and Traditional) is $2,000. Secondly, the
distributions are taxed differently. The Roth IRA offers tax-free
distributions when made from assets which have been held in the account for 5
tax years and are made after attaining age 59, to pay for qualified first time
homebuyer expenses (lifetime maximum of $10,000) or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the Traditional IRA, there are no minimum required
distributions during the Owner's lifetime; however, required distributions at
death are the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. The Policy includes a Death Benefit
that in some cases may exceed the greater of the Premium Payments or the
Policy Value. The Death Benefit could be characterized as an incidental
benefit, the amount of which is limited in any tax-sheltered annuity under
section 403(b). Because the Death Benefit may exceed this limitation,
employers using the Policy in connection with such plans should consult their
tax adviser. Additionally, in accordance with the requirements of the Code,
Section 403(b) annuities generally may not permit distribution of (i) elective
contributions made in years beginning after December 31, 1988, and (ii)
earnings on those contributions and (iii) earnings on amounts attributed to
elective contributions held as of the end of the last year beginning before
January 1, 1989. Distributions of such amounts will be allowed only upon the
death of the employee, on or after attainment of age 59 1/2, separation from
service, disability, or financial hardship, except that income attributable to
elective contributions may not be distributed in the case of hardship.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments. The Policy includes a Death Benefit that in some
cases may exceed the greater of the Premium Payments or the Policy Value. The
Death Benefit could be characterized as an incidental benefit, the amount of
which is limited in an pension or profit-sharing plan. Because the Death
Benefit may exceed this limitation, employers using the Policy in connection
with such plans should consult their tax adviser.
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Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is not used in the Code),
provides for certain deferred compensation plans with respect to service for
state governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. The Policies can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. All such investments, however, are owned by, and
are subject to, the claims of the general creditors of the sponsoring
employer. Depending on the terms of the particular plan, the employer may be
entitled to draw on deferred amounts for purposes unrelated to its Section 457
plan obligations. In general, all amounts received under a Section 457 plan
are taxable and are subject to federal income tax withholding as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Cash Value as of the close of the taxable year
and all previous distributions under the Policy over (ii) the sum of the
Premium Payments paid for the taxable year and any prior taxable year and the
amounts includable in gross income for any prior taxable year with respect to
the Policy. For these purposes, the Policy Value at year end may have to be
increased by any positive Excess Interest Adjustment which could result from a
full surrender at such time. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments and the Owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment. Notwithstanding the preceding sentences in
that paragraph, Section 72(u) of the Code does not apply to (i) a Policy the
nominal Owner of which is not a natural person but the beneficial Owner of
which is a natural person, (ii) a Policy acquired by the estate of a decedent
by reason of such decedent's death, (iii) a Qualified Policy (other than one
qualifying under Section 457) or (iv) a single-payment annuity the
Commencement Date for which is no later than one year from the date of the
single Premium Payment; such Policies are taxed as described above under the
heading "Taxation of Annuities."
Possible Changes in Taxation. Although the likelihood of legislative change
in uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted,
would adversely modify the federal taxation of the Policies. It is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). A tax adviser should be consulted with respect to
legislative developments and their effect on the Policy.
DISTRIBUTOR OF THE POLICIES
AFSG Securities Corporation, an affiliate of PFL, located at 4333 Edgewood
Road N.E., Cedar Rapids, IA 52499-0001, is the principal underwriter of the
Policies. AFSG Securities Corporation 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. ("NASD").
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Policies are sold by registered representatives of AFSG Securities
Corporation or of broker/dealers who have entered into written sales
agreements with the principal underwriter, who are also licensed through
various affiliated or unaffiliated agencies as insurance agents for PFL. PFL
has entered into a distribution agreement with AFSG Securities Corporation and
companion sales agreements with agencies and/or agents through which
agreements the Policies are sold and the registered representatives are
compensated by the agencies and/or AFSG Securities Corporation. Broker/dealers
will generally receive sales commissions of up to 5% of Premium Payments.
These commissions are not deducted from Premium Payments, 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 Policies. The level
of such compensation will not exceed that paid to broker/dealers for their
sale of the Policies. No amounts will be retained by AFSG Securities
Corporation for acting as principal underwriter for the Policies. The offering
of Policies will be made on a continuing basis.
VOTING RIGHTS
To the extent required by law, PFL will vote the Underlying Fund shares held
by the Mutual Fund Account at regular and special shareholder meetings of the
Underlying Funds in accordance with instructions received from persons having
voting interests in the portfolios, (although the Underlying 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 PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Owner holds voting interest in the
selected Portfolios. The number of votes that an Owner has the right to
instruct will be calculated separately for each Subaccount. The number of
votes that an Owner has the right to instruct for a particular Subaccount will
be determined by dividing the Owner's Policy Value in the Subaccount by the
net asset value per share of the corresponding Portfolio in which the
Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, 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 Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy 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
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL 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
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be
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voted in proportion to the voting instructions that are received with respect
to all Policies participating in the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
YEAR 2000 MATTERS
In October, 1996, 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 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 Mutual Fund Account is a party
or to which the assets of the 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 Mutual Fund Account or PFL.
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STATEMENT OF ADDITIONAL INFORMATION
A 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 that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non Participating........................................................ 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
Historical Performance Data................................................ 9
Money Market Yields...................................................... 9
Other Subaccount Yields.................................................. 10
Total Returns............................................................ 11
Other Performance Data................................................... 11
State Regulation of PFL.................................................... 12
Administration............................................................. 12
Records and Reports........................................................ 12
Distribution of the Policies............................................... 12
Other Products............................................................. 13
Custody of Assets.......................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 13
Other Information.......................................................... 13
Financial Statements....................................................... 13
</TABLE>
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APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S*(G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate applicable to S.
C= Current Guaranteed Interest Rate then being offered on new Premium
Payments for the next longer Guaranteed Period than "M". If this policy
form or such a Guaranteed period is no longer offered, "C" will be the
U.S. Treasury rate for the next longer maturity (in whole years) than "M"
on the 25th day of the previous calendar month, plus up to 2%.
M= Number of months remaining in the current Guaranteed Period, rounded up to
the next higher whole number of months.
EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Policy Value ("PV") at middle of
Contract Year 3 = 50,000* (1.055)/\ 2.5 = 57,161.18
Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35
EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18
Amount Subject to EIA
EIA Floor = 57,161.18 - 7,161.18 = 50,000.00
Excess Interest Adjustment = 50,000* (1.03)/\ 2.5 = 53,834.80
G = .055
C = .085
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 50,000.00* (.055 - .085)* (30/12)
= 1,250.00
= 3,750.00, but Excess Interest
Adjustment cannot cause the Adjusted
Policy Value to fall below the
floor, so the adjustment is limited
to 53,834.80 - 57,161.18 = -3,326.38
- ----------------------------------
(1) *represents multiplication;
/\ represents exponentiation.
- 65 -
<PAGE>
Adjusted Policy Value = PV + EIA = 57,161.18 - 3,326.38 =
53,834.80
Surrender Charge = (50,000 - 17,148.35)* .06 = 1,971.10
Cash Value at middle of Policy
Year 3 = PV + EIA - Surrender Charge
= 57,161.18 - 3,326.38 - 1,971.10
= 51,863.70
EXAMPLE 2 (FULL SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Policy Value at middle of
Policy Year 3 = 50,000 * (1.055)/\ 2.5 = 57,161.18
Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35
EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18
Amount Subject to EIA
EIA Floor = 57,161.18 - 7,161.18 = 50,000.00
= 50,000* (1.03)/\ 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .045
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 50,000* (.055 - .045)* (30/12)
= 1,250.00
Adjusted Policy Value = PV + EIA
= 57,161.18 + 1,250.00 = 58,411.18
Surrender Charge = (50,000 - 17,148.35)* .06 = 1,971.10
Cash Value at middle of Policy
Year 3 = PV + EIA - Surrender Charge
= 57,161.18 + 1,250 - 1,971.10
= 56,440.08
- 66 -
<PAGE>
On a partial withdrawal, PFL will pay the Owner the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge--Free withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts withdrawn in excess of the Surrender Charge--Free amount will reduce
the Policy Value by an amount equal to:
X-Y + Z
X= Excess Partial Withdrawal = Requested withdrawal less Surrender Charge--
Free amount
A= Amount of Partial Withdrawal which is subject to Excess Interest
Adjustment = Requested withdrawal-EIA--Free Amount, where EIA--Free
Amount = Cumulative interest credited at time of, but prior to,
withdrawal.
Y= Excess Interest Adjustment = (A)*(G-C)*(M/12) where G, C, and M are
defined above, with "A" substituted for "S" in the definition of G and
M.
Z= Surrender Charge on X minus Y.
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3
Policy Value at middle of Policy
Year 3 = 50,000* (1.055)/\ 2.5 = 57,161.18
Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35
EIA Free Amount at middle of
Policy Year 3 = 57,161.18-50,000 = 7,161.18
Excess Interest Adjustment/Surrender Charge
X =30,000-17,148.35 = 12,851.65
A =30,000-7,161.18 = 22,838.82
G =.055
C =.065
M =30
Y =22,838.82* (.055-.065)* (30/12) = -570.97
Z =.06* [12,851.65- (-570.97)] = 805.36
Reduction to Policy Value due to
Surrender Charge--Free
withdrawal = 17,148.35
Reduction to Policy Value due to
Excess Withdrawal = X-Y + Z
= 12,851.65- (-570.97) + 805.36
= 14,227.98
- 67 -
<PAGE>
Policy Value after withdrawal at
middle of Policy Year 3 = 57,161.18 - [17,148.35 + 14,227.98]
= 57,161.18 - [17,148.35 + 12,851.65 -
( - 570.97) + 805.36]
= 57,161.18 - [30,000 - ( - 570.97) +
805.36]
= 57,161.18 - 31,376.33 = 25,784.85
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3
Policy Value at middle of Policy
Year 3
= 50,000* (1.055)/\ 2.5 = 57,161.18
Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35
EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18
Excess Interest Adjustment/Surrender Charge
X=30,000 - 17,148.35 = 12,851.65
A=30,000 - 7,161.18 = 22,838.82
G=.055
C=.045
M=30
Y=22,838.82* (.055 - .045)* (30/12) = 570.97
Z=.06* [12,851.65 - (570.97)] = 736.84
Reduction to Policy Value due to
Surrender Charge--Free
Withdrawal = 17,148.35
Reduction to Policy Value due to
Excess Withdrawal = X - Y + Z
= 12,851.65 - (570.97) + 736.84
= 13,017.52
Policy Value after withdrawal at
middle of Policy Year 3 = 57,161.18 - [17,148.35 + 13,017.52]
= 57,161.18 - [17,148.35 + 12,851.65 -
(570.97) + 736.84]
=57,161.18 - [30,000 - (570.97)
+ 736.84]
= 57,161.18 - 30,165.87 = 26,995.31
- 68 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
RETIREMENT INCOME BUILDER
VARIABLE 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 Retirement Income Builder Variable Annuity (the
"Policy") offered by PFL Life Insurance Company. You may obtain a copy of the
Prospectus dated May 1, 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 Policy. Terms used in the current Prospectus for the Policy 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 POLICY AND THE PFL
RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT.
Dated: May 1, 1998
- 1 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE POLICY--GENERAL PROVISIONS............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non Participating........................................................ 4
FEDERAL TAX MATTERS (53)................................................... 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
INVESTMENT EXPERIENCE...................................................... 6
HISTORICAL PERFORMANCE DATA (20)........................................... 9
Money Market Yields...................................................... 9
Other Subaccount Yields.................................................. 10
Total Returns............................................................ 11
Other Performance Data................................................... 11
STATE REGULATION OF PFL.................................................... 12
ADMINISTRATION............................................................. 12
RECORDS AND REPORTS........................................................ 12
DISTRIBUTION OF THE POLICIES (40).......................................... 12
OTHER PRODUCTS............................................................. 13
CUSTODY OF ASSETS.......................................................... 13
LEGAL MATTERS.............................................................. 13
INDEPENDENT AUDITORS....................................................... 13
OTHER INFORMATION.......................................................... 13
FINANCIAL STATEMENTS (20).................................................. 13
</TABLE>
(Numbers in parenthesis indicate corresponding pages of the Prospectus).
- 2 -
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to a prospective purchaser.
THE POLICY--GENERAL PROVISIONS
OWNER
The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment.
While the Annuitant is living, the Owner may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary; and of the Owner's spouse in a community
or marital property state.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death,
if the Owner predeceases the Annuitant. If no Successor Owner survives the
Owner and the Owner predeceases the Annuitant, the Owner's estate will become
the Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to
the new Owner. A change of ownership may have tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.
If ownership is transferred (except to the Owner's spouse) because the Owner
dies before the Annuitant, the Adjusted Policy Value generally must be
distributed to the Successor Owner within five years of the Owner's death, or
if the first payment begins within one year of the Owner's death, payments
must be made for a period certain which does not exceed that Successor Owner's
life expectancy.
ENTIRE POLICY
The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in
the application are representations and not warranties. No statement will
cause the Policy to be void or to be used in defense of a claim unless
contained in the application.
DELAY OF PAYMENT AND TRANSFERS
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified
Policy generally will occur within seven business days from the date the
Written Notice (and any other required documentation or information) is
received, except that PFL may be permitted to defer such payment from the
Mutual Fund Account if: (1) the New York Stock Exchange is closed for other
than usual weekends or holidays or trading on the Exchange is otherwise
restricted; or (2) an emergency exists as defined by the SEC or the SEC
requires that trading be restricted; or (3) the SEC permits a delay for the
protection of Owners. In addition, transfers of amounts from the Subaccounts
may be deferred under these circumstances.
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See p.31 of the Policy Prospectus.
- 3 -
<PAGE>
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have
purchased for the correct age or sex. The dollar amount of any underpayment
made by PFL shall be paid in full with the next payment due such person or the
Beneficiary. The dollar amount of any overpayment made by PFL due to any
misstatement shall be deducted from payments subsequently accruing to such
person or Beneficiary. Any underpayment or overpayment will include interest
at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the Annuitant may be established at any time by the
submission of proof satisfactory to PFL.
REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, the Owner may reallocate the value of a
designated number of Annuity Units of a Subaccount of the Mutual Fund Account
then credited to a Policy into an equal value of Annuity Units of one or more
other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number
of times a reallocation of Policy Value may be made in any given Policy Year.
After the Annuity Commencement Date, no transfers may be made from the Fixed
Account to the Mutual Fund Account.
ASSIGNMENT
During the lifetime of the Annuitant the Owner may assign any rights or
benefits provided by a Nonqualified Policy. An assignment will not be binding
on PFL until a copy has been filed at its Administrative and Service Office.
The rights and benefits of the Owner and Beneficiary are subject to the rights
of the assignee. PFL assumes no responsibility for the validity or effect of
any assignment. Any claim made under an assignment shall be subject to proof
of interest and the extent of the assignment. An assignment may have tax
consequences.
Unless the Owner so directs by filing Written Notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
Ownership under Qualified Policies is restricted to comply with the Internal
Revenue Code.
EVIDENCE OF SURVIVAL
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be
made until PFL receives such evidence.
NON-PARTICIPATING
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
- 4 -
<PAGE>
FEDERAL TAX MATTERS
TAX STATUS OF THE POLICY
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
((S)) 1.817-5) apply a diversification requirement to each of the Subaccounts
of the Mutual Fund Account. The Mutual Fund Account, through the Underlying
Funds and their Portfolios, intends to comply with the diversification
requirements of the Treasury. PFL has entered into agreements regarding
participation in the Retirement Income Builder that require the Underlying
Funds and their Portfolios to be operated in compliance with the Treasury
regulations.
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 contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
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, 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 policyholders may direct their investments
to particular subaccounts without being treated as owners of underlying
assets."
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer
among these accounts more frequently than in such rulings. These differences
could result in policyowners being treated as the owners of the assets of the
Mutual Fund Account. In addition, PFL does not know what standards will be set
forth, if any, in the regulations or rulings with the Treasury Department has
stated it expects to issue. PFL therefore reserves the right to modify the
Policies as necessary to attempt to prevent the policyowners from being
considered the owners of a pro rata share of the assets of the Mutual Fund
Account.
Distribution Requirements. The Code also requires that Nonqualified Policies
contain specific provisions for distribution of Policy proceeds upon the death
of the Owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such Policies provide that if any Owner
dies on or after the Annuity Commencement Date and before the entire interest
in the Policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owners death. If any
Owner dies before the Annuity Commencement Date, the entire interest in the
Policy must generally be distributed within 5 years after such Owner's date of
death or be applied to provide an immediate annuity under which payments will
begin within one year of such Owner's death and will be made for the life of
the Beneficiary or for a period not extending beyond the life expectancy of
the Beneficiary. However, if such Owner's death occurs prior to the Annuity
Commencement Death, and such Owner's surviving spouse is named beneficiary,
then the Policy may be continued with the surviving spouse as the new Owner.
If any Owner is not a natural person, then for purposes of these distribution
requirements, the primary Annuitant shall be treated as the Owner and any
death or change of such primary Annuitant shall be treated as the Death of the
Owner. The Policy contains provisions intended to comply with these
requirements of the Code. No regulations interpreting these requirements of
the Code have yet been issued and thus no assurance can be given that the
provisions contained in the Policies satisfy all such Code requirements. The
provisions contained in the Policies will be reviewed and
- 5 -
<PAGE>
modified if necessary to maintain their compliance with the Code requirements
when clarified by regulation or otherwise.
TAXATION OF PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund 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. PFL does not expect to incur any
federal income tax liability with respect to investment income and net capital
gains arising from the activities of the Mutual Fund Account retained as part
of the reserves under the Policy. Based on this expectation, it is anticipated
that no charges will be made against the Mutual Fund Account for federal
income taxes. If, in future years, any federal income taxes are incurred by
PFL with respect to the Mutual Fund Account, PFL may make a charge to the
Mutual Fund Account.
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of Accumulation
Units and Annuity Units, and to determine annuity payment rates.
ACCUMULATION UNITS
Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the
dollar amount allocated to each Subaccount by the value of an Accumulation
Unit for that Subaccount as next determined after the Premium Payment is
received at the Administrative and Service Office or, in the case of the
initial Premium Payment, when the Policy application is completed, whichever
is later. The value of an Accumulation Unit was arbitrarily established at
$1.000000 at the inception of each Subaccount. Thereafter, the value of an
Accumulation Unit is determined as of the close of trading on each day the New
York Stock Exchange and PFL's Administrative and Service Office are open for
business.
An index (the "Net Investment Factor") which measures the investment
performance of a Subaccount during a Valuation Period, is used to determine
the value of an Accumulation Unit for the next subsequent Valuation Period.
The Net Investment Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Owner bears this
investment risk. The net investment performance of a Subaccount and deduction
of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Subaccount for any 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 per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by PFL to
have resulted from the investment operations of the Subaccount;
(b) the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period; and
(c) is the charge for mortality and expense risk during the Valuation
Period (equal on an annual basis to 1.10% for the Return of Premium Death
Benefit and 1.25% for both the 5% Annually Compounding Death Benefit or the
Annual Step-Up Death Benefit) of the daily net asset value of the
Subaccount, plus the .15% administrative charge for all three Death Benefit
Options.
- 6 -
<PAGE>
ILLUSTRATION OF ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING THE NET INVESTMENT FACTOR
ASSUME EITHER THE 5% ANNUALLY COMPOUNDING DEATH BENEFIT OR THE ANNUAL STEP-UP
DEATH BENEFIT IS IN EFFECT.
Investment Experience Factor = (A + B - C) - E
D
Where: A The Net Asset Value of an Underlying Fund share as of the end of
= the current Valuation Period.
Assume......................................... A = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding Valuation Period.
Assume.............................................. B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume.............................................. C = 0
D = The Net Asset Value of an Underlying Fund share at the end of the
immediately preceding Valuation Period.
Assume......................................... D = $11.40
E = The daily deduction for Mortality and Expense Risk Fee and
Administrative Charges, which totals 1.40% on an annual basis.
On a daily basis........................... = .0000380909
Then, the Investment Experience Factor = 11.57 + 0 - 0 -
.0000380909 = Z = 1.0148741898
11.40
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A X B
Where: A The Accumulation Unit Value for the immediately preceding
= Valuation Period.
Assume............................................. = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume............................................... = Y
Then, the Accumulation Unit Value = $ X X Y = $ Z
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 of 5% annually. 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;
- 7 -
<PAGE>
(b) is the net investment factor for that Subaccount for the valuation
period; and
(c) is the investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual 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 Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is
determined by dividing (i) by (ii) and subtracting (iii) from the result,
where:
(i) is the 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
(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
PFL determines to have resulted from the investment operations of the
Subaccount.
(ii) is the net asset value of a fund share held in that Subaccount
determined as of the end of the immediately preceding valuation period.
(iii) is a factor representing the Mortality and Expense Risk Fee and
Administrative Charge. This factor is equal, on an annual basis, to 1.25%
(for Death Benefit Option A) or 1.40% (for Death Benefit Options B and C)
of the daily net asset value of a fund share held in that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Policy also contains a table for determining the adjusted age of the
Annuitant.
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A X B X C
Where: A Annuity Unit Value for the immediately preceding Valuation Period.
= Assume.............................................. = $ X
B = Investment Experience Factor for the Valuation Period for which
the Annuity Unit Value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z
Then, the Annuity Unit Value is:
$ X X Y X Z = $ Q
- 8 -
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY VARIABLE
ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A X B
$1,000
Where: A The Policy Value as of the Annuity Commencement Date.
= Assume.............................................. = $ X
B = 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 Policy.
Assume.............................................. = $ Y
Then, the first Monthly Variable Annuity Payment = $ X X $ Y = $ Z
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
B
Where: A The dollar amount of the first monthly Variable Annuity Payment.
= Assume............................................. = $ X
The Annuity Unit Value for the Valuation Date on which the first
B = monthly payment is due.
Assume............................................. = $ Y
Then, the number of Annuity Units = $ X = Z
$ Y
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
PFL 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 Policy that are
attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for (i) the Administrative
Charges; and (ii) the Mortality and Expense Risk Fee. 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.
- 9 -
<PAGE>
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 Policy, 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 Surrender Charges that may be applicable to a particular Policy.
Surrender Charges range from 6% to 0% of the amount of Premium Payments
withdrawn based on the number of years since the Premium Payment was made.
However, Surrender Charges will not be assessed after the tenth Policy Year.
PFL 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) X (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. For the seven days
ended December 31, 1997, the yield of the VIP Money Market Subaccount was
4.257%, and the effective yield was 4.347% for the Return of Premium Death
Benefit. For the seven days ended December 31, 1997, the yield of the VIP
Money Market Subaccount was 4.102%, and the effective yield was 4.186% for the
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit.
OTHER SUBACCOUNT YIELDS
PFL may from time to time advertise or disclose the current annualized yield
of one or more of the Subaccounts of the Mutual Fund Account (except the Money
Market Subaccount) for 30-day periods. The annualized yield of a 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 (i) the Administrative Charge and (ii) the Mortality
and Expense Risk Fee. 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.
- 10 -
<PAGE>
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 and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect
the effect of any premium taxes or Surrender Charges that may be applicable to
a particular Policy. Surrender Charges range from 6% to 0% of the amount of
Premium Payments withdrawn based on the number of years since the Premium
Payment was made. However, Surrender Charges will not be assessed after the
tenth Policy Year.
The yield on amounts held in the Subaccounts of the Mutual Fund 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
PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund 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 PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Fee and the Administrative Charges. Total return calculations will reflect the
effect of Surrender 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.
OTHER PERFORMANCE DATA
PFL 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
the Surrender Charge percentage will be assumed to be 0%.
PFL 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 the Surrender
Charge percentage will be 0%.
- 11 -
<PAGE>
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 Mutual Fund 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 Policy charges that were
in effect at the inception of the Subaccounts.
STATE REGULATION OF PFL
PFL is 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 the
operation of PFL 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 PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's 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, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy 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. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AFSG Securities Corporation, an affiliate of PFL, is the principal
underwriter of the Policies and may enter into agreements with broker-dealers
for the distribution of the Policies. Prior to April 30, 1998, AEGON USA
- 12 -
<PAGE>
Securities, Inc. (also an affiliate of PFL) was the principal underwriter.
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 during 1996
or prior years.
OTHER PRODUCTS
PFL makes other variable annuity policies available that may also be funded
through the Mutual Fund Account. These variable annuity policies may have
different features, such as different investment options or charges.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held by
PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other
Subaccounts and from PFL's general account assets. PFL maintains 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 Mutual Fund
Account is afforded by PFL's fidelity bond, presently in the amount of
$5,000,000, covering the acts of officers and employees of PFL.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan LLP, of Washington D.C.
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and the
Financial Statements of the PFL Retirement Builder Variable Annuity Account at
December 31, 1997, and for the period from January 2, 1997 (commencement of
operations) to 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
Policies 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 Policies 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.
FINANCIAL STATEMENTS
The values of the interest of Owners in the Mutual Fund Account will be
affected solely by the investment results of the selected Subaccount(s). The
Financial Statements of PFL, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
PFL to meet its obligations under the Policies. They should not be considered
as bearing on the investment performance of the assets held in the Mutual Fund
Account.
- 13 -
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<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.
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
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
2
<PAGE>
PFL Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
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
================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
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.
4
<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 reserve 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 benefits 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 reserves 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 investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)
--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND 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 methodology - - (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 reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 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.
6
<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 withdrawals (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 receivables, 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)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
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 beginning 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.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
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.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. 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 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.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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;
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES 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>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (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.
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
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)
=======================================
<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 appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>
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)
=======================================
19
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 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>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (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.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
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.
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.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
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.
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.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
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
AMOUNT OF TOTAL AMOUNT OF 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
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
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
manage-ment, 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 statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (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.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
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.
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.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
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.
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%.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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.
29
<PAGE>
PFL Life Insurance Company
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
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 other 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.
30
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================
YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================
$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 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.
32
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO 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>
33
<PAGE>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Contract Owners of
Retirement Income Builder Variable Annuity,
PFL Life Insurance Company
We have audited the accompanying balance sheet of PFL Retirement Builder
Variable Annuity Account as of December 31, 1997, and the related statements of
operations and changes in contract owners' equity for the periods indicated
therein. These financial statements are the responsibility of the Variable
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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. Our procedures included
confirmation of mutual fund shares owned as of December 31, 1997 by
correspondence with the mutual funds' transfer agent. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the PFL Retirement Builder
Variable Annuity Account at December 31, 1997, and the results of its operations
and changes in its contract owners' equity for the periods indicated therein in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
March 27, 1998
<PAGE>
PFL Retirement Builder Variable Annuity Account,
Retirement Income Builder Variable Annuity
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 15 15 - - - -
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio 3,166,893 3,166,893 - - - -
High Income Portfolio 1,750,627 - 1,750,627 - - -
Equity-Income Portfolio 5,451,273 - - 5,451,273 - -
Growth Portfolio 3,820,785 - - - 3,820,785 -
Overseas Portfolio 1,404,976 - - - - 1,404,976
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 2,070,359 - - - - -
Asset Manager Portfolio 2,104,231 - - - - -
Asset Manager: Growth Portfolio 1,735,996 - - - - -
Contrafund Portfolio 3,844,215 - - - - -
Index 500 Portfolio 7,245,314 - - - - -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 2,024,015 - - - - -
Growth & Income Portfolio 957,916 - - - - -
Balanced Portfolio 532,818 - - - - -
--------------- ---------- ---------- ---------- ---------- ----------
Total investments in mutual funds 36,109,418 3,166,893 1,750,627 5,451,273 3,820,785 1,404,976
--------------- ---------- ---------- ---------- ---------- ----------
Total Assets $ 36,109,433 3,166,908 1,750,627 5,451,273 3,820,785 1,404,976
=============== ========== ========== ========== ========== ==========
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 768 - 7 131 122 30
--------------- ---------- ---------- ---------- ---------- ----------
Total Liabilities 768 - 7 131 122 30
Contract owners' equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 36,108,665 3,166,908 1,750,620 5,451,142 3,820,663 1,404,946
--------------- ---------- ---------- ---------- ---------- ----------
Total liabilities and contract
owners' equity $ 36,109,433 3,166,908 1,750,627 5,451,273 3,820,785 1,404,976
=============== ========== ========== ========== ========== ==========
<CAPTION>
INVESTMENT ASSET ASSET MANAGER: GROWTH
GRADE BOND MANAGER GROWTH CONTRAFUND INDEX 500 OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash - - - - - -
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio - - - - - -
High Income Portfolio - - - - - -
Equity-Income Portfolio - - - - - -
Growth Portfolio - - - - - -
Overseas Portfolio - - - - - -
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 2,070,359 - - - - -
Asset Manager Portfolio - 2,104,231 - - - -
Asset Manager: Growth Portfolio - - 1,735,996 - - -
Contrafund Portfolio - - - 3,844,215 - -
Index 500 Portfolio - - - - 7,245,314 -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio - - - - - 2,024,015
Growth & Income Portfolio - - - - - -
Balanced Portfolio - - - - - -
---------- ---------- ---------- ---------- ----------- ----------
Total investments in mutual funds 2,070,359 2,104,231 1,735,996 3,844,215 7,245,314 2,024,015
---------- ---------- ---------- ---------- ----------- ----------
Total Assets 2,070,359 2,104,231 1,735,996 3,844,215 7,245,314 2,024,015
========== ========== ========== ========== =========== ==========
Liabilities and contract owners' equity
Liabilities:
1 46 46 119 190 46
Contract terminations payable ---------- ---------- ---------- ---------- ----------- ----------
Total Liabilities 1 46 46 119 190 46
Contract owners' equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 2,070,358 2,104,185 1,735,950 3,844,096 7,245,124 2,023,969
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and contract
owners' equity 2,070,359 2,104,231 1,735,996 3,844,215 7,245,314 2,024,015
========== ========== ========== ========== ========== ==========
<CAPTION>
GROWTH &
INCOME BALANCED
SUBACCOUNT SUBACCOUNT
---------- ----------
<S> <C> <C>
ASSETS
- -
Cash
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio - -
High Income Portfolio - -
Equity-Income Portfolio - -
Growth Portfolio - -
Overseas Portfolio - -
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio - -
Asset Manager Portfolio - -
Asset Manager: Growth Portfolio - -
Contrafund Portfolio - -
Index 500 Portfolio - -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio - -
Growth & Income Portfolio 957,916 -
Balanced Portfolio - 532,818
---------- ----------
Total investments in mutual funds 957,916 532,818
---------- ----------
Total Assets 957,916 532,818
========== ==========
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable 22 8
---------- ----------
Total Liabilities 22 8
Contract owners' equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 957,894 532,810
---------- ----------
Total liabilities and contract
owners' equity 957,916 532,818
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
Page 1
<PAGE>
<TABLE>
<CAPTION>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997, EXCEPT AS NOTED
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends $ 110,468 91,424 160 207 75 175
Expenses (Note 4):
Mortality and expense risk charge 161,980 22,630 7,661 23,348 17,015 6,897
------------ ---------- -------- -------- -------- -------
Net Investment income (loss) $ (51,512) 68,794 (7,501) (23,141) (16,940) (6,722)
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain from sales
of investments:
Proceeds from sales 12,527,272 11,927,753 65,753 103,837 79,595 15,673
Cost of investments sold 12,446,099 11,927,753 60,307 87,449 65,276 14,527
------------ ----------- -------- -------- -------- -------
Net realized capital gain from sales of 81,173 - 5,446 16,388 14,319 1,146
investments
Net change in unrealized appreciation/
depreciation of investments:
Beginning of the period - - - - - -
End of the period 1,544,857 - 75,871 318,208 165,093 (36,265)
------------ ----------- -------- -------- -------- -------
Net change in unrealized appreciation/
depreciation of investments 1,544,857 - 75,871 318,208 165,093 (36,265)
------------ ---------- -------- -------- -------- -------
Net realized and unrealized capital
gain (loss) from investments 1,626,030 - 81,317 334,596 179,412 (35,119)
------------ ---------- -------- -------- -------- -------
INCREASE (DECREASE) FROM OPERATIONS $ 1,574,518 68,794 73,816 311,455 162,472 (41,841)
============ ========== ======== ======== ======== =======
<CAPTION>
INVESTMENT ASSET ASSET MANAGER: GROWTH
GRADE BOND MANAGER GROWTH CONTRAFUND INDEX 500 OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT (1)
---------- ---------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends 120 245 3 62 70 -
Expenses (Note 4):
Mortality and expense risk charge 10,410 8,852 8,646 17,020 30,863 5,468
---------- --------- -------- -------- --------- --------
Net Investment income (loss) (10,290) (8,607) (8,643) (16,958) (30,793) (5,468)
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain from sales of
investments:
Proceeds from sales 41,946 77,779 48,568 21,625 75,371 38,345
Cost of investments sold 39,602 69,453 40,386 18,105 62,616 33,148
---------- -------- -------- -------- -------- --------
Net realized capital gain from sales of 2,344 8,326 8,182 3,520 12,755 5,197
investments
Net change in unrealized appreciation/
depreciation of investments:
Beginning of the period - - - - - -
End of the period 85,548 86,225 94,664 232,437 414,528 83,717
---------- -------- -------- -------- -------- --------
Net change in unrealized appreciation/
depreciation of investments 85,548 86,225 94,664 232,437 414,528 83,717
---------- -------- -------- -------- -------- --------
Net realized and unrealized capital
gain (loss) from investments 87,892 94,551 102,846 235,957 427,283 88,914
---------- -------- -------- -------- -------- --------
INCREASE (DECREASE) FROM OPERATIONS 77,602 85,944 94,203 218,999 396,490 83,446
========== ======== ======== ======== ======== ========
<CAPTION>
GROWTH &
INCOME BALANCED
SUBACCOUNT (1) SUBACCOUNT (1)
-------------- --------------
<S> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends 17,927 -
Expenses (Note 4):
Mortality and expense risk charge 2,001 1,169
---------- ---------
Net Investment income (loss) 15,926 (1,169)
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain from sales of
investments:
Proceeds from sales 28,865 2,162
Cost of investments sold 25,594 1,883
---------- ---------
Net realized capital gain from sales of 3,271 279
investments
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period - -
End of the period 12,585 12,246
---------- ---------
Net change in unrealized appreciation/
depreciation of investments 12,585 12,246
---------- ---------
Net realized and unrealized capital
gain (loss) from investments 15,856 12,525
---------- ---------
INCREASE (DECREASE) FROM OPERATIONS 31,782 11,356
========== =========
</TABLE>
(1) Period from May 3, 1997 (commencement of operations) to December 31, 1997.
See accompanying Notes to Financial Statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
Statements of Changes in Contract Owners' Equity
Period From January 2, 1997 (Commencement of Operations) to December 31, 1997, Except as Noted
MONEY HIGH
MARKET INCOME
TOTAL SUBACCOUNT SUBACCOUNT
----------- ----------- ----------
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (51,512) 68,794 (7,501)
Net realized capital gain 81,173 - 5,446
Net change in unrealized appreciation/
depreciation of investments 1,544,857 - 75,871
----------- ----------- ----------
Increased (decrease) from operations 1,574,518 68,794 73,816
----------- ----------- ----------
CONTRACT TRANSACTIONS
Net contract purchase payments 20,891,560 19,401,194 106,207
Transfer payments from (to) other
subaccounts or general account 13,877,698 (16,283,970) 1,581,209
Contract terminations, withdrawals
and other deductions (235,111) (19,110) (10,612)
----------- ----------- ----------
Increase from contract transactions 34,534,147 3,098,114 1,676,804
----------- ----------- ----------
Net increase in contract owners'
----------- ----------- ----------
equity 36,108,665 3,166,908 1,750,620
----------- ----------- ----------
CONTRACT OWNERS' EQUITY, at
Beginning of the period - - -
----------- ----------- ----------
CONTRACT OWNERS' EQUITY, at
End of period $36,108,665 3,166,908 1,750,620
=========== =========== ==========
<CAPTION>
Equity-
Income Growth Overseas
Subaccount Subaccount Subaccount
---------- ------------ ----------
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) (23,141) (16,940) (6,722)
Net realized capital gain 16,388 14,319 1,146
Net change in unrealized appreciation/
depreciation of investments 318,208 165,093 (36,265)
---------- ------------ ----------
Increased (decrease) from operations 311,455 162,472 (41,841)
---------- ------------ ----------
CONTRACT TRANSACTIONS
Net contract purchase payments 217,414 143,537 100,095
Transfer payments from (to) other
subaccounts or general account 4,967,638 3,552,092 1,352,946
Contract terminations, withdrawals
and other deductions (45,365) (37,438) (6,254)
---------- ------------- ----------
Increase from contract transactions 5,139,687 3,658,191 1,446,787
---------- ------------- ----------
Net increase in contract owners'
---------- ------------- ----------
equity 5,451,142 3,820,663 1,404,946
---------- ------------ ----------
CONTRACT OWNERS' EQUITY
Beginning of the period - -
---------- ------------ ----------
End of period 5,451,142 3,820,663 1,404,946
========== ============ ==========
<CAPTION>
INVESTMENT
GRADE BOND
SUBACCOUNT
-----------
1997
----
<S> <C>
OPERATIONS
Net investment income (loss) (10,290)
Net realized capital gain 2,344
Net change in unrealized appreciation/
depreciation of investments 85,548
-----------
Increased (decrease) from operations 77,602
-----------
CONTRACT TRANSACTIONS
Net contract purchase payments 271,416
Transfer payments from (to) other
subaccounts or general account 1,749,133
Contract terminations, withdrawals
and other deductions (27,793)
-----------
Increase from contract transactions 1,992,756
-----------
Net increase in contract owners
-----------
equity 2,070,358
-----------
CONTRACT OWNERS' EQUITY
Beginning of the period -
-----------
End of period 2,070,358
===========
</TABLE>
<TABLE>
<CAPTION>
ASSET ASSET MANAGER:
MANAGER GROWTH CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ -------------- ----------
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (8,607) (8,643) (16,958)
Net realized capital gain 8,326 8,182 3,520
Net change in unrealized appreciation/
depreciation of investment 86,225 94,664 232,437
------------ ----------- ----------
Increase (decrease) from operations 85,944 94,203 218,999
------------ ----------- ----------
CONTRACT TRANSACTIONS
Net contract purchase payments 61,883 101,792 81,941
Transfer payments from (to) other
subaccounts or general account 1,964,920 1,553,083 3,554,196
Contract terminations, withdrawals,
and other deductions (8,562) (13,128) (11,040)
------------ ----------- ----------
Increase from contract transactions 2,018,241 1,641,747 3,625,097
------------ ----------- ----------
Net increase in contract owners
------------ ----------- ----------
equity 2,104,185 1,735,950 3,844,096
------------ ----------- ----------
Contract Owners' Equity
Beginning of the period - - -
------------ ----------- ----------
End of the period $ 2,104,185 1,735,950 3,844,096
============ =========== ==========
<CAPTION>
GROWTH GROWTH &
INDEX 500 OPPORTUNITIES INCOME
SUBACCOUNT SUBACCOUNT (1) SUBACCOUNT (1)
------------ -------------- --------------
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) (30,793) (5,468) 15,926
Net realized capital gain 12,755 5,197 3,271
Net change in unrealized appreciation/
depreciation of investment 414,528 83,717 12,585
------------ ----------- ----------
Increase (decrease) from operations 396,490 83,446 31,782
------------ ----------- ----------
CONTRACT TRANSACTIONS
Net contract purchase payments 319,407 56,584 15,930
Transfer payments from (to) other
subaccounts or general account 6,576,519 1,886,944 912,735
Contract terminations, withdrawals,
and other deductions (47,292) (3,005) (2,553)
------------ ----------- ----------
Increase from contract transactions 6,848,634 1,940,523 926,112
------------ ----------- ----------
Net increase in contract owners'
------------ ----------- ----------
equity 7,245,124 2,023,969 957,894
------------ ----------- ----------
CONTRACT OWNERS' EQUITY
Beginning of the period - - -
------------ ----------- ----------
End of the period 7,245,124 2,023,969 957,894
============ =========== ==========
<CAPTION>
BALANCED
SUBACCOUNT (1)
--------------
1997
----
<S> <C>
OPERATIONS
Net investment income (loss) (1,169)
Net realized capital gain 279
Net change in unrealized appreciation/
depreciation of investment 12,246
------------
Increase (decrease) from operations 11,356
------------
CONTRACT TRANSACTIONS
Net contract purchase payments 14,160
Transfer payments from (to) other
subaccounts or general account 510,253
Contract terminations, withdrawals,
and other deductions (2,959)
------------
Increase from contract transactions 521,454
------------
Net increase in contract owners'
------------
equity 532,810
------------
CONTRACT OWNERS' EQUITY
Beginning of the period -
------------
End of the period 532,810
============
</TABLE>
(1) Period from May 3, 1997 (commencement of operations) to December 31, 1997.
See accompanying Notes to Financial Statements.
Page 3
<PAGE>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization --- The PFL Retirement Income Builder Variable Annuity Account
("Mutual Fund Account") is a segregated investment account of PFL Life Insurance
Company ("PFL Life"), an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AUSA"), a holding company. AUSA is an indirect, wholly-owned subsidiary of
AEGON nv, a holding company organized under the laws of The Netherlands.
The Money Market, High Income, Equity-Income, Growth, Overseas, Investment Grade
Bond, Asset Manager, Asset Manager: Growth, Contrafund and Index 500 subaccounts
commenced operations January 2, 1997. The Growth Opportunities, Growth & Income
and Balanced subaccounts commenced operations May 3, 1997.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940.
Investments --- Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Variable Insurance Products Fund, Variable
Insurance Products Fund II and Variable Insurance Products Fund III, as selected
by the contract owner. Investments are stated at the closing net asset values
per share as of December 31, 1997.
Realized capital gains and losses from sale of shares in the mutual funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the mutual funds are credited or charged to contract owners'
equity.
Dividend Income --- Dividends received from the mutual fund investments are
reinvested to purchase additional mutual fund shares.
<PAGE>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (continued)
2. INVESTMENTS
A summary of the mutual fund investment at December 31, 1997 follows:
<TABLE>
<CAPTION>
NUMBER OF NET ASSET VALUE
SHARES HELD PER SHARE MARKET VALUE COST
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio 3,166,893.370 $ 1.00 $ 3,166,893 $ 3,166,893
High Income Portfolio 128,912.136 13.58 1,750,627 1,674,756
Equity-Income Portfolio 224,517.021 24.28 5,451,273 5,133,065
Growth Portfolio 102,986.127 37.10 3,820,785 3,655,692
Overseas Portfolio 73,175.854 19.20 1,404,976 1,441,241
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 164,837.511 12.56 2,070,359 1,984,811
Asset Manager Portfolio 116,836.835 18.01 2,104,231 2,018,006
Asset Manager: Growth Portfolio 106,112.210 16.36 1,735,996 1,641,332
Contrafund Portfolio 192,789.097 19.94 3,844,215 3,611,778
Index 500 Portfolio 63,338.699 114.39 7,245,314 6,830,786
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 105,034.503 19.27 2,024,015 1,940,298
Growth & Income Portfolio 76,449.797 12.53 957,916 945,331
Balanced Portfolio 36,544.442 14.58 532,818 520,572
------------ -------------
$36,109,418 $34,564,561
============ =============
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
COMMENCEMENT OF OPERATIONS TO DECEMBER 31
-----------------------------------------
1997
-----------------------------------
PURCHASES SALES
----------------- -------------
<S> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio $ 15,094,646 11,927,753
High Income Portfolio 1,735,063 65,753
Equity-Income Portfolio 5,220,514 103,837
Growth Portfolio 3,720,968 79,595
Overseas Portfolio 1,455,768 15,673
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 2,024,413 41,946
Asset Manager Portfolio 2,087,459 77,779
Asset Manager: Growth Portfolio 1,681,718 48,568
Contrafund Portfolio 3,629,883 21,625
Index 500 Portfolio 6,893,402 75,371
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 1,973,446 38,345
Growth & Income Portfolio 970,925 28,865
Balanced Portfolio 522,455 2,162
-------------- ------------
$ 47,010,660 12,527,272
============== ============
</TABLE>
<PAGE>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (continued)
3. CONTRACT OWNERS' EQUITY
A summary of deferred annuity contracts terminable by owners at December 31,
1997 follows:
<TABLE>
<CAPTION>
RETURN OF PREMIUM DEATH BENEFIT
-------------------------------------------------------------
ACCUMULATION ACCUMULATION TOTAL
UNITS OWNED UNIT VALUE CONTRACT VALUE
------------------- ------------------ --------------------
<S> <C> <C> <C>
Money Market Portfolio 1,538,095.590 $ 1.041652 $ 1,602,160
High Income Portfolio 790,218.659 1.165012 920,614
Equity-Income Portfolio 1,955,419.658 1.274458 2,492,100
Growth Portfolio 1,653,392.152 1.231921 2,036,849
Overseas Portfolio 560,955.405 1.113081 624,389
Investment Grade Bond Portfolio 894,679.948 1.081642 967,723
Asset Manager Portfolio 713,379.802 1.195229 852,652
Asset Manager: Growth Portfolio 465,131.055 1.239118 576,352
Contrafund Portfolio 1,157,189.672 1.238907 1,433,650
Index 500 Portfolio 2,083,207.545 1.317652 2,744,943
Growth Opportunities Portfolio 856,473.567 1.228996 1,052,603
Growth & Income Portfolio 295,288.778 1.237676 365,472
Balanced Portfolio 184,894.892 1.146670 212,013
--------------------
$ 15,881,520
====================
<CAPTION>
5% ANNUALLY COMPOUNDING DEATH BENEFIT
ANNUAL STEP-UP DEATH BENEFIT
-------------------------------------------------------
ACCUMULATION ACCUMULATION TOTAL
UNITS OWNED UNIT VALUE CONTRACT VALUE
----------------- ---------------- ------------------
<S> <C> <C> <C>
Money Market Portfolio 1,504,396.531 $ 1.040117 1,564,748
High Income Portfolio 713,496.095 1.163294 830,006
Equity-Income Portfolio 2,325,232.286 1.272579 2,959,042
Growth Portfolio 1,450,130.335 1.230106 1,783,814
Overseas Portfolio 702,293.009 1.111441 780,557
Investment Grade Bond Portfolio 1,020,909.375 1.080052 1,102,635
Asset Manager Portfolio 1,048,640.321 1.193482 1,251,533
Asset Manager: Growth Portfolio 937,197.160 1.237304 1,159,598
Contrafund Portfolio 1,948,498.226 1.237079 2,410,446
Index 500 Portfolio 3,420,336.530 1.315713 4,500,181
Growth Opportunities Portfolio 791,157.687 1.227778 971,366
Growth & Income Portfolio 479,129.254 1.236456 592,422
Balanced Portfolio 280,038.882 1.145544 320,797
-----------------
$ 20,227,145
=================
</TABLE>
At December 31, 1997 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $ 34,563,808 3,166,908 1,674,749 5,132,934 3,655,570 1,441,211
Adjustment for appreciation/
depreciation to market value 1,544,857 - 75,871 318,208 165,093 (36,265)
--------------- ---------- ---------- ---------- ---------- -----------
Total Contract Owners' Equity $ 36,108,665 3,166,908 1,750,620 5,451,142 3,820,663 1,404,946
=============== ========== ========== ========== ========== ===========
<CAPTION>
INVESTMENT ASSET ASSET MANAGER: GROWTH
GRADE BOND MANAGER GROWTH CONTRAFUND INDEX 500 OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 1,984,810 2,017,960 1,641,286 3,611,659 6,830,596 1,940,252
Adjustment for appreciation/
depreciation to market value 85,548 86,225 94,664 232,437 414,528 83,717
----------- ---------- ---------- ---------- ---------- ----------
Total Contract Owners' Equity 2,070,358 2,104,185 1,735,950 3,844,096 7,245,124 2,023,969
=========== ========== ========== ========== ========== ==========
<CAPTION>
GROWTH &
INCOME BALANCED
SUBACCOUNT SUBACCOUNT
---------- ----------
<S> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 945,309 520,564
Adjustment for appreciation/
depreciation to market value 12,585 12,246
--------- ----------
Total Contract Owners' Equity 957,894 532,810
========= ==========
</TABLE>
A summary of changes in contract owners' account units follows
<TABLE>
<CAPTION>
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at
January 2, 1997 - - - - - -
Units purchased 20,189,805 18,906,680 95,261 179,649 119,792 87,023
Units redeemed and transferred 9,579,977 (15,864,188) 1,408,454 4,101,003 2,983,730 1,176,226
-------------- ----------- ---------- ---------- ---------- ----------
Units outstanding at
December 31, 1997 29,769,782 3,042,492 1,503,715 4,280,652 3,103,522 1,263,248
============== =========== ========== ========== ========== ==========
<CAPTION>
INVESTMENT ASSET ASSET MANAGER: GROWTH
GRADE BOND MANAGER GROWTH CONTRAFUND INDEX 500 OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at beginning of
period - - - - - -
Units purchased 261,320 52,572 88,662 69,851 254,517 48,106
Units redeemed and transferred 1,654,270 1,709,448 1,313,667 3,035,837 5,249,027 1,599,525
------------ ----------- ----------- ----------- ---------- -----------
Units outstanding 12/31/97 1,915,589 1,762,020 1,402,328 3,105,688 5,503,544 1,647,631
============ =========== =========== =========== ========== ===========
<CAPTION>
GROWTH &
INCOME BALANCED
SUBACCOUNT SUBACCOUNT
---------- ----------
<S> <C> <C>
Units outstanding at beginning of
period - -
Units purchased 13,590 12,784
Units redeemed and transferred 760,828 452,150
---------- ----------
Units outstanding 12/31/97 774,418 464,934
========== ==========
</TABLE>
<PAGE>
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT,
RETIREMENT INCOME BUILDER VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (continued)
4. ADMINISTRATIVE, MORTALITY AND EXPENSE RISK CHARGE
Administrative charges include an annual charge of $30 per contract. Charges for
administrative fees to the variable annuity contracts are an expense of the
Mutual Fund Account.
PFL Life deducts a daily charge for assuming certain mortality and expense
risks. For the 5% Annually Compounding Death Benefit and the Annual Step-Up
Death Benefit, this charge is equal to an effective annual rate of 1.25% of the
value of the contract owners' individual account. For the Return of Premium
Death Benefit, the corresponding charge is equal to an effective annual rate of
1.10% of the value of the contract owners' individual account. PFL Life also
deducts a daily charge equal to an annual rate of .15% of the contract owners'
account for administrative expenses.
5. TAXES
Operations of the Mutual Fund Account form a part of PFL Life, which is taxed as
a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Mutual Fund Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Mutual Fund Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not otherwise
taxable as an entity separate from PFL Life. Under existing federal income tax
laws, the income of the Mutual Fund Account, to the extent applied to increase
reserves under the variable annuity contracts, is not taxable to PFL Life.
6. YEAR 2000 (UNAUDITED)
PFL Life and its parent have adopted and have 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. PFL Life
has begun to convert, remediate or modify, where necessary, critical data
processing systems. It is contemplated that the Project will be substantially
completed by early 1999. PFL Life 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, PFL Life 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 PFL Life.
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 PFL Life, 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.
<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 Mutual Fund
Account. Note 1.
(2) Not Applicable.
(3) (a) Principal Distribution Agreement by and between PFL Life
Insurance Company on its own behalf and on the behalf of the
Mutual Fund Account, and AEGON USA Securities, Inc. Note 2.
(a)(1) Principal Underwriting Agreement by and between PFL Life
Insurance Company on its own behalf and on behalf of the
Mutual Fund Account, and AFSG Securities Corporation.
Note 5.
(b) Form of Broker/Dealer Supervision and Sales Agreement by and
between AFSG Securities Corporation and the Broker/Dealer.
Note 5.
(4) Form of Policy for the Retirement Income Builder Variable
Annuity. Note 2
(5) (a) Form of Application for the Retirement Income Builder
Variable Annuity. Note 3
(b) Form of Application for the First Union First Choice
Variable Annuity. Note 5.
(c) Form of Application for the Retirement Income Builder
Variable Annuity. Note 5.
(6) (a) Articles of Incorporation of PFL Life Insurance Company.
Note 1.
(b) ByLaws of PFL Life Insurance Company. Note 1.
(7) Not Applicable.
(8) (a) Participation Agreement by and between PFL Life Insurance
Company and Fidelity Distributors Corporation and Addendum
thereto. Note 2
(b) Participation Agreement between Variable Insurance Products
Fund III, Fidelity Distributors Corporation (Underwriter),
and PFL Life Insurance Company (Depositor). Note 3
(c) Participation Agreement by and among AIM Variable Insurance
Funds, Inc., PFL Life Insurance Company, and AFSG
Securities Corporation. Note 5
(d) Form of Participation Agreement by and between PFL Life
Insurance Company and Evergreen Variable Trust. Note 5
(e) Amended Exhibit A and Exhibit B to Participation Agreement
by and between PFL Life Insurance Company, Federated
Insurance Series and Federated Securities Corp. Note 5
(f) Participation Agreement among MFS Variable Insurance Trust,
PFL Life Insurance Company and Massachusetts Financial
Services Company. Note 4
(g) Participation Agreement among Oppenheimer Variable Account
Funds, OppenheimerFunds, Inc. and PFL Life Insurance
Company. Note 4
(h) Participation Agreement by and between Putnam Variable
Trust, Putnam Mutual Funds Corp. and PFL Life Insurance
Company. Note 5
(i) Addendum to Participation Agreement between Variable
Insurance Product Funds, Fidelity Distributors Corporation,
and PFL Life Insurance Company. Note 5.
(9) Opinion and Consent of Counsel. Note 2
<PAGE>
(10) (a) Consent of Independent Auditors. Note 5
(b) Opinion and Consent of Actuary. Note 5
(11) Not applicable.
(12) Not applicable.
(13) Performance Data Calculations. Note 2
(14) Powers of Attorney. Note 1. (Patrick S. Baird, Craig D.
Vermie, William L. Busler, Patrick E. Falconio, Douglas C.
Kolsrud, Robert J. Kontz) Note 2. Brendy K. Clancy.
------------------------
Note 1. Filed with one Initial filing of this Form N-4 Registration
Statement (File No. 333-7509) on July 3, 1996.
Note 2. Filed with Pre-Effective Amendment No. 1 to this Form N-4
Registration Statement (File No. 333-7509) on December 6,
1996.
Note 3. Filed with Post-Effective Amendment No. 1 to this Form N-4
Registration Statement (File No. 333-7509) on April 29,
1997.
Note 4. Filed with Post-Effective Amendment No. 2 to this form N-4
Registration Statement (File No. 333-7509) on December 23,
1997.
Note 5. Filed herewith.
<PAGE>
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Principal Positions
Name and and Offices with
Business Address 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
4333 Edgewood Road N.E. Chief Operating Officer
Cedar Rapids, Iowa 52499-0001
Craig D. Vermie Director, Vice President, Secretary and
4333 Edgewood Road N.E. Corporate Counsel
Cedar Rapids, Iowa 52499-0001
Douglas C. Kolsrud Director, Vice President and
4333 Edgewood Road N.E. Corporate Actuary
Cedar Rapids, Iowa 52499-0001
Patrick E. Falconio Director, Senior Vice President and
4333 Edgewood Road N.E. Chief Investment Officer
Cedar Rapids, Iowa 52499-0001
Robert J. Kontz Vice President and
4333 Edgewood Road N.E. Controller
Cedar Rapids, Iowa 52499-0001
Brenda K. Clancy Vice President, Treasurer and Chief
4333 Edgewood Road N.E. Financial Officer
Cedar Rapids, Iowa 52499-0001
</TABLE>
<PAGE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
<TABLE>
<CAPTION>
Jurisdication 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
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 Agency, Inc. Kansas 100% Monumental General Sale/admin. of travel
Insurance Group, Inc. insurance
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Monumental General Maryland 100% Monumental General Provides management srvcs.
Administrators, Inc. Insurance Group, Inc. to unaffiliated third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial consulting
Consultant Services, Inc. Administrators, Inc. services
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale of
Marketing, Inc. Insurance Group, Inc. mass marketed insurance
coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment advisor
Advisors, Inc.
Diversified Investors Securities Delaware 100% Diversified Investment Broker-Dealer
Corp. Advsiors, Inc.
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer
Supplemental Ins. Division, Inc. Tennessee 100% AUSA Holding Co. Insurance
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Inc. Insurance agency
Canadian Dealer Network 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 Corporation Delaware 100% Quantra Corporation Manufacture and sell
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 Systems, Inc. Iowa 100% AEGON USA Realty Information Systems for
Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Real estate management
Management, Inc. Realty Advisors, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
USP Real Estate Investment Trust Iowa 21.89% First AUSA Life Ins. Co. Real estate investment 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 trust
3.77% Bankers United 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 Advisors, Limited Partnership
Partnership Inc. is General Partner and 5%
owner.
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
ISI Insurance Agency, Inc. California 100% Intersecurities, Inc. Insurance agency
ISI Insurance Agency Ohio 100% ISI Insurance Agency, Inc. Insurance agency
of Ohio, Inc.
ISI Insurance Agency Texas 100% ISI Insurance Agency, Inc. Insurance agency
of Texas, Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Agency Inc. Insurance Agency
of Massachusetts, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
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.
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 II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 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 Ins. Co. Insurance
Company of America
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Life Investors Agency Iowa 100% Life Investors Ins. Marketing
Group, Inc. Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Ins. Co. Insurance
AEGON Financial Services Minnesota 100% PFL Life Insurance Co. Marketing
Group, Inc.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Ins. Co. Insurance
Co. of Ohio
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
Monumental Life Insurance Co. Maryland 100% First AUSA Life Ins. Co. Insurance
AEGON Special Markets Maryland 100% Monumental Life Ins. Co. Marketing
Group, Inc.
Monumental General Casualty Co. Maryland 100% First AUSA Life Ins. Co. Insurance
United Financial Services, Inc. Maryland 100% First AUSA Life Ins. Co. General agency
Bankers Financial Life Ins. Co. Arizona 100% First AUSA Life Ins. Co. Insurance
The Whitestone Corporation Maryland 100% First AUSA Life Ins. Co. Insurance agency
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Inc. Kentucky 100% CGC Provider of srvcs. to ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life
Insurance Company
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Durco Agency, Inc. Virginia 100% Benefit Plans, Inc. General agent
Commonwealth General. Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
Providian Financial Services, Inc. Pennsylvania 100% CGC Financial services
AFSG Securities Corporation Pennsylvania 100% CGC Broker-Dealer
PB Investment Advisors, Inc. Delaware 100% CGC Registered investment advisor
Diversified Financial Products Inc. Delaware 100% CGC Provider of investment,
marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Financial Real estate and mortgage
Services, Inc. Products Inc. holding company
Capital Real Estate Delaware 100% CGC Furniture and equiment lessor
Development Corporation
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, Inc. Investment subsidiary
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
Ammest Realty Corporation Texas 100% Peoples Security Life Special purpose subsidiary
Insurance Company
Agency Holding II, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments II, Inc. Delaware 100% Agency Holding II, Inc. Investment subsidiary
Agency Holding III, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments III, Inc. Delaware 100% Agency Holding III, Inc. Investment subsidiary
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
JMH Operating Company, Inc. Mississippi 100% Peoples Security Life Real estate holdings
Insurance Company
Capital Security Life Ins. Co. North Carolina 100% Capital General Insurance company
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 Corporation Delaware 100% CGC Real estate holdings
Capital Broadway Corporation Kentucky 100% CGC Real estate holdings
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Inc. Pennsylvania 100% CGC Provider of management
(EIN 23-1720755) support services
National Home Life Corporation Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Association Consultants, Inc. Illinois 100% Ampac Insurance TPA license-holder
Agency, Inc.
Valley Forge Associates, Inc. Pennsylvania 100% Ampac Insurance Furniture & equipment lessor
Agency, Inc.
Veterans Benefits Plans, Inc. Pennsylvania 100% Ampac Insurance Administator of group
Agency, Inc. insurance programs
Veterans Insurance Services, Inc. Delaware 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Financial Planning Services, Inc. Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Inc. Delaware 100% CGC Holding company
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
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. Inc. Kansas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Insurance Agency, Inc. California 100% Academy Insurance General agent
Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
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, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
(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, Inc. Massachusetts 100% Force Fin. Group, Inc. Special-purpose subsidiary
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 Administrative Provider of admin. servcies
Services, GmbH Services, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Providian Property and Casualty Kentucky 100% Providian Auto and Insurance company
Insurance Company Home Insurance Company
Providian Fire Insurance Co. Kentucky 100% Providian Property Insurance company
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
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, Inc. Pennsylvania 100% Veterans Life Ins. Co. Special-purpose subsidiary
First Providian Life and New York 100% Veterans Life Ins. Co. Insurance Company
Health Insurance Company
</TABLE>
<PAGE>
Item 27. Number of Contract Owners
As of December 31, 1997, there were 977 Owners of the Policies.
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 procedures for determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 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.
<PAGE>
Item 29. Principal Underwriters
AFSG Securities Corporation
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499-0001
The directors and officers of
AFSG Securities Corporation
are as follows:
<TABLE>
<S> <C>
Larry N. Norman Sarah J. Strange
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
Vice President
Anne Spaes
Vice President
</TABLE>
- --------------------
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.
- --------------------------------------------------------------------
AEGON USA Securities, Inc., the former broker/dealer and/or the broker-dealers
received $2,337,939.76 from the Registrant during the last fiscal year for its
services in distributing the Policies. No other commission or compensation was
received by the principal underwriter, directly or indirectly, from the
Registrant during the fiscal year.
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.. As of May 1, 1998, AFSG Securities Corporation will serve as
the principal underwriter for the above named 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.
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.
<PAGE>
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 Policy 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 policies, 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.
Section 403(b) Representations
- ------------------------------
PFL represents that it is relying on a no-action letter dated November 28, 1988,
to the American Council of Life Insurance (Ref. No. IP-6-88), regarding Sections
22(e), 27(c)(1), and 27(d) of the Investment Company Act of 1940, in connection
with redeemability restrictions on Section 403(b) Policies, and that paragraphs
numbered (1) through (4) of that letter will be complied with.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b) of
Rule 485 and has caused this Registration Statement to be signed on its behalf,
in the City of Cedar Rapids and State of Iowa, on this 20th day of April, 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.
<TABLE>
<CAPTION>
Signatures Title Date
- --------------------------- ----------------------------- ------------------
<S> <C> <C>
/s/ Patrick S. Baird Director April 20, 1998
- ---------------------------
Patrick S. Baird
/s/ Craig D. Vermie Director April 20, 1998
- ---------------------------
Craig D. Vermie
/s/ William L. Busler Director April 20, 1998
- ---------------------------
William L. Busler (Principal Executive Officer)
/s/ Patrick E. Falconio Director April 20, 1998
- ---------------------------
Patrick E. Falconio
/s/ Douglas C. Kolsrud Director April 20, 1998
- ---------------------------
Douglas C. Kolsrud
/s/ Robert J. Kontz Vice President and April 20, 1998
- ---------------------------
Robert J. Kontz Corporate Controller
/s/ Brenda K. Clancy Treasurer April 20, 1998
- ---------------------------
Brenda K. Clancy
</TABLE>
<PAGE>
Registration No.
333-7509
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,D.C. 20549
----------------
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
----------------
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO./*/
- ----------- ---------------------- -----------
<S> <C> <C>
(3)(a)(1) Principal Underwriting Agreement
by and between PFL Life Insurance
Company on its own behalf and on
behalf of the Mutual Fund Account,
and AFSG Securities Corporation.
(3)(b) Form of Broker/Dealer Supervision
and Sales Agreement by and between
AFSG Securities Corporation and
the Broker/Dealer.
(5)(b) Form of Application for the First
Union First Choice Variable
Annuity.
(5)(c) Form of Application for the
Retirement Income Builder Variable
Annuity.
(8)(c) Participation Agreement by and
among AIM Variable Insurance
Products Funds, Inc., PFL Life
Insurance Company, and AFSG
Securities Corporation.
(8)(d) Form of Participation Agreement by and
between PFL Life Insurance
Company and Evergreen Variable Trust.
(8)(e) Amended Exhibit A and Exhibit B to
Participation Agreement by and
between PFL Life Insurance
Company, Federated Insurance
Series and Federated Securities
Corp.
(8)(h) Participation Agreement by and
between Putnam Variable Trust,
Putnam Mutual Funds Corp. and
PFL Life Insurance Company.
(8)(i) Addendum to Participation
Agreement between Variable
Insurance Product Funds, Fidelity
Distributors Corporation and PFL
Life Insurance Company.
(10)(a) Consent of Independent Auditors
(10)(b) Option and Consent of Actuary
</TABLE>
- --------------
/*/ Page numbers included only in manually executed original.
<PAGE>
EXHIBIT (3)(A)(1)
-----------------
PRINCIPAL UNDERWRITING AGREEMENT
BY AND BETWEEN
PFL LIFE INSURANCE COMPANY ON ITS OWN BEHALF
AND ON BEHALF OF THE MUTUAL FUND ACCOUNT,
AND AFSG SECURITIES CORPORATION.
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
THIS PRINCIPAL UNDERWRITING AGREEMENT made and effective as of the 30th day
of April, 1998, by and between AFSG SECURITIES CORPORATION ("AFSG"), a
Pennsylvania corporation, and PFL LIFE INSURANCE COMPANY ("PFL"), an Iowa
corporation, on its own behalf and on behalf the separate investment accounts of
PFL set forth in Exhibit A attached hereto and made a part hereof (collectively,
---------
the "Account").
WITNESSETH:
WHEREAS, the Account was established or acquired by PFL under the laws of
the State of Iowa, pursuant to a resolution of PFL's Board of Directors in order
to set aside the investment assets attributable to certain flexible premium,
multi-funded annuity contracts ("Contracts") issued by PFL;
WHEREAS, PFL has registered or will register the Account with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, PFL has registered or will register the Contracts under the
Securities Act of 1933 (the "1933 Act");
WHEREAS, AFSG is and will continue to be registered as a broker-dealer with
the SEC under the Securities Exchange Act of 1934 (the "1934 Act"), and a member
of the National Association of Securities Dealers, Inc. (the "NASD") prior to
the offer and sale of the Contracts; and
WHEREAS, PFL proposes to have the Contracts sold and distributed through
AFSG, and AFSG is willing to sell and distribute such Contracts under the terms
stated herein;
NOW, THEREFORE, the parties, intending to be legally bound, hereby agree
as follows:
2
<PAGE>
1. Appointment as Distributor/Principal Underwriter. PFL grants to AFSG
------------------------------------------------
the exclusive right to be, and AFSG agrees to serve as, distributor and
principal underwriter of the Contracts during the term of this Agreement. AFSG
agrees to use its best efforts to solicit applications for the Contracts and
otherwise perform all duties and functions which are necessary and proper for
the distribution of the Contracts.
2. Prospectus. AFSG agrees to offer the Contracts for sale in accordance
----------
with the registration statements and prospectus therefor then in effect. AFSG
is not authorized to give any information or to make any representations
concerning the Contracts other than those contained in the current prospectus
therefor filed with the SEC or in such sales literature as may be authorized by
PFL.
3. Considerations. All premiums, purchase payments or other moneys
--------------
payable under the Contracts shall be remitted promptly in full together with
such application, forms and any other required documentation to PFL or its
designated servicing agent and shall become the exclusive property of PFL.
Checks or money orders in payment under the Contracts shall be drawn to the
order of "PFL Life Insurance Company" and funds may be remitted by wire if prior
written approval is obtained from PFL.
4. Copies of Information. On behalf of the Account, PFL shall furnish
---------------------
AFSG with copies of all prospectuses, financial statements and other documents
which AFSG reasonably requests for use in connection with the distribution of
the Contracts.
5. Representations. AFSG represents that it is (a) duly registered as a
---------------
broker-dealer under the 1934 Act, (b) a member in good standing of the NASD and
(c) to the extent necessary to offer the Contracts, duly registered or otherwise
qualified under the securities laws of any state or other jurisdiction. AFSG
shall be responsible for carrying out its sales and underwriting obligations
hereunder in continued compliance with the NASD Rules and federal and state
securities and insurance laws and regulations. Further, AFSG represents and
warrants that it will
3
<PAGE>
adopt, abide by and enforce the principles set forth in the Principles and Code
of Ethical Market Conduct of the Insurance Marketplace Standards Association as
adopted by the Company.
6. Other Broker-Dealer Agreements. AFSG is hereby authorized to enter
------------------------------
into written sales agreements with other independent broker-dealers for the sale
of the Contracts. All such sales agreements entered into by AFSG shall provide
that each independent broker-dealer will assume full responsibility for
continued compliance by itself and by its associated persons with the NASD Rules
and applicable federal and state securities and insurance laws, shall provide
that each independent broker-dealer will adopt, abide by and enforce the
principles set forth in the Principles and Code of Ethical Market Conduct of the
Insurance Marketplace Standards Association as adopted by the Company, and shall
be in such form and contain such other provisions as PFL may from time to time
require. All associated persons of such independent broker-dealers soliciting
applications for the Contracts shall be duly and appropriately registered by the
NASD and licensed and appointed by PFL for the sale of Contracts under the
insurance laws of the applicable states or jurisdictions in which such Contracts
may be lawfully sold. All applications for Contracts solicited by such broker-
dealers through their representatives, together with any other required
documentation and premiums, purchase payments and other moneys, shall be handled
as set forth in paragraph 3 above.
7. Insurance Licensing and Appointments. PFL shall apply for the proper
------------------------------------
insurance licenses and appointments in appropriate states or jurisdictions for
the designated persons associated with AFSG or with other independent broker-
dealers that have entered into sales agreements with AFSG for the sale of
Contracts, provided that PFL reserves the right to refuse to appoint any
proposed registered representative as an agent or broker, and to terminate an
agent or broker once appointed.
8. Recordkeeping. PFL and AFSG shall cause to be maintained and
-------------
preserved for the periods prescribed such accounts, books, and other documents
as are required of them by the
4
<PAGE>
1940 Act, and 1934 Act, and any other applicable laws and regulations. The
books, accounts and records of PFL, of the Account, and of AFSG as to all
transactions hereunder shall be maintained so as to disclose clearly and
accurately the nature and details of the transactions. PFL (or such other entity
engaged by PFL for this purpose), on behalf of and as agent for AFSG, shall
maintain AFSG's books and records pertaining to the sale of Contracts to the
extent as mutually agreed upon from time to time by PFL and AFSG; provided that
such books and records shall be the property of AFSG, and shall at all times be
subject to such reasonable periodic, special or other audit or examination by
the SEC, NASD, any state insurance commissioner and/or all other regulatory
bodies having jurisdiction. PFL shall be responsible for sending on behalf of
and as agent for AFSG all required confirmations on customer transactions in
compliance with applicable regulations, as modified by an exemption or other
relief obtained by PFL. AFSG shall cause PFL to be furnished with such reports
as PFL may reasonably request for the purpose of meeting its reporting and
recordkeeping requirements under the insurance laws of the State of Iowa and any
other applicable states or jurisdictions. PFL agrees that its records relating
to the sale of Contracts shall be subject to such reasonable periodic, special
or other audit or examination by the SEC, NASD, and any state insurance
commissioner and/or all other regulatory bodies having jurisdiction.
9. Commissions. PFL shall have the responsibility for paying on behalf
-----------
of AFSG (a) any compensation to other independent broker-dealers and their
associated persons due under the terms of any sales agreements entered into
pursuant to paragraph 6 above, between AFSG and such broker-dealers as agreed to
by PFL and (b) all commissions or other fees to associated persons of AFSG which
are due for the sale of the Contracts in the amounts and on such terms and
conditions as PFL and AFSG determine. Notwithstanding the preceding sentence,
no broker-dealer, associated person or other individual or entity shall have an
interest in any deductions or other fees payable to AFSG as set forth herein.
5
<PAGE>
10. Expense Reimbursement. PFL shall reimburse AFSG for all costs and
---------------------
expenses incurred by AFSG in furnishing the services, materials, and supplies
required by the terms of this Agreement.
11. Indemnification. PFL agrees to indemnify AFSG for any losses incurred
---------------
as a result of any action taken or omitted by AFSG, or any of its officers,
agents or employees, in performing their responsibilities under this Agreement
in good faith and without willful misfeasance, gross negligence, or reckless
disregard of such obligations.
12. Regulatory Investigations. AFSG and PFL agree to cooperate fully in
-------------------------
any insurance or judicial regulatory investigation or proceeding arising in
connection with Contracts distributed under this Agreement. AFSG and PFL
further agree to cooperate fully in any securities regulatory inspection,
inquiry, investigation or proceeding or any judicial proceeding with respect to
PFL, AFSG, their affiliates and their representatives to the extent that such
inspection, inquiry, investigation or proceeding or judicial proceeding is in
connection with Contracts distributed under this Agreement. Without limiting
the foregoing:
(a) AFSG will be notified promptly of any customer complaint or notice of
any regulatory inspection, inquiry investigation or proceeding or judicial
proceeding received by PFL with respect to AFSG or any representative or which
may affect PFL's issuance of any Contracts marketed under this Agreement; and
(b) AFSG will promptly notify PFL of any customer complaint or notice of
any regulatory inspection, inquiry, investigation or judicial proceeding
received by AFSG or any representative with respect to PFL or its affiliates in
connection with any Contracts distributed under this Agreement.
In the case of a customer complaint, AFSG and PFL will cooperate in
investigating such complaint and shall arrive at a mutually satisfactory
response.
6
<PAGE>
13. Termination.
-----------
(a) This Agreement may be terminated by either party hereto upon 60
days' prior written notice to the other party.
(b) This Agreement may be terminated upon written notice of one party
to the other party hereto in the event of bankruptcy or insolvency of such party
to which notice is given.
(c) This Agreement may be terminated at any time upon the mutual
written consent of the parties hereto.
(d) AFSG shall not assign or delegate its responsibilities under this
Agreement without the written consent of PFL.
(e) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except the obligations to settle accounts hereunder,
including payments or premiums or contributions subsequently received for
Contracts in effect at the time of termination or issued pursuant to
applications received by PFL prior to termination.
14. Regulatory Impact. This Agreement shall be subject to, among other
-----------------
laws, the provisions of the 1940 Act and the 1934 Act and the rules,
regulations, and rulings thereunder and of the NASD, from time to time in
effect, including such exemptions from the 1940 Act as the SEC may grant, and
the terms hereof shall be interpreted and construed in accordance therewith.
AFSG shall submit to all regulatory and administrative bodies having
jurisdiction over the operations of the Account, present or future; and will
provide any information, reports or other material which any such body by reason
of this Agreement may request or require pursuant to applicable laws or
regulations.
15. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
7
<PAGE>
16. Choice of Law. This Agreement shall be construed, enforced and
-------------
governed by the laws of the State of Iowa.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officials as of the day and year
first above written.
AFSG SECURITIES CORPORATION PFL LIFE INSURANCE COMPANY
By: Lorri E. Mehaffey By: William L. Busler
Title: President Title: President
8
<PAGE>
EXHIBIT A
1. PFL Life Variable Annuity Account A
2. PFL Endeavor VA Separate Account
3. PFL Wright Variable Annuity Account
4. PFL Retirement Builder Variable Annuity Account
5. PFL Endevaor Target Account
9
<PAGE>
EXHIBIT (3)(b)
-------------
FORM OF BROKER/DEALER SUPERVISION AND SALES AGREEMENT
BY AND BETWEEN
AFSG SECURITIES CORPORATION
AND THE BROKER/DEALER.
<PAGE>
SELECTED BROKER AGREEMENT
AGREEMENT dated__________________________,19____, by and between AFSG
Securities Corporation ("Distributor"), a Pennsylvania corporation, PFL Life
Insurance Company ("Company") and___________________________________________
("Broker"), a_______________________ corporation. This Agreement supersedes and
replaces any prior Selected Broker Agreement regarding the subject matter
between the parties hereto.
WITNESSETH:
In consideration of the mutual promises contained herein, the parties hereto
agree as follows:
A. Definitions
-----------
(1) Contracts--Variable life insurance contracts and/or variable annuity
contracts described in Schedule A attached hereto and issued by PFL Life
Insurance Company and for which Distributor has been appointed the
principal underwriter pursuant to Distribution Agreements, copies of
which have been furnished to Broker.
(2) Accounts--Separate accounts established and maintained by Company
pursuant to the laws of New York, as applicable, to fund the benefits
under the Contracts.
(3) The Funds--, open-end management investment companies registered under
the 1940 Act, shares of which are sold to the Accounts in connection with
the sale of the Contracts, as described in the Prospectus for the
Contracts.
(4) Registration Statement--The registration statements and amendments
thereto relating to the Contracts, the Accounts, and the Funds, including
financial statements and all exhibits.
(5) Prospectus--The prospectuses included within the Registration Statements.
(6) 1933 Act--The Securities Act of 1933, as amended.
(7) 1934 Act--The Securities Exchange Act of 1934, as amended.
(8) 1940 Act--The Investment Company Act of 1940, as amended.
(9) SEC--The Securities and Exchange Commission.
(10) NASD--The National Association of Securities Dealers, Inc.
B. Agreements of Distributor
-------------------------
(1) Pursuant to the authority delegated to it by Company, Distributor hereby
authorizes Broker during the term of this Agreement to solicit
applications for Contracts from eligible persons provided that there is
an effective Registration Statement relating to such Contracts and
provided further that Broker has been notified by Distributor that the
Contracts are qualified for sale under all applicable securities and
insurance laws of the state or jurisdiction in which the application
will be solicited. In connection with the solicitation of applications
for Contracts, Broker is hereby authorized to offer riders that are
available with the Contracts in accordance with instructions furnished
by Distributor or Company.
(2) Distributor, during the term of this Agreement, will notify Broker of
the issuance by the SEC of any stop order with respect to the
Registration Statement or any amendments thereto or the initiation of
any proceedings for that purpose or for any other purpose relating to
the registration and/or offering of the Contracts and of any other
action or circumstance that may prevent the lawful sale of the Contracts
in any state or jurisdiction.
(3) During the term of this Agreement, Distributor shall advise Broker of
any amendment to the Registration Statement or any amendment or
supplement to any Prospectus.
C. Agreements of Broker
--------------------
(1) It is understood and agreed that Broker is a registered broker/dealer
under the 1934 Act and a member of the NASD and that the agents or
representatives of Broker who will be soliciting applications for the
Contracts also will be duly registered representative of Broker.
(2) Commencing at such time as Distributor and Broker shall agree upon,
Broker agrees to use commercially reasonable efforts to find purchasers
for the Contracts acceptable to Company. In meeting its obligation to
use its commercially reasonable efforts to solicit applications for
Contracts, Broker shall, during the term of this Agreement, engage in
the following activities:
(a) Regularly utilize only training, sales and promotional materials
relating to the Contracts which have been approved by Company.
(b) Establish and implement reasonable procedures for periodic
inspection and supervision of sales practices of its agents or
representatives and submit periodic reports to Distributor as may be
requested on the results of such inspections and the compliance with
such procedures.
(c) Broker shall take reasonable steps to ensure that the various
representatives appointed by it shall not make recommendations to an
applicant to purchase a Contract in the absence of reasonable grounds to
believe that
<PAGE>
the purchase of the Contract is suitable for such applicant. While not
limited to the following, a determination of suitability shall be based
on information furnished to a representative after reasonable inquiry of
such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs, and, if applicable, the
likelihood that the applicant will make the premium payments
contemplated by the Contract.
(d) Broker shall adopt, abide by, and enforce the principles set forth
in the Principles and Code of Ethical market Conduct of the Insurance
Marketplace Standards Association as adopted by the Company and provided
to You with this Agreement.
(3) All payments for Contracts collected by agents or representatives of
Broker shall be held at all times in a fiduciary capacity and shall be
remitted promptly in full together with such applications, forms and
other required documentation to an office of the Company designated by
Distributor. Checks or money orders in payment of initial premiums shall
be drawn to the order of "PFL Life Insurance Company." Broker
acknowledges that the Company retains the ultimate right to control the
sale of the Contracts and that the Distributor or Company shall have the
unconditional right to reject, in whole or part, any application for the
Contract. In the event Company or Distributor rejects an application,
Company immediately will return all payments directly to the purchaser
and Broker will be notified of such action. In the event that any
purchaser of a Contract elects to return such Contract pursuant to the
free look right, the purchaser will receive a refund of either premium
payments or the value of the invested portion of such premiums as set
forth in the Contract and according to applicable state law. The Broker
will be notified of any such action.
(4) Broker shall act as an independent contractor, and nothing herein
contained shall constitute Broker, its agents or representatives, or any
employees thereof as employees of Company or Distributor in connection
with solicitation of applications for Contracts. Broker, its agents or
representatives, and its employees shall not hold themselves out to be
employees of Company or Distributor in this connection or in any
dealings with the public.
(5) Broker agrees that any material, including material it develops,
approves or uses for sales, training, explanatory or other purposes in
connection with the solicitation of applications for Contracts hereunder
(other than generic advertising materials which do not make specific
reference to the Company or the Contracts) will only be used after
receiving the written consent of Distributor to such material and, where
appropriate, the endorsement of Company to be obtained by Distributor.
(6) Solicitation and other activities by Broker shall be undertaken only in
accordance with applicable Company procedures, ethical principles and
manuals, and applicable laws and regulations. No agent or representative
of Broker shall solicit applications for the contracts until duly
licensed and appointed by Company (such appointment not to be
unreasonably withheld by the Company) as a life insurance and variable
contract broker or agent of Company in the appropriate states or other
jurisdictions. Broker shall ensure that such agents or representatives
fulfill any training requirements necessary to be licensed and that such
agents or representatives are properly supervised and controlled
pursuant to the rules and regulations of the SEC and the NASD. Broker
shall certify agents' and representatives' qualifications to the
satisfaction of Distributor, including certifying a General Letter of
Recommendation set forth in Exhibit A hereto. Broker understands and
acknowledges that neither it nor its agents or representatives is
authorized by Distributor or Company to give any information or make any
representation in connection with this Agreement or the offering of the
Contracts other than those contained in the Prospectus or other
solicitation material authorized in writing by Distributor or Company.
(7) Broker shall not have authority on behalf of Distributor or Company to:
make, alter or discharge any Contract or other form; waive any
forfeiture, extend the time of paying any premium; receive any monies or
premiums due, or to become due, to Company, except as set forth in
Section C(3) of this Agreement. Broker shall not expend, nor contract
for the expenditure of the funds of Distributor, nor shall Broker
possess or exercise any authority on behalf of Broker by this Agreement.
(8) Broker shall have the responsibility for maintaining the records of its
representatives licensed, registered and otherwise qualified to sell the
Contracts. Broker shall maintain such other records as are required of
it by applicable laws and regulations. The books, accounts and records
of the Company, the Account, Distributor and Broker relating to the sale
of the Contracts shall be maintained so as to clearly and accurately
disclose the nature and details of the transactions. All records
maintained by the Broker in connection with this Agreement shall be the
property of the Company and shall be returned to the Company upon
termination of this Agreement, free from any claims or retention of
rights by the Broker. Nothing in this Section C(8) shall be interpreted
to prevent the Broker from retaining copies of any such records which
the Broker, in its discretion, deems necessary or desirable to keep. The
Broker shall keep confidential any information obtained pursuant to this
Agreement and shall disclose such information only if the Company has
authorized such disclosure or if such disclosure is expressly required
by applicable federal or state regulatory authorities.
D. Compensation
------------
(1) Pursuant to the Distribution Agreement between Distributor and Company,
Distributor shall cause Company to arrange for the payment of
commissions to Broker as compensation for the sale of each contract sold
by an
<PAGE>
agent or representative of Broker. Such amounts shall be paid to Broker
or its subsidiary insurance agency, whichever is authorized to receive
insurance commissions under applicable insurance laws, in accordance
with the schedules attached hereto, the General Agent Agreement, and the
commission schedules attached thereto. All terms and conditions of the
General Agent Agreement not otherwise conflicting with the terms herein,
shall be incorporated by reference herein. Company shall identify to
Broker with each such payment the name of the agent or representative of
Broker who solicited each Contract covered by the payment.
(2) Neither Broker nor any of its agents or representatives shall have any
right to withhold or deduct any part of any premium it shall receive for
purposes of payment of commission or otherwise. Neither Broker nor any
of its agents or representatives shall have an interest in any
compensation paid by Company to Distributor, now or hereafter, in
connection with the sale of any Contracts hereunder.
E. Complaints and Investigations
-----------------------------
(1) Broker and Distributor jointly agree to cooperate fully in any insurance
or securities regulatory investigation or proceeding or judicial
proceeding arising in connection with the Contracts marketed under this
Agreement. Broker, upon receipt, will notify Distributor of any customer
complaint or notice of any regulatory investigation or proceeding or
judicial proceeding in connection with the Contracts. Broker and
Distributor further agree to cooperate fully in any securities
regulatory investigation or proceeding or judicial proceeding with
respect to Broker, Distributor, their affiliates and their agents or
representatives to the extent that such investigation or proceeding is
in connection with Contracts marketed under this Agreement. Broker shall
furnish applicable federal and state regulatory authorities with any
information or reports in connection with its services under this
Agreement which such authorities may request in order to ascertain
whether the Company's operations are being conducted in a manner
consistent with any applicable law or regulation. Each party shall bear
its own costs and expenses of complying with any regulatory requests,
subject to any right of indemnification that may be available pursuant
to Section G of this Agreement.
F. Term of Agreement
-----------------
(1) This Agreement shall continue in force for one year from its effective
date and thereafter shall automatically be renewed every year for a
further one year period; provided that either party may unilaterally
terminate this Agreement upon thirty (30) days' written notice to the
other party of its intention to do so.
(2) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except (a) the agreements contained in Section E
hereof; (b) the indemnity set forth in Section G hereof; and (c) the
obligations to settle accounts hereunder, including commission payments
on premiums subsequently received for Contracts in effect at the time of
termination or issued pursuant to applications received by Broker prior
to termination.
(3) Distributor and Company reserve the right, without notice to Broker, to
suspend, withdraw or modify the offering of the Contracts or to change
the conditions of their offering.
G. Indemnity
---------
(1) Broker shall be held to the exercise of reasonable care in carrying out
the provisions of this Agreement.
(2) Distributor agrees to indemnify and hold harmless Broker and each
officer or director of Broker against any losses, claims, damages or
liability, joint or several, to which Broker or such officer or director
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of
a material fact, required to be stated therein or necessary to make the
statements therein not misleading, contained in any Registration
Statement or any post-effective amendment thereto or in the Prospectus
or any amendment or supplement to the Prospectus, or any sales
literature provided by the Company or by the Distributor.
(3) Broker agrees to indemnify and hold harmless Company and Distributor and
each of their current and former directors and officers and each person,
if any, who controls or has controlled Company or Distributor within the
meaning of the 1933 Act or the 1934 Act, against any losses, claims,
damages or liabilities to which Company or Distributor and any such
director or officer or controlling person may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon:
(a) Any unauthorized use of sales materials or any verbal or written
misrepresentations or any unlawful sales practices concerning the
Contracts by Brokers, its agents, employees or representatives; or
(b) Claims by agents or representatives or employees of Broker for
commissions, service fees, development allowances or other compensation
or remuneration of any type;
(c) The failure of Broker, its officers, employees, or agents to comply
with the provisions of this Agreement; and Broker will reimburse Company
and Distributor and any director or officer or controlling person of
either for any legal or other expenses reasonably incurred by Company,
Distributor, or such director, officer of controlling person in
connection with investigating or defending any such loss, claims,
damage, liability or action. This indemnity agreement will be in
addition to any liability which Broker may otherwise have.
H. Assignability
-------------
<PAGE>
This Agreement shall not be assigned by either party without the written
consent of the other.
I. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Iowa.
J. Notices
-------
All communications under the Agreement shall be in writing and shall be
deemed delivered when mailed by certified mail, postage prepaid.
Alternatively, communications shall be deemed delivered by timely
transmission of the writing, delivery charges prepaid, to a third party
company or governmental entity providing delivery services in the
ordinary course of business, which guarantees delivery to the other
party on the next business day. Notices shall be sent to the following
addresses unless and until the addressee notifies the other party of a
change in address according to the terms of this Section:
<TABLE>
<S> <C>
(1) if to Broker, to: (2) if to the Distributor or
Company, send to the
Company, to:
----------------------- PFL LIFE INSURANCE COMPANY
-----------------------(street address) FINANCIAL MARKETS DIVISION
----------------------- 4333 EDGEWOOD ROAD NE
-----------------------(city, state, zip) CEDAR RAPIDS, IOWA 52499
-----------------------(telephone no.)
-----------------------(fax no.) (319) 297-8208 (telephone no.)
Attention:------------- (319) 297-8132 (fax no.)
</TABLE>
In Witness Whereof, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
------------------------------
(Broker Name)
By:
---------------------------
Title:
------------------------
AFSG SECURITIES CORPORATION
(Distributor)
By:
---------------------------
Title:
------------------------
PFL LIFE INSURANCE COMPANY
(Company)
By:
---------------------------
Title:
------------------------
<PAGE>
EXHIBIT A
GENERAL LETTER OF RECOMMENDATION
BROKER-DEALER hereby certifies to the Company that all the following
requirements will be fulfilled in conjunction with the submission of
licensing/appointment papers for all applicants as agents of the Company
submitted by BROKER-DEALER. BROKER-DEALER will, upon request, forward proof of
compliance with same to the Company in a timely manner.
1. We have made a thorough and diligent inquiry and investigation relative to
each applicant's identity, residence and business reputation and declare
that each applicant is personally known to us, has been examined by us, is
known to be of good moral character, has a good business reputation, is
reliable, is financially responsible and is worthy of a license. Each
individual is trustworthy, competent and qualified to act as an agent for
the Company to hold himself out in good faith to the general public.
2. We have on file a U-4 form which was completed (and has been amended, as
required) by each applicant. We have fulfilled all the necessary
investigative requirements for the registration of each applicant as a
registered representative through our NASD member firm, including but not
limited to: (i) checking for and investigating criminal arrest and
conviction records available to Broker-Dealer on the CRD system; and (ii)
communicating with each employer of the applicant for 3 years prior to the
applicant's registration with our firm. Each applicant is presently
registered as an NASD registered representative.
The above information in our files indicates no fact or condition which
would disqualify the applicant from receiving a license and all the findings
of all investigative information is favorable.
At the time of application, in those states required by the Company, we
shall provide the Company with a copy of the entire U-4 form, or
designated pages, thereof, completed by each applicant, including any
amendments or updates thereto, and we certify those items are true copies
of the original.
3. We certify that all educational requirements have been met for the
specified state each applicant is requesting a license in, and that all
such persons have fulfilled the appropriate examination, education and
training requirements.
4. If the applicant is required to submit his picture, his signature, and
securities registration in the state in which he is applying for a
license, we certify that those items forwarded to the Company are those of
the applicant and the securities registration is a true copy of the
original.
5. We hereby warrant that the applicant is not applying for a license with
the Company in order to place insurance chiefly and solely on his life or
property, or lives or property of his relatives, or property or liability
of his associates.
6. We will not permit any applicant to transact insurance in a state as an
agent until duly licensed and appointed therefor with the appropriate
State Insurance Department. No applicants have been given a contract or
furnished supplies, nor have any applicants been permitted to write,
solicit business, or act as an agent in any capacity, and they will not be
so permitted until the certificate of authority or license applied for is
received.
<PAGE>
EXHIBIT (5)(b)
--------------
Form of Application for the
First Union Variable Annuity.
<PAGE>
<TABLE>
<S> <C>
FIRST CHOICE VARIABLE ANNUITY
Issued by: PFL Life Insurance Company ("PFL Life") * 4333 Edgewood Road N.E., Cedar Rapids, IA 52499-0001 * Policyholder
Service: 800-525-6205
Mail the application and check payable to: PFL Life Insurance Company * 4333 Edgewood Road N.E., Cedar Rapids, IA
52499-0001, Attn: Variable Annuity Dept.
----------------------------------------------------------------------------------------------------------------------------
1. OWNER(S) Name ______________________________________________ M [ ] F [ ] Birthdate ____/____ /____
If the owner is a Address ___________________________________________________________________________________________
Trust, please Street City State Zip
O provide verification Soc. Sec. No. ________________________________________ Phone No. _______________________________
W of trustees.
N Name ______________________________________________ M [ ] F [ ] Birthdate ____/____ /____
E Address ___________________________________________________________________________________________
R Street City State Zip
S Soc. Sec. No. ________________________________________ Phone No. _______________________________
H ............................................................................................................................
I ANNUITANT Name ______________________________________________ M [ ] F [ ] Birthdate ____/____ /____
P Leave this section Address ___________________________________________________________________________________________
blank if Annuitant Street City State Zip
I is same as sole Owner Soc. Sec. No. _____________________________________ Relationship to Owner _____________________
N - If you, the policy owner, have named someone other than yourself as the annuitant, please select
F one of the following regarding payment of the death proceeds. If neither is selected, the first
O option will be deemed in effect:
R [ ] At the named annuitant's death, I wish to become the annuitant and defer payment of death
M proceeds until my death.
A [ ] At the named annuitant's death, I wish to have the death proceeds paid to the named
T beneficiary.
I
O Policy Owner Signature Required (when applicable) _______________________________________________
N ...........................................................................................................................
BENEFICIARY(IES) Primary ______________________________________________ Relationship to Owner _________________
Contingent ___________________________________________ Relationship to Owner _________________
- -----------------------------------------------------------------------------------------------------------------------------------
2. PREMIUM PAYMENT/ INITIAL PREMIUM $ ____________________ (MIN: $2000)
PLAN OPTIONS INVESTMENT ALLOCATION (WHOLE % ONLY, NO FRACTIONS)
Y VARIABLE OPTIONS:
O ----------------
U [ ] AIM V.I. Growth and Income Fund .0%
R ----
[ ] AIM V.I. International Equity Fund .0%
R ----
E [ ] AIM V.I. Value Fund .0%
T ----
I [ ] Evergreen VA Fund .0%
R ----
E [ ] Evergreen VA Foundation Fund .0%
M ----
E [ ] Evergreen VA Growth and Income Fund .0%
N ----
T [ ] Federated High Income Bond Fund II .0%
----
I [ ] MFS Emerging Growth Series .0%
N ----
C [ ] MFS Research Series .0%
O ----
M [ ] MFS Total Return Series .0%
E ----
[ ] Oppenheimer Growth Fund .0%
B ----
U [ ] Oppenheimer Multiple Strategies Fund .0%
I ----
L [ ] Oppenheimer Strategic Bond Fund .0%
D ----
E [ ] Putnam VT Global Growth Fund .0%
R ----
[ ] Putnam VT Money Market Fund .0%
P ----
O [ ] Putnam VT New Value Fund .0%
L ----
I Additional: _________________ .0%
C ----
Y Additional: _________________ .0%
----
PFL LIFE FIXED RATE OPTIONS:
---------------------------
[ ] 1 Year for DCA Only .0%
----
(Must complete DCA form)
[ ] 1 Year .0%
----
[ ] 3 Year N/A
----
[ ] 5 Year N/A
----
[ ] 7 Year N/A
----
TOTAL (ALL) 100%
Note: Initial variable premium payments will be invested in the
Money Market Option for at least 14 days, or longer, based on your
state's "Right to Cancel" period. See your policy for details.
DEATH BENEFIT OPTION
--------------------
(SELECT ONLY ONE):
Your selection cannot be changed after the policy has been issued.
If no option has been specified, the contract will be issued with
the option for return of premium less distributions (Option A).
[ ] Option A - Return of premiums paid less distributions taken.
Annual Mortality and Expense (M&E) risk fee and administrative
charge is 1.25%.
[ ] Option B - 5% Annually Compounding Death Benefit. Maximum issue
age of 80: Annual M&E risk fee and administrative charge is
1.40%
[ ] Option C - Annual Step-Up Death Benefit: Maximum issue age of 80:
Annual M&E risk fee and administrative charge is 1.40%.
............................................................................................................................
SPECIAL Please initial one: I authorize my Registered Rep. and myself______or myself only ______ to make
INSTRUCTIONS telephone transfer requests. Registered Representative's Name _________________________________
............................................................................................................................
REPLACEMENT Will this annuity replace or change any existing annuity or life insurance? Yes [ ] No [ ]
INFORMATION (If Yes, complete the following.)
Company ________________________________________________ Policy No. ____________________________
............................................................................................................................
TAX QUALIFIED PLAN [ ] Yes [ ] No (If Yes, Complete the following.)
[ ] Other Tax Qualified Plan _________________ (type)
[ ] IRA Rollover: $ _______ [ ] IRA: $_____ Yr. of Contribution: ____
[ ] IRA Transfer [ ] Qualified Plan Rollover
- -----------------------------------------------------------------------------------------------------------------------------------
3. - I understand that Policy Values, when allocated to any of the variable options above are not
guaranteed as to a fixed dollar amount.
I - When funds are allocated to the Fixed Account Guarantee Periods, Policy Values under the policy
M may increase or decrease in accordance with the Excess Interest Adjustment prior to the end of
P the Guarantee Period.
O - AZ, CA, ID, LA, NM, NV, TX, WA and WI: Spousal consent is required when the spouse is not
R designated a Policy Owner and/or a Primary Beneficiary and has purchased this annuity in, and/or
T resides in a community or marital property state, at the time of sale. By signing below, I
A (consenting spouse) understand and hereby give my consent for the Policy Owner to designate
N someone other than myself as Primary Beneficiary or Owner of the policy represented by this
T application. I also understand that this designation may affect my community or marital rights
to the proceeds of this policy.
I I [ ] was never married. [ ] am divorced. [ ] My spouse is deceased.
N Spouse's Signature _______________________________________________ Date ____ /____/____
F - To the best of my knowledge and belief, my answers to the questions on this application are
O correct and true, and I agree that this application becomes a part of the annuity policy when
R issued to me. If this application is part of an instant issue policy, I acknowledge that I am
M in receipt of a complete copy of the policy provisions herewith.
A - This application is subject to acceptance by PFL Life. If this application is rejected for any
T reason, PFL Life will be liable only for return of premiums paid.
I - Send me a copy of the Statement of Additional Information. [ ]
O - I am in receipt of a current prospectus for this variable annuity.
N ............................................................................................................................
SIGNATURE(S) I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE FOR MY NEEDS.
| Signed at ______________________________________________________________ Date ____/____/____
City State
P Owner(s) _________________________________ Annuitant (if not Owner) ______________________________
L ............................................................................................................................
E AGENT USE Do you have reason to believe the annuity applied for will replace or change any existing annuity
A ONLY or life insurance? [ ] Yes [ ] No
S
E I HAVE REVIEWED THE APPLICANT'S EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE FOR
HIS/HER NEEDS.
R Registered Rep/Agent (Please print) ___________________________ Signed ___________________________
E Phone No. __________________________ Soc. Sec. No. ___________________ PFL Agent # ______________
A Firm Name ____________________________________ Firm Address ______________________________________
D ............................................................................................................................
RBKVA-APP R797 SEE YOUR PROSPECTUS AND POLICY PROVISIONS FOR TERM EXPLANATIONS. FC
</TABLE>
<PAGE>
EXHIBIT (5)(c)
--------------
FORM OF APPLICATION FOR THE
RETIREMENT INCOME BUILDER VARIABLE ANNUITY.
<PAGE>
RETIREMENT INCOME BUILDER/(R)/ VARIABLE ANNUITY
Issued by: PFL Life Insurance Company ("PFL Life") . 4333 Edgewood Road N.E.,
Cedar Rapids, IA 52499-0001 . Policyholder Service: 800-525-6205
Mail the application and a check payable to: PFL Life Insurance Company . 4333
Edgewood Road N.E., Cedar Rapids, IA 52499-0001, Attn: Variable Annuity Dept.
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1. OWNERSHIP INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
OWNER(S) Name______________________________________________ [_] M [_] F Birthdate _______/_________/______
If the owner is a
Trust, please Address_____________________________________________________________________________________________________
provide verification Street City State Zip
of trustees. Soc. Sec. No._____________________________________ Phone No.___________________________________________
Name______________________________________________ [_] M [_] F Birthdate _______/_________/______
Address_____________________________________________________________________________________________________
Street City State Zip
Soc. Sec. No._____________________________________ Phone No.___________________________________________
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUITANT Name______________________________________________ [_] M [_] F Birthdate _______/_________/______
Leave this section
blank if Annuitant Address_____________________________________________________________________________________________________
is same as sole Street City State Zip
Owner Soc. Sec. No._____________________________________ Relationship to Owner ______________________________
. If you, the policy owner, have named someone other than yourself as the annuitant, please select one of the
following regarding payment of the death proceeds. If neither is selected, the first option will be deemed
in effect:
[_] At the named annuitant's death, I wish to become the annuitant and defer payment of death proceeds until
my death.
[_] At the named annuitant's death, I wish to have the death proceeds paid to the named beneficiary.
Policy Owner Signature Required (when applicable):________________________________________________________
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BENEFICIARY(IES) Primary___________________________________________ Relationship to Owner ______________________________
Contingent________________________________________ Relationship to Owner ______________________________
- ------------------------------------------------------------------------------------------------------------------------------------
2. YOUR RETIREMENT INCOME BUILDER POLICY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMIUM Initial Premium $______________ (Min: $2000)
PAYMENT/
PLAN OPTIONS Investment Allocation (whole % only, no fractions)
Variable Options: PFL Life Fixed Rate Options: Death Benefit Option
----------------- ---------------------------- --------------------
[_] VIP II: Asset Manager .0% [_] 1 Year for DCA only .0% (Select only one):
[_] VIP II: Asset Manager - Growth .0% (Must complete DCA form) Your selection cannot be charged
[_] VIP: Growth .0% [_] 1 Year .0% after the policy has been issued.
[_] VIP II: Contrafund .0% [_] 3 Year .0% If no option has been specified,
[_] VIP II: Index 500 .0% [_] 5 Year .0% the contract will be issued with
[_] VIP: Equity-Income .0% [_] 7 Year .0% the option for return of premium
[_] VIP: Overseas .0% Total (all) 100% less distributions (Option A).
[_] VIP: High Income .0% [_] Option A - Return of premiums
[_] VIP II: Investment Grade Bond .0% Note: Initial variable premium paid less distributions taken.
[_] VIP III: Growth Opportunities .0% payments will be invested in Annual Mortality and Expense
[_] VIP III: Growth & Income .0% the VIP Money Market Option (M&E) risk fee and administrative
[_] VIP III: Balanced Portfolio .0% for at least 14 days, or longer, charge is 1.25%
[_] VIP: Money Market .0% based on your state's "Right to [_] Option B - 5% Annually Compounding
Additional:_____________________ .0% Cancel" period. See your policy Death Benefit. Maximum issue age of
Additional:_____________________ .0% for details. 80: Annual M&E risk fee and
administrative charge is 1.10%.
[_] Option C - Annual Step-Up Death
Benefit. Maximum issue age of 80:
Annual M&E risk fee and
administrative charge is 1.40%.
....................................................................................................................................
SPECIAL Please initial one: I authorize my Registered Rep. and myself _________ or myself only ________ to make telephone
INSTRUCTIONS transfer requests. Registered Representative's Name _______________________________________
....................................................................................................................................
REPLACEMENT Will this annuity replace or change any existing annuity or life insurance? [_] Yes [_] No (If Yes, complete the
INFORMATION following.)
Company __________________________________________ Policy No. ________________________________________
....................................................................................................................................
TAX QUALIFIED [_] Yes [_] No (If Yes, Complete the following.) [_] Other Tax Qualified Plan ____________________(type)
PLAN [_] IRA Rollover: $________ [_] IRA: $________ Yr. of Contribution: ___ [_] IRA Transfer [_] Qualified Plan Rollover
- ------------------------------------------------------------------------------------------------------------------------------------
3. IMPORTANT INFORMATION - PLEASE READ
- ------------------------------------------------------------------------------------------------------------------------------------
. I understand that Policy Values, when allocated to any of the variable options above are not guaranteed as to
a fixed dollar amount.
. When funds are allocated to the Fixed Account Guarantee Periods, Policy Values under the policy may increase or
decrease in accordance with the Excess Interest Adjustment prior to the end of the Guarantee Period.
. AZ, CA, ID, LA, NM, NV, TX, WA and WI: Spousal consent is required when the spouse is not designated a Policy
Owner and/or a Primary Beneficiary, and has purchased this annuity in, and/or resides in a community or marital
property state, at the time of sale. By signing below, I (consenting spouse) understand and hereby give my
consent for the Policy Owner to designate someone other than myself as Primary Beneficiary or Owner of the policy
represented by this application. I also understand that this designation may affect my community or marital
rights to the proceeds of this policy.
I [_] was never married. [_] am divorced [_] My spouse is deceased.
Spouse's Signature ______________________________________________________ Date _______/ ___________/ ___________
. To the best of my knowledge and belief, my answers to the questions on this application are correct and true, and
I agree that this application becomes a part of the annuity policy when issued to me. If this application is
part of an instant issue policy, I acknowledge that I am in receipt of a complete copy of the policy provisions
herewith.
. This application is subject to acceptance by PFL Life. If this application is rejected for any reason, PFL Life
will be liable only for return of premiums paid.
. Send me a copy of the Statement of Additional Information. [_]
. I am in receipt of a current prospectus for this variable annuity.
....................................................................................................................................
SIGNATURE(s) I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE FOR MY NEEDS.
Signed at ______________________________________________________________________ Date ________/ _________/ _________
City State
Owner(s)__________________________________________________ Annuitant (if not Owner) _____________________________
....................................................................................................................................
AGENT USE Do you have reason to believe the annuity applied for will replace or change any existing annuity or life insurance?
ONLY [_] Yes [_] No
I HAVE REVIEWED THE APPLICANT'S EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE FOR HIS/HER NEEDS.
Registered Rep./Licensed Agent (Please print) __________________________________ Signed ________________________
Phone No. _____________________________ Soc. Sec. No. __________________________ PFL Agent # ___________________
Firm Name _______________________________________ Firm Address _________________________________________________
....................................................................................................................................
</TABLE>
SEE YOUR PROSPECTUS AND POLICY PROVISIONS FOR TERM EXPLANATIONS.
<PAGE>
PARTICIPATION AGREEMENT
BY AND AMONG
AIM VARIABLE INSURANCE FUNDS, INC.,
PFL LIFE INSURANCE COMPANY,
ON BEHALF OF ITSELF AND
ITS SEPARATE ACCOUNTS,
AND
AFSG SECURITIES CORPORATION AS UNDERWRITER
OF VARIABLE CONTRACTS AND POLICIES
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- -----------------------------------------------------------
<S> <C> <C>
Section 1. Available Funds.............................................. 2
1.1 Availability................................................ 2
1.2 Addition, Deletion or Modification of Funds................. 2
1.3 No Sales to the General Public.............................. 2
Section 2. Processing Transactions...................................... 2
2.1 Timely Pricing and Orders................................... 2
2.2 Timely Payments............................................. 3
2.3 Applicable Price............................................ 3
2.4 Dividends and Distributions................................. 4
2.5 Book Entry.................................................. 4
Section 3. Costs and Expenses........................................... 4
3.1 General..................................................... 4
3.2 Registration................................................ 4
3.3 Other (Non-Sales-Related)................................... 5
3.4 Other (Sales-Related)....................................... 5
3.5 Parties To Cooperate........................................ 5
Section 4. Legal Compliance............................................. 5
4.1 Tax Laws.................................................... 5
4.2 Insurance and Certain Other Laws............................ 8
4.3 Securities Laws............................................. 8
4.4 Notice of Certain Proceedings and Other Circumstances....... 9
4.5 LIFE COMPANY To Provide Documents; Information About AVIF... 10
4.6 AVIF To Provide Documents; Information About LIFE COMPANY... 11
Section 5. Mixed and Shared Funding..................................... 12
5.1 General..................................................... 12
5.2 Disinterested Directors..................................... 13
5.3 Monitoring for Material Irreconcilable Conflicts............ 13
5.4 Conflict Remedies........................................... 14
5.5 Notice to LIFE COMPANY...................................... 15
5.6 Information Requested by Board of Directors................. 15
5.7 Compliance with SEC Rules................................... 15
5.8 Other Requirements.......................................... 16
Section 6. Termination.................................................. 16
6.1 Events of Termination....................................... 16
6.2 Notice Requirement for Termination.......................... 17
6.3 Funds To Remain Available................................... 17
6.4 Survival of Warranties and Indemnifications................. 18
6.5 Continuance of Agreement for Certain Purposes............... 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- -----------------------------------------------------------
<S> <C> <C>
Section 7. Parties To Cooperate Respecting Termination.................. 18
Section 8. Assignment................................................... 18
Section 9. Notices...................................................... 18
Section 10. Voting Procedures........................................... 19
Section 11. Foreign Tax Credits......................................... 20
Section 12. Indemnification............................................. 20
12.1 Of AVIF by LIFE COMPANY and UNDERWRITER.................... 20
12.2 Of LIFE COMPANY and UNDERWRITER by AVIF.................... 22
12.3 Effect of Notice........................................... 25
12.4 Successors................................................. 25
Section 13. Applicable Law.............................................. 25
Section 14. Execution in Counterparts................................... 25
Section 15. Severability................................................ 25
Section 16. Rights Cumulative........................................... 25
Section 17. Headings.................................................... 25
Section 18. Confidentiality............................................. 26
Section 19. Trademarks and Fund Names................................... 26
Section 20. Parties to Cooperate........................................ 28
</TABLE>
<PAGE>
FORM OF PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the ____ day of _________, 1998
("Agreement"), by and among AIM Variable Insurance Funds, Inc., a Maryland
corporation ("AVIF"); PFL Life Insurance Company, an Iowa life insurance company
("LIFE COMPANY"), on behalf of itself and each of its segregated asset accounts
listed in Schedule A hereto, as the parties hereto may amend from time to time
(each, an "Account," and collectively, the "Accounts"); and AFSG Securities
Corporation, an affiliate of LIFE COMPANY and the principal underwriter of the
Contracts ("UNDERWRITER") (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, AVIF is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, AVIF currently consists of nine separate series ("Series"), shares
("Shares") of each of which are registered under the Securities Act of 1933, as
amended (the "1933 Act") and are currently sold to one or more separate accounts
of life insurance companies to fund benefits under variable annuity contracts
and variable life insurance contracts; and
WHEREAS, AVIF will make Shares of each Series listed on Schedule A hereto
as the Parties hereto may amend from time to time (each a "Fund"; reference
herein to "AVIF" includes reference to each Fund, to the extent the context
requires) available for purchase by the Accounts; and
WHEREAS, LIFE COMPANY will be the issuer of certain variable annuity
contracts and variable life insurance contracts ("Contracts") as set forth on
Schedule A hereto, as the Parties hereto may amend from time to time, which
Contracts (hereinafter collectively, the "Contracts"), if required by applicable
law, will be registered under the 1933 Act; and
WHEREAS, LIFE COMPANY will fund the Contracts through the Accounts, each of
which may be divided into two or more subaccounts ("Subaccounts"; reference
herein to an "Account" includes reference to each Subaccount thereof to the
extent the context requires); and
WHEREAS, LIFE COMPANY will serve as the depositor of the Accounts, each of
which is registered as a unit investment trust investment company under the 1940
Act (or exempt therefrom), and the security interests deemed to be
<PAGE>
issued by the Accounts under the Contracts will be registered as securities
under the 1933 Act (or exempt therefrom); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase Shares in one or more of the Funds
on behalf of the Accounts to fund the Contracts; and
WHEREAS, UNDERWRITER is a broker-dealer registered with the SEC under the
Securities Exchange Act of 1934 ("1934 Act") and a member in good standing of
the National Association of Securities Dealers, Inc. ("NASD");
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Parties hereto agree as follows:
SECTION 1. AVAILABLE FUNDS
---------------------------
1.1 AVAILABILITY.
------------
AVIF will make Shares of each Fund available to LIFE COMPANY for purchase
and redemption at net asset value and with no sales charges, subject to the
terms and conditions of this Agreement. The Board of Directors of AVIF may
refuse to sell Shares of any Fund to any person, or suspend or terminate the
offering of Shares of any Fund if such action is required by law or by
regulatory authorities having jurisdiction or if, in the sole discretion of the
Directors acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, such action is deemed in the best
interests of the shareholders of such Fund.
1.2 ADDITION, DELETION OR MODIFICATION OF FUNDS.
-------------------------------------------
The Parties hereto may agree, from time to time, to add other Funds to
provide additional funding media for the Contracts, or to delete, combine, or
modify existing Funds, by amending Schedule A hereto. Upon such amendment to
Schedule A, any applicable reference to a Fund, AVIF, or its Shares herein shall
include a reference to any such additional Fund. Schedule A, as amended from
time to time, is incorporated herein by reference and is a part hereof.
1.3 NO SALES TO THE GENERAL PUBLIC.
------------------------------
AVIF represents and warrants that no Shares of any Fund have been or will
be sold to the general public.
<PAGE>
SECTION 2. PROCESSING TRANSACTIONS
-----------------------------------
2.1 TIMELY PRICING AND ORDERS.
-------------------------
(a) AVIF or its designated agent will use its best efforts to provide LIFE
COMPANY with the net asset value per Share for each Fund by 6:00 p.m. Central
Time on each Business Day. As used herein, "Business Day" shall mean any day on
which (i) the New York Stock Exchange is open for regular trading, (ii) AVIF
calculates the Fund's net asset value, and (iii) LIFE COMPANY is open for
business.
(b) LIFE COMPANY will use the data provided by AVIF each Business Day
pursuant to paragraph (a) immediately above to calculate Account unit values and
to process transactions that receive that same Business Day's Account unit
values. LIFE COMPANY will perform such Account processing the same Business
Day, and will place corresponding orders to purchase or redeem Shares with AVIF
by 9:00 a.m. Central Time the following Business Day; provided, however, that
AVIF shall provide additional time to LIFE COMPANY in the event that AVIF is
unable to meet the 6:00 p.m. time stated in paragraph (a) immediately above.
Such additional time shall be equal to the additional time that AVIF takes to
make the net asset values available to LIFE COMPANY.
(c) With respect to payment of the purchase price by LIFE COMPANY and of
redemption proceeds by AVIF, LIFE COMPANY and AVIF shall net purchase and
redemption orders with respect to each Fund and shall transmit one net payment
per Fund in accordance with Section 2.2, below.
(d) If AVIF provides materially incorrect Share net asset value
information (as determined under SEC guidelines), LIFE COMPANY shall be entitled
to an adjustment to the number of Shares purchased or redeemed to reflect the
correct net asset value per Share. Any material error in the calculation or
reporting of net asset value per Share, dividend or capital gain information
shall be reported promptly upon discovery to LIFE COMPANY.
2.2 TIMELY PAYMENTS.
---------------
LIFE COMPANY will wire payment for net purchases to a custodial account
designated by AVIF by 1:00 p.m. Central Time on the same day as the order for
Shares is placed, to the extent practicable. AVIF will wire payment for net
redemptions to an account designated by LIFE COMPANY by 1:00 p.m. Central Time
on the same day as the Order is placed, to the extent practicable, but in any
event within five (5) calendar days after the date the order is placed in order
to enable LIFE COMPANY to pay redemption proceeds within the time specified in
Section 22(e) of the 1940 Act or such shorter period of time as may be required
by law.
<PAGE>
2.3 APPLICABLE PRICE.
----------------
(a) Share purchase payments and redemption orders that result from purchase
payments, premium payments, surrenders and other transactions under Contracts
(collectively, "Contract transactions") and that LIFE COMPANY receives prior to
the close of regular trading on the New York Stock Exchange on a Business Day
will be executed at the net asset values of the appropriate Funds next computed
after receipt by AVIF or its designated agent of the orders. For purposes of
this Section 2.3(a), LIFE COMPANY shall be the designated agent of AVIF for
receipt of orders relating to Contract transactions on each Business Day and
receipt by such designated agent shall constitute receipt by AVIF; provided that
AVIF receives notice of such orders by 9:00 a.m. Central Time on the next
following Business Day or such later time as computed in accordance with Section
2.1(b) hereof.
(b) All other Share purchases and redemptions by LIFE COMPANY will be
effected at the net asset values of the appropriate Funds next computed after
receipt by AVIF or its designated agent of the order therefor, and such orders
will be irrevocable.
2.4 DIVIDENDS AND DISTRIBUTIONS.
---------------------------
AVIF will furnish notice by wire or telephone (followed by written
confirmation) on or prior to the payment date to LIFE COMPANY of any income
dividends or capital gain distributions payable on the Shares of any Fund. LIFE
COMPANY hereby elects to reinvest all dividends and capital gains distributions
in additional Shares of the corresponding Fund at the ex-dividend date net asset
values until LIFE COMPANY otherwise notifies AVIF in writing, it being agreed by
the Parties that the ex-dividend date and the payment date with respect to any
dividend or distribution will be the same Business Day. LIFE COMPANY reserves
the right to revoke this election and to receive all such income dividends and
capital gain distributions in cash.
2.5 BOOK ENTRY.
----------
Issuance and transfer of AVIF Shares will be by book entry only. Stock
certificates will not be issued to LIFE COMPANY. Shares ordered from AVIF will
be recorded in an appropriate title for LIFE COMPANY, on behalf of its Account.
Section 3. Costs and Expenses
------------------------------
3.1 GENERAL.
-------
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
<PAGE>
3.2 REGISTRATION.
------------
(a) AVIF will bear the cost of its registering as a management investment
company under the 1940 Act and registering its Shares under the 1933 Act, and
keeping such registrations current and effective; including, without
limitation, the preparation of and filing with the SEC of Forms N-SAR and Rule
24f-2 Notices with respect to AVIF and its Shares and payment of all applicable
registration or filing fees with respect to any of the foregoing.
(b) LIFE COMPANY will bear the cost of registering, to the extent required,
each Account as a unit investment trust under the 1940 Act and registering units
of interest under the Contracts under the 1933 Act and keeping such
registrations current and effective; including, without limitation, the
preparation and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices with
respect to each Account and its units of interest and payment of all applicable
registration or filing fees with respect to any of the foregoing.
<PAGE>
3.3 OTHER (NON-SALES-RELATED).
-------------------------
(a) AVIF will bear, or arrange for others to bear, the costs of preparing,
filing with the SEC and setting for printing AVIF's prospectus, statement of
additional information and any amendments or supplements thereto (collectively,
the "AVIF Prospectus"), periodic reports to shareholders, AVIF proxy material
and other shareholder communications.
(b) LIFE COMPANY will bear the costs of preparing, filing with the SEC and
setting for printing each Account's prospectus, statement of additional
information and any amendments or supplements thereto (collectively, the
"Account Prospectus"), any periodic reports to Contract owners, annuitants,
insureds or participants (as appropriate) under the Contracts (collectively,
"Participants"), voting instruction solicitation material, and other Participant
communications.
(c) LIFE COMPANY will print in quantity and deliver to existing
Participants the documents described in Section 3.3(b) above and the prospectus
provided by AVIF in camera ready or computer diskette form. AVIF will print
the AVIF statement of additional information, proxy materials relating to AVIF
and periodic reports of AVIF.
3.4 OTHER (SALES-RELATED).
---------------------
LIFE COMPANY will bear the expenses of distribution. These expenses would
include by way of illustration, but are not limited to, the costs of
distributing to Participants the following documents, whether they relate to the
Account or AVIF: prospectuses, statements of additional information, proxy
materials and periodic reports. These costs would also include the costs of
preparing, printing, and distributing sales literature and advertising relating
to the Funds, as well as filing such materials with, and obtaining approval
from, the SEC, the NASD, any state insurance regulatory authority, and any other
appropriate regulatory authority, to the extent required.
3.5 PARTIES TO COOPERATE.
--------------------
Each Party agrees to cooperate with the others, as applicable, in arranging
to print, mail and/or deliver, in a timely manner, combined or coordinated
prospectuses or other materials of AVIF and the Accounts.
<PAGE>
Section 4. Legal Compliance
----------------------------
4.1 TAX LAWS.
--------
(a) AVIF represents and warrants that each Fund is currently qualified as a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and represents that it will use its best
efforts to qualify and to maintain qualification of each Fund as a RIC. AVIF
will notify LIFE COMPANY immediately upon having a reasonable basis for
believing that a Fund has ceased to so qualify or that it might not so qualify
in the future.
(b) AVIF represents that it will use its best efforts to comply and to
maintain each Fund's compliance with the diversification requirements set forth
in Section 817(h) of the Code and Section 1.817-5(b) of the regulations under
the Code. AVIF will notify LIFE COMPANY immediately upon having a reasonable
basis for believing that a Fund has ceased to so comply or that a Fund might not
so comply in the future. In the event of a breach of this Section 4.1(b) by
AVIF, it will take all reasonable steps to adequately diversify the Fund so as
to achieve compliance within the grace period afforded by Section 1.817-5 of the
regulations under the Code.
(c) LIFE COMPANY agrees that if the Internal Revenue Service ("IRS")
asserts in writing in connection with any governmental audit or review of LIFE
COMPANY or, to LIFE COMPANY's knowledge, of any Participant, that any Fund has
failed to comply with the diversification requirements of Section 817(h) of the
Code or LIFE COMPANY otherwise becomes aware of any facts that could give rise
to any claim against AVIF or its affiliates as a result of such a failure or
alleged failure:
(i) LIFE COMPANY shall promptly notify AVIF of such
assertion or potential claim (subject to the Confidentiality
provisions of Section 18 as to any Participant);
(ii) LIFE COMPANY shall consult with AVIF as to how to minimize any
liability that may arise as a result of such failure or alleged
failure;
(iii) LIFE COMPANY shall use its best efforts to minimize any
liability of AVIF or its affiliates resulting from such failure,
including, without limitation, demonstrating, pursuant to
Treasury Regulations Section 1.817-5(a)(2), to the Commissioner
of the IRS that such failure was inadvertent;
<PAGE>
(iv) LIFE COMPANY shall permit AVIF, its affiliates and their legal
and accounting advisors to participate in any conferences,
settlement discussions or other administrative or judicial
proceeding or contests (including judicial appeals thereof) with
the IRS, any Participant or any other claimant regarding any
claims that could give rise to liability to AVIF or its
affiliates as a result of such a failure or alleged failure;
provided, however, that LIFE COMPANY will retain control of the
conduct of such conferences discussions, proceedings, contests or
appeals;
(v) any written materials to be submitted by LIFE COMPANY to the IRS,
any Participant or any other claimant in connection with any of
the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the IRS
pursuant to Treasury Regulations Section 1.817-5(a)(2)), (a)
shall be provided by LIFE COMPANY to AVIF (together with any
supporting information or analysis); subject to the
confidentiality provisions of Section 18, at least ten (10)
business days or such shorter period to which the Parties hereto
agree prior to the day on which such proposed materials are to be
submitted, and (b) shall not be submitted by LIFE COMPANY to any
such person without the express written consent of AVIF which
shall not be unreasonably withheld;
(vi) LIFE COMPANY shall provide AVIF or its affiliates and their
accounting and legal advisors with such cooperation as AVIF shall
reasonably request (including, without limitation, by permitting
AVIF and its accounting and legal advisors to review the relevant
books and records of LIFE COMPANY) in order to facilitate review
by AVIF or its advisors of any written submissions provided to it
pursuant to the preceding clause or its assessment of the
validity or amount of any claim against its arising from such a
failure or alleged failure;
(vii) LIFE COMPANY shall not with respect to any claim of the IRS or
any Participant that would give rise to a claim against AVIF or
its affiliates (a) compromise or settle any claim, (b) accept any
adjustment on audit, or (c) forego any allowable administrative
or judicial appeals, without the express written consent of AVIF
or its affiliates, which shall not be unreasonably withheld,
provided that LIFE COMPANY shall not be required, after
exhausting all administrative penalties, to appeal any adverse
judicial decision unless AVIF or its affiliates shall have
provided an opinion of independent
<PAGE>
counsel to the effect that a reasonable basis exists for taking
such appeal; and provided further that the costs of any such
appeal shall be borne equally by the Parties hereto; and
(viii) AVIF and its affiliates shall have no liability as a result of
such failure or alleged failure if LIFE COMPANY fails to comply
with any of the foregoing clauses (i) through (vii), and such
failure could be shown to have materially contributed to the
liability.
Should AVIF or any of its affiliates refuse to give its written consent to
any compromise or settlement of any claim or liability hereunder, LIFE COMPANY
may, in its discretion, authorize AVIF or its affiliates to act in the name of
LIFE COMPANY in, and to control the conduct of, such conferences, discussions,
proceedings, contests or appeals and all administrative or judicial appeals
thereof, and in that event AVIF or its affiliates shall bear the fees and
expenses associated with the conduct of the proceedings that it is so authorized
to control; provided, that in no event shall LIFE COMPANY have any liability
resulting from AVIF's refusal to accept the proposed settlement or compromise
with respect to any failure caused by AVIF. As used in this Agreement, the term
"affiliates" shall have the same meaning as "affiliated person" as defined in
Section 2(a)(3) of the 1940 Act.
(d) LIFE COMPANY represents and warrants that the Contracts currently are
and will be treated as annuity contracts or life insurance contracts under
applicable provisions of the Code and that it will use its best efforts to
maintain such treatment; LIFE COMPANY will notify AVIF immediately upon having a
reasonable basis for believing that any of the Contracts have ceased to be so
treated or that they might not be so treated in the future.
(e) LIFE COMPANY represents and warrants that each Account is a "segregated
asset account" and that interests in each Account are offered exclusively
through the purchase of or transfer into a "variable contract," within the
meaning of such terms under Section 817 of the Code and the regulations
thereunder. LIFE COMPANY will use its best efforts to continue to meet such
definitional requirements, and it will notify AVIF immediately upon having a
reasonable basis for believing that such requirements have ceased to be met or
that they might not be met in the future.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
--------------------------------
(a) AVIF will use its best efforts to comply with any applicable state
insurance laws or regulations, to the extent specifically requested in writing
by LIFE COMPANY, including, the furnishing of information not otherwise
available to LIFE COMPANY which is required by state insurance law to enable
LIFE COMPANY to obtain the authority needed to issue the Contracts in any
applicable state.
<PAGE>
(b) LIFE COMPANY represents and warrants that (i) it is an insurance
company duly organized, validly existing and in good standing under the laws of
the State of Iowa and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains each
Account as a segregated asset account under the Iowa Insurance Code and the
regulations thereunder, and (iii) the Contracts comply in all material respects
with all other applicable federal and state laws and regulations.
(c) AVIF represents and warrants that it is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Maryland
and has full power, authority, and legal right to execute, deliver, and perform
its duties and comply with its obligations under this Agreement.
4.3 SECURITIES LAWS.
---------------
(a) LIFE COMPANY represents and warrants that (i) interests in each Account
pursuant to the Contracts will be registered under the 1933 Act to the extent
required by the 1933 Act, (ii) the Contracts will be duly authorized for
issuance and sold in compliance with all applicable federal and state laws,
including, without limitation, the 1933 Act, the 1934 Act, the 1940 Act and Iowa
law, (iii) each Account is and will remain registered under the 1940 Act, to the
extent required by the 1940 Act, (iv) each Account does and will comply in all
material respects with the requirements of the 1940 Act and the rules
thereunder, to the extent required, (v) each Account's 1933 Act registration
statement relating to the Contracts, together with any amendments thereto, will
at all times comply in all material respects with the requirements of the 1933
Act and the rules thereunder, (vi) LIFE COMPANY will amend the registration
statement for its Contracts under the 1933 Act and for its Accounts under the
1940 Act from time to time as required in order to effect the continuous
offering of its Contracts or as may otherwise be required by applicable law, and
(vii) each Account Prospectus will at all times comply in all material respects
with the requirements of the 1933 Act and the rules thereunder.
(b) AVIF represents and warrants that (i) Shares sold pursuant to this
Agreement will be registered under the 1933 Act to the extent required by the
1933 Act and duly authorized for issuance and sold in compliance with Maryland
law, (ii) AVIF is and will remain registered under the 1940 Act to the extent
required by the 1940 Act, (iii) AVIF will amend the registration statement for
its Shares under the 1933 Act and itself under the 1940 Act from time to time as
required in order to effect the continuous offering of its Shares, (iv) AVIF
does and will comply in all material respects with the requirements of the 1940
Act and the rules thereunder, (v) AVIF's 1933 Act registration statement,
together with
<PAGE>
any amendments thereto, will at all times comply in all material respects with
the requirements of the 1933 Act and rules thereunder, and (vi) AVIF's
Prospectus will at all times comply in all material respects with the
requirements of the 1933 Act and the rules thereunder.
(c) AVIF will at its expense register and qualify its Shares for sale in
accordance with the laws of any state or other jurisdiction if and to the extent
reasonably deemed advisable by AVIF.
(d) AVIF currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it reserves the right to make such payments in the future. To the
extent that it decides to finance distribution expenses pursuant to Rule 12b-1,
AVIF undertakes to have its Board of Directors, a majority of whom are not
"interested" persons of the Fund, formulate and approve any plan under Rule 12b-
1 to finance distribution expenses.
(e) AVIF represents and warrants that all of its trustees, officers,
employees, investment advisers, and other individuals/entities having access to
the funds and/or securities of the Fund are and continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund in an amount not less than the minimal coverage as required currently by
Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from
time to time. The aforesaid bond includes coverage for larceny and embezzlement
and is issued by a reputable bonding company.
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
-----------------------------------------------------
(a) AVIF will immediately notify LIFE COMPANY of (i) the issuance by any
court or regulatory body of any stop order, cease and desist order, or other
similar order with respect to AVIF's registration statement under the 1933 Act
or AVIF Prospectus, (ii) any request by the SEC for any amendment to such
registration statement or AVIF Prospectus that may affect the offering of Shares
of AVIF, (iii) the initiation of any proceedings for that purpose or for any
other purpose relating to the registration or offering of AVIF's Shares, or (iv)
any other action or circumstances that may prevent the lawful offer or sale of
Shares of any Fund in any state or jurisdiction, including, without limitation,
any circumstances in which (a) such Shares are not registered and, in all
material respects, issued and sold in accordance with applicable state and
federal law, or (b) such law precludes the use of such Shares as an underlying
investment medium of the Contracts issued or to be issued by LIFE COMPANY. AVIF
will make every reasonable effort to prevent the issuance, with respect to any
Fund, of any such stop order, cease and desist order or similar order and, if
any such order is issued, to obtain the lifting thereof at the earliest possible
time.
<PAGE>
(b) LIFE COMPANY will immediately notify AVIF of (i) the issuance by any
court or regulatory body of any stop order, cease and desist order, or other
similar order with respect to each Account's registration statement under the
1933 Act relating to the Contracts or each Account Prospectus, (ii) any request
by the SEC for any amendment to such registration statement or Account
Prospectus that may affect the offering of Shares of AVIF, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of each Account's interests pursuant to the Contracts,
or (iv) any other action or circumstances that may prevent the lawful offer or
sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. LIFE COMPANY will make every reasonable effort to prevent the
issuance of any such stop order, cease and desist order or similar order and, if
any such order is issued, to obtain the lifting thereof at the earliest possible
time.
4.5 LIFE COMPANY TO PROVIDE DOCUMENTS; INFORMATION ABOUT AVIF.
---------------------------------------------------------
(a) LIFE COMPANY will provide to AVIF or its designated agent at least one
(1) complete copy of all SEC registration statements, Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to each Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
(b) LIFE COMPANY will provide to AVIF or its designated agent at least one
(1) complete copy of each piece of sales literature or other promotional
material in which AVIF or any of its affiliates is named, at least five (5)
Business Days prior to its use or such shorter period as the Parties hereto may,
from time to time, agree upon. No such material shall be used if AVIF or its
designated agent objects to such use within five (5) Business Days after receipt
of such material or such shorter period as the Parties hereto may, from time to
time, agree upon. AVIF hereby designates AIM as the entity to receive such
sales literature, until such time as AVIF appoints another designated agent by
giving notice to LIFE COMPANY in the manner required by Section 9 hereof.
(c) Neither LIFE COMPANY nor any of its affiliates, will give any
information or make any representations or statements on behalf of or concerning
AVIF or its affiliates in connection with the sale of the Contracts other than
(i) the information or representations contained in the registration statement,
including the AVIF Prospectus contained therein, relating to Shares, as such
registration statement and AVIF Prospectus may be amended from time to time; or
(ii) in reports or proxy materials for AVIF; or (iii) in published reports for
AVIF that are in the public domain and approved by AVIF for distribution; or
<PAGE>
(iv) in sales literature or other promotional material approved by AVIF, except
with the express written permission of AVIF.
(d) LIFE COMPANY shall adopt and implement procedures reasonably designed
to ensure that information concerning AVIF and its affiliates that is intended
for use only by brokers or agents selling the Contracts (i.e., information that
is not intended for distribution to Participants) ("broker only materials") is
so used, and neither AVIF nor any of its affiliates shall be liable for any
losses, damages or expenses relating to the improper use of such broker only
materials.
(e) For the purposes of this Section 4.5, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media, (e.g., on-
line networks such as the Internet or other electronic messages), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials and any other material constituting sales literature or
advertising under the NASD rules, the 1933 Act or the 1940 Act.
4.6 AVIF TO PROVIDE DOCUMENTS; INFORMATION ABOUT LIFE COMPANY.
---------------------------------------------------------
(a) AVIF will provide to LIFE COMPANY at least one (1) complete copy of
all SEC registration statements, AVIF Prospectuses, reports, any preliminary and
final proxy material, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to AVIF or the
Shares of a Fund, contemporaneously with the filing of such document with the
SEC or other regulatory authorities.
(b) AVIF will provide to LIFE COMPANY camera ready or computer diskette
copies of all AVIF prospectuses and printed copies, in an amount specified by
LIFE COMPANY, of AVIF statements of additional information, proxy materials,
periodic reports to shareholders and other materials required by law to be sent
to Participants who have allocated any Contract value to a Fund. AVIF will
provide such copies to LIFE COMPANY in a timely manner so as to enable LIFE
COMPANY, as the case may be, to print and distribute such materials within the
time required by law to be furnished to Participants.
<PAGE>
(c) AVIF will provide to LIFE COMPANY or its designated agent at least one
(1) complete copy of each piece of sales literature or other promotional
material in which LIFE COMPANY, or any of its respective affiliates is named, or
that refers to the Contracts, at least five (5) Business Days prior to its use
or such shorter period as the Parties hereto may, from time to time, agree upon.
No such material shall be used if LIFE COMPANY or its designated agent objects
to such use within five (5) Business Days after receipt of such material or such
shorter period as the Parties hereto may, from time to time, agree upon. LIFE
COMPANY shall receive all such sales literature until such time as it appoints a
designated agent by giving notice to AVIF in the manner required by Section 9
hereof.
(d) Neither AVIF nor any of its affiliates will give any information or
make any representations or statements on behalf of or concerning LIFE COMPANY,
each Account, or the Contracts other than (i) the information or representations
contained in the registration statement, including each Account Prospectus
contained therein, relating to the Contracts, as such registration statement and
Account Prospectus may be amended from time to time; or (ii) in published
reports for the Account or the Contracts that are in the public domain and
approved by LIFE COMPANY for distribution; or (iii) in sales literature or other
promotional material approved by LIFE COMPANY or its affiliates, except with the
express written permission of LIFE COMPANY.
(e) AVIF shall cause its principal underwriter to adopt and implement
procedures reasonably designed to ensure that information concerning LIFE
COMPANY, and its respective affiliates that is intended for use only by brokers
or agents selling the Contracts (i.e., information that is not intended for
distribution to Participants) ("broker only materials") is so used, and neither
LIFE COMPANY, nor any of its respective affiliates shall be liable for any
losses, damages or expenses relating to the improper use of such broker only
materials.
(f) For purposes of this Section 4.6, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media, (e.g., on-
line networks such as the Internet or other electronic messages), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials and any other material constituting sales literature or
advertising under the NASD rules, the 1933 Act or the 1940 Act.
<PAGE>
Section 5. Mixed and Shared Funding
------------------------------------
5.1 GENERAL.
-------
The SEC has granted an order to AVIF exempting it from certain provisions
of the 1940 Act and rules thereunder so that AVIF may be available for
investment by certain other entities, including, without limitation, separate
accounts funding variable annuity contracts or variable life insurance
contracts, separate accounts of insurance companies unaffiliated with LIFE
COMPANY, and trustees of qualified pension and retirement plans (collectively,
"Mixed and Shared Funding"). The Parties recognize that the SEC has imposed
terms and conditions for such orders that are substantially identical to many of
the provisions of this Section 5. Sections 5.2 through 5.8 below shall apply
pursuant to such an exemptive order granted to AVIF. AVIF hereby notifies LIFE
COMPANY that, in the event that AVIF implements Mixed and Shared Funding, it may
be appropriate to include in the prospectus pursuant to which a Contract is
offered disclosure regarding the potential risks of Mixed and Shared Funding.
5.2 DISINTERESTED DIRECTORS.
-----------------------
AVIF agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of AVIF within the meaning of Section 2(a)(19) of the 1940 Act and the
rules thereunder and as modified by any applicable orders of the SEC, except
that if this condition is not met by reason of the death, disqualification, or
bona fide resignation of any director, then the operation of this condition
shall be suspended (a) for a period of forty-five (45) days if the vacancy or
vacancies may be filled by the Board; (b) for a period of sixty (60) days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
------------------------------------------------
AVIF agrees that its Board of Directors will monitor for the existence of
any material irreconcilable conflict between the interests of the Participants
in all separate accounts of life insurance companies utilizing AVIF
("Participating Insurance Companies"), including each Account, and participants
in all qualified retirement and pension plans investing in AVIF ("Participating
Plans"). LIFE COMPANY agrees to inform the Board of Directors of AVIF of the
existence of or any potential for any such material irreconcilable conflict of
which it is aware. The concept of a "material irreconcilable conflict" is not
defined by the 1940 Act or the rules thereunder, but the Parties recognize that
such a conflict may arise for a variety of reasons, including, without
limitation:
(a) an action by any state insurance or other regulatory authority;
<PAGE>
(b) a change in applicable federal or state insurance, tax or securities
laws or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax or securities
regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Fund are being managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract Participants or by Participants of
different Participating Insurance Companies;
(f) a decision by a Participating Insurance Company to disregard the
voting instructions of Participants; or
(g) a decision by a Participating Plan to disregard the voting
instructions of Plan participants.
Consistent with the SEC's requirements in connection with exemptive orders
of the type referred to in Section 5.1 hereof, LIFE COMPANY will assist the
Board of Directors in carrying out its responsibilities by providing the Board
of Directors with all information reasonably necessary for the Board of
Directors to consider any issue raised, including information as to a decision
by LIFE COMPANY to disregard voting instructions of Participants.
5.4 CONFLICT REMEDIES.
-----------------
(a) It is agreed that if it is determined by a majority of the members of
the Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, LIFE COMPANY will, if it is a
Participating Insurance Company for which a material irreconcilable conflict is
relevant, at its own expense and to the extent reasonably practicable (as
determined by a majority of the Disinterested Directors), take whatever steps
are necessary to remedy or eliminate the material irreconcilable conflict, which
steps may include, but are not limited to:
(i) withdrawing the assets allocable to some or all of the Accounts
from AVIF or any Fund and reinvesting such assets in a different
investment medium, including another Fund of AVIF, or submitting
the question whether such segregation should be implemented to a
vote of all affected Participants and, as appropriate, segregating
the assets of any particular group (e.g., annuity Participants,
life insurance Participants or all Participants) that votes in
favor of such segregation, or offering to the affected Participants
the option of making such a change; and
<PAGE>
(ii) establishing a new registered investment company of the type
defined as a "management company" in Section 4(3) of the 1940 Act
or a new separate account that is operated as a management company.
(b) If the material irreconcilable conflict arises because of LIFE
COMPANY's decision to disregard Participant voting instructions and that
decision represents a minority position or would preclude a majority vote, LIFE
COMPANY may be required, at AVIF's election, to withdraw each Account's
investment in AVIF or any Fund. No charge or penalty will be imposed as a
result of such withdrawal. Any such withdrawal must take place within six (6)
months after AVIF gives notice to LIFE COMPANY that this provision is being
implemented, and until such withdrawal AVIF shall continue to accept and
implement orders by LIFE COMPANY for the purchase and redemption of Shares of
AVIF.
(c) If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to LIFE COMPANY conflicts with the
majority of other state regulators, then LIFE COMPANY will withdraw each
Account's investment in AVIF within six (6) months after AVIF's Board of
Directors informs LIFE COMPANY that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal AVIF shall
continue to accept and implement orders by LIFE COMPANY for the purchase and
redemption of Shares of AVIF. No charge or penalty will be imposed as a result
of such withdrawal.
(d) LIFE COMPANY agrees that any remedial action taken by it in resolving
any material irreconcilable conflict will be carried out at its expense and with
a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any material
irreconcilable conflict. In no event, however, will AVIF or any of its
affiliates be required to establish a new funding medium for any Contracts.
LIFE COMPANY will not be required by the terms hereof to establish a new funding
medium for any Contracts if an offer to do so has been declined by vote of a
majority of Participants materially adversely affected by the material
irreconcilable conflict.
<PAGE>
5.5 NOTICE TO LIFE COMPANY.
----------------------
AVIF will promptly make known in writing to LIFE COMPANY the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
-------------------------------------------
LIFE COMPANY and AVIF (or its investment adviser) will at least annually
submit to the Board of Directors of AVIF such reports, materials or data as the
Board of Directors may reasonably request so that the Board of Directors may
fully carry out the obligations imposed upon it by the provisions hereof or
any exemptive order granted by the SEC to permit Mixed and Shared Funding, and
said reports, materials and data will be submitted at any reasonable time deemed
appropriate by the Board of Directors. All reports received by the Board of
Directors of potential or existing conflicts, and all Board of Directors actions
with regard to determining the existence of a conflict, notifying Participating
Insurance Companies and Participating Plans of a conflict, and determining
whether any proposed action adequately remedies a conflict, will be properly
recorded in the minutes of the Board of Directors or other appropriate records,
and such minutes or other records will be made available to the SEC upon
request.
5.7 COMPLIANCE WITH SEC RULES.
-------------------------
If, at any time during which AVIF is serving as an investment medium for
variable life insurance Contracts, 1940 Act Rules 6e-3(T) or, if applicable, 6e-
2 are amended or Rule 6e-3 is adopted to provide exemptive relief with respect
to Mixed and Shared Funding, AVIF agrees that it will comply with the terms and
conditions thereof and that the terms of this Section 5 shall be deemed modified
if and only to the extent required in order also to comply with the terms and
conditions of such exemptive relief that is afforded by any of said rules that
are applicable.
5.8 OTHER REQUIREMENTS.
------------------
AVIF will require that each Participating Insurance Company and
Participating Plan enter into an agreement with AVIF that contains in substance
the same provisions as are set forth in Sections 4.1(b), 4.1(d), 4.3(a), 4.4(b),
4.5(a), 5, and 10 of this Agreement.
<PAGE>
SECTION 6. TERMINATION
-----------------------
6.1 EVENTS OF TERMINATION.
---------------------
Subject to Section 6.4 below, this Agreement will terminate as to a Fund:
(a) at the option of any party, with or without cause with respect to the
Fund, upon six (6) months advance written notice to the other parties, or, if
later, upon receipt of any required exemptive relief from the SEC, unless
otherwise agreed to in writing by the parties; or
(b) at the option of AVIF upon institution of formal proceedings against
LIFE COMPANY or its affiliates by the NASD, the SEC, any state insurance
regulator or any other regulatory body regarding LIFE COMPANY's obligations
under this Agreement or related to the sale of the Contracts, the operation of
each Account, or the purchase of Shares, if, in each case, AVIF reasonably
determines that such proceedings, or the facts on which such proceedings would
be based, have a material likelihood of imposing material adverse consequences
on the Fund with respect to which the Agreement is to be terminated; or
(c) at the option of LIFE COMPANY upon institution of formal proceedings
against AVIF, its principal underwriter, or its investment adviser by the NASD,
the SEC, or any state insurance regulator or any other regulatory body regarding
AVIF's obligations under this Agreement or related to the operation or
management of AVIF or the purchase of AVIF Shares, if, in each case, LIFE
COMPANY reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on LIFE COMPANY, or the Subaccount corresponding to the
Fund with respect to which the Agreement is to be terminated; or
(d) at the option of any Party in the event that (i) the Fund's Shares are
not registered and, in all material respects, issued and sold in accordance with
any applicable federal or state law, or (ii) such law precludes the use of such
Shares as an underlying investment medium of the Contracts issued or to be
issued by LIFE COMPANY; or
(e) upon termination of the corresponding Subaccount's investment in the
Fund pursuant to Section 5 hereof; or
(f) at the option of LIFE COMPANY if the Fund ceases to qualify as a RIC
under Subchapter M of the Code or under successor or similar provisions, or if
LIFE COMPANY reasonably believes that the Fund may fail to so qualify; or
(g) at the option of LIFE COMPANY if the Fund fails to comply with Section
817(h) of the Code or with successor or similar provisions, or if LIFE COMPANY
reasonably believes that the Fund may fail to so comply; or
<PAGE>
(h) at the option of AVIF if the Contracts issued by LIFE COMPANY cease to
qualify as annuity contracts or life insurance contracts under the Code (other
than by reason of the Fund's noncompliance with Section 817(h) or Subchapter M
of the Code) or if interests in an Account under the Contracts are not
registered, where required, and, in all material respects, are not issued or
sold in accordance with any applicable federal or state law; or
(i) upon another Party's material breach of any provision of this
Agreement.
6.2 NOTICE REQUIREMENT FOR TERMINATION.
----------------------------------
No termination of this Agreement will be effective unless and until the
Party terminating this Agreement gives prior written notice to the other Party
to this Agreement of its intent to terminate, and such notice shall set forth
the basis for such termination. Furthermore:
(a) in the event that any termination is based upon the provisions of
Sections 6.1(a) or 6.1(e) hereof, such prior written notice shall be given at
least six (6) months in advance of the effective date of termination unless a
shorter time is agreed to by the Parties hereto;
(b) in the event that any termination is based upon the provisions of
Sections 6.1(b) or 6.1(c) hereof, such prior written notice shall be given at
least ninety (90) days in advance of the effective date of termination unless a
shorter time is agreed to by the Parties hereto; and
(c) in the event that any termination is based upon the provisions of
Sections 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, such prior written
notice shall be given as soon as possible within twenty-four (24) hours after
the terminating Party learns of the event causing termination to be required.
6.3 FUNDS TO REMAIN AVAILABLE.
-------------------------
Notwithstanding any termination of this Agreement, AVIF will, at the option
of LIFE COMPANY, continue to make available additional shares of the Fund
pursuant to the terms and conditions of this Agreement, for all Contracts in
effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts"). Specifically, without limitation, the
owners of the Existing Contracts will be permitted to reallocate investments in
the Fund (as in effect on such date), redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The parties agree that this Section 6.3 will not apply to
any terminations under Section 5 and the effect of such terminations will be
governed by Section 5 of this Agreement.
<PAGE>
6.4 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
-------------------------------------------
All warranties and indemnifications will survive the termination of this
Agreement.
6.5 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
---------------------------------------------
If any Party terminates this Agreement with respect to any Fund pursuant to
Sections 6.1(b), 6.1(c), 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, this
Agreement shall nevertheless continue in effect as to any Shares of that Fund
that are outstanding as of the date of such termination (the "Initial
Termination Date"). This continuation shall extend to the earlier of the date
as of which an Account owns no Shares of the affected Fund or a date (the "Final
Termination Date") six (6) months following the Initial Termination Date, except
that LIFE COMPANY may, by written notice shorten said six (6) month period in
the case of a termination pursuant to Sections 6.1(d), 6.1(f), 6.1(g), 6.1(h) or
6.1(i).
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
-------------------------------------------------------
The Parties hereto agree to cooperate and give reasonable assistance to one
another in taking all necessary and appropriate steps for the purpose of
ensuring that an Account owns no Shares of a Fund after the Final Termination
Date with respect thereto, or, in the case of a termination pursuant to Section
6.1(a), the termination date specified in the notice of termination. Such steps
may include combining the affected Account with another Account, substituting
other mutual fund shares for those of the affected Fund, or otherwise
terminating participation by the Contracts in such Fund.
SECTION 8. ASSIGNMENT
----------------------
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
SECTION 9. NOTICES
-------------------
Notices and communications required or permitted by Section 9 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
<PAGE>
AIM VARIABLE INSURANCE FUNDS, INC.
11 Greenway Plaza, Suite 100
Houston, Texas 77046
Facsimile: (713) 993-9185
Attn: Nancy L. Martin, Esq.
LIFE COMPANY
Street Address
City, State, Zip Code
Facsimile:
Attn: [NAME OF PERSON]
UNDERWRITER
Street Address
City, State, Zip Code
Facsimile:
Attn: [NAME OF PERSON]
SECTION 10. VOTING PROCEDURES
------------------------------
Subject to the cost allocation procedures set forth in Section 3 hereof,
LIFE COMPANY will distribute all proxy material furnished by AVIF to
Participants to whom pass-through voting privileges are required to be extended
and will solicit voting instructions from Participants. LIFE COMPANY will vote
Shares in accordance with timely instructions received from Participants. LIFE
COMPANY will vote Shares that are (a) not attributable to Participants to whom
pass-through voting privileges are extended, or (b) attributable to
Participants, but for which no timely instructions have been received, in the
same proportion as Shares for which said instructions have been received from
Participants, so long as and to the extent that the SEC continues to interpret
the 1940 Act to require pass through voting privileges for Participants.
Neither LIFE COMPANY nor any of its affiliates will in any way recommend action
in connection with or oppose or interfere with the solicitation of proxies for
the Shares held for such Participants. LIFE COMPANY reserves the right to vote
shares held in any Account in its own right, to the extent permitted by law.
LIFE COMPANY shall be responsible for assuring that each of its Accounts holding
Shares calculates voting privileges in a manner consistent with that of other
Participating Insurance Companies or in the manner required
<PAGE>
by the Mixed and Shared Funding exemptive order obtained by AVIF. AVIF will
notify LIFE COMPANY of any changes of interpretations or amendments to Mixed and
Shared Funding exemptive order it has obtained. AVIF will comply with all
provisions of the 1940 Act requiring voting by shareholders, and in particular,
AVIF either will provide for annual meetings (except insofar as the SEC may
interpret Section 16 of the 1940 Act not to require such meetings) or will
comply with Section 16(c) of the 1940 Act (although AVIF is not one of the
trusts described in Section 16(c) of that Act) as well as with Sections 16(a)
and, if and when applicable, 16(b). Further, AVIF will act in accordance with
the SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors and with whatever rules the SEC may promulgate
with respect thereto.
SECTION 11. FOREIGN TAX CREDITS
--------------------------------
AVIF agrees to consult in advance with LIFE COMPANY concerning any decision
to elect or not to elect pursuant to Section 853 of the Code to pass through the
benefit of any foreign tax credits to its shareholders.
SECTION 12. INDEMNIFICATION
----------------------------
12.1 OF AVIF BY LIFE COMPANY AND UNDERWRITER.
---------------------------------------
(a) Except to the extent provided in Sections 12.1(b) and 12.1(c), below,
LIFE COMPANY and UNDERWRITER agree to indemnify and hold harmless AVIF, its
affiliates, and each person, if any, who controls AVIF or its affiliates within
the meaning of Section 15 of the 1933 Act and each of their respective directors
and officers, (collectively, the "Indemnified Parties" for purposes of this
Section 12.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY
and UNDERWRITER) or actions in respect thereof (including, to the extent
reasonable, legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise;
provided, the Account owns shares of the Fund and insofar as such losses,
claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Account's
1933 Act registration statement, any Account Prospectus, the
Contracts, or sales literature or advertising for the Contracts (or
any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein
<PAGE>
not misleading; provided, that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and
in conformity with information furnished to LIFE COMPANY or
UNDERWRITER by or on behalf of AVIF for use in any Account's 1933
Act registration statement, any Account Prospectus, the Contracts,
or sales literature or advertising or otherwise for use in
connection with the sale of Contracts or Shares (or any amendment
or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained
in AVIF's 1933 Act registration statement, AVIF Prospectus, sales
literature or advertising of AVIF, or any amendment or supplement
to any of the foregoing, not supplied for use therein by or on
behalf of LIFE COMPANY, UNDERWRITER or their respective affiliates
and on which such persons have reasonably relied) or the negligent,
illegal or fraudulent conduct of LIFE COMPANY, UNDERWRITER or their
respective affiliates or persons under their control (including,
without limitation, their employees and "Associated Persons," as
that term is defined in paragraph (m) of Article I of the NASD's
By-Laws), in connection with the sale or distribution of the
Contracts or Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933 Act
registration statement, AVIF Prospectus, sales literature or
advertising of AVIF, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to AVIF or its affiliates by or on behalf of
LIFE COMPANY, UNDERWRITER or their respective affiliates for use in
AVIF's 1933 Act registration statement, AVIF Prospectus, sales
literature or advertising of AVIF, or any amendment or supplement
to any of the foregoing; or
(iv) arise as a result of any failure by LIFE COMPANY or UNDERWRITER to
perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement, or
any material breach of any representation and/or warranty made by
LIFE COMPANY or
<PAGE>
UNDERWRITER in this Agreement or arise out of or result from any
other material breach of this Agreement by LIFE COMPANY or
UNDERWRITER; or
(v) arise as a result of failure by the Contracts issued by LIFE
COMPANY to qualify as annuity contracts or life insurance contracts
under the Code, otherwise than by reason of any Fund's failure to
comply with Subchapter M or Section 817(h) of the Code.
(b) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this Section
12.1 with respect to any losses, claims, damages, liabilities or actions to
which an Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance by that
Indemnified Party of its duties or by reason of that Indemnified Party's
reckless disregard of obligations or duties (i) under this Agreement, or (ii) to
AVIF.
(c) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this Section
12.1 with respect to any action against an Indemnified Party unless AVIF shall
have notified LIFE COMPANY and UNDERWRITER in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify LIFE COMPANY and UNDERWRITER of any such action
shall not relieve LIFE COMPANY and UNDERWRITER from any liability which they may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this Section 12.1. Except as otherwise provided herein, in case
any such action is brought against an Indemnified Party, LIFE COMPANY and
UNDERWRITER shall be entitled to participate, at their own expense, in the
defense of such action and also shall be entitled to assume the defense thereof,
with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably withheld. After notice from LIFE COMPANY or
UNDERWRITER to such Indemnified Party of LIFE COMPANY's or UNDERWRITER's
election to assume the defense thereof, the Indemnified Party will cooperate
fully with LIFE COMPANY and UNDERWRITER and shall bear the fees and expenses of
any additional counsel retained by it, and neither LIFE COMPANY nor UNDERWRITER
will be liable to such Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such Indemnified Party independently in
connection with the defense thereof, other than reasonable costs of
investigation.
12.2 OF LIFE COMPANY AND UNDERWRITER BY AVIF.
---------------------------------------
(a) Except to the extent provided in Sections 12.2(c), 12.2(d) and 12.2(e),
below, AVIF agrees to indemnify and hold harmless LIFE COMPANY, UNDERWRITER,
their respective affiliates, and each person, if any, who
<PAGE>
controls LIFE COMPANY, UNDERWRITER or their respective affiliates within the
meaning of Section 15 of the 1933 Act and each of their respective directors and
officers, (collectively, the "Indemnified Parties" for purposes of this Section
12.2) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of AVIF) or actions in
respect thereof (including, to the extent reasonable, legal and other expenses),
to which the Indemnified Parties may become subject under any statute,
regulation, at common law, or otherwise; provided, the Account owns shares of
the Fund and insofar as such losses, claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933 Act
registration statement, AVIF Prospectus or sales literature or
advertising of AVIF (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading; provided, that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to AVIF or its affiliates by
or on behalf of LIFE COMPANY, UNDERWRITER or their respective
affiliates for use in AVIF's 1933 Act registration statement, AVIF
Prospectus, or in sales literature or advertising or otherwise for
use in connection with the sale of Contracts or Shares (or any
amendment or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained
in any Account's 1933 Act registration statement, any Account
Prospectus, sales literature or advertising for the Contracts, or
any amendment or supplement to any of the foregoing, not supplied
for use therein by or on behalf of AVIF or its affiliates and on
which such persons have reasonably relied) or the negligent,
illegal or fraudulent conduct of AVIF or its affiliates or persons
under its control (including, without limitation, their employees
and "Associated Persons" as that term is defined in Section (n) of
Article I of the NASD By-Laws), in connection with the sale or
distribution of AVIF Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Account's
1933 Act registration statement, any Account Prospectus, sales
literature or advertising covering the Contracts, or any amendment
or supplement to any of the
<PAGE>
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, if such statement or
omission was made in reliance upon and in conformity with
information furnished to LIFE COMPANY, UNDERWRITER or their
respective affiliates by or on behalf of AVIF for use in any
Account's 1933 Act registration statement, any Account Prospectus,
sales literature or advertising covering the Contracts, or any
amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by AVIF to perform the
obligations, provide the services and furnish the materials
required of it under the terms of this Agreement, or any material
breach of any representation and/or warranty made by AVIF in this
Agreement or arise out of or result from any other material breach
of this Agreement by AVIF.
(b) Except to the extent provided in Sections 12.2(c), 12.2(d) and 12.2(e)
hereof, AVIF agrees to indemnify and hold harmless the Indemnified Parties from
and against any and all losses, claims, damages, liabilities (including amounts
paid in settlement thereof with, the written consent of AVIF) or actions in
respect thereof (including, to the extent reasonable, legal and other expenses)
to which the Indemnified Parties may become subject directly or indirectly under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or actions directly or indirectly result from or arise out
of the failure of any Fund to operate as a regulated investment company in
compliance with (i) Subchapter M of the Code and regulations thereunder, or (ii)
Section 817(h) of the Code and regulations thereunder, including, without
limitation, any income taxes and related penalties, rescission charges,
liability under state law to Participants asserting liability against LIFE
COMPANY pursuant to the Contracts, the costs of any ruling and closing agreement
or other settlement with the IRS, and the cost of any substitution by LIFE
COMPANY of Shares of another investment company or portfolio for those of any
adversely affected Fund as a funding medium for each Account that LIFE COMPANY
reasonably deems necessary or appropriate as a result of the noncompliance.
(c) AVIF shall not be liable under this Section 12.2 with respect to any
losses, claims, damages, liabilities or actions to which an Indemnified Party
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties (i) under this Agreement, or (ii) to LIFE COMPANY, UNDERWRITER, each
Account or Participants.
<PAGE>
(d) AVIF shall not be liable under this Section 12.2 with respect to any
action against an Indemnified Party unless the Indemnified Party shall have
notified AVIF in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the action shall have
been served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify AVIF of any such action shall not relieve AVIF from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this Section 12.2. Except as otherwise provided
herein, in case any such action is brought against an Indemnified Party, AVIF
will be entitled to participate, at its own expense, in the defense of such
action and also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the IRS), with counsel approved by
the Indemnified Party named in the action, which approval shall not be
unreasonably withheld. After notice from AVIF to such Indemnified Party of
AVIF's election to assume the defense thereof, the Indemnified Party will
cooperate fully with AVIF and shall bear the fees and expenses of any additional
counsel retained by it, and AVIF will not be liable to such Indemnified Party
under this Agreement for any legal or other expenses subsequently incurred by
such Indemnified Party independently in connection with the defense thereof,
other than reasonable costs of investigation.
(e) In no event shall AVIF be liable under the indemnification provisions
contained in this Agreement to any individual or entity, including, without
limitation, LIFE COMPANY, UNDERWRITER or any other Participating Insurance
Company or any Participant, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of any
representation, warranty, and/or covenant made by LIFE COMPANY or UNDERWRITER
hereunder or by any Participating Insurance Company under an agreement
containing substantially similar representations, warranties and covenants; (ii)
the failure by LIFE COMPANY or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Fund) as a legally and
validly established segregated asset account under applicable state law and as a
duly registered unit investment trust under the provisions of the 1940 Act
(unless exempt therefrom); or (iii) the failure by LIFE COMPANY or any
Participating Insurance Company to maintain its variable annuity or life
insurance contracts (with respect to which any Fund serves as an underlying
funding vehicle) as annuity contracts or life insurance contracts under
applicable provisions of the Code.
12.3 EFFECT OF NOTICE.
----------------
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Sections 12.1(c) or 12.2(d) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability or responsibility, and
<PAGE>
the indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
12.4 SUCCESSORS.
----------
A successor by law of any Party shall be entitled to the benefits of the
indemnification contained in this Section 12.
SECTION 13. APPLICABLE LAW
---------------------------
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with Maryland law, without regard for that state's
principles of conflict of laws.
SECTION 14. EXECUTION IN COUNTERPARTS
--------------------------------------
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
SECTION 15. SEVERABILITY
-------------------------
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
------------------------------
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
SECTION 17. HEADINGS
---------------------
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
<PAGE>
SECTION 18. CONFIDENTIALITY
----------------------------
AVIF acknowledges that the identities of the customers of LIFE COMPANY or
any of its affiliates (collectively, the "LIFE COMPANY Protected Parties" for
purposes of this Section 18), information maintained regarding those customers,
and all computer programs and procedures or other information developed by the
LIFE COMPANY Protected Parties or any of their employees or agents in connection
with LIFE COMPANY's performance of its duties under this Agreement are the
valuable property of the LIFE COMPANY Protected Parties. AVIF agrees that if it
comes into possession of any list or compilation of the identities of or other
information about the LIFE COMPANY Protected Parties' customers, or any other
information or property of the LIFE COMPANY Protected Parties, other than such
information as may be independently developed or compiled by AVIF from
information supplied to it by the LIFE COMPANY Protected Parties' customers who
also maintain accounts directly with AVIF, AVIF will hold such information or
property in confidence and refrain from using, disclosing or distributing any of
such information or other property except: (a) with LIFE COMPANY's prior written
consent; or (b) as required by law or judicial process. LIFE COMPANY
acknowledges that the identities of the customers of AVIF or any of its
affiliates (collectively, the "AVIF Protected Parties" for purposes of this
Section 18), information maintained regarding those customers, and all computer
programs and procedures or other information developed by the AVIF Protected
Parties or any of their employees or agents in connection with AVIF's
performance of its duties under this Agreement are the valuable property of the
AVIF Protected Parties. LIFE COMPANY agrees that if it comes into possession of
any list or compilation of the identities of or other information about the AVIF
Protected Parties' customers or any other information or property of the AVIF
Protected Parties, other than such information as may be independently developed
or compiled by LIFE COMPANY from information supplied to it by the AVIF
Protected Parties' customers who also maintain accounts directly with LIFE
COMPANY, LIFE COMPANY will hold such information or property in confidence and
refrain from using, disclosing or distributing any of such information or other
property except: (a) with AVIF's prior written consent; or (b) as required by
law or judicial process. Each party acknowledges that any breach of the
agreements in this Section 18 would result in immediate and irreparable harm to
the other parties for which there would be no adequate remedy at law and agree
that in the event of such a breach, the other parties will be entitled to
equitable relief by way of temporary and permanent injunctions, as well as such
other relief as any court of competent jurisdiction deems appropriate.
SECTION 19. TRADEMARKS AND FUND NAMES
--------------------------------------
(a) A I M Management Group Inc. ("AIM" or "licensor"), an affiliate of
AVIF, owns all right, title and interest in and to the name, trademark and
service mark "AIM" and such other tradenames, trademarks and service marks as
may be set forth on
<PAGE>
Schedule B, as amended from time to time by written notice from AIM to LIFE
COMPANY (the "AIM licensed marks" or the "licensor's licensed marks") and is
authorized to use and to license other persons to use such marks. LIFE COMPANY
and its affiliates are hereby granted a non-exclusive license to use the AIM
licensed marks in connection with LIFE COMPANY's performance of the services
contemplated under this Agreement, subject to the terms and conditions set forth
in this Section 19.
(b) The grant of license to LIFE COMPANY and its affiliates ( the
"licensee") shall terminate automatically upon termination of this Agreement.
Upon automatic termination, the licensee shall cease to use the licensor's
licensed marks, except that LIFE COMPANY shall have the right to continue to
service any outstanding Contracts bearing any of the AIM licensed marks. Upon
AIM's elective termination of this license, LIFE COMPANY and its affiliates
shall immediately cease to issue any new annuity or life insurance contracts
bearing any of the AIM licensed marks and shall likewise cease any activity
which suggests that it has any right under any of the AIM licensed marks or that
it has any association with AIM, except that LIFE COMPANY shall have the right
to continue to service outstanding Contracts bearing any of the AIM licensed
marks.
(c) The licensee shall obtain the prior written approval of the licensor
for the public release by such licensee of any materials bearing the licensor's
licensed marks. The licensor's approvals shall not be unreasonably withheld.
(d) During the term of this grant of license, a licensor may request that a
licensee submit samples of any materials bearing any of the licensor's licensed
marks which were previously approved by the licensor but, due to changed
circumstances, the licensor may wish to reconsider. If, on reconsideration, or
on initial review, respectively, any such samples fail to meet with the written
approval of the licensor, then the licensee shall immediately cease distributing
such disapproved materials. The licensor's approval shall not be unreasonably
withheld, and the licensor, when requesting reconsideration of a prior approval,
shall assume the reasonable expenses of withdrawing and replacing such
disapproved materials. The licensee shall obtain the prior written approval of
the licensor for the use of any new materials developed to replace the
disapproved materials, in the manner set forth above.
(e) The licensee hereunder: (i) acknowledges and stipulates that, to the
best of the knowledge of the licensee, the licensor's licensed marks are valid
and enforceable trademarks and/or service marks and that such licensee does not
own the licensor's licensed marks and claims no rights therein other than as a
licensee under this Agreement; (ii) agrees never to contend otherwise in legal
proceedings or in other circumstances; and (iii) acknowledges and agrees that
the use of the licensor's licensed marks pursuant to this grant of license shall
inure to the benefit of the licensor.
<PAGE>
SECTION 20. PARTIES TO COOPERATE
---------------------------------
Each party to this Agreement will cooperate with each other party and all
appropriate governmental authorities (including, without limitation, the SEC,
the NASD and state insurance regulators) and will permit each other and such
authorities reasonable access to its books and records (including copies
thereof) in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: By:
------------------ ----------------
Nancy L. Martin Name: Robert H. Graham
Assistant Secretary Title: President
LIFE INSURANCE COMPANY, on behalf of
itself and its separate accounts
Attest: By:
------------------ ----------------
Name: Name:
------------------ ----------------
Title: Title:
------------------ ----------------
SEPARATE ACCOUNT UNDERWRITER
Attest: By:
------------------ ----------------
Name: Name:
------------------ ----------------
Title: Title:
------------------ ----------------
<PAGE>
SCHEDULE A
FUNDS AVAILABLE UNDER THE CONTRACTS
- -----------------------------------
. AIM VARIABLE INSURANCE FUNDS, INC.
[LIST APPLICABLE PORTFOLIOS]
SEPARATE ACCOUNTS UTILIZING THE FUNDS
- -------------------------------------
CONTRACTS FUNDED BY THE SEPARATE ACCOUNTS
- -----------------------------------------
<PAGE>
SCHEDULE B
. AIM VARIABLE INSURANCE FUNDS, INC.
AIM_________________________ Fund
. AIM and Design
[AIM LOGO APPEARS HERE]
<PAGE>
EXHIBIT (8)(d)
--------------
FORM OF PARTICIPATION AGREEMENT
BY AND BETWEEN
PFL LIFE INSURANCE COMPANY AND
EVERGREEN VARIABLE TRUST
<PAGE>
EVERGREEN VARIABLE TRUST
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ____ day of __________, 1998 between EVERGREEN
VARIABLE TRUST, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"), and PFL LIFE INSURANCE COMPANY, a
life insurance company organized under the laws of the State of __________ (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the offer and sale of its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has obtained an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate account
exemptions from the provisions of section 9(a), 13(a), 15(a) and 15(b) of the
1940 Act and rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Trust to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
nonaffiliated life insurance companies and certain qualified pension and
retirement plans (the "Shared Trust Exemptive Order"); and
WHEREAS, the Company has registered or will register certain variable life
insurance policies and/or variable annuity contracts under the 1933 Act (the
"Contracts"); and
WHEREAS, the Company has registered or will register certain Accounts as
unit investment trusts under the 1940 Act;
WHEREAS, the Company relies on certain provisions of the 1940 and 1933 Acts
that exempt certain Accounts and Contracts from the registration requirements of
the Acts in connection with the sale of Contracts under certain private
placement offerings; and
<PAGE>
2
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
1.1. The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person or suspend or terminate the offering of shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary and in the best interest of the shareholders of such
Portfolio.
1.2. The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3. For the purposes of Sections 1.1 and 1.2, the Trust hereby
appoints the Company as its agent for the limited purpose of receiving and
accepting purchase and redemption orders resulting from investment in and
payments under the Contracts. Receipt by the Company shall constitute receipt
by the Trust provided that (i) such orders are received by the Company in good
order prior to the close of the regular trading session of the New York Stock
Exchange and (ii) the Trust receives notice of such orders by 9:30 a.m. New York
time on the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4. Purchase orders that are transmitted to the Trust in accordance with
Section 1.3
<PAGE>
3
shall be paid for on the same Business Day that the Trust receives notice of the
order. Payments shall be made in federal funds transmitted by wire.
<PAGE>
4
1.5. The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on shares of any Portfolio of
the Trust. The Company hereby elects to receive all such income dividends and
capital gain distributions as are payable on a Portfolio's shares in additional
shares of that Portfolio. The Trust shall notify the Company of the number of
shares so issued as payment of such dividends and distributions.
1.6. The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 7:00 p.m. New York time.
1.7. The Trust agrees that it shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Shared Trust Exemptive
Order. No shares of any Portfolio will be sold directly to the general public.
The Company agrees that the trust shares will be used only for the purposes of
funding the Contracts and Accounts listed in Schedule A, as amended from time to
time.
1.8. The Trust agrees that all participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.9 and
Article IV of this Agreement.
ARTICLE II
Obligations of the Parties
2.1. The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1. and all taxes to which an issuer is
subject on the issuance and transfer of its shares.
2.2. The Trust will bear or cause to be borne the printing costs (or
duplicating costs with respect to the statement of additional information) and
mailing costs associated with the delivery of the Trust's current prospectus,
statement of additional information, annual report, semi-annual report, Trust
sponsored proxy material or other shareholder communications, including any
amendments or supplements to any of the foregoing.
<PAGE>
5
2.3. The Company will bear the printing costs (or duplicating costs with
respect to the statement of additional information) and mailing costs associated
with the delivery of the Accounts' current prospectuses and statements of
additional information, private placement memorandums, annual and semi-annual
reports, Contracts, Contract applications, Account sponsored proxy materials and
voting solicitation instructions.
2.4. The Company agrees and acknowledges that one of the Trust's advisers,
Evergreen Asset Management Corp. ("Evergreen Asset"), is the sole owner of the
name and mark "Evergreen" and that all use of any designation comprised in whole
or in part of Evergreen (an "Evergreen Mark") under this Agreement shall inure
to the benefit of Evergreen Asset. Except as provided in Section 2.5., the
Company shall not use any Evergreen Mark on its own behalf or on behalf of the
Accounts or Contracts in any registration statement, advertisement, sales
literature or other materials relating to the Accounts or Contracts without the
prior written consent of Evergreen Asset. Upon termination of this Agreement
for any reason, the Company shall cease all use of any Evergreen Asset Mark(s)
as soon as reasonably practicable.
2.5. The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment advisers are named prior to the
filing of such document with the Securities and Exchange Commission. The
Company shall furnish, or shall cause to be furnished, to the Trust or its
designee, each piece of sales literature or other promotional material including
private placement memoranda, in which the Trust or its investment advisers are
named, at least ten Business Days prior to its use. No such material shall be
used if the Trust or its designee reasonably objects to such use within ten
Business Days after receipt of such material.
2.6. The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust or
its investment advisers in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
annual and semi-annual reports of the Trust, Trust-sponsored proxy statements,
or in sales literature or other promotional material approved by the Trust or
its designee, except as required by legal process or regulatory authorities or
with the written permission of the Trust or its designee.
2.7. The Trust shall furnish or cause to be furnished, to the Company or
its designee, a copy of each Trust prospectus or statement of additional
information in which the Company or the Accounts are named prior to the filing
of such document with the Securities and Exchange Commission. The Trust shall
furnish, or shall cause to be furnished, to the Company or its designee, each
piece of sales literature or other promotional material in which the Company or
the Accounts are named, at least ten Business Days prior to its use. No such
material shall be
<PAGE>
6
used if the Company or its designee reasonably objects to such use within ten
Business Days after receipt of such material.
2.8. The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement, prospectus or private
placement memorandum for the Contracts (as such registration statement,
prospectus or private placement memorandum may be amended or supplemented from
time to time), or in materials approved by the Company for distribution
including sales literature or other promotional materials, except as required by
legal process or regulatory authorities or with the written permission of the
Company.
2.9. So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policy owners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculated voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policy owners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
ARTICLE III
Representations and Warranties
3.1. The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of ____________
and that it has legally and validly established each Account as a segregated
asset account under such law on the dates set forth in Schedule A.
3.2. The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
<PAGE>
7
3.3. The Company represents and warrants that the Contracts will be
registered under the 1933 Act to the extent required by the 1933 Act prior to
any issuance or sale of the Contracts; the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws;
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4. The Trust represents and warrants that it is duly organized and
validly existing under the laws of The Commonwealth of Massachusetts.
3.5. The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust is registered under the 1940 Act prior to any issuance or sale of such
shares. The Trust shall amend its registration statement under the 1933 Act and
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for
sale in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder. The Trust shall provide the Company, or cause to be
provided, a letter from the appropriate office within ten Business Days
following the end of each calendar quarter of the Trust, certifying the Trust's
compliance during that calendar quarter with the diversification requirements
and qualification as a regulated investment company, including a detailed
listing of individual securities held by each Portfolio of the Trust. In the
event of a breach of this Section 3.6 by the Trust, it will take all reasonable
steps (a) to immediately notify the Company of such breach and (b) to adequately
diversify the Trust so as to achieve compliance within the grace period afforded
by Regulation 817-5.
ARTICLE IV
Potential Conflicts
4.1. The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a
variety of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling, no-
action or interpretative letter, or any
<PAGE>
8
similar action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard the
voting instructions of contract owners. The Trustees shall promptly inform the
Company if they determine that an irreconcilable material conflict exists and
the implications thereof.
4.2. The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Trust Exemptive
Order by providing the Trustees with all information reasonably necessary for
the Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3. If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that an irreconcilable material conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a difference investment medium, including (but
not limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4. If an irreconcilable material conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing irreconcilable material conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5. If any irreconcilable material conflict arises because a particular
state insurance
<PAGE>
9
regulator's decision applicable to the Company conflicts with the majority of
other state regulators, then the Company will withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account within six (6) months after the Trustees inform the Company in writing
that it had determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing irreconcilable material conflict
as determined by a majority of the disinterested Trustees. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.6. For purposes of Section 4.3. through 4.6. of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if any offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such irreconcilable material conflict as
determined by a majority of the disinterested Trustees.
4.7. The Company shall at least annually submit to the trustees such
reports, materials or data as the Trustees may reasonably request so that the
trustees may fully carry out the duties imposed upon them by the Shared Trust
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if deemed appropriate by the Trustees.
4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(l) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Trust Exemptive Order) on terms and conditions
materially different from those contained in the Shared Trust Exemptive Order,
then the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(l),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
Indemnification
<PAGE>
10
5.1. Indemnification By the Company. The Company agrees to indemnify and
------------------------------
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in a registration statement,
prospectus or private placement memorandum for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the Company on behalf
of the Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately derived from
written information furnished to the Company by or on behalf of the Trust for
use in Company Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Trust
Documents as defined in Section 5.2.(a)) or wrongful conduct of the Company or
persons under its control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in Section
5.2(a) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide the
services or furnish the materials required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or result
from any other material breach of this Agreement by the Company.
<PAGE>
11
5.2. Indemnification By the Trust. The Trust agrees to indemnify and
----------------------------
hold harmless the Company and each of its directors, officers, employees and
agents and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Article V) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Trust) or
expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Trust (or any amendment or supplement thereto),
(collectively, "Trust Documents" for the purposes of this Article V), or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, provided, that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and was accurately derived from written
information furnished to the Trust by or on behalf of the Company for use in
Trust Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Company
Documents) or wrongful conduct of the Trust or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived form written
information furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide the
services or furnish the materials required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust.
5.3. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any Losses incurred or assessed
<PAGE>
12
against an Indemnified Party that arise from such Indemnified Party's willful
misfeasance, bad faith or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
5.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim which shall have been served upon or otherwise received by
such Indemnified Party (or after such Indemnified Party shall have received
notice of service upon or other notification to any designated agent), but
failure to notify the party against whom indemnification is sought of any such
claim or shall not relieve that party from any liability which it may have to
the Indemnified Party in the absence of Sections 5.1. and 5.2.
5.5. In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
ARTICLE VI
Termination
6.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six (6) months' advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Trust with respect
to any Portfolio based upon the Company's determination that shares of such
Portfolio are not reasonably available to meet the requirements of the Contracts
or not consistent with the Company's obligations to Contract owners; or
(c) termination by the Company by written notice to the Trust with respect
to any Portfolio in the event any of the Portfolio's shares are not registered,
issued or sold in accordance
<PAGE>
13
with applicable state and/or federal law or such law precludes the use of such
shares as the underlying investment media of the Contracts issued or to be
issued by the Company; or
(d) termination by the Company by written notice to the Trust with respect
to any Portfolio in the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or any independent
or resulting failure under Section 817 of the Code, or under any successor or
similar provision of either, or if the Company reasonably believes that the
Trust may fail to so qualify; or
(e) termination by the Trust by written notice to the Company if the Trust
shall determine, in its sole judgment exercised in good faith, that the Company
and/or its affiliated companies has suffered a material adverse change in its
business, operations, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity, but no such
termination shall be effective under this subsection (e) until the Company has
been afforded a reasonable opportunity to respond to a statement by the Trust
concerning the reason for notice of termination hereunder; or
(f) termination by the Company by written notice to the Trust if the
Company shall determine, in its sole judgment exercised in good faith, that
either the Trust or an investment adviser to the Trust has suffered a material
adverse change in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material adverse
publicity; but no such termination shall be effective under this subsection (f)
until the Trust has been afforded a reasonable opportunity to respond to a
statement by the Company concerning the reason for notice of termination
hereunder.
6.2. Notwithstanding any termination of this Agreement, the Trust shall,
at the option of the Company, continue to make available additional shares of
the Trust (or any Portfolio) pursuant to the terms and conditions of this
Agreement for all Contracts in effect on the effective date of termination of
this Agreement, provided that the Company continues to pay the costs set forth
in Section 2.3.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
<PAGE>
14
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
- ----------------
200 Berkeley Street
Boston, Massachusetts 02116
Attention: Legal Department
If to the Company:
- ------------------
ARTICLE VIII
Miscellaneous
8.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
8.5. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising directly or indirectly under this Agreement, of
any and every nature whatsoever, shall be satisfied solely out of the assets of
the Trust and that no Trustee, officer, agent or holder of shares of beneficial
interest of the Trust shall be personally liable for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
<PAGE>
15
8.7. The rights, remedies and obligations contained int his Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8. The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
Notwithstanding the foregoing, however, the parties agree that this Agreement
shall be assigned to the Evergreen Variable Annuity Trust on or about May 1,
1998.
8.10. No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
PFL LIFE INSURANCE COMPANY EVERGREEN VARIABLE TRUST
By: By:
-------------------------- ---------------------------
Name: Name:
Title: Title:
EVERGREEN VARIABLE ANNUITY TRUST
By:
---------------------------
Name:
Title:
<PAGE>
A-1
SCHEDULE A
Separate Accounts, Contracts and Associated Portfolios
------------------------------------------------------
Name of Separate Accounts and Date
Established by Board of Directors
- ---------------------------------
Contracts Funded by Separate Account
- ------------------------------------
Designated Portfolios
- ---------------------
<PAGE>
EXHIBIT (8)(e)
-------------
AMENDED EXHIBIT A AND EXHIBIT B
TO PARTICIPATION AGREEMENT
BY AND BETWEEN
PFL LIFE INSURANCE COMPANY,
FEDERATED INSURANCE SERIES AND
FEDERATED SECURITIES CORP.
<PAGE>
AMENDED
EXHIBIT A AND EXHIBIT B
EFFECTIVE JANUARY 12, 1998
----------------
ACCOUNT(S), POLICY(IES) AND PORTFOLIO(S)
SUBJECT TO THE PARTICIPATION AGREEMENT
Account PFL Life Variable Annuity Account A
PFL Retirement Builder Variable Annuity Account
Policies The Atlas Portfolio Builder Variable Annuity
PFL Retirement Income Builder Variable Annuity
The First Union First Choice Variable Annuity
(or successor marketing name)
Portfolios Federated Utility Fund II
Federated High Income Bond Fund II
PFL LIFE INSURANCE COMPANY FEDERATE INSURANCE SERIES
By its authorized officer, By its authorized officer,
By: /s/ William L. Busler By: /s/ S. Elliott Cohan
------------------------ -----------------------
William L. Busler S. Elliott Cohan
Title: President Title: Assistant Secretary
---------------------- --------------------
Date: January 12, 1998 Date: January 12, 1998
---------------------- --------------------
FEDERATED SECURITIES CORP.
By its authorized officer,
By: /s/ Byron F. Bowman
--------------------
Byron F. Bowman
Title: Vice President
-----------------
Date: January 12, 1998
-----------------
<PAGE>
EXHIBIT (8)(I)
--------------
ADDENDUM TO PARTICIPATION AGREEMENT
BETWEEN VARIABLE INSURANCE PRODUCT FUNDS,
FIDELITY DISTRIBUTORS CORPORATION AND
PFL LIFE INSURANCE COMPANY.
<PAGE>
PARTICIPATION AGREEMENT ADDENDUM
SCHEDULE A
----------
Accounts
--------
This Schedule shall be effective as of the date of the last signature below, and
replaces and supersedes Schedule A to the Participation Agreement dated April 1,
1991 (as amended) among the VIP Funds, Fidelity Distributors Corporation and PFL
Life Insurance Company.
<TABLE>
<CAPTION>
Date of Resolutions of
Company's Board which
Name of Contracts Name of Accounts established the Accounts
----------------- ---------------- ------------------------
<S> <C> <C>
Fidelity Income Plus Fidelity Variable August 24, 1979 (by an
Individual Variable Annuity Annuity Account affiliate subsequently
Contracts acquired by the Company)
PFL Retirement Builder Retirement Builder
Individual Variable Annuity Variable Annuity March 29, 1996
Contracts Account
</TABLE>
In witness whereof, we have hereunto set our hand as of the dates indicated:
PFL Life Insurance Company
4/19/96 By: /s/ Ronald L. Ziegler
- ------- ----------------------
Date Signed
Title: Vice President & Actuary
------------------------
Variable Insurance Products Fund
4/29/96 By: /s/ J. Gary Burkead
- ------- --------------------
Date Signed
Title: Senior Vice President
---------------------
Fidelity Distributors Corporation
4/23/96 By: /s/ Neil Litvack
------- -----------------
Date Signed
Title: President
---------
<PAGE>
EXHIBIT (10)(A)
---------------
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectuses and "Independent Auditors" in the Statements of
Additional Information and to the use of our report dated March 27, 1998 with
respect to the financial statements of PFL Retirement Builder Variable Annuity
Accoutn, 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 Post-Effective Amendment No. 4 to the Registration
Statement (Form N-4 No. 333-7509) and related Prospectuses of Retirement Income
Builder Variable Annuity and Flexible Premium Individual Deferred Variable
Annuity.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 27, 1998
<PAGE>
EXHIBIT (10)(B)
---------------
OPINION AND CONSENT OF ACTUARY
<PAGE>
April 13, 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. 333-7509
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 Retirement Income Builder Variable 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 against the policy values in the Variable Account
include:
(i) Service Charge and Administrative Charge
(ii) Contingent Deferred Sales Charge (Surrender Charge)
(iii) Mortality and Expense Risk Fee (M&E)
(iv) Taxes (including Premium and other Taxes if applicable)
The magnitude of each of the individual charges listed above in (i) through (iv)
is established in the pricing of the Retirement Income Builder, to achieve a
reasonable Return on Investment (ROI), which is within the range of industry
practice with respect to comparable variable annuity products.
<PAGE>
PFL Life Insurance Company
Page 2
April 13, 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,
guaranteed death benefits, 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
Associated Actuary
PFL Life Insurance Company
