PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT, 497, 1998-09-18

PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
497, 1998-09-18

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PROSPECTUS__________________________________________________ SEPTEMBER 14, 1998

FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY

Issued Through

PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT

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").
You can use the Policy to accumulate funds for retirement or other long-term
financial planning purposes. You are generally not taxed on any earnings on
amounts you invest until you withdraw them or begin to receive Annuity
Payments. The Policy is a "variable" annuity because the value of your
investments can go up or down based on the performance of mutual fund
portfolios that you select. It is a flexible premium policy because after you
purchase it you can generally make additional investments of any amount of $50
or more, until the Annuity Commencement Date when PFL begins making Annuity
Payments to you.

You have several investment options to choose from offered through the
Policy. They include the following variable investment options:

AIM VARIABLE INSURANCE FUNDS, INC. DREYFUS STOCK INDEX FUND

AIM V.I. Capital Appreciation Fund DREYFUS VARIABLE INVESTMENT FUND
AIM V.I. Government Securities Fund
AIM V.I. Growth & Income Fund Dreyfus Money Market Portfolio
AIM V.I. Value Fund Dreyfus Small Company Stock Portfolio

OPPENHEIMER VARIABLE ACCOUNT FUNDS
MFS VARIABLE INSURANCE TRUST Oppenheimer Global Securities Fund
Oppenheimer Growth Fund
MFS Emerging Growth Series Oppenheimer Growth & Income Fund
MFS Foreign & Colonial Emerging Oppenheimer High Income Fund
Markets Equity Series Oppenheimer Strategic Bond Fund
MFS Research Series
MFS Total Return Series
MFS Utilities Series

WRL SERIES FUND, INC.
WRL Emerging Growth
WRL Global
WRL Growth

YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU
COULD LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.

The Fixed Account is an additional investment option. If you invest in one
of the alternatives available under the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.

Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).

LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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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
P.O. Box 3183
Cedar Rapids, Iowa 52406-3183
or
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001

Please Read This Prospectus Carefully.
Keep It For Future Reference.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.

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TABLE OF CONTENTS

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DEFINITIONS................................................................ 5
SUMMARY OF THE POLICY...................................................... 8
ANNUITY POLICY FEE TABLE................................................... 13
CONDENSED FINANCIAL INFORMATION............................................ 17
FINANCIAL STATEMENTS....................................................... 17
HISTORICAL PERFORMANCE DATA................................................ 17
Standardized Performance Data............................................ 17
Dreyfus Money Market Subaccount........................................ 18
Other Subaccounts...................................................... 18
Non-Standardized Performance Data........................................ 18
Adjusted Historical Performance Data................................... 18
PUBLISHED RATINGS.......................................................... 22
PFL LIFE INSURANCE COMPANY................................................. 22
THE RETIREMENT BUILDER ACCOUNTS............................................ 22
The Mutual Fund Account.................................................. 22
The Underlying Funds................................................... 23
Addition, Deletion, or Substitution of Investments..................... 26
The Fixed Account........................................................ 26
Guaranteed Periods..................................................... 27
Dollar Cost Averaging Fixed Account Option............................. 27
Guaranteed Interest Rates.............................................. 28
Transfers................................................................ 28
Reinstatements........................................................... 29
Telephone Transactions................................................... 29
Dollar Cost Averaging (DCA).............................................. 30
Asset Rebalancing........................................................ 30
THE POLICY................................................................. 30
Policy Application and Issuance of Policies--Premium Payments............ 30
Additional Premium Payments............................................ 31
Maximum Total Premium Payments......................................... 31
Allocation of Premium Payments......................................... 31
Payment Not Honored by Bank............................................ 31
Policy Value............................................................. 32
The Mutual Fund Policy Value........................................... 32
Adjusted Policy Value (APV).............................................. 32
Amendments............................................................... 32
Non-participating Policy................................................. 32
DISTRIBUTIONS UNDER THE POLICY............................................. 33
Surrenders............................................................... 33
Policy Loans for 403(b) Policies......................................... 34
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............................................. 37
Premium Tax............................................................ 37
Supplementary Contract................................................. 37
Availability as an Immediate Annuity................................... 37
</TABLE>

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<TABLE>
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Annuity Payment Options.................................................. 37
Guaranteed Values...................................................... 38
Variable Payment Options............................................... 39
Determination of the First Variable Payment............................ 39
Determination of Additional Variable Payments.......................... 39
Transfers.............................................................. 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......................................................... 42
Mortality and Expense Risk Fee........................................... 43
Administrative Charges................................................... 44
Premium Taxes............................................................ 44
Federal, State and Local Taxes........................................... 44
Transfer Fee............................................................. 44
Other Expenses Including Investment Advisory Fees........................ 45
Employee and Agent Purchases............................................. 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 45
Tax Status of the 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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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, P.O. Box 3183, Cedar Rapids, Iowa 52406-3183 or 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.

Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.

Annuity Commencement Date--The date upon which Annuity Payments are to
commence. The Annuity Commencement Date may not be later than the last day of
the policy month starting after the Annuitant attains age 85, except as
expressly allowed by PFL, but in no event later than the last day of the
Policy month following the month in which the Annuitant attains age 95. The
Annuity Commencement Date may be required to be earlier for Qualified
Policies.

Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.

Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.

Beneficiary--The person who has the right to the death benefit set forth in
the Policy.

Business Day--A day when the New York Stock Exchange is open for 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 there
has been an increase or decrease in interest rates, respectively.

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Excess Partial Withdrawal--The portion of a partial withdrawal (surrender)
that can be subject to a Surrender Charge.

Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.

Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.

Guaranteed Period Options--The various guaranteed interest rate periods of
the Fixed Account which may be offered by PFL and into which Premium Payments
may be paid or amounts transferred.

Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.

Mutual Fund Account--The PFL Retirement Builder Variable Annuity Account, a
separate account established and registered as a unit investment trust under
the Investment Company Act of 1940, as amended, (the "1940 Act"), 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:

(i) Premium Payments; minus

(ii) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus

(iii) interest credited in the Fixed Account; plus

(iv) accumulated gains or losses in the Mutual Fund Account; minus

(v) Service Charges, premium taxes and transfer fees, if any.

Policy Year--A Policy Year begins on the Policy Date and on each Policy
Anniversary.

Premium Payment--An amount paid to PFL by the Owner or on the Owner's behalf
as consideration for the benefits provided by the Policy.

Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special federal income tax treatment under the Code.

Service Charge--There is an annual Service Charge on each Policy Anniversary
(and a charge at the time of surrender during any Policy Year) for Policy
maintenance and related administrative expenses. This annual charge is the
lesser of 2% of the Policy Value or $30.

Subaccount--A subdivision within the Mutual Fund Account, the assets of
which are invested in a specified Portfolio of the Underlying Funds.

Successor Owner--A person appointed by the Owner to succeed to ownership of
the Policy in the event of the death of the Owner who is not the Annuitant
before the Annuity Commencement Date.

Surrender Charge--The applicable contingent deferred sales charge, assessed
on certain full surrenders or partial withdrawals of Premium Payments to cover
expenses relating to the sale of the Policies.

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Underlying Funds--The designated portfolios of AIM Variable Insurance Funds,
Inc., managed by A I M Advisors, Inc. ("AIM"); Dreyfus Variable Investment
Fund and Dreyfus Stock Index Fund, managed by The Dreyfus Corporation; MFS
Variable Insurance Trust, managed by Massachusetts Financial Services Company,
and Oppenheimer Variable Account Funds, managed by OppenheimerFunds, Inc., and
WRL Series Fund, Inc. (WRL Emerging Growth managed by Van Kampen American
Capital Asset Management, Inc.; WRL Global and WRL Growth managed by Janus
Capital Corporation).

Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determinations shall be made on each Business Day.

Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.

Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.

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SUMMARY OF THE POLICY

The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.

THE POLICY

The 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 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., the Dreyfus Variable Investment Fund, the Dreyfus Stock Index Fund, MFS
Variable Insurance Trust, Oppenheimer Variable Account Funds, and WRL Series
Fund, Inc., (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. Capital Appreciation Fund
. AIM V.I. Government Securities Fund
. AIM V.I. Growth & Income Fund
. AIM V.I. Value Fund

Managed by The Dreyfus Corporation:
. Dreyfus Money Market Portfolio
. Dreyfus Small Company Stock Portfolio
. Dreyfus Stock Index Fund

Managed by Massachusetts Financial Services Company:
. MFS Emerging Growth Series
. MFS Foreign & Colonial Emerging Markets Equity Series
. MFS Research Series
. MFS Total Return Series
. MFS Utilities Series

Managed by OppenheimerFunds, Inc.:
. Oppenheimer Global Securities Fund
. Oppenheimer Growth Fund
. Oppenheimer Growth & Income Fund
. Oppenheimer High Income Fund
. Oppenheimer Strategic Bond Fund

Managed by Van Kampen American Capital Asset Management, Inc.:
. WRL Emerging Growth

Managed by Janus Capital Corporation
.WRL Global
.WRL Growth

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Each of the Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value may
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE RETIREMENT
BUILDER ACCOUNTS--The Mutual Fund Account," p. 22.)

The Fixed Account. PFL guarantees an annual credited rate of at least 3% on
Premium Payments and transfers to, less partial withdrawals and transfers
from, the Fixed Account. Upon Surrender, PFL guarantees return of at least the
Premium Payments made to, less prior Partial Withdrawals and transfers from,
the Fixed Account. PFL will always offer a Current Interest Rate which will be
guaranteed for at least one year from the date of the Premium Payment or
transfer, although certain Dollar Cost Averaging programs may run for shorter
periods. PFL may, in its sole discretion, declare a higher Current Interest
Rate from time-to-time. PFL may offer optional guaranteed interest rate
periods into which Premium Payments may be made or amounts transferred. PFL
may also offer a Dollar Cost Averaging Fixed Account Option which will have a
one-year interest rate guarantee and which will require automatic periodic
transfers to the Mutual Fund Account. (See "THE RETIREMENT BUILDER ACCOUNTS--
The Fixed Account," p. 26.)

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. 42 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--Premium Payments," p. 30.)

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.

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

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Periods, and will not be subject to an Excess Interest Adjustment at that
time. The Owner may, however, transfer an amount equal to any or all of the
interest credited in any of the Guaranteed Period Options to any Subaccount(s)
of the Mutual Fund Account prior to the end of a specified Guaranteed Period.
(See "THE RETIREMENT BUILDER ACCOUNTS--Transfers," p. 28.) Any such "Interest
Transfers" from a Guaranteed Period Option prior to the end of a Guaranteed
Period will not be subject to any Excess Interest Adjustment. (See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 35.)
Transfers from the Dollar Cost Averaging Fixed Account Option, except through
a Dollar Cost Averaging program, are not allowed. (See "THE RETIREMENT BUILDER
ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 27.) Transfers
currently may be made either by telephone or by sending Written Notice to
PFL's Administrative and Service Office. (See "THE RETIREMENT BUILDER
ACCOUNTS--Telephone Transactions," p. 29.)

PFL reserves the right to impose a $10 fee for each transfer in excess of 12
transfers per Policy Year. At the present time, PFL does not charge for
transfers. (See "THE RETIREMENT BUILDER ACCOUNTS--Transfers," p. 28.)

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.

POLICY LOANS FOR 403(B) POLICIES

An Owner of a Policy used in connection with a Tax Sheltered Annuity Plan
("TSA Plan") under Section 403(b) of the Code, may elect a Policy Loan
Endorsement under which the Policy Owner can receive Policy Loans, subject to
certain restrictions. If the Policy Loan endorsement is available, the Owner
can borrow against the Policy an amount not to exceed: (1) 75% of the Policy
Value when total indebtedness (all Policy Loans and unpaid accrued interest)
is less than or equal to $10,000; or (2) 50% of the Policy Value when total
indebtedness is greater than $10,000 but less than or equal to $50,000. When a
loan is made, an amount equal to the loan will be withdrawn from the
Subaccount(s) and/or Fixed Account(s) specified by the Owner and transferred
to the loan reserve. The loan reserve is part of the Fixed Account used as
collateral for any Policy Loan.

Interest on any loan will be at the Policy Loan rate of 7% in arrears.
Amounts in the loan reserve will earn interest at a minimum guaranteed
effective annual interest rate of 5%. Principal and interest must be repaid in
substantially level quarterly or monthly payments over a 5-year period or, if
the loan is used to acquire the Owner's principal residence, a 10, 15, or 20-
year period, but such an extended period cannot go beyond the Owner's
estimated retirement age. While the Policy is in force and before the Annuity
Commencement Date, any loan may be repaid in full. (See "DISTRIBUTIONS UNDER
THE POLICY--Policy Loans For 403(b) Policies," p. 34)

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): (i) has been confined in a
hospital or nursing facility for 30 consecutive days or (ii) 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 are not imposed on surrenders

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or partial withdrawals. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit,"
p. 40, "DISTRIBUTIONS UNDER THE POLICY--Nursing Care and Terminal Condition
Withdrawal Option," p. 35, and "DISTRIBUTIONS UNDER THE POLICY--Unemployment
Waiver," p. 35.) (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 (i)
must have been employed full time for at least two years prior to becoming
unemployed, (ii) must have been employed full time on the Policy Date, (iii)
must have been unemployed for at least 60 consecutive days at the time of
withdrawal, and (iv) must have a minimum Cash Value at the time of withdrawal
of $5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than 15 days after the date of the withdrawal request. This
benefit may not be available in all states, see the Policy or endorsement for
details.

CHARGES AND DEDUCTIONS

Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL generally does not deduct sales or other charges at the time of
investment, (although in some states, a premium tax charge may be deducted).
However, a Surrender Charge, which is a contingent deferred sales charge, of
up to 6% of the Premium Payment is imposed on certain full surrenders or
partial withdrawals of Premium Payments in order to cover expenses relating to
the distribution of the Policies. A Surrender Charge will only be applied to
withdrawals that exceed the amount available under certain listed exceptions.
The applicable Surrender Charge is based on the period of time elapsed since
payment of the Premium Payment(s) being withdrawn. There will be no Surrender
Charge imposed five or more years after a Premium Payment was paid. In any
event, Surrender Charges will be waived after the tenth Policy Year. For
purposes of determining the applicable Surrender Charge, Premium Payments are
considered to be withdrawn on a "first-in, first-out" basis. (See "CHARGES AND
DEDUCTIONS--Surrender Charge," p. 42.)

In each Policy Year the Owner may request partial withdrawals ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the "Cumulative Free Percentage." That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free Percentage withdrawals previously taken reduce the Cumulative Free
Percentage that is available. (See "DISTRIBUTIONS UNDER THE POLICY--
Surrenders," p. 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 market rates of interest, the
effect of an Excess Interest Adjustment could eliminate all interest in excess
of the minimum guaranteed effective annual interest rate of 3%, or it could
result in the crediting of additional interest. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustment," p. 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

- 11 -
<PAGE>

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.)

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 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. Should PFL determine that any such taxes be
imposed with respect to any of the Accounts, PFL may deduct such taxes from
amounts held in the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal,
State and Local Taxes," p. 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 Payments
Surrendered)(/1/)(/2/).. 6%
Surrender Fees........ 0
Service Charge(/2/)... $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
Fees(/3/).................... 1.25%
Administrative Charge......... 0.15%
--------
TOTAL SEPARATE ACCOUNT ANNUAL
EXPENSES..................... 1.40%
</TABLE>

- ------------------------------------------------------------------------------
PORTFOLIO ANNUAL EXPENSES(/4/)
(as a percentage of average net assets and after expense reimbursements)

- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
RULE PORTFOLIO
MANAGEMENT OTHER 12B-1 ANNUAL
FEES EXPENSES FEES EXPENSES
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation
Fund(/5/).............................. 0.63% 0.05% -- 0.68%
AIM V.I. Government Securities
Fund(/5/).............................. 0.50% 0.37% -- 0.87%
AIM V.I. Growth & Income Fund(/5/)...... 0.63% 0.06% -- 0.69%
AIM V.I. Value Fund(/5/)................ 0.62% 0.08% -- 0.70%
Dreyfus Money Market Portfolio.......... 0.50% 0.12% -- 0.62%
Dreyfus Small Company Stock Portfolio... 0.75% 0.64% -- 1.39%
Dreyfus Stock Index Fund................ 0.25% 0.05% -- 0.30%
MFS Emerging Growth Series(/6/)......... 0.75% 0.12% -- 0.87%
MFS Foreign & Colonial Emerging Markets
Equity Series(/6/)..................... 1.25% 0.25% -- 1.50%
MFS Research Series(/6/)................ 0.75% 0.13% -- 0.88%
MFS Total Return Series(/6/)............ 0.75% 0.25% -- 1.00%
MFS Utilities Series(/6/)............... 0.75% 0.25% -- 1.00%
Oppenheimer Global Securities Fund...... 0.70% 0.06% -- 0.76%
Oppenheimer Growth Fund................. 0.73% 0.02% -- 0.75%
Oppenheimer Growth & Income Fund........ 0.75% 0.08% -- 0.83%
Oppenheimer High Income Fund............ 0.75% 0.07% -- 0.82%
Oppenheimer Strategic Bond Fund......... 0.75% 0.08% -- 0.83%
WRL Emerging Growth(/7/) ............... 0.80% 0.13% -- 0.93%
WRL Global(/7/) ........................ 0.80% 0.20% -- 1.00%
WRL Growth(/7/) ........................ 0.80% 0.07% -- 0.87%
</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 POLICY--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. The Service Charge is the lesser of 2% of the
Policy Value or $30 per Policy. There is no fee for the first 12 transfers
per year. For additional transfers, PFL may charge a fee of $10 per
transfer, but currently does not charge for any transfers. Mutual Fund
Account Annual Expenses do not apply to the Fixed Account (See "CHARGES
AND DEDUCTIONS--Other Expenses Including Investment Advisory Fees," p.
45.)
(/3/) Mortality and Expense Risk Fees (1.25%) shown are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fees for the "Return of Premium Death Benefit" is 1.10% for
each Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p.
40.)

- 13 -
<PAGE>

(/4/) The fee table information relating to the Underlying Funds is for 1997
and was provided to PFL by the Underlying Funds, and PFL has not
independently verified such information.
(/5/) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. Effective May 1, 1998, the Funds reimburse
AIM in an amount up to 0.25% of the average net asset value of each Fund,
for expenses incurred in providing, or assuring that participating
insurance companies provide, certain adminstrative services. Currently,
the fee only applies to the verage net asset value of each Fund in excess
of the net asset value of each Fund as calculated on April 30, 1998.
(/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 1997
would be: 0.27% and 0.45%, respectively, for the MFS Total Return Series;
1.02% and 1.20%, respectively, for the MFS Utilities Series; and is
estimated to be 4.67% and 5.92%, respectively, for the MFS Foreign &
Colonial Emerging Markets Equity Series.
(/7/) Effective January 1, 1997, the WRL Series Fund, Inc. adopted a Plan of
Distribution pursuant to Rule 12b-1 under the 1940 Act ("Distribution
Plan") and pursuant to the Distribution Plan, has entered into a
Distribution Agreement with InterSecurities, Inc. ("ISI"), principal
underwriter for the WRL Series Fund, Inc. Under the Distribution Plan,
the WRL Series Fund, Inc., on behalf of the WRL Growth Portfolio, the WRL
Global Portfolio and the WRL Emerging Growth Portfolio is authorized to
pay to various service providers, as direct payment for expenses incurred
in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's
shares, up to a maximum rate of 0.15% on an annualized basis of the
average daily net assets. This fee is measured and accrued daily and paid
monthly. ISI has determined that it would not seek payment by the WRL
Series Fund, Inc. of distribution expenses with respect to any portfolio
(including the WRL Growth, WRL Global and WRL Emerging Growth Portfolios)
during the fiscal year ending December 31, 1998. Owners will be notified
in advance prior to ISI's seeking such reimbursement in the future.

- 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:

<TABLE>
<CAPTION>
IF THE POLICY IS ANNUITIZED
IF THE POLICY IS AT THE END OF THE APPLICABLE
SURRENDERED AT THE END TIME PERIOD OR IF THE POLICY
OF THE APPLICABLE TIME IS NOT SURRENDERED OR
PERIOD. ANNUITIZED.
-----------------------------------
1 3 5 10 1 3 5 10
SUBACCOUNT YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation........... $74 $103 $116 $232 $ 20 $ 63 $ 108 $ 232
AIM V.I. Government
Securities............. $76 $109 $126 $252 $ 22 $ 68 $ 117 $ 252
AIM V.I. Growth &
Income................. $74 $103 $116 $233 $ 20 $ 63 $ 108 $ 233
AIM V.I. Value.......... $74 $104 $117 $234 $ 20 $ 63 $ 109 $ 234
Dreyfus Money Market.... $73 $101 $113 $226 $ 20 $ 61 $ 104 $ 226
Dreyfus Small Company
Stock.................. $81 $125 $152 $304 $ 27 $ 84 $ 143 $ 304
Dreyfus Stock Index..... $70 $ 91 $ 96 $192 $ 16 $ 51 $ 88 $ 192
MFS Emerging Growth..... $76 $109 $126 $252 $ 22 $ 68 $ 117 $ 252
MFS Foreign & Colonial
Emerging Markets
Equity................. $82 $113 $128 $314 $ 28 $ 87 $ 149 $ 314
MFS Research............ $76 $109 $126 $253 $ 22 $ 69 $ 118 $ 253
MFS Total Return........ $77 $113 $132 $265 $ 23 $ 72 $ 124 $ 265
MFS Utilities........... $77 $113 $132 $265 $ 23 $ 72 $ 124 $ 265
Oppenheimer Global
Securities............. $75 $105 $120 $241 $ 21 $ 65 $ 112 $ 241
Oppenheimer Growth...... $75 $105 $120 $240 $ 21 $ 65 $ 111 $ 240
Oppenheimer Growth &
Income................. $76 $108 $124 $248 $ 22 $ 67 $ 115 $ 248
Oppenheimer High
Income................. $75 $107 $123 $247 $ 22 $ 67 $ 115 $ 247
Oppenheimer Strategic
Bond................... $76 $108 $124 $248 $ 22 $ 67 $ 115 $ 248
WRL Emerging Growth..... $77 $111 $129 $259 $ 23 $ 70 $ 121 $ 259
WRL Global.............. $77 $112 $132 $264 $ 23 $ 72 $ 123 $ 264
WRL Growth.............. $76 $109 $126 $263 $ 22 $ 69 $ 118 $ 253
</TABLE>

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:

<TABLE>
<CAPTION>
IF THE POLICY IS ANNUITIZED
IF THE POLICY IS AT THE END OF THE APPLICABLE
SURRENDERED AT THE END TIME PERIOD OR IF THE POLICY
OF THE APPLICABLE TIME IS NOT SURRENDERED OR
PERIOD. ANNUITIZED.
-----------------------------------
1 3 5 10 1 3 5 10
SUBACCOUNT YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation........... $76 $108 $124 $248 $ 22 $ 67 $ 115 $ 248
AIM V.I. Government
Securities............. $78 $113 $133 $267 $ 24 $ 73 $ 125 $ 267
AIM V.I. Growth &
Income................. $76 $108 $124 $249 $ 22 $ 67 $ 116 $ 249
AIM V.I. Value.......... $76 $108 $125 $250 $ 22 $ 68 $ 116 $ 250
Dreyfus Money Market.... $75 $106 $121 $242 $ 21 $ 65 $ 112 $ 242
Dreyfus Small Company
Stock.................. $83 $129 $159 $318 $ 29 $ 88 $ 151 $ 318
Dreyfus Stock Index..... $72 $ 96 $104 $208 $ 18 $ 56 $ 96 $ 208
MFS Emerging Growth..... $78 $113 $133 $267 $ 24 $ 73 $ 125 $ 267
MFS Foreign & Colonial
Emerging Markets
Equity................. $84 $133 $165 $328 $ 30 $ 92 $ 156 $ 328
MFS Research............ $78 $114 $134 $268 $ 24 $ 73 $ 125 $ 268
MFS Total Return........ $79 $117 $140 $280 $ 25 $ 77 $ 131 $ 280
MFS Utilities........... $79 $117 $140 $280 $ 25 $ 77 $ 131 $ 280
Oppenheimer Global
Securities............. $76 $110 $128 $256 $ 23 $ 70 $ 119 $ 256
Oppenheimer Growth...... $76 $110 $127 $255 $ 22 $ 69 $ 119 $ 255
Oppenheimer Growth &
Income................. $77 $112 $131 $263 $ 23 $ 72 $ 123 $ 263
Oppenheimer High
Income................. $77 $112 $131 $262 $ 23 $ 71 $ 122 $ 262
Oppenheimer Strategic
Bond................... $77 $112 $131 $263 $ 23 $ 72 $ 123 $ 263
WRL Emerging Growth..... $78 $116 $137 $274 $ 24 $ 75 $ 128 $ 274
WRL Global.............. $79 $117 $139 $279 $ 25 $ 77 $ 131 $ 279
WRL Growth.............. $78 $114 $134 $268 $ 24 $ 73 $ 125 $ 268
</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.

- 15 -
<PAGE>

THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS 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.

In these examples, the $30 Service Charge is reflected as a charge of
0.0644% based on an estimated average Policy Value of $46,590.

DEATH BENEFIT

In the event that the Annuitant who is not the Owner dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant unless the
Owner specifically requests on the application or in a Written Request that
the Death Benefit be paid upon the Annuitant's death and PFL agrees to such an
election. If the Annuitant is also the Owner, upon receipt of proof that the
Annuitant has died before the Annuity Commencement Date, the Death Benefit is
calculated and is payable to the Beneficiary when we receive an election of
the method of settlement and return of the Policy.

The amount of the Death Benefit will depend on the state where the Policy is
purchased and may depend on the Death Benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date due proof of death and election of
the method of settlement are received by PFL.

The Owner has the "one-time" option of choosing a "Return of Premium Death
Benefit," (Death Benefit Option "A"), a "5% Annually Compounding Death
Benefit," (Death Benefit Option "B"), or an "Annual Step-Up Death Benefit,"
(Death Benefit Option "C"). The Return of Premium Death Benefit is the return
of all Premium Payments less any Partial Withdrawals, as of the date of death.
The 5% Annually Compounding Death Benefit is the total Premium Payments less
any Partial Withdrawals, accumulated at 5% until the earlier of the date of
death or the Owner's 81st birthday. The Annual Step-Up Death Benefit is the
largest Policy Value on the issue date or on any Policy Anniversary prior to
the earlier of the date of death or prior to the Owner's 81st birthday, plus
any premiums paid, less any premium withdrawals taken, subsequent to the date
of the largest anniversary Policy Value. If no election is made by the 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

- 16 -
<PAGE>

Commencement Date are to elect a lump sum payment, or elect to receive annuity
payments under one of the Fixed Payment Options. New Jersey residents cannot
elect Variable Payment Options. Consult your agent and the policy form itself
for details regarding these and other terms applicable to policies sold in New
Jersey.

FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY

With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to occur
(e.g., a pledge or assignment of a Policy). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, a penalty tax may apply to
certain distributions or deemed distributions under the Policy. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 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 RETIREMENT BUILDER ACCOUNTS--The Fixed
Account," p. 26.)

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.

- 17 -
<PAGE>

Dreyfus Money Market Subaccount. The yield of the Dreyfus 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 Dreyfus 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.

Adjusted Historical Performance Data. The following performance data is
historic performance data for the underlying Portfolios since their inception
reduced by some or all of the fees and charges under the Policy. Such adjusted
historic performance includes data that precedes the inception dates of the
Subaccounts. This data is designed to show the performance that would have
resulted if the Policy had been in existence during that time, based on the
performance of the applicable Portfolio and the assumption that the applicable
Subaccount was in existence for the same period as the Portfolio with a level
of charges equal to those currently assessed under the Policies. This data is
not intended to indicate future performance.

For instance, as shown in Table 1 and Table 2 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

- 18 -
<PAGE>

Charge and Surrender Charges. Table 1 assumes a complete surrender of the
Policy at the end of the period, and THEREFORE THE SURRENDER CHARGE IS
DEDUCTED. Table 2 assumes that the Policy is not surrendered, and THEREFORE
THE SURRENDER CHARGE IS NOT DEDUCTED.

The following information is also based on the method of calculation
described in the Statement of Additional Information. The adjusted historical
average annual total returns for periods ended December 31, 1997, were as
follows:

- 19 -
<PAGE>

TABLE 1
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
SUBACCOUNT 1 YEAR 5 YEAR INCEPTION INCEPTION DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation... 7.41% -- 17.17% May 5, 1993
AIM V.I. Government Securities.. 2.04% -- 3.81% May 5, 1993
AIM V.I. Growth & Income........ 19.69% -- 19.45% May 2, 1994
AIM V.I. Value.................. 17.65% -- 18.28% May 5, 1993
Dreyfus Small Company Stock..... 15.72% -- 14.39% May 1, 1996
Dreyfus Stock Index............. 26.96% 18.21% 14.38% September 29, 1989
MFS Emerging Growth............. 15.85% -- 21.05% July 24, 1995
MFS Foreign & Colonial Emerging
Markets Equity................. -- -- (15.73%) October 16, 1997
MFS Research.................... 14.20% -- 19.62% July 26, 1995
MFS Total Return................ 15.24% -- 18.74% January 3, 1995
MFS Utilities................... 25.70% -- 25.88% January 3, 1995
Oppenheimer Global Securities... 16.37% 17.33% 10.82% November 12, 1990
Oppenheimer Growth.............. 20.65% 17.13% 15.20% April 3, 1985
Oppenheimer Growth & Income..... 26.48% -- 35.06% July 5, 1995
Oppenheimer High Income......... 6.11% 12.30% 12.86% December 31, 1987+
Oppenheimer Strategic Bond...... 2.59% -- 6.11% May 3, 1993
WRL Emerging Growth............. 15.39% -- 18.86% March 1, 1993
WRL Global...................... 12.68% 18.88% 18.97% December 31, 1992
WRL Growth...................... 11.46% 12.78% 17.18% October 2, 1986+

10 YEAR CORRESPONDING
OR PORTFOLIO
SUBACCOUNT 1 YEAR 5 YEAR INCEPTION INCEPTION DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation... 7.25% -- 17.00% May 5, 1993
AIM V.I. Government Securities.. 1.88% -- 3.65% May 5, 1993
AIM V.I. Growth & Income........ 19.52% -- 19.28% May 2, 1994
AIM V.I. Value.................. 17.48% -- 18.12% May 5, 1993
Dreyfus Small Company Stock..... 15.55% -- 14.22% May 1, 1996
Dreyfus Stock Index............. 26.79% 18.04% 14.22% September 29, 1989
MFS Emerging Growth............. 15.68% -- 20.88% July 24, 1995
MFS Foreign & Colonial Emerging
Markets Equity................. -- -- (15.76%) October 16, 1997
MFS Research.................... 14.03% -- 19.44% July 26, 1995
MFS Total Return................ 15.08% -- 18.57% January 3, 1995
MFS Utilities................... 25.52% -- 25.70% January 3, 1995
Oppenheimer Global Securities... 16.20% 17.16% 10.66% November 12, 1990
Oppenheimer Growth.............. 20.48% 16.96% 15.03% April 3, 1985
Oppenheimer Growth & Income..... 26.30% -- 34.88% July 5, 1995
Oppenheimer High Income......... 5.95% 12.14% 12.70% December 31, 1987+
Oppenheimer Strategic Bond...... 2.43% -- 5.95% May 3, 1993
WRL Emerging Growth............. 15.23% -- 18.70% March 1, 1993
WRL Global...................... 12.51% 18.72% 18.81% December 31, 1992
WRL Growth...................... 11.30% 12.61% 17.01% October 2, 1986+
</TABLE>
+ Ten Year Date

- 20 -
<PAGE>

TABLE 2
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
SUBACCOUNT 1 YEAR 5 YEAR INCEPTION INCEPTION DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation... 12.07% -- 17.16% May 5, 1993
AIM V.I. Government Securities.. 6.75% -- 3.96% May 5, 1993
AIM V.I. Growth & Income........ 24.20% -- 19.60% May 2, 1994
AIM V.I. Value.................. 22.18% -- 18.26% May 5, 1993
Dreyfus Small Company Stock..... 20.27% -- 16.81% May 1, 1996
Dreyfus Stock Index............. 31.39% 18.21% 14.38% September 29, 1989
MFS Emerging Growth............. 20.40% -- 22.00% July 24, 1995
MFS Foreign & Colonial Emerging
Markets Equity................. -- -- (10.27%) October 16, 1997
MFS Research.................... 18.77% -- 20.61% July 26, 1995
MFS Total Return................ 19.81% -- 19.43% January 3, 1995
MFS Utilities................... 30.14% -- 26.38% January 3, 1995
Oppenheimer Global Securities... 20.92% 17.33% 10.82% November 12, 1990
Oppenheimer Growth.............. 25.15% 17.13% 15.20% April 3, 1985
Oppenheimer Growth & Income..... 30.91% -- 35.61% July 5, 1995
Oppenheimer High Income......... 10.78% 12.30% 12.86% December 31, 1987+
Oppenheimer Strategic Bond...... 7.30% -- 6.23% May 3, 1993
WRL Emerging Growth............. 19.96% -- 18.83% March 1, 1993
WRL Global...................... 17.29% 18.88% 18.97% December 31, 1992
WRL Growth...................... 16.07% 12.78% 17.18% October 2, 1986+

<CAPTION>
- -------------------------------------------------------------------------------
5% ANNUALLY COMPOUNDING DEATH BENEFIT OR ANNUAL STEP-UP DEATH BENEFIT
(TOTAL MUTUAL FUND ACCOUNT ANNUAL EXPENSES: 1.40%)
- -------------------------------------------------------------------------------
10 YEAR CORRESPONDING
OR PORTFOLIO
SUBACCOUNT 1 YEAR 5 YEAR INCEPTION INCEPTION DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation... 11.91% -- 17.00% May 5, 1993
AIM V.I. Government Securities.. 6.60% -- 3.80% May 5, 1993
AIM V.I. Growth & Income........ 24.03% -- 19.43% May 2, 1994
AIM V.I. Value.................. 22.01% -- 18.10% May 5, 1993
Dreyfus Small Company Stock..... 20.11% -- 16.64% May 1, 1996
Dreyfus Stock Index............. 31.21% 18.04% 14.22% September 29, 1989
MFS Emerging Growth............. 20.24% -- 21.83% July 24, 1995
MFS Foreign & Colonial Emerging
Markets Equity................. -- -- (10.30%) October 16, 1997
MFS Research.................... 18.61% -- 20.44% July 26, 1995
MFS Total Return................ 19.64% -- 19.27% January 3, 1995
MFS Utilities................... 29.96% -- 26.20% January 3, 1995
Oppenheimer Global Securities... 20.75% 17.16% 10.66% November 12, 1990
Oppenheimer Growth.............. 24.98% 16.96% 15.03% April 3, 1985
Oppenheimer Growth & Income..... 30.74% -- 35.43% July 5, 1995
Oppenheimer High Income......... 10.62% 12.14% 12.70% December 31, 1987+
Oppenheimer Strategic Bond...... 7.14% -- 6.07% May 3, 1993
WRL Emerging Growth............. 19.79% -- 18.66% March 1, 1993
WRL Global...................... 17.11% 18.72% 18.81% December 31, 1992
WRL Growth...................... 15.91% 12.61% 17.01% October 2, 1986+
</TABLE>
+ Ten Year Date

- 21 -
<PAGE>

For purposes of the calculations in Table 1 and Table 2 above, 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.

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 RETIREMENT BUILDER ACCOUNTS

Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.

THE MUTUAL FUND ACCOUNT

The Mutual Fund Account 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

- 22 -
<PAGE>

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 shares available under the Policy
are those of AIM Variable Insurance Funds, Inc. (managed by A I M Advisors,
Inc.), Dreyfus Variable Investment Fund and Dreyfus Stock Index Fund (managed
by The Dreyfus Corporation), MFS Variable Insurance Trust (managed by
Massachusetts Financial Services Company), Oppenheimer Variable Account Funds
(managed by OppenheimerFunds, Inc.), and WRL Series Fund, Inc. (WRL Emerging
Growth managed by Van Kampen American Capital Asset Management, Inc.; WRL
Global and WRL Growth managed by Janus Capital Corporation).

The Mutual Fund Account currently has dedicated twenty Subaccounts. 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.

These Underlying Funds are not available for purchase directly by the
general public, and are not the same as the mutual funds with very similar or
nearly identical names that are sold directly to the public. However, the
investment objectives and policies of certain of the Portfolios are very
similar to the investment objectives and policies of other portfolios that are
or may be managed by the same investment adviser or manager. Nevertheless, the
investment performance and results of the Portfolios available under the
Policies may be lower, or higher, than the investment results of such other
(publicly available) portfolios. There can be no assurance, and no
representation is made, that the investment results of any of the Portfolios
will be comparable to the investment results of any other portfolio or mutual
fund, even if the other portfolio or mutual fund has the same investment
adviser or manager and the same investment objectives and policies, and a very
similar name.

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. CAPITAL APPRECIATION FUND seeks capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller
emerging growth companies.

- 23 -
<PAGE>

AIM V.I. GOVERNMENT SECURITIES FUND seeks to achieve a high level of current
income consistent with reasonable concern for safety of principal by investing
in debt securities issued, guaranteed or otherwise backed by the United States
Government.

AIM V.I. GROWTH & INCOME FUND seeks growth of capital, with current income
as a secondary objective. Although the amount of the Fund's current income
will vary from time to time, it is anticipated that the current income
realized by the Fund will be generally greater than that realized by mutual
funds whose sole objective is capital growth.

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.

DREYFUS MONEY MARKET PORTFOLIO seeks to provide as high a level of current
income as is consistent with the preservation of capital and the maintenance
of liquidity.

DREYFUS SMALL COMPANY STOCK PORTFOLIO seeks to provide investment results
that are greater than the total return performance of publicly-traded common
stocks in the aggregate, as represented by the Russell 2500(TM) Index. It
invests primarily in a portfolio of equity securities of small- to medium-
sized domestic issuers, while attempting to maintain volatility and
diversification similar to that of the Russell 2500(TM) Index.

DREYFUS STOCK INDEX FUND seeks to provide investment results that correspond
to the price and yield performance of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Composite Stock Price
Index. In anticipation of taking a market position, the Fund is permitted to
purchase and sell stock index futures. The Fund is neither sponsored by nor
affiliated with Standard & Poor's. Mellon Equity Associates, an affiliate of
The Dreyfus Corporation, serves as the Fund's index fund manager.

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 FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES seeks capital
appreciation.

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.

MFS UTILITIES SERIES seeks capital growth and current income (income above
that available from a portfolio invested entirely in equity securities).

OPPENHEIMER GLOBAL SECURITIES FUND seeks long-term capital appreciation by
investing a substantial portion of its assets in securities of foreign
issuers, "growth-type" companies, cyclical industries and special situations
which are considered to have appreciation possibilities, but which may be
considered to be speculative.

OPPENHEIMER GROWTH FUND seeks to achieve capital appreciation by investing
in securities of well-known established companies.

OPPENHEIMER GROWTH & INCOME FUND seeks a high total return (which includes
growth in the value of its shares as well as current income) from equity and
debt securities. From time to time this Fund may focus on small to medium
capitalization common stocks, bonds and convertible securities.

- 24 -
<PAGE>

OPPENHEIMER HIGH INCOME FUND seeks a high level of current income from
investment in high yield fixed-income securities. High Income Fund's
investments include unrated securities or high risk securities in the lower
rating categories, commonly known as "junk bonds," which are subject to a
greater risk of loss of principal and nonpayment of interest than higher-rated
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. Capital appreciation 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.

WRL EMERGING GROWTH PORTFOLIO MANAGED BY VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC. seeks capital appreciation. The portfolio seeks to achieve
its objective by investing primarily in common stocks of small and medium
sized companies. Under normal conditions, at least 65% of the portfolio's
total assets will be invested in common stocks of small and medium sized
companies, both domestic and foreign, in the early stages of their life cycle,
that the portfolio's sub-adviser believes have the potential to become major
enterprises. Investments in such companies may offer greater opportunities for
growth of capital than larger, more established companies, but also involve
certain special risks. Emerging growth companies often have limited product
lines, markets, or financial resources, and they may be dependent upon one or
a few key people for management. The securities of such companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general.

WRL GLOBAL PORTFOLIO MANAGED BY JANUS CAPITAL CORPORATION seeks long-term
growth of capital in a manner consistent with preservation of capital,
primarily through investments in common stocks of foreign and domestic
issuers. The portfolio seeks to invest in companies on a worldwide basis,
regardless of country of organization or place of principal business activity,
as well as domestic and foreign governments, government agencies and other
governmental entities. Realization of income is not a significant investment
consideration and any income realized on the portfolio's investments will,
therefore, be incidental to the portfolio's objective.

WRL GROWTH PORTFOLIO MANAGED BY JANUS CAPITAL CORPORATION seeks growth of
capital. The portfolio will invest substantially all of its assets in common
stocks when the subadviser believes that the relevant market environment
favors profitable investing in those securities. Common stock investments are
selected in industries and companies that the subadviser believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate. The
subadviser's analysis and election process focuses on stocks issued by
companies with earnings growth potential. In particular, the Growth Portfolio
intends to buy stocks with earnings growth potential that may not be
recognized by the market. Securities are selected solely for their growth
potential; investment income is not a consideration.

THERE IS NO ASSURANCE THAT ANY OF THE UNDERLYING FUNDS' PORTFOLIOS WILL
ACHIEVE ITS INVESTMENT OBJECTIVE.

PFL may receive expense reimbursements or other revenues from the Underlying
Funds or their investment advisors. The amount of these reimbursements or
revenues, if any, may be based on the amount of assets that PFL or the Mutual
Fund Account invests in the Underlying Funds.

The Underlying Funds' prospectuses should be read carefully before any
decision is made concerning the allocation of Premium Payments to a particular
Subaccount. The Underlying Funds are not limited to selling their shares to
the Mutual Fund Account and are permitted to accept investments from any
separate account of an insurance company. Since the Portfolios of the
Underlying Funds are available to registered separate accounts offering
variable annuity products of PFL, as well as variable annuity and variable
life products of other insurance companies, there is a

- 25 -
<PAGE>

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
Dreyfus Money Market Portfolio is not insured or guaranteed by the U.S.
government or any government agency.

Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Subaccounts will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. 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 Dreyfus Money Market Portfolio (or in a similar portfolio
of money market instruments) or in another Subaccount, if appropriate.

In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required, or (iii) combined
with one or more other separate accounts. To the extent permitted by
applicable law, PFL also may (i) transfer the assets of the Mutual Fund
Account associated with the Policies to another account or accounts, (ii)
restrict or eliminate any voting rights of Owners or other persons who have
voting rights as to the Mutual Fund Account, (iii) create new mutual fund
accounts, (iv) add new Subaccounts to or remove existing Subaccounts from the
Mutual Fund Account, or combine Subaccounts, or (v) 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, as amended, (the "1933 Act"), nor is the
general account registered as an investment company under the 1940 Act.
Accordingly, neither the general account nor any interests therein are
generally subject to the provisions of the 1933 or 1940 Acts. PFL has been
advised that while the staff of the SEC has not reviewed the disclosures in
this Prospectus which relate to the fixed portion, the disclosures may be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of the statements made in the
prospectus.

- 26 -
<PAGE>

The Fixed Account is made up of all the general assets of PFL, other than
those in the Mutual Fund Account or in any other segregated asset account. The
Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Rather than the Owner bearing the investment risk, as is the case for Policy
Value allocated to the Mutual Fund Account, PFL bears the full investment risk
for all Policy Value allocated to the Fixed Account. PFL has sole discretion
to invest the assets of its general account, including the Fixed Account,
subject to applicable law.

Premium Payments applied to, and any amounts transferred to, the Fixed
Account will reflect a fixed interest rate. The interest rates PFL sets will
be credited for increments of at least one year measured from each Premium
Payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%.

Upon full surrender, the Owner will always receive at least the Premium
Payments applied to, less prior partial withdrawals and transfers from, the
Fixed Account.

Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options") into which Premium Payments may be paid or
amounts transferred. For example, PFL may offer Guaranteed Period Options for
1, 3, 5, or 7 years duration from time to time. The Current Interest Rate PFL
sets for funds placed in each Guaranteed Period Option will be guaranteed
until the end of the applicable Guaranteed Period. At the end of the
Guaranteed Period, the Policy Value for the Guaranteed Period Option will be
rolled into a new Guaranteed Period Option(s) or may be transferred to any
Subaccount(s) within the Mutual Fund Account.

The Owner may choose the Guaranteed Period Option(s) in which to place the
Policy Value by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period Option will be the same as the expiring Guaranteed Period
Option unless that Guaranteed Period Option is no longer offered, in which
case, the next shorter Guaranteed Period Option offered will be used. PFL
reserves the right, for new Premium Payments, transfers, or rollovers, to
offer or not to offer any Guaranteed Period Option. PFL will, however, always
offer at least a one-year Guaranteed Period Option.

Surrenders or partial withdrawals from a Guaranteed Period Option prior to
the end of the Guaranteed Period and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal are subject to
an Excess Interest Adjustment on the amount withdrawn. An Excess Interest
Adjustment may result in a loss of interest credited, or again of additional
interest, but the Owner's Fixed Account Policy Values will always be credited
with an effective annual interest rate of at least 3%. Surrender charges, if
any, are applied after the Excess Interest Adjustment. However, upon full
surrender the Owner is guaranteed return of Premium Payments to the Fixed
Account, less partial withdrawals and transfers from the Fixed Account. See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 41.) No
transfers from any Guaranteed Period Option to any other Investment Option
will be allowed prior to the end of the Guaranteed Period. (See "THE
RETIREMENT BUILDER ACCOUNTS--Transfers," p. 32.)

For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
first; the next oldest Premium Payment or transfer plus interest is considered
to be withdrawn next, and so on (this is a "first-in, first-out" procedure).
The Owner bears the risk that PFL will not credit interest in excess of 3% per
year.

Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will have a one-year interest rate guarantee for amounts in the
DCA Fixed Account and will only be available under a Dollar Cost Averaging
(DCA) program. If the Owner, for any reason, discontinues the DCA program
before its completion, then the interest credited on amounts in the DCA
account may be adjusted downward, but not below the minimum guaranteed
effective annual interest rate of 3%. PFL may credit different interest rates
for DCA programs of varying time periods. Interest credited on the amounts in
the DCA Fixed Account will always be at least an annual effective rate of 3%.

Prior to the Annuity Commencement Date, no transfers, except through a
Dollar Cost Averaging program, will be allowed from the Dollar Cost Averaging
Fixed Account. Dollar Cost Averaging transfers to Subaccounts of the

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Mutual Fund Account must begin within 30 days after the Premium Payment or
transfer to the Dollar Cost Averaging Fixed Account. Transfers must be
scheduled for at least six but not more than 24 months, or for at least four,
but not more than eight calendar quarters. Transfers will continue until the
elected Subaccount or DCA Fixed Account value is depleted. The amount
transferred each time must be at least $500. All transfers from the DCA
account will be the same amount as the initial transfer unless subsequently
changed. Changes to the amount transferred will only be allowed after the
minimums are satisfied or when additional premium is allocated or a new amount
is transferred into the DCA account. If the amount transferred is changed, the
minimums must be met again (that is, transfers must be scheduled for at least
six more but not more than 24 months, or for at least four more, but not more
than eight quarters). Changes can be made to the Subaccounts to which these
transfers are allocated. Dollar Cost Averaging transfers from the Dollar Cost
Averaging Fixed Account will not be subject to an Excess Interest Adjustment.
(See "THE RETIREMENT BUILDER ACCOUNTS--Dollar Cost Averaging," p. 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 purchases through periods of both high and low
price levels.

Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rates may be changed by PFL frequently or infrequently
depending on interest rates on investments available to PFL and other factors
as described below, but once established, the rate will be guaranteed for the
entire duration of the Guaranteed Period. However, except for limited
situations, any amount withdrawn or transferred will be subject to an Excess
Interest Adjustment, except those at the end of the Guaranteed Period Option.
(See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 35.)

The Guaranteed Interest Rate will not be less than 3% per year regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Guaranteed
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Guaranteed Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; the Policy Owner assumes the risk that declared rates will not
exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.

PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE GUARANTEED
EFFECTIVE INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.

TRANSFERS

An Owner can transfer Policy Value from one Investment Option to another
within certain limits.

Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Owner, to the
Administrative and Service Office. The minimum amount of Policy Value which
may be transferred from a Subaccount of the Mutual Fund Account is the lesser
of $500 or the entire Subaccount value. If the Subaccount value remaining
after a transfer is less than $500, PFL reserves the right, at its discretion,
to include that amount as part of the transfer.

Subject to the limitations and restrictions described below, transfers
currently may be made without charge as often as the Owner wishes, subject to
the minimum dollar amounts specified above. PFL reserves the right to limit
these transfers to no more than 12 per Policy Year in the future or to charge
up to $10 per transfer in excess of 12 per Policy Year.

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<PAGE>

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 "THE RETIREMENT BUILDER
ACCOUNTS--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."

REINSTATEMENTS

Requests are occasionally received by PFL to reinstate funds which had been
transferred to another life insurance company pursuant to a Code Section 1035
exchange or trustee-to-trustee transfer. In this situation PFL will require
the Owner to replace the same total dollar amount of funds in the applicable
Subaccounts and/or Fixed Accounts as was taken from them to effect the
exchange. The total dollar amount of funds reapplied to the Mutual Fund
Account will be used to purchase a number of Accumulation Units available for
each Subaccount based on the Accumulation Unit values at the date of
reinstatement (within two days of the date the funds are received by PFL). It
should be noted that the number of Accumulation Units available on the
Reinstatement date may be more or less than the number surrendered for the
exchange. Amounts reapplied to the Fixed Account will be entitled to receive
the interest rate they would otherwise have received had they not been
withdrawn. However, an adjustment will be made to the amount reapplied to
compensate PFL for the additional interest credited during the period of time
between the withdrawal and the reapplication of the funds. Owners should
consult a qualified personal tax adviser concerning the tax consequences of
any Code Section 1035 exchanges or reinstatements.

TELEPHONE TRANSACTIONS

Owners (or their designated registered representative) may make transfers
and/or change the allocation of Additional Premium Payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the Policy
application has been initialed or telephone transfers have been subsequently
authorized by the Owner by appropriate Written Request. PFL will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. However, PFL will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, it may be liable for any losses due to unauthorized or fraudulent
instructions. All telephone requests will be recorded on voice recorder
equipment for the protection of the Owner. The Owner, when making telephone
requests, will be required to provide the Owner's social security number,
and/or other information for identification purposes.

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.

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<PAGE>

DOLLAR COST AVERAGING (DCA)

Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a dollar amount
specified by the Owner from the DCA Fixed Account Option to any other
Subaccount or Subaccounts of the Mutual Fund Account. The automatic transfers
can occur monthly or quarterly and will occur on the 28th day of the month. If
the DCA request is received prior to the 28th day of any month, the first
transfer will occur on the 28th day of that month. If the DCA request is
received on or after the 28th day of any month, the first transfer will occur
on the 28th day of the following month. The amount transferred each time must
be at least $500. A minimum of six monthly or four quarterly transfers are
required and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account.

Dollar Cost Averaging results in the purchase of more Accumulation Units
when the Accumulation Unit value is low, and fewer Accumulation Units when the
Accumulation Unit value is high. However, there is no guarantee that the
Dollar Cost Averaging program will result in higher Policy Values or will
otherwise be successful.

The Policy Owner may request Dollar Cost Averaging when purchasing the
Policy or later. The program will terminate when the amount in the DCA Fixed
Account is insufficient for the next transfer, at which time the entire
remaining balance is transferred.

The Owner may discontinue the program after satisfying the required minimum
number of transfers at any time by sending a Written Notice to the
Administrative and Service Office. The required minimum number of transfers
(six monthly or four quarterly) must be satisfied each time the DCA program is
restarted following termination of the program for any reason. Discontinuance
of a DCA program may result in PFL reducing interest rates credited to amounts
remaining in the DCA Fixed Account if the conditions established for a
particular DCA program are not met. There is no charge for participation in
this program.

ASSET REBALANCING

Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis based on the Policy Date, and
beginning on a date selected by the Owner. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing. Rebalancing may be started, stopped, or changed
at any time, except that rebalancing will not be available when: (i) a Dollar
Cost Averaging program is in effect, or (ii) 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

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<PAGE>

case, up to the maximum total premium payment allowed by PFL, may be used to
start a Policy. The initial Premium Payment for tax deferred 403(b) purchases
must be received within 90 days following the Policy Date, otherwise the
Policy will be canceled. PFL reserves the right to increase or decrease this
amount for a class of Policies issued after some future date. The initial
Premium Payment is the only Premium Payment required to be paid under a
Policy. A Policy ordinarily will be issued only in respect of Annuitants Age 0
through 80. Acceptance or declination of an application shall be based on
PFL's underwriting standards, and PFL reserves the right to reject any
application or Premium Payment based on those underwriting standards.

If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.

PFL may, if the application or transmittal form can be accepted in the form
received, credit the initial Premium Payment to the Policy Value within one
Business Day after the later of receipt by PFL's agent of the information
needed or the Premium Payment.

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%. 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.

In some states, any amounts allocated to Subaccounts of the Mutual Fund
Account will be temporarily allocated entirely to the Money Market Subaccount
of the Mutual Fund Subaccount 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.

The Owner may change the allocation instructions for future Additional
Premium Payments by sending a Written Notice, signed by the Owner, to PFL's
Administrative and Service Office, or by telephone (subject to the provisions
described under "THE RETIREMENT BUILDER ACCOUNTS--Telephone Transactions," p.
29). The allocation change will apply to Premium Payments received after the
date the Written Notice or telephone request is received.

Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.

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<PAGE>

POLICY VALUE

On or before the Annuity Commencement Date, the Policy Value is equal to the
Owner's:

(i) Premium Payments; minus

(ii) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus

(iii) interest credited in the Fixed Account; plus or minus

(iv) accumulated gains or losses in the Mutual Fund Account; minus

(v) 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.

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<PAGE>

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.)

When requesting a partial surrender ($500 minimum), the Owner must instruct
PFL how the amount withdrawn is to be allocated among various Investment
Options. If the Owner's request for a partial surrender from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Owner's interest in each Investment Option bears to the total Policy
Value. PFL reserves the right to defer payment of the Cash Value from the
Fixed Account for up to six months.

In each Policy Year the Owner may request partial surrenders ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the Cumulative Free Percentage. That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free percentage withdrawals previously taken (that is, lump sums, systematic
payouts, nursing care and terminal condition withdrawals, minimum required
distributions, and unemployment withdrawals) reduce the Cumulative Free
Percentage that is available. For example, 10% Cumulative Free Percentage is
available at the beginning of the first Policy Year. If no partial withdrawals
are taken in the first Policy Year, the first year unused Cumulative Free
Percentage of 10% is carried forward to the second Policy Year. The unused 10%
from year one plus 10% additional Cumulative Free Percentage available at the
beginning of Policy Year two accumulates to a 20% Cumulative Free Percentage
as of the beginning of Policy Year two. Assume only 5% is used in Policy Year
two. Thus the Cumulative Free Percentage available as of the beginning of
Policy Year three would be 25% (that is, 20% - 5% = 15% unused from Policy
Year two, plus an additional 10% available at the beginning of Policy Year
three). Amounts withdrawn in excess of 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. 42. 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

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<PAGE>

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.)

POLICY LOANS FOR 403(B) POLICIES

After the Policy has been in force for at least 30 days and prior to the
Annuity Commencement Date, Owners of Policies used in connection with a TSA
Plan under Section 403(b) of the Code, if the TSA Plan is not subject to the
Employee Retirement Income Security Act of 1974, may elect a Policy Loan
Endorsement under which the Policy Owner can receive Policy Loans. The
availability of Policy Loans will also be governed by the provisions of the
TSA Plans involved. An Owner of a Policy used in connection with a TSA Plan
may be subject to income tax or tax penalties if loans from the plan are not
repaid in accordance with applicable provisions of the Code. In addition,
Internal Revenue Authorities suggest that a Policy Loan may, at least in some
circumstances, result in adverse tax consequences for the TSA Plan.
ACCORDINGLY, A COMPETENT TAX ADVISOR SHOULD BE CONSULTED BEFORE A POLICY LOAN
IS REQUESTED.

If the Policy Loan endorsement is available, the Owner can borrow against
the Policy an amount not to exceed: (1) 75% of the Policy Value when total
indebtedness (all Policy Loans and unpaid accrued interest) is less than or
equal to $10,000; or (2) 50% of the Policy Value when total indebtedness is
greater than $10,000 but less than or equal to $50,000. In all events, the
minimum amount that can be borrowed is $2,000 (unless otherwise required by
state law). The Owner has the sole responsibility for requesting loans and
making loan repayments that comply with applicable tax requirements.

When a loan is made, an amount equal to the loan will be withdrawn from the
Subaccount(s) and/or Fixed Account(s) specified by the Owner and transferred
to the loan reserve. The loan reserve is part of the Fixed Account used as
collateral for any Policy Loan. If no Subaccount(s) and/or Fixed Account are
specified, the loan will be made from each Subaccount and/or Fixed Account in
proportion to the portion of the Policy Value (immediately prior to the loan)
in each Subaccount and/or Fixed Account. Amounts transferred to the loan
reserve do not participate in the investment experience of the Subaccount(s)
from which they were withdrawn.

The loan date is the date PFL processes the loan request. A $50 fee will be
charged at the time of each Policy Loan origination (unless otherwise required
by state law). The Policy will be the sole security for the loan. PFL reserves
the right to postpone distributing the proceeds of a Policy Loan from the
Fixed Account for up to six months if required by regulatory authorities. Only
one new loan will be permitted during a Policy Year.

On each Policy Anniversary, PFL will compare the amount of the Policy Loan
to the amount in loan reserve. If the total indebtedness exceeds the amount in
the loan reserve, PFL will withdraw the difference from the Policy's
Subaccount(s) and/or Fixed Account in proportion to the portion of the Policy
Value in each Subaccount and/or Fixed Account and transfer it to the loan
reserve. If the amount of the loan reserve exceeds the amount of the
outstanding loan, PFL will withdraw the difference from the loan reserve and
transfer it to the Subaccount(s) and/or Fixed Account in accordance with the
Owner's current premium payment allocation. However, PFL reserves the right to
require the transfer to the Fixed Account if the amount was transferred from
the Fixed Account to establish the Policy Loan.

If the total indebtedness at any time exceeds the Policy Value, PFL will
mail notices to the last known addresses of the Owner and any assignee of
record. If the total indebtedness is not paid within 20 days after mailing of
the notices, the Policy will terminate without value.

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<PAGE>

Loan Interest. Interest on any loan will be at the Policy Loan rate of 7% in
arrears. Amounts in the loan reserve will earn interest at a minimum
guaranteed effective annual interest rate of 5%. In its sole discretion, PFL
may declare higher current interest rates from time to time. Different current
interest rates may be applied to the Fixed Account attributable to the loan
reserve than to other portions of the Fixed Account.

Repayment of Loans. Principal and interest must be repaid in substantially
level quarterly or monthly payments over a 5-year period or, if the loan is
used to acquire the Owner's principal residence, a 10, 15, or 20-year period,
but such an extended period cannot go beyond the Owner's estimated retirement
age. If a loan installment repayment is not received within 20 days from the
installment's original due date a deemed distribution of the entire amount of
the total indebtedness and any applicable charges under the Policy, including
any Surrender Charge, will take place. A deemed distribution will be reported
to the Internal Revenue Service as a taxable distribution. Under a Qualified
Plan, this distribution may be subject to income tax and a penalty tax, and
may cause the Policy to fail to qualify under the Code.

While the Policy is in force and before the Annuity Commencement Date, any
loan may be repaid in full. If not repaid, loans will automatically reduce the
amount of any Death Proceeds, the amount payable upon a Partial Withdrawal or
Surrender of the Policy, and the amount applied on the Annuity Commencement
Date to provide annuity payments.

Policy Loans may not be currently available in all states.

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)--(i) has been confined in a
hospital or nursing facility for 30 consecutive days or (ii) has been
diagnosed as having a terminal condition as defined in the Policy or
endorsement (generally a life expectancy of 12 months or less), then the
Surrender Charge and Excess Interest Adjustment are not imposed on surrenders
or partial withdrawals. (Since this benefit may not be available in all
states, see the Policy or endorsement for details.) (See DISTRIBUTIONS UNDER
THE POLICY--Nursing Care and Terminal Condition Withdrawal Option," p. 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 (i)
must have been employed full time for at least two years prior to becoming
unemployed, (ii) must have been employed full time on the Policy Date, (iii)
must have been unemployed for at least 60 consecutive days at the time of
withdrawal, and (iv) must have a minimum Cash Value at the time of withdrawal
of $5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than fifteen (15) days following the date PFL receives the
withdrawal request. (This benefit may not be available in all states--see the
Policy or endorsement for details.)

EXCESS INTEREST ADJUSTMENT (EIA)

Full surrenders, partial withdrawals, and amounts applied to an Annuity
Payment Option (prior to the end of any Guaranteed Period) from the Fixed
Account Guaranteed Period Options will be subject to an Excess Interest
Adjustment except as provided for under "DISTRIBUTIONS UNDER THE POLICY--
Surrenders," p. 33 or "DISTRIBUTIONS UNDER THE POLICY--Nursing Care and
Terminal Condition Withdrawal Option," p. 35 above or "DISTRIBUTIONS UNDER THE
POLICY--Systematic Payout Option," p. 36.

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.

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<PAGE>

Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower Cash Value
upon surrender. Conversely, if interest rates have fallen since the date of
the guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher Cash Value
upon surrender.

Excess Interest Adjustments will not reduce the Adjusted Policy Value at the
time of full surrender for a Guaranteed Period Option below the amount paid
into, less any prior partial withdrawals and transfers from that Guaranteed
Period Option, plus interest at the Policy's minimum guaranteed effective
annual interest rate of 3%.

The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.

SYSTEMATIC PAYOUT OPTION

Under the Systematic Payout Option, Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
specified Investment Options (except the DCA account). Monthly and quarterly
payments can only be accomplished by electronic funds transfer directly to a
checking or savings account. The minimum payment is $50. The maximum payment
is 10% of the Policy Value at the time the Systematic Payout is made divided
by the number of payments made per year (for example, 12 for monthly). If this
requested amount is below the minimum distribution requirements for that
Policy specified by the IRS for tax qualified plans, the maximum payment will
be increased to this minimum required distribution amount. Only partial
withdrawal requests which are in excess of the minimum required distribution
will be subject to any applicable Surrender Charge and/or Excess Interest
Adjustment. The "Request for Systematic Payout" form must specify a date for
the first payment, which must be at least 30 days but not more than one year
after the form is submitted (that is, Systematic Payouts will start at the end
of the payment mode selected, but not earlier than 30 days from the date of
request).

The Surrender Charge and Excess Interest Adjustment will be waived for
Owners under age 59 1/2 on Qualified Policies if they take Systematic Payouts
using one of the payout methods described in I.R.S. Notice 89-25, Q&A-12 (the
Life Expectancy Recalculation Option, Amortization, or Annuity Factor) which
generally requires payments for life or life expectancy. These payments must
be continued until the later of age 59 1/2 or five years from commencement of
the payments. No additional withdrawals may be taken during the time these
payments are made. For Qualified Policies, Owners age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.

In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge will not be imposed on Systematic Payouts. Only Systematic Payouts in
excess of the cumulative interest credited at the time of, but prior to, the
payout will be subject to an Excess Interest Adjustment.

In certain circumstances amounts withdrawn pursuant to a Systematic Payout
may be included in the Owner's gross income and may be subject to penalty
taxes. In addition, Qualified Policies are subject to complex rules with
respect to restrictions on and taxation of distributions, including the
applicability of penalty taxes. Therefore, the Owner should consult a
qualified tax adviser before requesting a Systematic Payout. In certain
circumstances withdrawn amounts may be included in the Owner's gross income.
(See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 45.)

ANNUITY PAYMENTS

Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
which is selected by the Owner at the time the Policy is applied for. The
Annuity Commencement Date may be changed from time to time by the Owner by
Written Notice to PFL, provided that notice of each change is received by PFL
at its Administrative and Service Office at

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<PAGE>

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: (i) at least thirty (30) days after the date notice of the
change is received by PFL and (ii) not later than the last day of the Policy
month starting after the Annuitant attains age 85. In no event will an Annuity
Commencement Date be permitted to be later than the last day of the Policy
month following the month in which the Annuitant attains age 95. The laws of
some states may require earlier Annuity Commencement Dates. The Annuity
Commencement Date may also be changed by the Beneficiary's election of the
Annuity Option after the Annuitant's death.

Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose a Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the Annuity Commencement Date. If no election is
made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Option 3, life income with level payments for 10 years certain,
using the existing Adjusted Policy Value of the Fixed Account, or (ii) under
Option 3-V, life income with variable payments for 10 years certain using the
existing Policy Value of the Mutual Fund Account, or (iii) in a combination of
(i) and (ii). If the Adjusted Policy Value on the Annuity Commencement Date is
less than $2,000, PFL reserves the right to pay it in one lump sum in lieu of
applying it under a Payment Option.

Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "DISTRIBUTIONS UNDER THE POLICY--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 an annuity purchased under Option 3, 3-V, 5 or
5-V.

Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a payment option or upon withdrawal. If so, PFL will deduct
the premium tax before applying or paying the proceeds.

Supplementary Contract. Once proceeds become payable and a Payment Option
has been selected, the Policy will terminate and PFL will issue a
Supplementary Contract to reflect the terms of the option selected. The
Supplementary Contract will name the payees and will describe the payment
schedule.

Availability as an Immediate Annuity. The Policy may be purchased and
immediately annuitized, without the need for an accumulation period. The
Annuity Commencement Date must be a date at least thirty days after notice of
such election is received by PFL.

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).

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<PAGE>

NOTE CAREFULLY: Under Payment Options 3(l) and 5 (including 3-V(l) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second Annuity Payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third Annuity Payment; and so forth.

On the Annuity Commencement Date, the Adjusted Policy Value will be applied
to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value for the Valuation
Period which ends immediately preceding the Annuity Commencement Date,
including the effect of any applicable Excess Interest Adjustment.

The effect of choosing a Fixed Payment Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Payment Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed) of the Annuitant. For further
information, contact PFL at its Administrative and Service Office.

Guaranteed Values. There are five Fixed Payment Options. Payment Options 1,
2 and 4 are based on a guaranteed interest rate of 3%. Payment Options 3 and 5
are based on a guaranteed interest rate of 3% using the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.)

Payment Option 1--Interest Payments. The Adjusted Policy Value may be left
with PFL for any agreed-upon term. PFL will pay the interest in equal payments
or it may be left to accumulate. Withdrawal rights will be agreed upon by the
Owner and PFL when the option is elected.

Payment Option 2--Income for a Specified Period. Level payments of the
proceeds with interest are made for the fixed period elected, at which time
the funds are exhausted.

Payment Option 3--Life Income. An election may be made between:

1. "No Period Certain"--Level payments will be made during the lifetime of
the Annuitant.

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.

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<PAGE>

Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of additional Variable
Annuity Payments will vary based on the investment performance of the
Subaccount(s) of the Mutual Fund Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the Variable Annuity Payments would
increase. Conversely, if actual investment performance is lower than the
Assumed Investment Return, the amount of the Variable Annuity Payments would
decrease.

Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed
under state law) and adjusted age of the Annuitant. The adjusted age is the
Annuitant's actual age nearest birthday, on the Annuity Commencement Date,
adjusted as follows:

<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- ------------
<S> <C>
Before
2001 Actual Age
2001-
2010 Actual Age minus 1
2011-
2020 Actual Age minus 2
2021-
2030 Actual Age minus 3
2031-
2040 Actual Age minus 4
After
2040 As determined by PFL
</TABLE>

This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.

The following Variable Payment Options generally are available:

Payment Option 3-V--Life Income. An election may be made between:

l. "No Period Certain"--Payments will be made during the lifetime of the
Annuitant.

2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.

Payment Option 5-V--Joint and Survivor Annuity. Payments are made as long as
either the payee or the joint payee is living.

Certain Payment Options may not be available in some states.

Determination of Additional Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount on the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed, assuming no transfers to or from that Subaccount occur. The
dollar value of variable Annuity Units in the chosen Subaccount will increase
or decrease reflecting the investment experience of the chosen Subaccount. The
dollar amount of each Variable Annuity Payment after the first may increase,
decrease or remain constant, and is equal to the sum of the amounts determined
by multiplying the number of Annuity Units of each particular Subaccount
credited to the Policy by the Annuity Unit value for the particular Subaccount
on the date the payment is made.

Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no

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<PAGE>

transfers may be made from the Fixed Account to the Mutual Fund Account. The
minimum amount which may be transferred is the lesser of $10 of monthly income
or the entire monthly income of the variable Annuity Units in the Subaccount
from which the transfer is being made. The remaining Annuity Units in the
Subaccount must provide at least $10 of monthly income. If, after a transfer,
the monthly income of the remaining Annuity Units in a Subaccount would be
less than $10, PFL reserves the right to include those Annuity Units as part
of the transfer. PFL reserves the right to limit transfers between Subaccounts
or from the Mutual Fund Account to the Guaranteed Period Options of the Fixed
Account after the Annuity Commencement Date to once per Policy Year.

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, who is the Annuitant, dies prior to
the Annuity Commencement Date. The amount of the Death Benefit will be the
greatest of a) the Policy Value on the date proof of the Owner's death and an
election of the method of settlement are received by PFL's Administrative and
Service Office, b) the Cash Value on the date PFL receives due proof of death
and an election of a method of settlement, and c) the Guaranteed Minimum Death
Benefit ("GMDB") described below, plus Premium Payments less Partial
Withdrawals, from the date of death to the date the death proceeds are paid.

There are three Guaranteed Minimum Death Benefit options available, (A) the
"Return of Premium Death Benefit", (B) the "5% Annually Compounding Death
Benefit," and (C) the "Annual Step-Up Death Benefit."

The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below), as of the date of death.

The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals (defined below) plus interest at an
effective annual rate of 5% from the payment or withdrawal date up to the
earlier of the date of death or the Owner's 81st birthday. There is an extra
charge for this Death Benefit (See "CHARGES AND DEDUCTIONS--Mortality and
Expense Risk Fee," p. 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 (i) and (ii), where

(i) The Surrender-charge-free withdrawal amount taken and,

(ii) 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 (i) be distributed within five years of the
date of the deceased Owner's death, or (ii) 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: (i) within five years after the date of the deceased Owner's
death, or (ii) payments under a Payment Option must begin no later than one
year after the deceased Owner's death and must be made for the successor
Owner's lifetime or for a period certain (so long as any period certain does
not exceed the successor Owner's life expectancy).

Death On or After Annuity Commencement Date. The Death Benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.

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<PAGE>

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 (i) the spouse of the deceased Owner is the sole
beneficiary, (ii) the Owner is not a natural person and the primary Annuitant
dies or is changed, or (iii) 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 "DISTRIBUTIONS UNDER THE POLICY--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: (i) termination of
employment in the Texas public institutions of higher education; (ii)
retirement; or (iii) 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 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.

RESTRICTIONS UNDER QUALIFIED POLICIES

Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.

CHARGES AND DEDUCTIONS

No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.

SURRENDER CHARGE

PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may apply a Surrender Charge, which is a contingent deferred sales charge,

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<PAGE>

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 or
"DISTRIBUTIONS UNDER THE POLICY--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
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.

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<PAGE>

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 an amount up to $30 at the time of surrender during any
Policy Year. After the Annuity Commencement Date, the charge is not deducted.
This annual Service Charge is the lesser of 2% of the Policy Value or $30 and
it will not be increased in the future. This charge is waived if either the
Policy Value or the sum of all Premium Payments less the sum of all partial
surrenders equals or exceeds $50,000 on a Policy Anniversary (or date of
surrender).

PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is 0.15% of the net assets in the Mutual Fund Account.

PREMIUM TAXES

PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments it receives under
the Policies. However, PFL will deduct the aggregate premium taxes that it
pays on behalf of a particular Policy from the Policy Value on (i) the Annuity
Commencement Date (thus reducing the Policy Value), (ii) the total surrender
of a Policy, or (iii) payment of the death proceeds of a Policy. Premium taxes
currently range from 0% to 3.50% of Premium Payments.

FEDERAL, STATE AND LOCAL TAXES

No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.

TRANSFER FEE

There is no charge for the first 12 allowable transfers among Investment
Options in each Policy Year. PFL reserves the right to impose a $10 charge for
the thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a Transfer Fee is
payable, 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.

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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 federal income tax treatment as the initial
Premium Payment under the Policy; PFL will not accept an Additional Premium
Payment under a Policy if the federal income tax treatment of such Premium
Payment would be different from that of the initial Premium Payment.

The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), 408(a), 408A or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.

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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 gross Policy Value does not exceed the
"Investment in the Contract" and no aggregation rule applies), then such
amount received or deemed received will not be includable in gross income, and
will simply reduce the "Investment in the Contract."

For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.

Aggregation Rules. Generally all Nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year. The same aggregation rules apply
to Roth individual retirement annuities and accounts. The Roth IRAs and
Traditional IRAs shall be treated separately for distribution purposes.

Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that

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<PAGE>

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.

Where an Owner allocates a portion of the Adjusted Annuity Purchase Value on
the Annuity Commencement Date to more than one Annuity Payment Option (fixed
or variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of Annuity Payment Options. Instead, any Owner is
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Annuity Purchase Value to any particular
Annuity Payment Option.

If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.

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: (i) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (ii) if

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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 or a deemed distribution under
a Policy resulting from a pledge, assignment or agreement to pledge or assign
or an Annuity Payment with respect to a Policy, there may be imposed on the
recipient a federal penalty tax equal to 10% of the amount includable in gross
income. The penalty tax generally will not apply to any distribution: (i) made
on or after the date on which the taxpayer attains age 59 1/2; (ii) made as a
result of the death of the holder (generally the Owner); (iii) attributable to
the disability of the taxpayer; or (iv) which is part of a series of
substantially equal periodic payments made (not less frequently than annually)
for the life (or life expectancy) of the taxpayer or the joint lives (or joint
life expectancies) of such taxpayer and the taxpayer's beneficiary. Other
rules may apply to Qualified Policies.

Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding. The withholding rate varies according to the
type of distribution and the Owner's tax status. For qualified policies,
"eligible rollover distributions" from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion
of any distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity
form. The 20% withholding does not apply, however, if the Owner chooses a
"direct rollover" from the plan to another tax-qualified plan or IRA.

Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; and in other specified
circumstances. Some retirement plans are subject to distribution and other
requirements that are not incorporated into PFL's Policy administration
procedures. Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Policies comply with applicable law.

For qualified plans under section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the Owner
(or plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made
in a specified form or manner. If the plan participant is a "5 percent owner"
(as defined in the Code), distributions generally must begin no later than
April 1 of the calendar year in which the Owner (or plan participant) reaches
age 70 1/2. Each Owner is responsible for requesting distributions under the
Policy that satisfy applicable tax rules.

PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.

Individual Retirement Annuities ("IRA"). 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

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withdrawals must begin no later than April 1 of the calendar year following
the calendar year in which the Annuitant attains age 70 1/2; (v) an Annuity
Payment Option with a Period Certain that will guarantee Annuity Payments
beyond the life expectancy of the Annuitant and the Beneficiary may not be
selected; (vi) certain payments of Death Benefits must be made in the event
the Annuitant dies prior to the distribution of the Policy Value; and (vii)
the entire interest of the Owner is non-forfeitable. Policies intended to
qualify as Traditional individual retirement annuities under Section 408(b) of
the Code contain such provisions. Amounts in the IRA (other than nondeductible
contributions) are taxed when distributed from the IRA. Distributions prior to
age 59 1/2 (unless certain exceptions apply) are subject to a 10% penalty tax.

Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") may be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity policy that provides a death benefit that equals the
greater of the premiums paid or the Cash Value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.

Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a Traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other 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, or to pay for
qualified first time homebuyer expenses (lifetime maximum of $10,000), or due
to death or disability. All other distributions are subject to income tax when
made from earnings and may be subject to a premature withdrawal penalty tax
unless an exception applies. Unlike the Traditional IRA, there are no minimum
required distributions during the Owner's lifetime; however, required
distributions at death are the same.

Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. The Policy includes a Death Benefit
that in some cases may exceed the greater of the Premium Payments or the
Policy Value. The Death Benefit could be characterized as an incidental
benefit, the amount of which is limited in any tax-sheltered annuity under
section 403(b). Because the Death Benefit may exceed this limitation,
employers using the Policy in connection with such plans should consult their
tax adviser. Additionally, in accordance with the requirements of the Code,
Section 403(b) annuities generally may not permit distribution of (i) elective
contributions made in years beginning after December 31, 1988, (ii) earnings
on those contributions, and (iii) earnings on amounts attributed to elective
contributions held as of the end of the last year beginning before January 1,
1989. Distributions of such amounts will be allowed only upon the death of the
employee, on or after attainment of age 59 1/2, separation from service,
disability, or financial hardship, except that income attributable to elective
contributions may not be distributed in the case of hardship.

Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments. The

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<PAGE>

Policy includes a Death Benefit that in some cases may exceed the greater of
the Premium Payments or the Policy Value. The Death Benefit could be
characterized as an incidental benefit, the amount of which is limited in an
pension or profit-sharing plan. Because the Death Benefit may exceed this
limitation, employers using the Policy in connection with such plans should
consult their tax adviser.

Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is used in the Code), provides
for certain deferred compensation plans with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. The Policies can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. All such investments, however, are owned by the
sponsoring employer, and are subject to the claims of the general creditors of
the sponsoring employer (except for certain governmental plans). 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, like PFL, an indirect wholly-owned subsidiary
of AEGON U.S.A., located at 4333 Edgewood Road N.E., Cedar Rapids, IA 52499-
0001, is the principal underwriter of the Policies. AFSG Securities
Corporation is registered as a broker/dealer under the Securities Exchange Act
of 1934, as amended. It is a member of the National Association of Securities
Dealers, Inc. ("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 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

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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 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 (i) develop an inventory of all
applications; (ii) evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (iii)

- 51 -
<PAGE>

estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (iv) define testing and deployment
requirements to successfully manage validation and re-deployment of any
changed code. It is anticipated that all compliance issues will be resolved by
December 1998.

As of the date of this Prospectus, PFL has identified and made available
what it believes are the appropriate resources of hardware, people, and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.

The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even
with appropriate and diligent pursuit of a well-conceived response plan,
including testing procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its efforts or results,
PFL's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond its
knowledge or control.

LEGAL PROCEEDINGS

There are no legal proceedings to which the Mutual Fund Account is a party
or to which the assets of the Account are subject. PFL, like other life
insurance companies, is a defendant in lawsuits. In some class action and
other lawsuits involving other insurers, substantial damages have been sought
and/or material settlement payments have been made. Although the outcome of
any litigation cannot be predicted with certainty, PFL believes that at the
present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on the Mutual Fund Account or PFL.

- 52 -
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus. The
following is the Table of Contents for that Statement:

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non Participating........................................................ 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
Historical Performance Data................................................ 9
Money Market Yields...................................................... 9
Other Subaccount Yields.................................................. 10
Total Returns............................................................ 11
Other Performance Data................................................... 11
Hypothetical Performance Data............................................ 12
State Regulation of PFL.................................................... 12
Administration............................................................. 12
Records and Reports........................................................ 12
Distribution of the Policies............................................... 12
Other Products............................................................. 13
Custody of Assets.......................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 13
Other Information.......................................................... 13
Financial Statements....................................................... 13
</TABLE>

- 53 -
<PAGE>

APPENDIX A

EXCESS INTEREST ADJUSTMENT(1)

The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:

S*(G - C)* (M/12)

S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate applicable to S.
C= Current Guaranteed Interest Rate then being offered on new Premium Payments
for the next longer Guaranteed Period than "M". If this policy form or such
a Guaranteed period is no longer offered, "C" will be the U.S. Treasury
rate for the next longer maturity (in whole years) than "M" on the 25th day
of the previous calendar month, plus up to 2%.
M= Number of months remaining in the current Guaranteed Period, rounded up to
the next higher whole number of months.

EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3

Policy Value ("PV") at
middle of Contract Year
3 = 50,000* (1.055)^ 2.5 = 57,161.18
Surrender Charge Free
Amount at middle of
Policy Year 3 = 57,161.18* .30 = 17,148.35
EIA Free Amount at middle
of Policy Year 3
= 57,161.18 - 50,000 = 7,161.18
Amount Subject to EIA = 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
- -------------------------
(1) *represents multiplication;
^represents exponentiation.

- 54 -
<PAGE>

Adjusted Policy Value = PV + EIA = 57,161.18 - 3,326.38 = 53,834.80
Surrender Charge = (50,000 - 17,148.35)* .06 = 1,971.10
Cash Value at middle of
Policy Year 3
= PV + EIA - Surrender Charge
= 57,161.18 - 3,326.38 - 1,971.10
= 51,863.70

EXAMPLE 2 (FULL SURRENDER, RATES DECREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3

Policy Value at middle of
Policy Year 3
= 50,000 * (1.055)^ 2.5 = 57,161.18
Surrender Charge Free
Amount at middle of
Policy Year 3
= 57,161.18* .30 = 17,148.35
EIA Free Amount at middle
of Policy Year 3
= 57,161.18 - 50,000 = 7,161.18
Amount Subject to EIA = 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 = S* (G - C)* (M/12)
Adjustment = 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

- 55 -
<PAGE>

On a partial withdrawal, PFL will pay the Owner the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge--Free withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts withdrawn in excess of the Surrender Charge--Free amount will reduce
the Policy Value by an amount equal to:

X-Y + Z

X= Excess Partial Withdrawal = Requested withdrawal less Surrender Charge--
Free amount
A= Amount of Partial Withdrawal which is subject to Excess Interest
Adjustment = Requested withdrawal-EIA--Free Amount, where EIA--Free Amount
= Cumulative interest credited at time of, but prior to, withdrawal.
Y= Excess Interest Adjustment = (A)*(G-C)*(M/12) where G, C, and M are
defined above, with "A" substituted for "S" in the definition of G and M.
Z= Surrender Charge on X minus Y.

EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3

Excess Interest Adjustment/Surrender Charge

X=30,000-17,148.35 = 12,851.65

A=30,000-7,161.18 = 22,838.82

G=.055

C=.065

M=30

Y=22,838.82* (.055-.065)* (30/12) = -570.97

Z=.06* [12,851.65- (-570.97)] = 805.36

Reduction to Policy Value
due to Surrender
Charge--Free withdrawal
= 17,148.35

Reduction to Policy Value
due to Excess Withdrawal
= X-Y + Z
= 12,851.65- (-570.97) + 805.36
= 14,227.98

- 56 -
<PAGE>

Policy Value after
withdrawal at middle of
Policy Year 3 = 57,161.18 - [17,148.35 + 14,227.98]
= 57,161.18 - [17,148.35 + 12,851.65 - ( -
570.97) + 805.36]
= 57,161.18 - [30,000 - ( - 570.97) + 805.36]
= 57,161.18 - 31,376.33 = 25,784.85

EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3
Policy Value at middle of
Policy Year 3
= 50,000* (1.055)^ 2.5 = 57,161.18
Surrender Charge Free
Amount at middle of
Policy Year 3
= 57,161.18* .30 = 17,148.35
EIA Free Amount at middle
of Policy Year 3
= 57,161.18 - 50,000 = 7,161.18

Excess Interest Adjustment/Surrender Charge

X=30,000 - 17,148.35 = 12,851.65
A=30,000 - 7,161.18 = 22,838.82
G=.055
C=.045
M=30
Y=22,838.82* (.055 - .045)* (30/12) = 570.97
Z=.06* [12,851.65 - (570.97)] = 736.84

Reduction to Policy Value
due to Surrender
Charge--Free Withdrawal
= 17,148.35

Reduction to Policy Value
due to Excess Withdrawal
= X - Y + Z
= 12,851.65 - (570.97) + 736.84
= 13,017.52

Policy Value after
withdrawal at middle of
Policy Year 3
= 57,161.18 - [17,148.35 + 13,017.52]
= 57,161.18 - [17,148.35 + 12,851.65 - (570.97) +
736.84]
=57,161.18 - [30,000 - (570.97) + 736.84]
= 57,161.18 - 30,165.87 = 26,995.31

- 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 September 14, 1998, by calling 1-800-525-6205, or
by writing to the Administrative and Service Office, Financial Markets
Division-Variable Annuity Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499-0001. The Prospectus sets forth information that a prospective investor
should know before investing in a Policy. Terms used in the current Prospectus
for the Policy are incorporated in this Statement of Additional Information.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY AND THE PFL
RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT.

Dated: September 14, 1998

- 1 -
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE POLICY--GENERAL PROVISIONS............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non Participating........................................................ 4
FEDERAL TAX MATTERS (52)................................................... 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
INVESTMENT EXPERIENCE...................................................... 6
HISTORICAL PERFORMANCE DATA (19)........................................... 9
Money Market Yields...................................................... 9
Other Subaccount Yields.................................................. 10
Total Returns............................................................ 11
Other Performance Data................................................... 11
Hypothetical Performance Data............................................ 12
STATE REGULATION OF PFL.................................................... 12
ADMINISTRATION............................................................. 12
RECORDS AND REPORTS........................................................ 12
DISTRIBUTION OF THE POLICIES (60).......................................... 12
OTHER PRODUCTS............................................................. 13
CUSTODY OF ASSETS.......................................................... 13
LEGAL MATTERS.............................................................. 13
INDEPENDENT AUDITORS....................................................... 13
OTHER INFORMATION.......................................................... 13
FINANCIAL STATEMENTS (19).................................................. 13
</TABLE>

(Numbers in parenthesis indicate corresponding pages of the Prospectus).

- 2 -
<PAGE>

In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to a prospective purchaser.

THE POLICY--GENERAL PROVISIONS

OWNER

The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment.
While the Annuitant is living, the Owner may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary; and of the Owner's spouse in a community
or marital property state.

A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death,
if the Owner predeceases the Annuitant. If no Successor Owner survives the
Owner and the Owner predeceases the Annuitant, the Owner's estate will become
the Owner.

The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to
the new Owner. A change of ownership may have tax consequences.

When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.

If ownership is transferred (except to the Owner's spouse) because the Owner
dies before the Annuitant, the Adjusted Policy Value generally must be
distributed to the Successor Owner within five years of the Owner's death, or
if the first payment begins within one year of the Owner's death, payments
must be made for a period certain which does not exceed that Successor Owner's
life expectancy.

ENTIRE POLICY

The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in
the application are representations and not warranties. No statement will
cause the Policy to be void or to be used in defense of a claim unless
contained in the application.

DELAY OF PAYMENT AND TRANSFERS

Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified
Policy generally will occur within seven business days from the date the
Written Notice (and any other required documentation or information) is
received, except that PFL may be permitted to defer such payment from the
Mutual Fund Account if: (1) the New York Stock Exchange is closed for other
than usual weekends or holidays or trading on the Exchange is otherwise
restricted; or (2) an emergency exists as defined by the SEC or the SEC
requires that trading be restricted; or (3) the SEC permits a delay for the
protection of Owners. In addition, transfers of amounts from the Subaccounts
may be deferred under these circumstances.

Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See p. 32 of the Policy Prospectus.

- 3 -
<PAGE>

MISSTATEMENT OF AGE OR SEX

If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have
purchased for the correct age or sex. The dollar amount of any underpayment
made by PFL shall be paid in full with the next payment due such person or the
Beneficiary. The dollar amount of any overpayment made by PFL due to any
misstatement shall be deducted from payments subsequently accruing to such
person or Beneficiary. Any underpayment or overpayment will include interest
at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the Annuitant may be established at any time by the
submission of proof satisfactory to PFL.

REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE

After the Annuity Commencement Date, the Owner may reallocate the value of a
designated number of Annuity Units of a Subaccount of the Mutual Fund Account
then credited to a Policy into an equal value of Annuity Units of one or more
other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number
of times a reallocation of Policy Value may be made in any given Policy Year.

After the Annuity Commencement Date, no transfers may be made from the Fixed
Account to the Mutual Fund Account.

ASSIGNMENT

During the lifetime of the Annuitant the Owner may assign any rights or
benefits provided by a Nonqualified Policy. An assignment will not be binding
on PFL until a copy has been filed at its Administrative and Service Office.
The rights and benefits of the Owner and Beneficiary are subject to the rights
of the assignee. PFL assumes no responsibility for the validity or effect of
any assignment. Any claim made under an assignment shall be subject to proof
of interest and the extent of the assignment. An assignment may have tax
consequences.

Unless the Owner so directs by filing Written Notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.

Ownership under Qualified Policies is restricted to comply with the Internal
Revenue Code.

EVIDENCE OF SURVIVAL

PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be
made until PFL receives such evidence.

NON-PARTICIPATING

The Policy will not share in PFL's surplus earnings; no dividends will be
paid.

- 4 -
<PAGE>

FEDERAL TAX MATTERS

TAX STATUS OF THE POLICY

Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
((S)) 1.817-5) apply a diversification requirement to each of the Subaccounts
of the Mutual Fund Account. The Mutual Fund Account, through the Underlying
Funds and their Portfolios, intends to comply with the diversification
requirements of the Treasury. PFL has entered into agreements regarding
participation in the Retirement Income Builder that require the Underlying
Funds and their Portfolios to be operated in compliance with the Treasury
regulations.

Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of
the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
announced, in connection with the issuance of regulations concerning
investment diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor, rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular subaccounts without being treated as owners of underlying
assets."

The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer
among these accounts more frequently than in such rulings. These differences
could result in policyowners being treated as the owners of the assets of the
Mutual Fund Account. In addition, PFL does not know what standards will be set
forth, if any, in the regulations or rulings which 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 Owner's death. If
any Owner dies before the Annuity Commencement Date, the entire interest in
the Policy must generally be distributed within 5 years after such Owner's
date of death or be applied to provide an immediate annuity under which
payments will begin within one year of such Owner's death and will be made for
the life of the Beneficiary or for a period not extending beyond the life
expectancy of the Beneficiary. However, if such Owner's death occurs prior to
the Annuity Commencement Death, and such Owner's surviving spouse is named
beneficiary, then the Policy may be continued with the surviving spouse as the
new Owner. If any Owner is not a natural person, then for purposes of these
distribution requirements, the primary Annuitant shall be treated as the Owner
and any death or change of such primary Annuitant shall be treated as the
Death of the Owner. The Policy contains provisions intended to comply with
these requirements of the Code. No regulations interpreting these requirements
of the Code have yet been issued and thus no assurance can be given that the
provisions contained in the Policies satisfy all such Code requirements. The
provisions contained in the Policies

- 5 -
<PAGE>

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;

(b) the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period; and

(c) is the charge for mortality and expense risk during the Valuation Period
(equal on an annual basis to 1.10% for the Return of Premium Death Benefit and
1.25% for both the 5% Annually Compounding Death Benefit or the Annual Step-Up
Death Benefit) of the daily net asset value of the Subaccount, plus the .15%
administrative charge for all three Death Benefit Options.

- 6 -
<PAGE>

ILLUSTRATION OF ACCUMULATION UNIT VALUE CALCULATIONS

FORMULA AND ILLUSTRATION FOR DETERMINING THE NET INVESTMENT FACTOR

(ASSUME EITHER THE 5% ANNUALLY COMPOUNDING DEATH BENEFIT OR THE ANNUAL STEP-UP
DEATH BENEFIT IS IN EFFECT.)

Investment Experience Factor = (A + B - C) - E
-----------
D

Where: A The Net Asset Value of an Underlying Fund share as of the end of
= the current Valuation Period.
Assume......................................... A = $11.57

B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding Valuation Period.
Assume.............................................. B = 0

C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume.............................................. C = 0

D = The Net Asset Value of an Underlying Fund share at the end of the
immediately preceding Valuation Period.
Assume......................................... D = $11.40

E = The daily deduction for Mortality and Expense Risk Fee and
Administrative Charges, which totals 1.40% on an annual basis.
On a daily basis........................... = .0000380909

Then, the Investment Experience Factor = 11.57+0-0 - .0000380909=Z=1.0148741898
---------
11.40

FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE

Accumulation Unit Value = A X B

Where: A= The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume............................................. = $ X

B= The Net Investment Factor for the current Valuation Period.
Assume............................................... = Y

Then, the Accumulation Unit Value = $ X X Y = $ Z

ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES

The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than
the assumed rate. The value of a variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The
value of a variable Annuity Unit on any subsequent Business Day is equal to
(a) multiplied by (b) multiplied by (c), where:

(a) is the variable Annuity Unit Value for that Subaccount on the
immediately preceding Business Day;

- 7 -
<PAGE>

(b) is the net investment factor for that Subaccount for the valuation
period; and

The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.

The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is
determined by dividing (i) by (ii) and subtracting (iii) from the result,
where:

(i) is the result of:

(1) the net asset value of a fund share held in that Subaccount
determined at the end of the current valuation period; plus

(2) the per share amount of any dividend or capital gain
distributions made by the fund for shares held in that Subaccount if
the ex-dividend date occurs during the valuation period; plus or minus

(3) a per share charge or credit for any taxes reserved for, which
PFL determines to have resulted from the investment operations of the
Subaccount.

(ii) is the net asset value of a fund share held in that Subaccount
determined as of the end of the immediately preceding valuation period.

(iii) is a factor representing the Mortality and Expense Risk Fee and
Administrative Charge. This factor is equal, on an annual basis, to 1.25%
(for Death Benefit Option A) or 1.40% (for Death Benefit Options B and C)
of the daily net asset value of a fund share held in that Subaccount.

The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.

The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Policy also contains a table for determining the adjusted age of the
Annuitant.

ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS

FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE

Annuity Unit Value = A X B X C

Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume.............................................. = $ X

B = Investment Experience Factor for the Valuation Period for which
the Annuity Unit Value is being calculated.
Assume................................................ = Y

C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z

Then, the Annuity Unit Value is:
$ X X Y X Z = $ Q

- 8 -
<PAGE>

FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF
FIRST MONTHLY VARIABLE ANNUITY PAYMENT

First Monthly Variable Annuity Payment = A x B
------
$1,000

Where: A = The Policy Value as of the Annuity Commencement Date.
Assume.............................................. = $ X

B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according to
the tables contained in the Policy.
Assume.............................................. = $ Y

Then, the first Monthly Variable Annuity Payment = $ X x $ Y = $ Z
---------
1,000

FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT

Number of Annuity Units = A
-
B

Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume............................................. = $ X

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

HISTORICAL PERFORMANCE DATA

MONEY MARKET YIELDS

PFL may from time to time disclose the current annualized yield of the Money
Market Subaccount for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of
securities and unrealized appreciation and depreciation and income other than
investment income) at the end of the 7-day period in the value of a
hypothetical account having a balance of 1 unit at the beginning of the 7-day
period, dividing such net change in account value by the value of the account
at the beginning of the period to determine the base period return, and
annualizing this quotient on a 365-day basis. The net change in account value
reflects (i) net income from the Portfolio attributable to the hypothetical
account; and (ii) charges and deductions imposed under a Policy that are
attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for (i) the Administrative
Charges; and (ii) the Mortality and Expense Risk Fee. Current Yield will be
calculated according to the following formula:

Current Yield = ((NCS x ES)/UV) x (365/7)

Where: NCS = The net change in the value of the Portfolio (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical
account having a balance of 1 Subaccount unit.

- 9 -

<PAGE>

ES= Per unit expenses of the Subaccount for the 7-day period.

UV= The unit value on the first day of the 7-day period.

Because of the charges and deductions imposed under a Policy, the yield for
the Money Market Subaccount will be lower than the yield for the Money Market
Portfolio. The yield calculations do not reflect the effect of any premium
taxes or Surrender Charges that may be applicable to a particular Policy.
Surrender Charges range from 6% to 0% of the amount of Premium Payments
withdrawn based on the number of years since the Premium Payment was made.
However, Surrender Charges will not be assessed after the tenth Policy Year.

PFL may also disclose the effective yield of the Money Market Subaccount for
the same 7-day period, determined on a compounded basis. The effective yield
is calculated by compounding the base period return according to the following
formula:

Effective Yield = (1 + ((NCS - ES)/UV))/365 / 7/ - 1

Where:
NCS= The net change in the value of the account (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.

ES= Per unit expenses of the Subaccount for the 7-day period.

UV= The unit value on the first day of the 7-day period.

The yield on amounts held in the Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Subaccount actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Portfolio, the types and quality of portfolio securities held by
the Money Market Portfolio and its operating expenses.

OTHER SUBACCOUNT YIELDS

PFL may from time to time advertise or disclose the current annualized yield
of one or more of the Subaccounts of the Mutual Fund Account (except the Money
Market Subaccount) for 30-day periods. The annualized yield of a Subaccount
refers to income generated by the Subaccount over a specific 30-day period.
Because the yield is annualized, the yield generated by a Subaccount during
the 30-day period is assumed to be generated each 30-day period over a 12-
month period. The yield is computed by: (i) dividing the net investment income
of the Subaccount less Subaccount expenses for the period, by (ii) the maximum
offering price per unit on the last day of the period times the daily average
number of units outstanding for the period, compounding that yield for a 6-
month period, and (iv) multiplying that result by 2. Expenses attributable to
the Subaccount include (i) the Administrative Charge and (ii) the Mortality
and Expense Risk Fee. The 30-day yield is calculated according to the
following formula:

Yield = 2 X ((((NI - ES)/(U X UV)) + 1)/6/ - 1)

Where:
NI= Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.

ES=
Expenses of the Subaccount for the 30-day period.

- 10 -
<PAGE>

U= The average number of units outstanding.

UV= The unit value at the close (highest) of the last day in the 30-day
period.

Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect
the effect of any premium taxes or Surrender Charges that may be applicable to
a particular Policy. Surrender Charges range from 6% to 0% of the amount of
Premium Payments withdrawn based on the number of years since the Premium
Payment was made. However, Surrender Charges will not be assessed after the
tenth Policy Year.

The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any
given past period is not an indication or representation of future yields or
rates of return. A Subaccount's actual yield is affected by the types and
quality of its investments and its operating expenses.

TOTAL RETURNS

PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the
date the Subaccount commenced operations. When a Subaccount has been in
operation for 1, 5 and 10 years, respectively, the total return for these
periods will be provided. Total returns for other periods of time may from
time to time also be disclosed. Total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
to the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month end practicable, considering the
type and media of the communication and will be stated in the communication.

Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Fee and the Administrative Charges. Total return calculations will reflect the
effect of Surrender Charges that may be applicable to a particular period. The
total return will then be calculated according to the following formula:

P (1 + T)/N/ = ERV

Where:

T= The average annual total return net of Subaccount recurring charges.

ERV= The ending redeemable value of the hypothetical account at the end of
the period.

P= A hypothetical initial payment of $1,000.

N= The number of years in the period.

OTHER PERFORMANCE DATA

PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that
the Surrender Charge percentage will be assumed to be 0%.

PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Surrender
Charge percentage will be 0%.

- 11 -
<PAGE>

CTR = (ERV / P) - 1

Where:

CTR= The cumulative total return net of Subaccount recurring charges for
the period.

ERV= The ending redeemable value of the hypothetical investment at the end
of the period.

P= A hypothetical initial payment of $1,000.

All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.

HYPOTHETICAL PERFORMANCE DATA

From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the
assumption that the Subaccounts were in existence for the same periods as
those indicated for the Portfolios, with the level of Policy charges that were
in effect at the inception of the Subaccounts.

STATE REGULATION OF PFL

PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.

ADMINISTRATION

PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.

RECORDS AND REPORTS

All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law
or regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.

DISTRIBUTION OF THE POLICIES

The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.

AFSG Securities Corporation, an affiliate of PFL, is the principal
underwriter of the Policies and may enter into agreements with broker-dealers
for the distribution of the Policies.

- 12 -
<PAGE>

OTHER PRODUCTS

PFL makes other variable annuity policies available that may also be funded
through the Mutual Fund Account. These variable annuity policies may have
different features, such as different investment options or charges.

CUSTODY OF ASSETS

The assets of each of the Subaccounts of the Mutual Fund Account are held by
PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other
Subaccounts and from PFL's general account assets. PFL maintains records of
all purchases and redemptions of shares of the Underlying Funds held by each
of the Subaccounts. Additional protection for the assets of the Mutual Fund
Account is afforded by PFL's fidelity bond, presently in the amount of
$5,000,000, covering the acts of officers and employees of PFL.

LEGAL MATTERS

Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan LLP, of Washington D.C.

INDEPENDENT AUDITORS

The Financial Statements of PFL as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, included in
this Statement of Additional Information have been audited by Ernst & Young
LLP, Independent Auditors, Suite 3400, 801 Grand Avenue, Des Moines, Iowa
50309.

OTHER INFORMATION

A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed
with the Securities and Exchange Commission.

FINANCIAL STATEMENTS

The values of the interest of Owners in the Mutual Fund Account will be
affected solely by the investment results of the selected Subaccount(s). The
Financial Statements of PFL, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
PFL to meet its obligations under the Policies. They should not be considered
as bearing on the investment performance of the assets held in the Mutual Fund
Account.

- 13 -
<PAGE>

FINANCIAL STATEMENTS - STATUTORY BASIS

PFL LIFE INSURANCE COMPANY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>

PFL Life Insurance Company

Financial Statements - Statutory Basis

Years ended December 31, 1997, 1996 and 1995

CONTENTS

<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1

Audited Financial Statements

Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<PAGE>

[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]

Report of Independent Auditors

The Board of Directors
PFL Life Insurance Company

We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.

In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of PFL Life Insurance Company at December 31, 1997 and 1996, or the results of
its operations or its cash flows for each of the three years in the period ended
December 31, 1997.

1
<PAGE>

[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]

Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFL Life Insurance Company
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting practices prescribed or permitted by the Insurance
Division, Department of Commerce, of the State of Iowa. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic statutory-basis financial statements taken as a whole, present fairly in
all material respects the information set forth therein.

/s/ Ernst & Young LLP

February 27, 1998

2
<PAGE>

PFL Life Insurance Company

Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 23,939 $ 50,737
Bonds 4,913,144 4,773,433
Stocks:
Preferred 2,750 3,097
Common (cost: 1997 - $33,058; 1996 - $23,212) 42,345 32,038
Affiliated entities (cost: 1997 - $10,798; 1996 -
$14,893) 8,031 6,934

Mortgage loans on real estate 935,207 911,705
Real estate, at cost less accumulated depreciation
($8,655 in 1997; $11,338 in 1996):
Home office properties 8,283 10,372
Properties acquired in satisfaction of debt 11,814 12,260
Investment properties 36,416 35,922
Policy loans 57,136 54,214
Other invested assets 29,864 16,343
--------------------------------
Total cash and invested assets 6,068,929 5,907,055

Premiums deferred and uncollected 16,101 16,345
Accrued investment income 69,662 70,401
Short-term notes receivable from affiliate -- 53,900
Federal income taxes recoverable -- 4,018
Transfers from separate accounts 60,193 38,528
Other assets 37,624 31,215
Separate account assets 2,517,365 1,844,515
--------------------------------
Total admitted assets $8,769,874 $7,965,977
================================
</TABLE>

See accompanying notes.

3
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 884,018 $ 736,100
Annuity 4,204,125 4,408,419
Accident and health 169,328 139,269
Policy and contract claim reserves:
Life 8,635 7,369
Accident and health 57,713 66,988
Other policyholders' funds 143,831 126,672
Remittances and items not allocated 153,745 64,064
Asset valuation reserve 69,825 54,851
Interest maintenance reserve 30,287 23,745
Federal income taxes payable 1,889 --
Short-term notes payable to affiliates 16,400 --
Other liabilities 75,070 70,663
Payable to affiliates 13,240 4,975
Separate account liabilities 2,512,406 1,844,515
--------------------------------
Total liabilities 8,340,512 7,547,630

Commitments and contingencies

Capital and surplus:
Common stock, $10 par value, 500 shares authorized,
266 issued and outstanding 2,660 2,660

Paid-in surplus 154,282 154,129
Unassigned surplus 272,420 261,558
--------------------------------
Total capital and surplus 429,362 418,347
--------------------------------
Total liabilities and capital and surplus $8,769,874 $7,965,977
================================
</TABLE>

See accompanying notes.

4
<PAGE>

PFL Life Insurance Company

Statements of Operations - Statutory Basis
(Dollars in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 202,435 $ 204,872 $ 114,704
Annuity 657,695 725,966 921,452
Accident and health 207,982 227,862 232,738
Net investment income 446,424 428,337 392,685
Amortization of interest maintenance reserve 3,645 2,434 4,341
Commissions and expense allowances on reinsurance
ceded 49,859 73,931 77,071
--------------------------------------------------------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 146,583 147,024 146,346
Surrender benefits 658,071 512,810 498,626
Other benefits 126,495 101,288 88,607
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 149,575 140,126 50,071
Annuity (203,139) 188,002 528,330
Accident and health 30,059 26,790 17,694
Other 16,998 19,969 16,017
--------------------------------------------------------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions 157,300 177,466 200,706
General insurance expenses 57,571 57,282 57,623
Taxes, licenses and fees 8,715 13,889 15,700
Net transfers to separate accounts 297,480 171,785 42,981
Other expenses 119 526 760
--------------------------------------------------------
521,185 420,948 317,770
--------------------------------------------------------
1,445,827 1,556,957 1,663,461
--------------------------------------------------------

Gain from operations before federal income taxes and
net realized capital gains (losses) on investments 122,213 106,445 79,530

Federal income tax expense 43,381 41,177 33,335
--------------------------------------------------------

Gain from operations before net realized capital
gains (losses) on investments 78,832 65,268 46,195

Net realized capital gains (losses) on investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)

--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>

See accompanying notes.

5
<PAGE>

PFL Life Insurance Company

Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)

<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND SURPLUS
SURPLUS SURPLUS

---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,660 $114,129 $211,552 $328,341
Capital contribution - 40,000 - 40,000
Net income for 1995 - - 28,099 28,099
Net unrealized capital losses - - (7,574) (7,574)
Decrease in non-admitted assets - - 50 50
Increase in asset valuation reserve - - (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a division - - 35 35
Cancellation of reinsurance agreement - - 585 585
Amendment of reinsurance agreement - - 419 419
Transfer of subsidiary investment to
stockholder - - (3,250) (3,250)
Change in reserve valuation methodology - - (501) (501)
Increase in liability for reinsurance in
unauthorized companies - - (2,730) (2,730)
---------------------------------------------------------------------
Balance at December 31, 1995 2,660 154,129 220,739 377,528
Net income for 1996 - - 61,765 61,765
Net unrealized capital gains - - 2,351 2,351
Increase in non-admitted assets - - (148) (148)
Increase in asset valuation reserve - - (10,930) (10,930)
Dividend to stockholder - - (20,000) (20,000)
Prior period adjustment - - 5,025 5,025
Surplus effect of sale of a division - - (384) (384)
Surplus effect of ceding commission
associated with the sale of a division - - 29 29
Amendment of reinsurance agreement - - 421 421
Decrease in liability for reinsurance in
unauthorized companies - - 2,690 2,690
---------------------------------------------------------------------
Balance at December 31, 1996 2,660 154,129 261,558 418,347
Capital contribution - 153 - 153
Net income for 1997 - - 85,991 85,991
Net unrealized capital gains - - 3,592 3,592
Increase in non-admitted assets - - (481) (481)
Increase in asset valuation reserve - - (14,974) (14,974)
Dividend to stockholder - - (62,000) (62,000)
Surplus effect of sale of a division - - (161) (161)
Surplus effect of ceding commissions
associated with the sale of a division - - 5 5
Surplus effect of amendment of reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 402 402
Increase in liability for reinsurance in
unauthorized companies - - (1,901) (1,901)
---------------------------------------------------------------------
Balance at December 31, 1997 $2,660 $154,282 $272,420 $429,362
=====================================================================
</TABLE>

See accompanying notes.

6
<PAGE>

PFL Life Insurance Company

Statements of Cash Flows - Statutory Basis
(Dollars in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net of reinsurance $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income 452,091 431,456 398,051
Life and accident and health claims (154,383) (147,556) (140,798)
Surrender benefits and other fund withdrawals (658,071) (512,810) (498,626)
Other benefits to policyholders (126,462) (101,254) (88,519)
Commissions, other expenses and other taxes (225,042) (248,321) (278,241)
Net transfers to separate accounts (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on capital gains (47,909) (35,551) (32,905)
Cash paid in conjunction with an amendment of a
reinsurance agreement (4,826) (5,812)
Repayment of intercompany notes and receivables, net - - (48,070)
Cash received in connection with a reinsurance
agreement 1,477 - -

Other, net 89,693 (41,677) 62,345
--------------------------------------------------------------
Net cash provided by operating activities 127,358 368,911 683,663

INVESTING ACTIVITIES
Proceeds from investment sold, matured or repaid:
Bonds and preferred stocks 3,284,095 2,112,831 1,757,229
Common stocks 34,004 27,214 20,338
Mortgage loans on real estate 138,162 74,351 36,550
Real estate 6,897 18,077 23,203
Cash received from ceding commissions associated
with the sale of a division 8 45 55
Other 57,683 22,568 8,258
--------------------------------------------------------------
3,520,849 2,255,086 1,845,633

Cost of investments acquired:
Bonds and preferred stocks (3,411,442) (2,270,105) (2,294,195)
Common stocks (37,339) (29,799) (23,284)
Mortgage loans on real estate (159,577) (324,381) (192,292)
Real estate (2,013) (222) (10,188)
Policy loans (2,922) (1,539) (877)
Cash paid in association with the sale of a division - (539) -
Cash paid in conjunction with sales of a division (591) (123) -
Other (15,674) (6,404) (2,670)
--------------------------------------------------------------
(3,629,558) (2,633,112) (2,523,506)
--------------------------------------------------------------
Net cash used in investing activities (108,709) (378,026) (677,873)
</TABLE>

7
<PAGE>

PFL Life Insurance Company

Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>

FINANCING ACTIVITIES
Issuance of short-term intercompany notes payable $ 16,400 $ - $ 40,000
Capital contribution 153 - -
Dividends to stockholder (62,000) (20,000) -
-----------------------------------------------------------
Net cash provided by (used in) financing activities (45,447) (20,000) 40,000
-----------------------------------------------------------
Increase (decrease) in cash and short-term
investments (26,798) (29,115) 45,790

Cash and short-term investments at beginning of year 50,737 79,852 34,062
-----------------------------------------------------------
Cash and short-term investments at end of year $ 23,939 $ 50,737 $ 79,852
===========================================================
</TABLE>

See accompanying notes.

8
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis
(Dollars in thousands)

December 31, 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

PFL Life Insurance Company ("the Company") is a stock life insurance company and
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.

In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through mergers.
In addition, the Company has canceled or entered into several coinsurance and
reinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:

. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association, an
independent insurance agency, will be written by the insurance subsidiaries
of UICI and will not be shared with the Company and its affiliates through
coinsurance arrangements. As a result of the sale, during 1996 the Company
transferred $123 in assets, substantially all of which was cash, and $70 of
liabilities. The difference between the assets and liabilities of $(53) plus
a tax credit of $19 was charged directly to unassigned surplus. During 1997,
the Company transferred $591 in assets, substantially all of which was cash
and $343 of liabilities. The difference between the assets and liabilities
of $(248) net of a tax credit of $87 was charged directly to unassigned
surplus.

. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference between
the assets and liabilities, net of a tax effect of $302 was credited
directly to unassigned surplus.

9
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2-1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets and
liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a tax
credit of $270 was credited directly to unassigned surplus.

. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer by
novation as state regulatory and policyholder approvals are received. During
1996, the Company paid $539 in association with this sale; the payment, net
of a tax credit of $189, were charged directly to unassigned surplus. In
addition, the Company will receive from the third party administrator a
ceding commission of one percent of the premiums collected between January
1, 1994 and December 31, 1996. As a result of the sale, in 1995, the Company
received $55 for ceding commissions; the commissions net of the related tax
effect of $20 was credited directly to unassigned surplus. During 1996, the
Company received $45 for ceding commissions; the commissions net of the
related tax effect of $(16) was charged directly to unassigned surplus. In
1997, the Company received $8 for ceding commissions; the commissions net of
the related tax effect of $3 was credited directly to unassigned surplus.

. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.

NATURE OF BUSINESS

The Company sells individual non-participating whole life, endowment and term
contracts, as well as a broad line of single fixed and flexible premium annuity
products. In addition, the Company offers group life, universal life, and
individual and specialty health coverages. The Company is licensed in 49 states
and the District of Columbia. Sales of the Company's products are primarily
through the Company's agents and financial institutions.

10
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION

The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.

The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring new
business are charged to current operations as incurred rather than deferred and
amortized over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) potential declines in the estimated realizable value
of investments are provided for through the establishment of a formula-
determined statutory investment reserve (reported as a liability) changes to
which are charged directly to surplus, rather than through recognition in the
statement of operations for declines in value, when such declines are judged to
be other than temporary; (i) certain assets designated as "non-admitted assets"
have been charged to surplus rather than being reported as assets; (j) revenues
for universal life and investment products consist of premiums received rather
than policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid;

11
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l) adjustments to federal income taxes of prior years are charged or credited
directly to unassigned surplus, rather than reported as a component of expense
in the statement of operations; (m) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations; and (n) a liability is established for
"unauthorized reinsurers" and changes in this liability are charged or credited
directly to unassigned surplus. The effects of these variances have not been
determined by the Company.

The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.

INVESTMENTS

Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of affiliated and unaffiliated companies, which includes shares of mutual
funds (money market and other), are carried at market. Real estate is reported
at cost less allowances for depreciation. Depreciation is computed principally
by the straight-line method. Policy loans are reported at unpaid principal.
Other invested assets consist principally of investments in various joint
ventures and are recorded at equity in underlying net assets. Other "admitted
assets" are valued, principally at cost, as required or permitted by Iowa
Insurance Laws.

12
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.

Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $177, $1,541 and $2,272,
respectively, with respect to such practices.

The Company uses interest rate swaps and caps as part of its overall interest
rate risk management strategy for certain life insurance and annuity products.
The Company entered into several interest rate swap contracts to modify the
interest rate characteristics of the underlying liabilities. The net interest
effect of such swap transactions is reported as an adjustment of interest income
from the hedged items as incurred.

The Company has entered into interest-rate cap agreements to hedge the exposure
of changing interest rates. The cash flows from the interest rate caps will help
offset losses that might occur from changes in interest rates. The cost of such
agreements is included in interest expense ratably during the life of the
agreement. Income received as a result of the cap agreement will be recognized
in investment income as earned. Unamortized cost of the agreements is included
in other assets.

AGGREGATE POLICY RESERVES

Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum required
by law.

13
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 to 6.00 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.

Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.

Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.

POLICY AND CONTRACT CLAIM RESERVES

Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.

SEPARATE ACCOUNTS

Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at market.
Income and gains and losses with respect to the assets in the separate accounts
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
The separate accounts do not have any minimum guarantees and the investment
risks associated with market value changes are borne entirely by the
policyholders. The Company received variable contract premiums of $281,095,
$227,864 and $133,386 in 1997, 1996 and 1995, respectively. All variable account
contracts are subject to discretionary withdrawal by the policyholder at the
market value of the underlying assets less the current surrender charge.

14
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No. 119,
Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments, requires additional disclosure about derivatives. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement of
Financial Accounting Standards No. 107 and No. 119 exclude certain financial
instruments and all nonfinancial instruments from their disclosure requirements
and allow companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.

Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.

Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying value.

15
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.

Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.

Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.

The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 and No. 119:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------ ------------------------------
CARRYING Carrying
VALUE FAIR VALUE Value FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks 2,750 8,029 3,097 7,133
Common stocks 42,345 42,345 32,038 32,038
Affiliated common stock 8,031 8,031 6,934 6,934
Mortgage loans on real estate 935,207 983,720 911,705 922,010
Policy loans 57,136 57,136 54,214 54,214
Cash and short-term
investments 23,939 23,939 50,737 50,737

Interest rate cap 5,618 1,513 6,797 6,975
Interest rate swaps - 2,546 - -
Separate account assets 2,517,365 2,517,365 1,844,515 1,844,515

LIABILITIES
Investment contract liabilities 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>

16
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

3. INVESTMENTS

The carrying value and estimated fair value of investments in debt securities
were as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other government 61,532 2,584 (1,774) 62,342
Public utilities 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities 2,586,202 55,382 (5,263) 2,636,321
-----------------------------------------------------------------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks 2,750 5,279 - 8,029
-----------------------------------------------------------------
$4,915,894 $156,424 $(17,762) $5,054,556
=================================================================
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other government 59,644 1,906 177 61,373
Public utilities 147,918 5,616 1,020 152,514
Industrial and miscellaneous 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities 2,470,740 43,896 15,610 2,499,026
-----------------------------------------------------------------
4,773,433 119,429 25,092 4,867,770
Preferred stocks 3,097 4,036 - 7,133
-----------------------------------------------------------------
$4,776,530 $123,465 $ 25,092 $4,874,903
=================================================================
</TABLE>

The carrying value and estimated fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 132,834 $ 133,608
Due after one year through five years 1,036,862 1,066,474
Due after five years through ten years 886,542 915,229
Due after ten years 270,704 294,895
----------------------------
2,326,942 2,410,206
Mortgage and other asset-backed securities 2,586,202 2,636,321
----------------------------
$4,913,144 $5,046,527
============================
</TABLE>

17
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

3. INVESTMENTS (CONTINUED)

A detail of net investment income is presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $373,496 $364,356 $342,182
Dividends on equity investments 1,460 1,436 1,822
Interest on mortgage loans 80,266 69,418 52,702
Rental income on real estate 7,501 9,526 10,443
Interest on policy loans 3,400 3,273 3,112
Other investment income 613 1,799 1,803
--------------------------------------

Gross investment income 466,736 449,808 412,064

Investment expenses 20,312 21,471 19,379
--------------------------------------
Net investment income $446,424 $428,337 $392,685
======================================
</TABLE>

Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Proceeds $3,284,095 $2,112,831 $1,757,229
==============================================

Gross realized gains $ 30,094 $ 19,876 $ 19,721
Gross realized losses (17,265) (19,634) (34,399)
----------------------------------------------
Net realized gains (losses) $ 12,829 $ 242 $ (14,678)
==============================================
</TABLE>

At December 31, 1997, investments with an aggregate carrying value of $5,944,376
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.

18
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

3. INVESTMENTS (CONTINUED)

Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:

<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------

<S> <C> <C> <C>
Debt securities $ 12,829 $ 242 $(14,678)
Short-term investments (19) (197) 24
Equity securities 6,972 1,798 504
Mortgage loans on real estate 2,252 (5,530) (1,053)
Real estate 4,252 1,210 (1,908)
Other invested assets 1,632 12 (970)
---------------------------------------
27,918 (2,465) (18,081)

Tax effect (10,572) (1,235) 7,878
Transfer to interest maintenance reserve (10,187) 197 (7,891)
---------------------------------------
Net realized gains (losses) $ 7,159 $(3,503) $(18,096)
=======================================

<CAPTION>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Debt securities $40,289 $(115,867) $355,560
Equity securities 5,653 2,929 (16,379)
----------------------------------------
Change in unrealized appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>

Gross unrealized gains and gross unrealized losses on equity securities were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Unrealized gains $10,356 $ 9,590 $ 6,833
Unrealized losses (3,836) (8,723) (8,895)
---------------------------------------
Net unrealized gains (losses) $ 6,520 $ 867 $(2,062)
=======================================

19
</TABLE>
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

3. INVESTMENTS (CONTINUED)

During 1997, the Company issued mortgage loans with interest rates ranging from
7.32% to 8.62%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 80%. Mortgage loans with a
carrying value of $237 were non-income producing for the previous twelve months.
Accrued interest of $79 related to these mortgage loans was excluded from
investment income. The Company requires all mortgaged properties to carry fire
insurance equal to the value of the underlying property.

During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively, were
foreclosed and transferred to real estate. No mortgage loans were foreclosed
during 1997. At December 31, 1997 and 1996, the Company held a mortgage loan
loss reserve in the asset valuation reserve of $11,985 and $5,432, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:

<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 3
</TABLE>

At December 31, 1997, the Company had the following investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:

<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>

20
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

3. INVESTMENTS (CONTINUED)

The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels and
to manage duration mismatch of assets and liabilities. Those instruments include
interest rate exchange agreements (swaps and caps), options, and commitments to
extend credit and all involve elements of credit and market risks in excess of
the amounts recognized in the accompanying financial statements at a given point
in time. The contract or notional amounts of those instruments reflect the
extent of involvement in the various types of financial instruments.

The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.

At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:

<TABLE>
<CAPTION>
NOTIONAL AMOUNT
1997 1996
-----------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating $100,000 $ -
Receive floating (uncapped) - pay floating (capped) 67,229 -
Interest rate cap agreements 500,000 500,000
</TABLE>

4. REINSURANCE

The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.

21
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

4. REINSURANCE (CONTINUED)

Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:

<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed 2,038 1,796 2,356
Reinsurance ceded (246,372) (300,546) (324,993)
--------------------------------------------------
Net premiums earned $1,068,112 $1,158,700 $1,268,894
==================================================
</TABLE>

The Company received reinsurance recoveries in the amount of $183,638, $168,155
and $167,287 during 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $60,437 and $63,226, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $2,434,130 and
$2,737,441, respectively.

At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of trust
agreements totaling $117,686 at December 31, 1997 that can be drawn on for
amounts that remain unpaid for more than 120 days.

5. INCOME TAXES

For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.

22
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

5. INCOME TAXES (CONTINUED)

Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $42,775 $37,256 $27,835
Tax reserve adjustment 2,004 2,211 2,405
Excess tax depreciation (392) (384) (365)
Deferred acquisition costs tax basis 4,308 5,583 4,581
Prior year over accrual (1,016) (499) (306)
Dividend received deduction (941) (454) (56)
Charitable contribution (848) - -
Other items net (2,509) (2,536) (759)
-------------------------------------------
Federal income tax expense $43,381 $41,177 $33,335
===========================================
</TABLE>

Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1997). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings would
be reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $7,135.

The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual. This
included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related interest
of $1,686, net of a tax effect of $590. An examination is underway for years
1988 through 1995.

6. POLICY AND CONTRACT ATTRIBUTES

Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .9% and 1.0% of
ordinary life insurance in force at December 31, 1997 and 1996, respectively.

23
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)

A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on a
variety of the Company's products that are not subject to significant mortality
or morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves on
these products, by withdrawal characteristics are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------- --------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision 203,522 2 174,416 2
------------------------------- --------------------------------
9,243,628 100% 9,078,030 100%
Less reinsurance ceded 2,372,495 2,677,432
------------------ ------------------
Total policy reserves on annuities and
deposit fund liabilities $6,871,134 $6,400,598
================== ==================
</TABLE>

A reconciliation of the amounts transferred to and from the separate accounts is
presented below:

<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
Transfers to separate accounts $281,095 $227,864 $133,386
Transfers from separate accounts 9,819 75,172 104,219
---------------------------------------------------
Net transfers to separate accounts 271,276 152,692 29,167

Reconciling adjustments charges for investment
manage-ment, administration fees and contract guarantees 26,204 19,093 13,814
---------------------------------------------------
Transfers as reported in the summary of operations of the
life, accident and health annual statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>

24
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)

Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:

<TABLE>
<CAPTION>
GROSS LOADING NET
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business $ 2,316 $1,698 $ 618
Ordinary direct renewal business 22,724 6,834 15,890
Group life direct business 1,523 646 877
Reinsurance ceded (1,464) (81) (1,383)
----------------------------------------
25,099 9,097 16,002
Accident and health:
Direct 148 - 148
Reinsurance ceded (49) - (49)
----------------------------------------
Total accident and health 99 - 99
----------------------------------------
$25,198 $9,097 $16,101
========================================

DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business $ 2,657 $1,865 $ 792
Ordinary direct renewal business 23,307 7,180 16,127
Group life direct business 1,788 1,195 593
Reinsurance ceded (1,706) (438) (1,268)
----------------------------------------
26,046 9,802 16,244
Accident and health:
Direct 104 - 104
Reinsurance ceded (3) - (3)
-----------------------------------------
Total accident and health 101 - 101
----------------------------------------
$26,147 $9,802 $16,345
========================================
</TABLE>

At December 31, 1997 and 1996, the Company had insurance in force aggregating
$69,271 and $69,251, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa. The Company
established policy reserves of $1,128 and $1,252 to cover these deficiencies at
December 31, 1997 and 1996, respectively.

25
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)

In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $501 was made for
the year ended December 31, 1995, related to the change in reserve methodology.

7. DIVIDEND RESTRICTIONS

Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.

The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.

8. RETIREMENT AND COMPENSATION PLANS

The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
No. 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement and
Income Security Act of 1974.

The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Expense
related to this plan was $226, $297 and $465 for the years ended December 31,
1997, 1996 and 1995, respectively.

26
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)

AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.

In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $62, $184
and $164 for the years ended December 31, 1997, 1996 and 1995, respectively.

9. RELATED PARTY TRANSACTIONS

The Company shares certain offices, employees and general expenses with
affiliated companies.

The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $18,705, $17,028 and $14,214, respectively, for these
services, which approximates their costs to the affiliates.

Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.6% at December 31, 1997. During 1997, 1996 and
1995, the Company paid net interest of $1,188, $174 and $71, respectively, to
affiliates.

During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.

At December 31, 1997, the Company has a $16,400 short-term note payable to an
affiliate. Interest on this note accrues at 5.6%.

27
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

9. RELATED PARTY TRANSACTIONS (CONTINUED)

During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable. No
gain was recognized on this sale. This note matured during 1996.

During the year ended December 31, 1995, the Company restructured demand notes
and accrued interest of $13,250 and $745, respectively, related to an affiliate.
The Company received 9,750 shares of preferred stock from the affiliate for
satisfaction of debt. The Company realized a loss of $8,695 related to this
transaction. At December 31, 1996 and 1995, the preferred stock related to this
affiliate was deemed to have no value and an unrealized loss of $4,555 was
recognized in 1995.

10. COMMITMENTS AND CONTINGENCIES

The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.

The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$17,700 and $21,774 and an offsetting premium tax benefit of $7,984 and $8,752
at December 31, 1997 and 1996, respectively, for its estimated share of future
guaranty fund assessments related to several major insurer insolvencies. The
guaranty fund expense (benefit) was $(975), $2,617 and $5,859 for December 31,
1997, 1996 and 1995, respectively.

28
<PAGE>

PFL Life Insurance Company

Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)

11. YEAR 2000 (UNAUDITED)

AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.

Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.

29
<PAGE>

PFL Life Insurance Company

Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)

December 31, 1997

SCHEDULE I

<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and authorities $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions 136,058 139,110 136,058
Foreign governments 51,407 51,154 51,407
Public utilities 124,013 124,013 121,582
All other corporate bonds 3,275,849 3,377,152 3,278,280
Redeemable preferred stock 2,750 8,029 2,750
----------------------------------------------------
Total fixed maturities 4,915,894 5,054,556 4,915,894

EQUITY SECURITIES
Common stocks:
Banks, trust and insurance 7,593 9,046 9,046
Industrial, miscellaneous and all other 36,263 41,330 41,330
----------------------------------------------------
Total equity securities 43,856 50,376 50,376

Mortgage loans on real estate 935,207 935,207
Real estate 44,699 44,699
Real estate acquired in satisfaction of
debt 11,814 11,814
Policy loans 57,136 57,136
Other long-term investments 29,864 29,864
Cash and short-term investments 23,939 23,939
-------------- ----------------
Total investments $6,062,409 $6,068,929
============== ================
</TABLE>

(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.

30
<PAGE>

PFL Life Insurance Company

Supplementary Insurance Information
(Dollars in thousands)

SCHEDULE III

<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================

YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================

YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================

$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================

$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 1,268,894 $392,685 $1,345,691 $317,770
======================================================================
</TABLE>

* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.

32
<PAGE>

PFL Life Insurance Company

Reinsurance
(Dollars in thousands)

SCHEDULE IV

<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force $5,025,027 $420,519 $ 35,486 $4,639,994 .8%
=========================================================================
Premiums:
Individual life $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health 73,593 10,045 - 63,548 -
Group life and health 339,269 192,575 - 146,694 -
Annuity 697,893 40,198 - 657,695 -
-------------------------------------------------------------------------
$1,312,446 $ 246,372 $ 2,038 $1,068,112 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1996
Life insurance in force $4,863,416 $477,112 $30,685 $4,416,989 .7%
=========================================================================
Premiums:
Individual life $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health 68,699 12,828 - 55,871 -
Group life and health 390,296 215,515 - 174,781 -
Annuity 794,311 68,345 - 725,966 -
-------------------------------------------------------------------------
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
=========================================================================

YEAR ENDED DECEMBER
31, 1995
Life insurance in force $4,594,434 $468,811 $22,936 $4,148,559 .6%
=========================================================================
Premiums:
Individual life $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health 60,309 12,617 - 47,692 -
Group life and health 408,097 220,265 - 187,832 -
Annuity 1,009,191 88,270 531 921,452 .05%
-------------------------------------------------------------------------
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
=========================================================================
</TABLE>