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FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY
ISSUED BY
PFL LIFE INSURANCE COMPANY
Supplement Dated October 1, 1998
To The
Prospectus Dated May 1, 1998
An Amendatory Endorsement changing the way in which premium payments are
allocated during the applicable Right to Cancel Period has been added to the
Flexible Premium Individual Deferred Variable Annuity. This change impacts not
only the allocation of Premium Payments, but also the amount of the refund
received for cancellations during the Right to Cancel Period and the transfer
of the investment risk. The rights and benefits under the Amendatory
Endorsement are summarized below; however, the description of the Amendatory
Endorsement contained in this prospectus supplement is qualified in its
entirety by reference to the Amendatory Endorsement itself, a copy of which is
available upon request from PFL.
All capitalized terms used herein, which are not defined herein, shall have
the same meanings as the same terms used in the accompanying prospectus.
Premium Payments allocated to subaccounts of the Mutual Fund Account will no
longer be allocated entirely to the Money Market Subaccount of the Mutual Fund
Account for the first 14 days after the Policy is issued or a longer Period if
the laws of the state where the Policy is issued require more than a 10 day
Right to Cancel Period. Instead, amounts allocated to subaccounts of the
Mutual Fund Account will be allocated directly into the designated
subaccounts. YOU AS THE OWNER OF THE POLICY, WILL NOW BEAR THE ENTIRE
INVESTMENT RISK FOR ALL AMOUNTS THAT YOU ALLOCATE TO ANY MUTUAL FUND
SUBACCOUNT FROM THE DATE THE POLICY IS ISSUED. This means that immediately
after the Policy is issued, if the mutual fund subaccount shares increase or
decrease in value, then the value of the Policy will also increase or
decrease, respectively.
Also, during the Right to Cancel Period, the amount of the refund will now
be the Policy Value unless otherwise required by state law. The Policy Value
may be more or less than the money initially invested. Thus, the entire
investment risk is borne by you during the Right to Cancel Period.
For additional information regarding the Right to Cancel Period or
Allocation of Premium Payments, generally, please refer to pages 9 and 32 of
your Flexible Premium Individual Deferred Variable Annuity Prospectus.
The direct allocation of premium payments and the change in the right-to-
cancel period refund may not currently be available in all states. Please
contact your financial representative or PFL Life Insurance Company at (800)
525-6205 for additional information regarding their availability in your
state.
THIS PROSPECTUS SUPPLEMENT MUST BE ACCOMPANIED
BY THE PROSPECTUS FOR THE
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY DATED MAY 1, 1998
<PAGE>
The following provisions of the Flexible Premium Individual Deferred
Variable Annuity Prospectus are modified as a result of this change:
1. THE FOLLOWING REPLACES THE SECTION ENTITLED "SUMMARY OF THE POLICY--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. (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%.
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.)
2. THE FOLLOWING REPLACES THE SECTION ENTITLED "SUMMARY OF THE POLICY--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 ("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 some
states the period is ten days after the Policy is delivered to the Owner.
Some states allow for a longer period to return the Policy. The amount of
the refund will also depend on the state in which the Policy is issued.
Ordinarily the amount of the refund will be the Policy Value. However, some
states may require a return of the Premium Payments, or the greater of the
Premium Payments or the Policy Value. PFL will pay the refund within seven
days after it receives Written Notice of cancellation and the returned
Policy within the applicable period. The Policy will then be deemed void.
3. THE FOLLOWING REPLACES THE EIGHTH PARAGRAPH UNDER THE SECTION ENTITLED
"POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS":
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%. 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.
2
<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>
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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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<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
- 5 -
<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.
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<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.
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<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 21.05% July 24, 1995
MFS Research Subaccount............ 14.20% N/A 19.62% July 26, 1995
MFS Total Return Subaccount........ 15.24% N/A 18.74% 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 20.88% July 24, 1995
MFS Research Subaccount............ 14.03% N/A 19.44% July 26, 1995
MFS Total Return Subaccount........ 15.08% N/A 18.57% 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.
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<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 22.00% July 24, 1995
MFS Research Subaccount............ 18.77% N/A 20.61% 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 21.83% July 24, 1995
MFS Research Subaccount............ 18.61% N/A 20.44% July 26, 1995
MFS Total Return Subaccount........ 19.64% N/A 19.27% 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.
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<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
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<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
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<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.
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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................................................ 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
<TABLE>
<S> <C>
Then, the Investment Experience Factor = 11.57 + 0 - 0 - .0000380909 = Z = 1.0148741898
-------------
11.40
</TABLE>
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
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<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.
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<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
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<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.
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<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.
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<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.
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