COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
COVA VARIABLE LIFE ACCOUNT ONE
Supplement dated November 3,
1997 to Prospectus dated May 14, 1997, as
amended November 3, 1997
This supplement should be attached to your copy of the Prospectus for the
variable life policies issued by Cova Financial Services Life Insurance Company
("Cova Life") and Cova Variable Life Account One ("Variable Account One").
Growth and Income Portfolio Substitution
The purpose of this supplement is to notify you of a proposal to substitute
shares of the Lord Abbett Growth and Income Portfolio of Cova Series Trust
("Cova Trust") for shares of the Growth and Income Portfolio of Lord Abbett
Series Fund, Inc. ("Lord Abbett Fund") held by Variable Account One to fund
certain variable insurance policies ("Policies") issued by Cova Life.
Cova Life will file an application with the Securities and Exchange Commission
("Commission") requesting an order approving the Substitution. Upon obtaining
the order from the Commission approving the Substitution, and subject to any
prior approval by applicable state insurance authorities, Cova Life and Variable
Account One propose to effect the Substitution as soon as is practical.
A Policy owner, prior to the date of Substitution, may transfer his or her
Growth and Income Sub-Account Value to any other sub-account of Variable Account
One without any limitation or charge being imposed. Moreover, following the
Substitution for a period of 30 days, Cova Life will permit transfers from the
Lord Abbett Growth and Income Sub-Account to any other sub-account of Variable
Account One available under your Policy without any limitation or charge being
imposed. After the 30 days, any transfers from the Lord Abbett Growth and Income
Sub-Account will be subject to the restrictions described in the Prospectus.
A complete list of all available Portfolios in which Variable Account One
invests is set forth in the Prospectus. You may obtain a Prospectus by writing
or calling Cova Life at the address or telephone number set forth below.
Cova Life will effect the Substitution by simultaneously placing an order to
redeem the shares of the Growth and Income Portfolio and an order to purchase
shares of the Lord Abbett Growth and Income Portfolio.
Cova Life will bear the expenses attributable to the Substitution. Cova Life
will send affected Owners a notice within five days after the Substitution.
CUSTOMER SERVICE: (800) 343-8496
Issued by: Cova Financial Services Life Insurance Company
Distributed by: Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
COVA SERIES TRUST
Supplement dated November 3, 1997
to Prospectus dated May 1, 1997, as amended
September 8, 1997
The first paragraph under "Public Fund Performance" on page 25 of the Prospectus
and the Performance Recap are amended as follows:
The Mid-Cap Value, Large Cap Research and Developing Growth Portfolios are
commencing regular investment operations as of the date of this Supplement and
are now available for new sales.
CL-3032 (12/97)
THE MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
COVA VARIABLE LIFE ACCOUNT ONE
AND
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
This prospectus describes the Modified Single Premium Variable Life Insurance
Policy (Policy) offered by Cova Financial Services Life Insurance Company
(Cova).
The Policy has been designed to be used for estate and retirement planning and
other insurance needs of individuals.
The Policy offers you eleven (11) investment portfolios listed below. The
investment portfolios are part of Cova Series Trust, Lord Abbett Series Fund,
Inc. and General American Capital Company. When you buy a Policy, you bear the
complete investment risk. Your Account Value and, under certain circumstances,
the death benefit under the Policy may increase or decrease or the duration of
the death benefit may vary depending on the investment experience of the
investment portfolio(s) you select.
COVA SERIES TRUST:
MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT INC.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
MANAGED BY LORD, ABBETT & CO.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
LORD ABBETT SERIES FUND, INC.:
MANAGED BY LORD, ABBETT & CO.
Growth and Income
GENERAL AMERICAN CAPITAL COMPANY:
MANAGED BY CONNING ASSET
MANAGEMENT COMPANY
Money Market
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Cova Modified Single
Premium Variable Life Insurance Policy.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE PRODUCTS DESCRIBED HEREIN ARE NOT DEPOSITS OF, OR GUARANTEED BY ANY BANK,
NOR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
May 14, 1997, as amended November 3, 1997.
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Premiums
Application for a Policy
Allocation of Premiums
Grace Period
Accumulation Unit Values
3. INVESTMENT OPTIONS
Cova Series Trust
Lord Abbett Series Fund, Inc.
General American Capital Company
Transfers
Dollar Cost Averaging Program
Automatic Rebalancing Program
Approved Asset Allocation Program
Substitution
4. EXPENSES
Insurance Charges
Mortality and Expense Risk Charge
Administrative Charge
Tax Expense Charge
Cost of Insurance Charge
Annual Policy Maintenance Fee
Annual Withdrawal Amount
Surrender Charge
Nursing Home Waiver
Deferred Premium Tax Charge
Transfer Fee
Taxes
Investment Portfolio Expenses
5. DEATH BENEFIT
Accelerated Death Benefit
Joint Lives
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Loans
Loan Amount
Loan Account
Loan Interest
Interest Credited
Preferred Loan
Effect of Loan
Loan Repayments
Total Surrender
Partial Surrenders
Termination of the Policy
Reinstatement
8. OTHER INFORMATION
Cova
The Separate Account
Distributor
Suspension of Payments or Transfers
Ownership
Owner
Joint Owner
Beneficiary
Assignment
PART II
The Company
Executive Officers and Directors of Cova
Voting
Disregard of Voting Instructions
The Separate Account
Legal Opinions
Reduction or Elimination of Surrender Charge
Misstatement of Age or Sex
Cova's Right to Contest
Settlement Options
Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
Joint Lives
Tax Treatment of Loans and Surrenders
Multiple Policies
Tax Treatment of Assignments
Qualified Plans
Income Tax Withholding
Reports to Owners
Legal Proceedings
Experts
Financial Statements
APPENDIX A
Illustration of Policy Values
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Policy, however, certain technical words or
terms are unavoidable. We have identified some of those words or terms. For
several of these terms we have provided a definition. For the remainder, we
believe that you will find an adequate discussion in the text. For those terms,
we have identified them in the text in italic and the page number that is
indicated here is where we believe you will find the best explanation for the
word or term.
ACCOUNT VALUE -- The total value of your Policy. It is equal to the sum of the
Policy values allocated to the investment portfolios and the Policy values
allocated to the loan account.
ACCUMULATION UNIT -- An accounting unit used to calculate Policy values when
they are allocated to the investment portfolios.
CASH VALUE -- Your Policy's Account Value less any surrender charge and less any
deferred premium tax charge and less any policy maintenance fee.
CASH SURRENDER VALUE -- Your Policy's Cash Value less any outstanding loans and
accrued loan interest.
COVERAGE AMOUNT -- It is the difference between the death benefit and the
Account Value.
FACE AMOUNT -- The amount of coverage that you have chosen (unless later reduced
by a partial surrender) and which will be used to determine the death benefit.
MAXIMUM PREMIUM LIMIT -- This is the maximum amount of premium that Cova will
accept under a Policy. We can also refer to this as MPL. Cova's MPL has been
designed not to exceed the maximum premium allowed under the Internal Revenue
Code for a specified Face Amount of insurance for a given age.
POLICY DATE, POLICY ANNIVERSARY, POLICY YEAR -- The Policy Date is the day your
premium was initially invested in the Money Market Portfolio which may be before
we actually issue the Policy. It is the date from which Policy Anniversaries and
Policy Years are determined.
Page
Annual Withdrawal Amount
Beneficiary
Business Day
Death Benefit
Insured
Investment Portfolio
Issue Date
Joint Owner
Loan Account
Monthly Deduction
Owner
Net Death Benefit or Death Proceeds
Premium
Processing Date
Right to Examine Period
Surrender Charge
SUMMARY
The prospectus is divided into three sections: Summary, Part I and Part II. The
sections in this Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Even more detailed information is
contained in Part II.
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy offered by Cova is a contract between you,
the owner, and Cova, an insurance company.
The Policy provides for the payment of death proceeds to your selected
beneficiary upon the death of the insured which are free from federal income
taxes. The Policy can be used as part of your estate planning or to save for
retirement. The insured is the person whose life is insured under the Policy.
The insured can be the same as the owner but does not have to be.
You can choose among eleven (11) investment portfolios which are listed in Item
3. The investment portfolios are the investment options available under the
Policy. You can allocate your unloaned Account Value to any or all of the
investment portfolios. You can transfer between investment portfolios up to 12
times a year without charge and without being taxed. If you make more than 12
transfers in a year, we will charge $25 or 2% of the amount transferred,
whichever is less. While the Policy is in force, the Account Value and, under
certain circumstances, the death benefit, will vary, up or down, or the duration
of the death benefit may vary with the investment performance of the investment
portfolios you choose. You are not taxed on the earnings until you surrender or
borrow from your Policy.
2. PURCHASES
You can buy the Policy with a single premium and, under certain conditions, you
can make additional premiums. Your registered representative can help you fill
out the proper forms. The minimum initial premium we will accept is generally
$10,000. There is no minimum required for additional premiums. However, the
total of all premiums paid will be limited to that which is required to qualify
the Policy as life insurance under the Internal Revenue Code. We call this the
Maximum Premium Limit. We may also require additional information. In some
circumstances, the insured may be required to provide us with medical records or
a complete paramedical examination.
3. INVESTMENT OPTIONS
You can put your money in any or all of these investment portfolios which are
described in the prospectuses for the funds:
MANAGED BY J.P. MORGAN INVESTMENT
MANAGEMENT INC.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
MANAGED BY LORD, ABBETT & CO.
Bond Debenture
Growth and Income
Mid-Cap Value
Large Cap Research
Developing Growth
MANAGED BY CONNING ASSET MANAGEMENT COMPANY
Money Market
Depending upon market conditions, you can make or lose money in any of these
investment portfolios.
4. EXPENSES
The Policy has both insurance features and investment features, and there are
costs related to each that reduce the return on your investment.
Each year Cova deducts a $30 policy maintenance fee from your Policy. Cova will
not deduct this charge if the Account Value of your Policy is at least $50,000
at the time the deduction is to be made. If you make a complete surrender of
your Policy, the policy maintenance fee will be deducted, regardless of your
Account Value at that time.
Cova also deducts insurance charges on a monthly basis. For the first ten years,
the total charges are equal, on an annual basis, to 1.70% of the value of your
Policy, with 1/12 of that amount charged monthly. After the tenth year, the
total for insurance charges is 1.15% annually, with 1/12 of that amount charged
monthly.
Each month Cova will also deduct an additional insurance charge to cover the
cost of insurance. This charge will depend upon the sex, age and rating
classification of the insured and whether your initial premium was 100% of the
Maximum Premium Limit.
There are also daily investment charges which apply to the average daily value
of the investment portfolio and vary depending upon the investment portfolio.
These annual charges range from .205% to 1.10%.
If you take out more than the annual withdrawal amount, Cova may assess a
surrender charge which ranges from 7.5% of the premium surrendered in the first
year to 0% in the tenth year. Each year you may withdraw up to that sum of the
excess of your Account Value over premiums paid which have not been previously
surrendered; plus 10% of premiums without incurring this surrender charge. We
call this amount the annual withdrawal amount. If you take your money out before
the tenth year, Cova will assess a deferred premium tax charge which declines
from 2.25% of premium surrendered in the first year to 0% in the tenth year.
After the tenth year there is no surrender charge or deferred premium tax when
you withdraw your money.
Your Policy could lapse if your Cash Surrender Value is insufficient to cover
any charges due.
5. DEATH BENEFIT/DEATH PROCEEDS
The Policy provides for a Face Amount of insurance. The actual amount payable to
your beneficiary is the death benefit less any loans plus accrued loan interest
under the Policy. This amount is called the death proceeds. It may also be
called the net death benefit.
The death benefit will be the greater of (1) your Face Amount or (2) your
Account Value multiplied by a specified percentage. These percentages vary by
the age of the insured and are shown in your Policy. Therefore, increases in
your Account Value may increase the death benefit. A decrease in Account Value
may decrease the death benefit, but the death benefit will never be less than
the Face Amount (so long as the Policy remains in force). Also, a partial
surrender will reduce the Face Amount in the same proportion as the Account
Value was reduced.
All or part of the death proceeds may be paid in a lump sum or applied under one
of the Settlement Options contained in the Policy.
The Policy is offered on a single life or on a "joint life" basis. Under "joint
life" coverage, death proceeds are paid after the second insured's death.
At the time of application for a Policy, you designate a beneficiary who is the
person or persons who will receive the death proceeds. You can change your
beneficiary unless you have designated an irrevocable beneficiary. The
beneficiary does not have to be a natural person.
6. TAXES
Your earnings are not taxed until you take them out. In most cases, your Policy
will be a modified endowment contract unless it was exchanged for a contract
issued before June 21, 1988. Money taken out of a modified endowment contract is
considered to come from earnings first and is taxed as income. Also, if you are
younger than 59-1/2 when you take money out, you may be charged a 10% federal
tax penalty on the earnings withdrawn. Death proceeds are paid to your
beneficiary tax free.
7. ACCESS TO YOUR MONEY
Under the Policy you have access to a portion of your Account Value equal to
earnings without charge. You may also withdraw up to 10% of premium each year,
without incurring the surrender charge. Premiums withdrawn in excess of this 10%
will incur a surrender charge during the first 10 years. However, a deferred
premium tax charge will be assessed on all premiums surrendered during the first
ten years. The minimum partial surrender that you can make is $500. You can also
borrow some of your Cash Value. The minimum loan amount is $500.
8. OTHER INFORMATION
RIGHT TO EXAMINE
If you cancel your Policy within ten days after you receive it (or whatever
period is required in your state), we will return to you the greater of (1) the
premium(s) you paid or (2) your Account Value on the day we, or the agent
through whom it was purchased, received the returned Policy. Until the end of
the time you are allowed to examine your Policy (10 days or the required period
in your state) plus five days, your premium will remain in the Money Market
Portfolio. After that, we will invest your Account Value as you requested.
WHO SHOULD PURCHASE THE POLICY?
The Policy is designed for an individual who wants to:
* create or conserve his/her estate;
* supplement retirement income; and
* retain access to cash through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of an insured.
Cova will not issue a Policy on insureds older than 90.
Additional Features
* You can arrange to have a regular amount of money automatically invested in
selected investment portfolios each month, theoretically giving you a lower
average cost per unit over time than a single one time purchase. The amount
you selected will be placed in the Money Market Portfolio and will be
transferred to the selected investment portfolios monthly. We call this
feature Dollar Cost Averaging. There is no additional charge for this
feature.
* You can arrange to automatically readjust your unloaned Account Value
between investment portfolios periodically to keep the allocation you
select. We call this feature Automatic Rebalancing. There is no additional
charge for this feature.
* In the event the insured is terminally ill, you can request to receive up
to 50% of the death benefit up to a maximum of $500,000. If you have
selected the Joint Life option, the provision will only be available on the
second life after the death of the first. We call this feature the
Accelerated Death Benefit. There is no additional charge for this feature.
* If you or the joint owner are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins after the first
Policy Year, you can make a full or partial surrender and we will waive the
surrender charge. We call this feature the Nursing Home Waiver. There is no
additional charge for this feature.
* You can elect to have the death benefit payable upon the death of a second
person. This benefit is written on spouses only. We call this option the
Joint Life Option.
These features may not be available in your state. They may not be suitable for
your particular situation.
9. INQUIRIES
If you need more information, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policy owner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at:
Cova Financial Services Life Insurance Company
P.O. Box 10366
Des Moines, IA 50306
515-243-5834
800-343-8496
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
This variable life insurance policy is a contract between you, the owner, and
Cova, an insurance company. This kind of policy is most commonly used for
retirement and/or estate planning.
During the insured's lifetime, you can select among the investment portfolios
offered in the Policy. (There are currently eleven (11) investment portfolios
offered. They are listed in Item 3.) You can transfer between them up to 12
times a year without charge. The Account Value and, under some circumstances,
the death benefit will go up or down or the duration of the death benefit may
vary depending upon the investment experience of the investment portfolio(s) you
select. This gives you the opportunity to capture the upside potential of the
market. It also means you could lose money.
While your money remains in the Policy, you pay no current income taxes on
earnings or gains. This is called tax-deferred accumulation. It helps your money
grow faster. Subject to some limitations, you may take money out at any time
through loans or partial surrenders. Any money you take out, however, is taxed
as earnings until all earnings have been removed from the Policy. If you are
younger than age 59 1/2 when you take money out, you may also incur an
additional 10% federal tax penalty. If you purchased a Policy in exchange for a
policy issued prior to June 21, 1988, different tax rules may apply. (See
Section 6. Taxes. Part II also contains more detailed information regarding
taxes.)
Because this is a life insurance policy, it provides a death benefit, which is
an amount greater than your Account Value. When the insured dies, the death
benefit (minus any loans and any accrued loan interest) is paid to your
beneficiary free from federal income tax. The tax-free death benefit combined
with the ability to use your money while you're alive, makes this an excellent
way to accumulate money you don't think you'll use in your lifetime and a
tax-efficient way to provide for those you leave behind.
2. PURCHASES
PREMIUMS
Premiums are the monies you give us to buy the Policy. The minimum initial
premium we will accept is generally $10,000. When you apply for the Policy, you
request a specific amount of insurance. We call this amount the Face Amount of
the Policy. Your initial premium must be 80%, 90% or 100% of the Maximum Premium
Limit (MPL). The Internal Revenue Code (Code) has established certain criteria
which must be met in order for a life insurance policy to qualify as life
insurance under the Code. The MPL satisfies one of the criteria. Cova's MPL has
been designed not to exceed the Maximum Premium Limit allowed under the Code for
a specified Face Amount of insurance for a given age.
You can invest additional premiums up to the MPL. However, if the additional
premium increases the amount of insurance, we will require evidence of the
insurability of the insured. If all of your premiums total $1,000,000 or more,
you will need Cova's prior approval before you add premiums. If the additional
premium would cause the Policy to fail to meet the criteria established by the
Code to qualify as life insurance, Cova will send the premium back within 60
days of the anniversary of the Policy Date (Policy Anniversary). The amount and
frequency of additional premiums will affect the Account Value of your Policy
and may affect the amount or duration of your insurance.
APPLICATION FOR A POLICY
In order to purchase a Policy, you must submit an application to Cova which
requests some information regarding the proposed insured. In some cases, we will
ask for additional information. We may request that the insured provide us with
medical records or possibly require other medical tests.
Cova will not issue a Policy if the insured is over age 90.
Cova will review all the information it has about the insured and determine
whether or not the insured meets Cova's standards for issuing the Policy. This
process is called underwriting. If the insured meets all of Cova's underwriting
requirements, we will issue a Policy. There are several underwriting classes
under which the Policy may be issued.
During the underwriting period, which could be up to 60 days or longer from the
time the application is signed, we offer fixed insurance called conditional
insurance. The initial premium must be submitted with the application before the
conditional insurance is provided. The conditional insurance is effective up to
60 days from when the application is signed. For applicants 65 or younger,
conditional insurance will be for the lesser of $500,000 plus the initial
premium paid or the amount of insurance applied for. If the applicant is 66 or
older, the conditional insurance will be the lesser of $200,000 plus the initial
premium paid or the amount of insurance applied for. The conditional insurance
is subject to a number of restrictions and is only applicable if the proposed
insured was an acceptable risk for the insurance applied for.
ALLOCATION OF PREMIUMS
When you purchase a Policy, we will initially invest your money in the Money
Market Portfolio. After 15 days from the issue date (or the period required in
your state plus five days), we will allocate your Account Value to the
investment portfolios as you requested in the application. All allocation
directions must be in whole percentages. If you make additional premiums, we
will allocate them in the same way as your first premium unless you tell us
otherwise.
If you change your mind about owning a Policy, you can cancel it within 10 days
after receiving it (or the period required in your state (right to examine
period)). When you cancel the Policy within this time period, Cova will not
assess a surrender charge or a deferred premium tax charge. Cova will give you
back the greater of your premium payment or your Account Value.
If your application for the Policy is in good order, Cova will invest your first
premium in the Money Market Portfolio two days after it is received, EVEN IF OUR
UNDERWRITING IS NOT YET COMPLETE AND THE POLICY IS NOT YET ISSUED. The day we
invest your premium in the Money Market Portfolio is called the Policy Date. The
money will stay in the Money Market Portfolio for 15 days after the issue date.
(In some states, the period may be longer.) At the end of that period, we will
re-allocate those funds as you selected in the application.
If as a result of underwriting review, Cova does not issue you a Policy, we will
return to you your premium, plus interest required by your state.
If we do issue a Policy, on the issue date, we will deduct the monthly
deductions for the period from the Policy Date through the next processing date.
GRACE PERIOD
Your Policy will stay in effect as long as your Cash Surrender Value is
sufficient to cover the monthly deductions and the policy maintenance fee. If
the Cash Surrender Value of your Policy is not enough to cover these deductions
to be made from the Policy, Cova will mail you a notice. You will have 61 days
from the time the notice is mailed to you to send to Cova the required premium
payment. This is called the grace period. If the premium is not paid by the end
of the grace period, the Policy will terminate without value.
ACCUMULATION UNIT VALUES
The value of your Policy that is invested in the investment portfolios will go
up or down depending upon the investment performance of the investment
portfolio(s) you choose. In order to keep track of the value of your Policy, we
use a unit of measure we call an Accumulation Unit. (An Accumulation Unit works
like a share of a mutual fund.)
Every business day we determine the value of an Accumulation Unit for each of
the investment portfolios. The value of an Accumulation Unit for any given
business day is determined by multiplying a factor we call the net investment
factor times the value of an Accumulation Unit for the previous business day. We
do this for each investment portfolio. The net investment factor is a number
that reflects the change (up or down) in an underlying investment portfolio
share. Our business days are each day that the New York Stock Exchange is open
for business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 P.M. Eastern time.
The value of an Accumulation Unit may go up or down from day to day.
When you make a premium payment, we credit your Policy with Accumulation Units.
The number of Accumulation Units credited is determined by dividing the amount
of premiums allocated to an investment portfolio by the value of the
Accumulation Unit for that investment portfolio.
We calculate the value of an Accumulation Unit for each investment portfolio
after the New York Stock Exchange closes each day and then apply it to your
Policy.
When Cova assesses the monthly deductions and for the annual policy maintenance
fee we do so by deducting Accumulation Units from your Policy. When you have
selected more than one investment portfolio, we make the deductions pro rata
from all of the investment portfolios.
3. INVESTMENT OPTIONS
The Policy offers eleven (11) investment portfolios which are listed below.
Additional investment portfolios may be available in the future.
YOU SHOULD READ THE PROSPECTUSES FOR THESE FUNDS CAREFULLY BEFORE INVESTING.
COPIES OF THESE FUND PROSPECTUSES ARE ATTACHED TO THIS PROSPECTUS.
COVA SERIES TRUST
Cova Series Trust is managed by Cova Investment Advisory Corporation, which is
an indirect subsidiary of Cova. Cova Series Trust is a mutual fund with multiple
portfolios. Each investment portfolio has a different investment objective. Cova
Investment Advisory Corporation has engaged subadvisers to provide investment
advice for the individual investment portfolios. The following investment
portfolios are available under the Policy:
J.P. MORGAN INVESTMENT MANAGEMENT INC. IS THE SUB-ADVISER TO THE FOLLOWING
PORTFOLIOS:
Select Equity Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
LORD, ABBETT & CO. IS THE SUB-ADVISER TO THE FOLLOWING PORTFOLIOS:
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a mutual fund with multiple portfolios. Each
portfolio is managed by Lord, Abbett & Co. Only the following portfolio is
available under the Policy:
Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios. Only
the following portfolio is available under the Policy and is managed by Conning
Asset Management Company:
Money Market Portfolio
TRANSFERS
You can transfer money among the eleven (11) investment portfolios.
You can make 12 transfers every Policy Year without charge while the insured is
alive. If you make more than 12 transfers in a year, there is a transfer fee
deducted. (We measure years from your Policy Date.) The fee is $25 per transfer
or, if less, 2% of the amount transferred. The following apply to any transfer:
1. the minimum amount which you can transfer is $500 or your entire value in
the investment portfolio.
2. your request for transfer must clearly state the amount to be transferred
and which investment portfolios are involved in the transfer.
3. if a transfer fee applies, the charge will be deducted from the amount
transferred.
You can make transfers by telephone. Prior to making a transfer by telephone,
you will need to complete a written pre-authorization form. If you own the
Policy with a joint owner, unless Cova is instructed otherwise, Cova will accept
instructions from either you or the other owner. Cova will use reasonable
procedures to confirm that instructions given to us by telephone are genuine. If
Cova fails to use such procedures, we may be liable for any losses due to
unauthorized or fraudulent instructions. Cova records all telephone
instructions.
We have reserved the right to modify your transfer rights if we decide that the
exercise of this right by you, your authorized agent, or any owner is or would
be disadvantageous to other owners. We have also reserved the right to restrict
transfers to a maximum of 12 per year and to restrict transfers from being made
on consecutive business days.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Portfolio to any of the other investment
portfolio(s). By allocating amounts on a regular schedule as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations.
You must have at least $5,000 in the Money Market Portfolio (or the amount
required to complete your program, if more) in order to participate in the
Dollar Cost Averaging Program. There is no additional charge for this feature.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
AUTOMATIC REBALANCING PROGRAM
Once your money has been allocated among the investment portfolios, the
performance of each portfolio may cause your allocation to shift. You can direct
us to automatically readjust your non-loaned Account Value between investment
portfolios to keep the blend you selected. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
Policy Date. There is no additional charge for this feature. The transfer date
will be the 1st business day after the end of the period you selected. If you
participate in the Automatic Rebalancing Program, the transfers made under the
program are not taken into account in determining any transfer fee.
You cannot participate in both the Dollar Cost Averaging and Automatic
Rebalancing Programs at the same time.
APPROVED ASSET ALLOCATION PROGRAM
Cova recognizes the value to certain owners of having available, on a continuous
basis, advice for the allocation of your money among the investment portfolios
available under the Policy. Certain providers of these types of services have
agreed to provide such services to owners in accordance with Cova's
administrative rules regarding such programs.
Cova has made no independent investigation of these programs. Cova has only
established that these programs are compatible with our administrative systems
and rules.
Even though Cova permits the use of approved asset allocation programs, the
Policy was not designed for professional market timing organizations. Repeated
patterns of frequent transfers are disruptive to the operations of the
investment portfolios, and should Cova become aware of such disruptive
practices, we may modify the transfer privilege either on an individual or class
basis.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transfer fee.
SUBSTITUTION
Cova may elect to substitute one of the investment portfolios you have selected
with another portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intent to do
this. Cova may also limit further investment in an investment portfolio if it
deems it inappropriate.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. These charges and expenses are:
INSURANCE CHARGES
Each month, Cova will make certain deductions from your Policy on the processing
date. The processing date is the day each month that we deduct certain charges
from your Policy. The first processing date is the issue date. The issue date is
the date on which we issue you a Policy. After that, it is the same day each
month as the Policy Date.
The insurance charges are: (1) mortality and expense risk charge; (2)
administrative charge; (3) tax expense charge; and (4) cost of insurance charge.
Collectively, we refer to these charges as the monthly deduction. When you have
selected more than one investment portfolio, we make the deduction pro rata from
all of the investment portfolios you have selected.
MORTALITY AND EXPENSE RISK CHARGE. For the first ten years, this charge is
equal, on an annual basis, to .90%, 1/12 of which is charged each month, of the
Account Value of your Policy invested in the investment portfolios. For the
eleventh year and after, the charge is .75%, 1/12 of which is charged each
month. This charge cannot be increased.
ADMINISTRATIVE CHARGE. This charge is equal, on an annual basis, to .40%, 1/12
of which is charged each month, of the Account Value of your Policy. This charge
cannot be increased.
TAX EXPENSE CHARGE. This deduction is the sum of the premium tax charge and the
federal tax charge. It is deducted monthly for the first ten years. It is equal,
on an annual basis, to .40% (.15% for federal tax charge and .25% for premium
tax charge), 1/12 of which is charged each month, of the Account Value of your
Policy.
This charge compensates Cova for its expenses incurred for federal taxes
incurred as a result of issuing the Policy. It also compensates Cova for the
state and local premium taxes it incurred as a result of issuing the Policy.
Premium taxes range from 0% to 4%. You will be assessed the premium tax charge
regardless of what the total actual premium tax is in your state or local
jurisdiction. If you surrender all or part of your Policy during the first 10
years, Cova will charge a deferred premium tax charge. See below.
COST OF INSURANCE CHARGE. This charge compensates Cova for insurance coverage
provided during the month.
The guaranteed cost of insurance charge is determined by multiplying the
Coverage Amount by the cost of insurance rate. The Coverage Amount is the
difference between the death benefit and the Account Value. The cost of
insurance rate is based upon the sex, age, rate classification of the insured
and whether you paid 100%, or 90%, or 80% of the MPL. The rate classification of
the insured is determined through our underwriting process.
The Policy provides that for standard risks, the guaranteed cost of insurance
rate is based on the 1980 Commissioners Standard Ordinary Mortality Table, age
last birthday (1980 CSO Table). For substandard risks, the guaranteed cost of
insurance rate will be higher and will be based upon a multiple of the 1980 CSO
Table. The multiple will be based on the insured's substandard rating. Tables
setting forth the guaranteed cost of insurance rates are included in each
Policy.
Cova can use rates that are less than the guaranteed cost of insurance rates
shown in the Policy. Cova refers to these as the current cost of insurance
rates.
If 100% of the MPL is paid, Cova's current cost of insurance rate is a
percentage of the Account Value. The basis and amount of this charge may change
in the future, but can never be more than the guaranteed cost of insurance rates
contained in the Policy. For a better understanding of how the cost of insurance
rate and the other charges affect Policy values, you should request personalized
illustrations from your registered representative.
ANNUAL POLICY MAINTENANCE FEE
Every year on the Policy Anniversary, currently Cova deducts $30 as a policy
maintenance fee. This charge cannot be increased once the Policy is issued. Cova
will not deduct this charge, if when the deduction is to be made, your Account
Value is $50,000 or more. Cova may some time in the future discontinue this
practice for new policies issued and deduct the charge. If you make a complete
surrender of your Policy, the policy maintenance fee will be deducted,
regardless of your Account Value at that time. When you have selected more than
one investment portfolio, we make the deduction pro rata from all of the
investment portfolios you have selected.
ANNUAL WITHDRAWAL AMOUNT
While the Policy is in force, prior to the death of the insured and after the
expiration of the Right to Examine Period, you can make a total or partial
surrender of the Account Value of your Policy up to the Cash Surrender Value. A
surrender may be subject to a surrender charge and a deferred premium tax
charge.
When you request a surrender, we will determine what portion, if any, is part of
your annual withdrawal amount. The annual withdrawal amount is equal to:
1. the excess of the Account Value over premiums paid which have not been
previously surrendered. Neither the surrender charge nor deferred premium
tax charge are assessed on this amount; and
2. on a non-cumulative basis, 10% of your premium payments each year. This
portion of the annual withdrawal amount is subject to the deferred premium
tax charge.
SURRENDER CHARGE
During the first 10 years, the surrender charge is assessed against any premium
surrendered, which is not part of the annual withdrawal amount. The surrender
charge, which is a percent of premiums surrendered, is shown in the table below:
Policy Surrender Policy Surrender
Year Charge Year Charge
---- ------ ---- ------
1 7.5% 6 4.0%
2 7.5% 7 3.0%
3 7.5% 8 2.0%
4 6.0% 9 1.0%
5 5.0% 10+ 0%
NURSING HOME WAIVER
If you or the joint owner, if any, are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins during the first ten
years, under the Nursing Home Waiver rider, you can make a full or partial
surrender and we will waive the surrender charge. The Nursing Home Waiver goes
into effect after the first Policy Anniversary. There is no additional charge
for this feature.
DEFERRED PREMIUM TAX CHARGE
When you purchase a Policy there are various premium taxes assessed by state and
local governmental entities that we must pay on the Policy. You are charged a
portion of that each month for the first ten years as part of the tax expense
charge. (See the discussion of the Tax Expense Charge in Section 4 above.) The
deferred premium tax charge enables Cova to collect that portion of the premium
tax charge it has not collected when you surrender all or part of your Policy.
The deferred premium tax charge is assessed only on premiums surrendered from
the Policy during the first ten years. The deferred premium tax charge, which is
a percent of premiums surrendered, is shown in the table below:
Deferred Deferred
Policy Premium Policy Premium
Year Tax Charge Year Tax Charge
---- ---------- ---- ----------
1 2.25% 6 1.00%
2 2.00% 7 .75%
3 1.75% 8 .50%
4 1.50% 9 .25%
5 1.25% 10+ 0%
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the Policy
Date. If you make more than 12 transfers a year, we will deduct a transfer fee
of $25 or 2% of the amount that is transferred, whichever is less. If we do
assess a transfer fee, it will be deducted from the amount transferred.
If the transfer is part of the Dollar Cost Averaging Program, the Automatic
Rebalancing Program or an Approved Asset Allocation Program, it will not count
in determining the transfer fee.
TAXES
Cova may assess a charge against a Policy for any taxes attributable to the
Separate Account. Cova does not expect to incur such taxes.
INVESTMENT PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the
various investment portfolios, which are summarized below. See the fund
prospectuses for a complete description.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management 12b-1 certain Portfolios - Total Portfolio
Fees Fees see Note 1 below) Annual Expenses
---- ---- ----------------- ---------------
<S> <C> <C> <C> <C>
COVA SERIES TRUST (1)
Managed by J.P. Morgan
Investment Management Inc.
Select Equity (2) .75% - - .10% .85%
Small Cap Stock (2) .85% - - .10% .95%
Large Cap Stock (2) .65% - - .10% .75%
International Equity (2) .85% - - .10% .95%
Quality Bond (2) .55% - - .10% .65%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Lord, Abbett & Co.
Bond Debenture (2) .75% - - .10% .85%
Mid-Cap Value (3) 1.00% - - .10% 1.10%
Large Cap Research (3) 1.00% - - .10% 1.10%
Developing Growth (3) .90% - - .10% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
LORD ABBETT SERIES FUND, INC.
Managed by Lord, Abbett & Co.
Growth and Income (4) .50% .07% .02% .59%
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset
Management Company
Money Market .205% - - .00% .205%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Since August 20, 1990, Cova has been reimbursing the investment portfolios
of Cova Series Trust for all operating expenses (exclusive of the management
fees) in excess of approximately .10%. Absent the expense reimbursement, the
percentages shown for total portfolio annual expenses (on an annualized basis)
for the period ended December 31, 1996 would have been 1.70% for the Select
Equity Portfolio; 2.68% for the Small Cap Stock Portfolio; 1.23% for the Large
Cap Stock Portfolio; 3.80% for the International Equity Portfolio; 1.52% for the
Quality Bond Portfolio; and 2.05% for the Bond Debenture Portfolio.
(2) Annualized. The Portfolio commenced regular investment operations on April
2, 1996.
(3) Estimated. The Portfolio commenced regular investment operations on November
3, 1997.
(4) The Growth and Income Portfolio of Lord Abbett Series Fund, Inc. has a 12b-1
plan which provides for payments to Lord, Abbett & Co. for remittance to a life
insurance company for certain distribution expenses (see the Fund Prospectus).
The 12b-1 plan provides that such remittances, in the aggregate, will not exceed
.15% on an annual basis, of the daily net asset value of shares of the Growth
and Income Portfolio. As of the date of this Prospectus, no payments have been
made under the 12b-1 plan. For the year ending December 31, 1997, the 12b-1 fees
are estimated to be .07%.
</FN>
</TABLE>
5. DEATH BENEFIT
The primary purpose of the Policy is to provide death benefit protection on the
life of the insured. While the Policy is in force, if the insured dies, the
beneficiary(ies) will receive the death proceeds. The death proceeds equal the
death benefit under the Policy less any loans and accrued loan interest.
The death benefit is the greater of: (1) the Face Amount of the Policy; and (2)
the minimum death benefit. The minimum death benefit is the Account Value
multiplied by a percentage. Cova has included the minimum death benefit in order
to assure that the Policy will continue to qualify as life insurance under the
Internal Revenue Code.
You can choose to have the death proceeds paid in a lump sum or under a
Settlement Option. If you have not made a choice before the insured dies, the
beneficiary will choose the method of payment. If a method of payment has not
been chosen within 90 days after receiving proof of death, Cova may pay the
death proceeds in a lump sum.
The death benefit payable during the grace period is the death benefit in effect
immediately prior to the start of the grace period less any loans, accrued loan
interest and any overdue deductions. See discussion of grace period above.
ACCELERATED DEATH BENEFIT
If the insured is terminally ill, under the Accelerated Death Benefit rider,
Cova will pre-pay a portion of the death benefit. You may elect to have an
Accelerated Death Benefit of up to 50% of the death benefit but no greater than
$500,000.
You can only elect to receive an Accelerated Death Benefit once. The Accelerated
Death Benefit must first be used to repay any outstanding loans and accrued loan
interest. After repayment of the outstanding loans and accrued loan interest,
any remaining amount will be paid as a lump sum or under a payment plan. The
subsequent amount available for loans or surrenders or as a death benefit will
be reduced by the amount of the Accelerated Death Benefit, plus interest accrued
at the Policy loan interest rate.
This benefit may not be available in your state or may have different provisions
in your state.
JOINT LIVES
Cova offers a rider to the Policy that provides that the death benefit will be
paid only upon the death of a second person. This option is only available to
spouses.
The cost of insurance charge reflects the anticipated life expectancy of both
insureds. It also reflects the fact that the death benefit is payable at the
death of the last surviving insured.
If you wish to reinstate a lapsed Policy with a Joint Life rider attached, both
insureds must be alive and provide satisfactory evidence of insurability.
The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both insureds.
If a Joint Life rider is issued in conjunction with the Policy, the Accelerated
Death Benefit will only be payable on the terminal illness of the last surviving
insured.
This benefit may not be available in your state.
6. TAXES
NOTE: COVA HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. COVA HAS
INCLUDED IN PART II AN ADDITIONAL DISCUSSION REGARDING TAXES.
LIFE INSURANCE IN GENERAL
Life insurance, such as the Policy, is a means of providing for death protection
and setting aside money for future needs. Congress recognized the importance of
such planning and provided special rules in the Internal Revenue Code (Code) for
life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance policy until you take the money out. The
beneficiaries are not taxed when they receive the death proceeds upon the death
of the insured.
You, as the owner, will not be taxed on increases in the value of your Policy
until a distribution occurs - either as a surrender or as a loan. When you
receive a distribution, you are taxed on the amount of the withdrawal that is
earnings.
TAKING MONEY OUT OF YOUR POLICY
For tax purposes, your Policy will be treated as a modified endowment contract,
unless under certain circumstances it was exchanged for a policy issued before
June 21, 1988. Consequently if you make a withdrawal or a loan from your Policy,
the Code treats it as first coming from earnings and then from your premiums.
These earnings are included in taxable income.
The Code also provides that any amount received from an insurance policy which
is included in income may be subject to a 10% penalty. The penalty will not
apply if the income received is: (1) paid on or after the taxpayer reaches age
59-1/2; (2) paid if the taxpayer becomes totally disabled (as that term is
defined in the Code); or (3) in a series of substantially equal payments made
annually (or more frequently) for the life or life expectancy of the taxpayer.
If you purchased a Policy in exchange for a policy issued prior to June 21,
1988, different tax rules may apply. See "Tax Status" in Part II for more
details.
DIVERSIFICATION
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. Cova believes that the investment portfolios are being
managed so as to comply with the requirements.
Under current federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not Cova would be considered the owner of the shares of the
investment portfolios. If you are considered the owner of the investments, it
will result in the loss of the favorable tax treatment for the Policy. It is
unknown to what extent owners are permitted to select investment portfolios, to
make transfers among the investment portfolios or the number and type of
investment portfolios owners may select from. If guidance from the Internal
Revenue Service is provided which is considered a new position, then the
guidance would generally be applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the Policy, could be treated as the owner of the
investment portfolios. Due to the uncertainty in this area, Cova reserves the
right to modify the Policy in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
The Cash Surrender Value in your Policy is available: (1) by making a surrender
(either a partial or a complete surrender) or (2) by taking a loan from your
Policy.
LOANS
You may borrow money from Cova while the Policy is still in force. The Policy
will be the only security Cova will require for a Policy loan. You cannot borrow
against your Policy until the end of the right to examine period and you cannot
borrow if the Policy is in a grace period. Loans are considered distributions
from the Policy for tax purposes and the portion of the loan that has come from
earnings will be taxable to you and may be subject to a 10% penalty tax. See
"Tax Status" in Part II for more details.
LOAN AMOUNT. The maximum loan amount is equal to: 90% of the Account Value, less
loan interest due on the next Policy Anniversary, the surrender charge, the
policy maintenance fee, if any, and the deferred premium tax charge, if any.
The minimum loan amount is $500. If total loans equal or exceed the Cash Value,
the Policy will terminate at the end of the grace period if an appropriate loan
repayment is not received by Cova.
LOAN ACCOUNT. When you make a loan, a portion of your Account Value equal to the
loan will be transferred on a pro rata basis from the investment portfolios to
the loan account. The loan account is a portion of Cova's general account that
contains Account Values attributable to Policy loans.
LOAN INTEREST. Loan interest due on the Policy loan will accrue daily at a
current rate of 6.0% per annum. The loan interest is due each Policy Anniversary
and if not paid will become part of the loan. When that happens, a portion of
the Account Value equal to the loan interest due is transferred, on a pro rata
basis, from the investment portfolios to the loan account.
INTEREST CREDITED. Amounts held in the loan account will be credited daily with
interest, at a current rate of 4.0% per annum.
PREFERRED LOAN. The part of your loan equal to earnings is the Preferred Loan. A
preferred loan will be credited interest daily at a current rate of 6.0% per
annum.
EFFECT OF LOAN. When you make a loan against your Policy, Cova will redeem
Accumulation Units from the investment portfolios equal to the loan request and
transfer that amount to the loan account.
A Policy loan, whether or not repaid, will have a permanent effect on the
Policy. This is because the loan account does not share in the investment
results of the investment portfolio(s). If it is not repaid, the Policy loan and
accrued loan interest will reduce the amount of Cash Value. It will also reduce
the amount payable at death because outstanding loans and accrued loan interest
are deducted from the death benefit.
LOAN REPAYMENTS. You can repay all or part of a loan at any time while your
Policy is in force and the insured is alive. There is no minimum loan repayment
amount. If you want to repay a loan in full, the loan repayment must equal the
loan plus all the accrued loan interest.
When you repay a loan, Cova will transfer the amount held in the loan account to
the investment portfolios according to your most recent instructions.
Unless you tell Cova otherwise, any payment Cova receives from you will go first
to pay any interest due, then to repay any loan, and then will be considered a
premium payment.
TOTAL SURRENDER
You can terminate your Policy by notifying Cova in writing. Cova will pay you
the Cash Surrender Value. When that happens, the Policy will be terminated and
there will be no other benefits. When you make a total surrender there may be
surrender charges and deferred premium tax charges and the policy maintenance
fee will be deducted.
PARTIAL SURRENDERS
You can surrender some of the Cash Surrender Value by making a request in
writing to Cova. The minimum amount you can surrender is $500, unless your Cash
Surrender Value is less. Cova requires that you maintain a minimum Account Value
in your Policy of at least $5,000 after you make a partial surrender. If you do
not, the Policy will terminate and Cova will send you the entire Cash Surrender
Value. When you make a partial surrender, there may be surrender charges and
deferred premium tax charges.
When you make a partial surrender, the Face Amount of your Policy will be
reduced. The Face Amount is reduced in the same proportion that the Account
Value is reduced by the partial surrender. When you make a partial surrender,
the amount of the surrender is deducted on a pro rata basis from Account Value
allocated to the investment portfolios, unless you specify otherwise.
TERMINATION OF THE POLICY
Your Policy will terminate if (1) you make a total surrender of the Policy, (2)
the grace period has ended, or (3) the insured has died.
REINSTATEMENT
If your Policy terminates while the insured is still alive you can have it
reinstated provided the Policy did not terminate because you made a total
surrender. You can only reinstate your Policy within 5 years after the end of
the grace period. If there are joint insureds, both insureds must be alive.
When you reinstate your Policy you must provide Cova with satisfactory evidence
of insurability and you must either repay any outstanding loan and accrued
interest or you must reinstate the loan along with any accrued interest. You
must also pay a sufficient premium to (1) cover all the monthly deductions and
any policy maintenance fee that were unpaid during the grace period and (2) be
sufficient to keep the Policy in force for at least 2 months after the date of
reinstatement.
When you reinstate your Policy, the Face Amount of the reinstated Policy will be
the Face Amount of your original Policy at the time the Policy terminated,
unless you direct Cova otherwise. You cannot select a Face Amount that is larger
than that. The Account Value adjusted for the past due charges of your Policy
when you reinstate it will be the Account Value at the time of termination plus
the additional premium paid at the time of reinstatement. The past due monthly
deductions and policy maintenance fee, if any, will be deducted from this
amount. The surrender charge, if any, and the deferred premium tax charge, if
any, are based on the number of Policy Years from the original Policy Date.
The effective date of the reinstated Policy is the next processing date
following Cova's approval of your application for reinstatement.
8. OTHER INFORMATION
COVA
Cova Financial Services Life Insurance Company (Cova) was incorporated on August
17, 1981, as Assurance Life Company, a Missouri corporation, and changed its
name to Xerox Financial Services Life Insurance Company in 1985. On June 1,
1995, a wholly-owned subsidiary of General American Life Insurance Company
purchased Cova, which on that date changed its name to Cova Financial Services
Life Insurance Company.
Cova is licensed to do business in the District of Columbia and all states
except for California, Maine, New Hampshire, New York and Vermont.
THE SEPARATE ACCOUNT
Cova has established a separate account, Cova Variable Life Account One
(Separate Account), to hold the assets that underlie the Policies.
The assets of the Separate Account are held in Cova's name on behalf of the
Separate Account and legally belong to Cova. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business Cova may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the Policies
and not against any other policies Cova may issue.
DISTRIBUTOR
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is an affiliate of Cova.
Commissions will be paid to broker-dealers who sell the Policies. Broker-dealers
will be paid commissions up to 5.5% of premiums and a trail commission up to
.25% for years two through nine which increases up to .40% in year 10 or later.
Sometimes, Cova enters into an agreement with the broker-dealer to pay the
broker-dealer persistency bonuses, in addition to the standard commission.
SUSPENSION OF PAYMENTS OR TRANSFERS
Cova may be required to suspend or postpone any payments or transfers for any
period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or Cova cannot
reasonably value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
OWNERSHIP
OWNER. You, as the owner of the Policy, have all of the rights under the Policy.
If you die while the Policy is still in force and the insured is living,
ownership passes to a successor owner or if none, then your estate becomes the
owner.
JOINT OWNER. The Policy can be owned by joint owners. Authorization of both
joint owners is required for all Policy changes except for telephone transfers.
BENEFICIARY. The beneficiary is the person(s) or entity you name to receive any
death benefit. The beneficiary is named at the time the Policy is issued unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the insured dies. If there is an
irrevocable beneficiary, all Policy changes except premium allocations and
transfers require the consent of the beneficiary.
ASSIGNMENT. You can assign the Policy.
PART II
MORE INFORMATION
THE COMPANY
Cova Financial Services Life Insurance Company (Cova) was originally
incorporated on August 17, 1981 as Assurance Life Company, a Missouri
corporation and changed its name to Xerox Financial Services Life Insurance
Company in 1985. On June 1, 1995, a wholly-owned subsidiary of General American
Life Insurance Company (General American) purchased Cova from Xerox Financial
Services, Inc. On June 1, 1995, Cova changed its name to Cova Financial Services
Life Insurance Company. Cova presently is licensed to do business in the
District of Columbia and all states except California, Maine, New Hampshire, New
York and Vermont.
General American is a St. Louis-based mutual company with more than $275 billion
of life insurance in force and approximately $19 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individual and groups.
On April 1, 1996, Cova contributed initial capital to the Large Cap Stock and
Quality Bond Portfolios, by making a capital contribution through another
Separate Account. As of December 31, 1996, the capital contributed to the
Quality Bond Portfolio represented approximately 36% of the total assets of such
Portfolio and the capital contributed to the Large Cap Stock Portfolio by Cova
represented approximately 75% of the total assets of such Portfolio. Cova
currently intends to remove these assets from the Portfolios on a pro rata basis
in proportion to money invested in the Portfolios by both variable annuity and
variable life contract owners.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS OF COVA
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
PRINCIPAL OCCUPATION DURING
NAME THE PAST 5 YEARS
- ---- ----------------
<S> <C>
John W. Barber*** Director of Cova, First Cova Life Insurance Company (FCLIC)
and Cova Financial Life Insurance Company (CFLIC) - June,
1995 to present; Vice President and Controller of General
American - December, 1984 to present; President and Director
of Equity Intermediary Company - October, 1988 to present.
Frances S. Cook* First Vice President and Associate General Counsel of Cova -
July, 1997 to present, prior thereto Vice President and
Assistant General Counsel 1996 to 1997, prior thereto
Assistant General Counsel 1993 to 1997; Secretary of CFLIC,
Cova and FCLIC - 1997 to present; First Vice President of
Cova Life Management Company (CLMC) - July, 1997 to present,
prior thereto Vice President and Assistant General Counsel
1996 to 1997, prior thereto Assistant General Counsel 1993
to 1997; Secretary of Cova Investment Advisory Corporation
(Advisory) - 1997 to present; Assistant Secretary of Cova
Life Sales Company (CLSC) - 1993 to present.
Jerome P. Darga* Vice President and Assistant Secretary of Cova, CFLIC and
CLMC - 1992 to present.
Connie A. Doern**** Vice President of Cova and CFLIC - 1997 to present, prior
thereto Assistant Vice President from 1990 to 1996; Vice
President of FCLIC - 1997 to present, prior thereto
Assistant Vice President from 1993 to 1996; Vice President
of J&H/KVI - 1989 to present.
Judy M. Drew* Vice President of Cova and CFLIC - 1988 to present; Vice
President of FCLIC - 1992 to present; Senior Vice President
of CLMC - 1996 to present, prior thereto Vice President from
1989 to 1996; President, COO and Director of CLSC - 1988 to
present.
Patricia E. Gubbe* Vice President of Cova and CFLIC - 1989 to present; Vice
President of FCLIC - 1992 to present; First Vice President
of CLMC - 1996 to present, prior thereto Vice President from
1989 to 1996; Vice President and Chief Compliance Officer of
CLSC - 1989 to present.
Philip A. Haley* Vice President of Cova and CFLIC - 1990 to present; Vice
President of FCLIC - 1992 to present; Vice President of CLSC
- 1991 to present; Senior Vice President of CLMC - 1996 to
present, prior thereto Vice President from 1989 to 1996.
Christopher S. Harden* Vice President of Cova and CFLIC - 1991 to present; First
Vice President of CLMC - 1996 to present, prior thereto Vice
President - 1991 to 1996.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova and CFLIC
- 1991 to present; Vice President, Chief Actuary and
Director of FCLIC - 1992 to present; Senior Vice President,
Chief Actuary and Director of CLMC - 1996 to present, prior
thereto Vice President and Director from 1993 to 1996 and
Vice President from 1991 to 1993.
Thomas E. Hughes, Jr.** Treasurer and Director of Cova and CFLIC - June, 1995 to
present; Treasurer of FCLIC - June, 1995 to present;
Corporate Actuary and Treasurer of General American -
October, 1994 to present. Formerly, Executive Vice President
- Group Pensions General American - March, 1990 to October,
1994. In addition to the Cova companies, Director of the
following General American subsidiary companies: Paragon
Life Insurance Company and RGA Reinsurance Company -
October, 1994 to present. Treasurer of the following General
American subsidiary companies: Paragon Life Insurance
Company, General Life Insurance Company of America, General
Life Insurance Company, General American Holding Company,
Red Oak Realty Company, Gen Mark Incorporated, Walnut Street
Securities, Inc., Walnut Street Advisers Inc., White Oak
Royalty Company, Walnut Street Funds, Inc., and RGA
Reinsurance Company - October, 1994 to present.
Douglas E. Jacobs* Vice President of Cova, CFLIC and CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto
Assistant Vice President from 1990 to 1996; Vice President
of CFLIC - 1997 to present, prior thereto Assistant Vice
President from 1988 to 1996; Vice President of FCLIC - 1997
to present, prior thereto Assistant Vice President from 1993
to 1996; Vice President of J&H/KVI - 1985 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC,
CLMC, Advisory and Cova Investment Allocation Corporation
(Allocation) - April, 1997 to present; Chairman of the
Board, President and Chief Executive Officer of General
American - May, 1992 to present; Mr. Liddy also holds
various positions with the General American subsidiaries as
follows: Chairman of the Board and President of General
American Mutual Holding Company, GenAmerica Corporation and
General American Holding Company; Chairman of the Board of
Security Equity Life Insurance Company, Conning Corporation,
The Walnut Street Funds, Inc., General American Capital
Company, Reinsurance Group of America, Inc., RGA Life
Reinsurance Company of Canada, and RGA Reinsurance Company.
William C. Mair* Vice President, Controller and Director of Cova from 1995 to
present, prior thereto Vice President, Controller, Treasurer
and Director. Vice President, Controller and Director of
CFLIC from 1995 to present, prior thereto Vice President,
Controller, Treasurer and Director; Vice President,
Controller and Director of FCLIC - from 1992 to present;
Vice President, Treasurer, Controller and Director of
Advisory - 1993 to present; Vice President, Treasurer,
Controller and Director of Allocation - 1994 to present;
Director of CLSC - 1992 to present; Senior Vice President,
Treasurer, Controller and Director of CLMC - 1989 to
present; Vice President, Treasurer, Controller, Chief
Financial Officer, Chief Accounting Officer and Director of
Cova Series Trust - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova, CFLIC and FCLIC -
June, 1995 to present; Associate General Counsel and Vice
President of General American - 1973 to present; also,
Director, Vice President, General Counsel and Secretary for
several other General American subsidiaries, including
Equity Intermediary Company, Red Oak Realty Company, and
White Oak Royalty Company; General American Holding Company
and Paragon Life Insurance Company. General Counsel and
Secretary, Reinsurance Group of America, Incorporated.
Director and Secretary, General American Capital Company.
General Counsel and Secretary, Conning Corporation. General
Counsel, Conning Asset Management Company. Director of RGA
Reinsurance Company and Walnut Street Securities, Inc.
Secretary to the Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President of Cova and CFLIC - May, 1997 to
present; Executive Vice President and Director of FCLIC -
May, 1997 to present; Executive Vice President of CLMC -
May, 1997 to present; Executive Vice President and Director
of Advisory - December, 1996 to present; Executive Vice
President and Director of Allocation - December, 1996 to
present.
Leonard M. Rubenstein** Director of Cova, CFLIC, FCLIC, and CLMC - January, 1996 to
present; Director of Advisory and Allocation from 1995 to
present; Executive Vice President and Director of General
American - 1992 to present. Mr. Rubenstein also holds
various positions with the General American subsidiaries as
follows: Director and Treasurer of General American Capital
Company; Senior Vice President Investments, Treasurer and
Director of Reinsurance Group of America, Incorporated;
Director of Paragon Life Insurance Company; Director of
General American Holding Company; Chief Executive Officer,
Chairman and Director of Conning Corporation; Director of
the following: General Life Insurance Company, Security
Equity Life Insurance Company, BHIF America de Vida Seguros
S.A. (Chile), Manatial Seguros de Vida, S.A. (Argentina),
Red Oak Realty Company, General Life Insurance Company of
America; RGA Reinsurance Company; Secretary and Director for
RGA Sud America S.A.
Myron H. Sandberg* Vice President of Cova and CFLIC - 1985 to present; Vice
President of CLMC - 1989 to present.
John W. Schaus* Vice President of Cova and CFLIC - 1988 to present; Vice
President of CLMC - 1989 to present.
Lorry J. Stensrud* President and Director of Cova, CFLIC, FCLIC and CLMC from
June, 1995 to present, prior thereto Executive Vice
President; President and Director of Advisory from 1993 to
present; President and Director of Allocation from 1994 to
present. Director of CLSC from 1989 to present; President,
Chief Executive Officer and Director of Cova Series Trust -
1996 to present.
Peter L. Witkewiz**** Vice President of Cova, CFLIC and FCLIC - 1993 to present.
Kent R. Zimmerman** Assistant Treasurer of Cova and CFLIC - May, 1996 to
present; Assistant Treasurer of CLMC - 1996 to present;
Second Vice President of General American - 1997 to present,
prior thereto Vice President of General American - 1992 to
1997. Mr. Zimmerman holds various positions with the General
American subsidiaries - Assistant Treasurer, Security Equity
Life Insurance Company, Paragon Life Insurance Company,
General Life Insurance Company of America and RGA
Reinsurance Co.
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: J&H/KVI, 1776 West Lakes Parkway, West Des Moines, IA 50266
</TABLE>
VOTING
In accordance with its view of present applicable law, Cova will vote the shares
of the investment portfolios at special meetings of shareholders in accordance
with instructions received from owners having a voting interest. Cova will vote
shares for which it has not received instructions in the same proportion as it
votes shares for which it has received instructions. Cova will vote shares it
owns in the same proportion as it votes shares for which it has received
instructions. The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
Cova determines that it is permitted to vote the shares of the funds in its own
right, it may elect to do so.
The voting interests of the owner in the funds will be determined as follows:
owners may cast one vote for each $100 of Account Value of a Policy which is
allocated to an investment portfolio on the record date. Fractional votes are
counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by Cova not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each owner having such a voting interest will receive periodic reports relating
to the investment portfolios in which he or she has an interest, proxy material
and a form with which to give such voting instructions.
DISREGARD OF VOTING INSTRUCTIONS. Cova may, when required to do so by state
insurance authorities, vote shares of the funds without regard to instructions
from owners if such instructions would require the shares to be voted to cause
an investment portfolio to make, or refrain from making, investments which would
result in changes in the sub-classification or investment objectives of the
investment portfolio. Cova may also disapprove changes in the investment policy
initiated by owners or trustees/directors of the funds, if such disapproval is
reasonable and is based on a good faith determination by Cova that the change
would violate state or federal law or the change would not be consistent with
the investment objectives of the investment portfolios or which varies from the
general quality and nature of investments and investment techniques used by
other funds with similar investment objectives underlying other variable
contracts offered by Cova or of an affiliated company. In the event Cova does
disregard voting instructions, a summary of this action and the reasons for such
action will be included in the next semi-annual report to owners.
THE SEPARATE ACCOUNT
Cova has established the separate account, Cova Variable Life Account One
(Separate Account), to hold the assets that underlie the Policies. The Board of
Directors of Cova adopted a resolution to establish the Separate Account under
Missouri insurance law on February 24, 1987. The Separate Account has not yet
commenced operations. Cova has registered the Separate Account with the
Securities Exchange Commission as a unit investment trust under the Investment
Company Act of 1940.
The investment program of the Separate Account will not be changed without the
approval by the Insurance Commissioner of the state of Missouri. If required,
the approval process is on file with the Commissioner of the state in which this
Policy is issued.
If the New York Stock Exchange is closed (except for holidays and weekends) or
trading is restricted due to an emergency as defined by the Securities and
Exchange Commission so that Cova cannot value Accumulation Units, Cova may
postpone all procedures which require valuation of the Accumulation Units until
valuation is possible.
LEGAL OPINIONS
Legal matters in connection with the Policies described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE
The amount of the surrender charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the surrender charge will be determined by Cova after examination
of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Policies with fewer sales contacts.
2. The total amount of premium payments to be received will be considered. Per
Policy sales expenses are likely to be less on larger premium payments than
on smaller ones.
3. Any prior or existing relationship with Cova will be considered. Per Policy
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Policy with
fewer sales contacts.
4. There may be other circumstances, of which Cova is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, Cova determines that there
will be a reduction in sales expenses, Cova may provide for a reduction or
elimination of the surrender charge.
The surrender charge may be eliminated when the Policies are issued to an
officer, director or employee of Cova or any of its affiliates. In no event will
any reduction or elimination of the surrender charge be permitted where the
reduction or elimination will be unfairly discriminatory to any person.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the insured(s) has been incorrectly stated, the death
benefit will be adjusted to reflect the death benefit that would have been
provided by the last cost of insurance at the correct age and/or sex of the
insured.
COVA'S RIGHT TO CONTEST
Cova cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the insured's lifetime for two years from the
Policy Date. If the Policy is reinstated, the two-year period is measured from
the date of reinstatement. In addition, if the insured commits suicide in the
two-year period, or such period as specified in state law, the benefit payable
will be limited to premiums paid less debt and less any surrenders.
SETTLEMENT OPTIONS
The Cash Surrender Value or the death proceeds may be paid in a lump sum or may
be applied to one of the Settlement Options. The Settlement Options are:
Option 1: Life Annuity
Option 2: Life Annuity with 5, 10 or 20 years Guaranteed
Option 3: Joint and Last Survivor Annuity
Option 4: Payments for a Designated Period
You or the beneficiary can select to have the Settlement Options payable on
either a fixed or variable basis.
TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON COVA'S UNDERSTANDING OF CURRENT
FEDERAL INCOME TAX LAW APPLICABLE TO LIFE INSURANCE IN GENERAL. COVA CANNOT
PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE. PURCHASERS
ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY OF SUCH
CHANGES. SECTION 7702 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE"),
DEFINES THE TERM "LIFE INSURANCE CONTRACT" FOR PURPOSES OF THE CODE. COVA
BELIEVES THAT THE POLICIES TO BE ISSUED WILL QUALIFY AS "LIFE INSURANCE
CONTRACTS" UNDER SECTION 7702. COVA DOES NOT GUARANTEE THE TAX STATUS OF THE
POLICIES. PURCHASERS BEAR THE COMPLETE RISK THAT THE POLICIES MAY NOT BE TREATED
AS "LIFE INSURANCE" UNDER FEDERAL INCOME TAX LAWS. PURCHASERS SHOULD CONSULT
THEIR OWN TAX ADVISERS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS
PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS.
INTRODUCTION. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon Cova's understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
Cova is taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from Cova and its
operations form a part of Cova.
DIVERSIFICATION. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy. The Code contains a safe harbor
provision which provides that life insurance policies such as the Policies meet
the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated investment
company and no more than fifty-five (55%) percent of the total assets consist of
cash, cash items, U.S. Government securities and securities of other regulated
investment companies. There is an exception for securities issued by the U.S.
Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Policies. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these Regulations, all securities of the same
issuer are treated as a single investment.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer".
Cova intends that each investment portfolio underlying the Policies will be
managed by the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered as the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
TAX TREATMENT OF THE POLICY. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, Cova has relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While Cova has attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with Cova's interpretations of Section 7702 that were
made in determining such compliance. In the event the Policy is determined not
to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies. Owners should consult their tax advisers with
respect to the tax consequences of purchasing the Policy.
POLICY PROCEEDS. Loan proceeds and/or surrender payments from the Policies are
fully taxable to the extent of income in the Policy and may further be subject
to an additional 10% federal income tax penalty. (See "Tax Treatment of Loans
and Surrenders".) Otherwise, the Policy should receive the same federal income
tax treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under Section
101(a) of the Code and any benefits paid under the Accelerated Death Benefit
Rider shall be excludable from gross income under Section 101(g) of the Code.
Furthermore, the owner is not deemed to be in constructive receipt of the
Account Value or Cash Surrender Value, including increments thereon, under a
Policy until surrender thereof. If the death proceeds are to be paid under one
of the Settlement Options, the payments will be pro rated between the amount
attributable to the death benefit which will be excludable from the
beneficiary's income and the amount attributable to interest which will be
includable in the beneficiary's income.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Policy owner or beneficiary. Owners and beneficiaries should consult their tax
advisers.
JOINT LIVES. The Policy may be issued with a Joint Life Rider providing for the
payment of the death benefit upon the death of the last surviving insured. While
Cova believes that a Policy issued on this basis complies with Section 7702 of
the Code, such circumstances are not directly addressed in either Section 7702
or the regulations issued thereunder. In the absence of regulations or other
guidelines, there is some uncertainty as to whether a Policy with such a joint
life feature meets the requirements of Section 7702 of the Code.
TAX TREATMENT OF LOANS AND SURRENDERS. The Code alters the tax treatment
accorded to loans and certain distributions from life insurance policies which
are deemed to be "modified endowment contracts". The Policy's premium
requirements are such that Policies issued on or after June 21, 1988 will be
treated as modified endowment contracts. A Policy received in exchange for a
modified endowment contract is also a modified endowment contract regardless of
whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the Policy will not cause the Policy to be
treated as a modified endowment contract if no additional premiums are paid.
A Policy that was entered into prior to June 21, 1988 may be deemed to be a
modified endowment contract if it is materially changed and fails to meet the
7-pay test. A Policy fails to meet the 7-pay test when the cumulative amount
paid under the Policy at any time during the first 7 Policy Years exceeds the
sum of the net level premiums which would have been paid on or before such time
if the Policy provided for paid-up future benefits after the payment of seven
(7) level annual premiums. A material change would include any increase in the
future benefits provided under a policy unless the increase is attributable to:
(1) the payment of premiums necessary to fund the lowest death benefit and
qualified additional benefits payable in the first seven Policy Years; or (2)
the crediting of interest or other earnings (including policyholder dividends)
with respect to such premiums.
Assuming that the Policy will be treated as a modified endowment contract,
surrenders and/or loan proceeds are taxable to the extent of income in the
Policy. Such distributions are deemed to be on a last-in, first-out basis, which
means the taxable income is distributed first. Loan proceeds and/or surrender
payments may also be subject to an additional 10% federal income tax penalty
applied to the income portion of such distribution. The penalty shall not apply,
however, to any distribution: (1) made on or after the date on which the
taxpayer reaches age 59-1/2; (2) which is attributable to the taxpayer becoming
disabled (within the meaning of Section 72(m)(7) of the Code); or (3) 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 his or her
beneficiary. Furthermore, only under limited circumstances will interest paid on
Policy loans be tax deductible.
Policy owners should seek competent tax advice on the tax consequences of taking
loans, making a partial or total surrender or making any material modifications
to their Policies.
MULTIPLE POLICIES. The Code further provides that multiple modified endowment
contracts that are issued within a calendar year period to the same owner by one
company or its affiliates are treated as one modified endowment contract for
purposes of determining the taxable portion of any loans or distributions. Such
treatment may result in adverse tax consequences including more rapid taxation
of the loans or distributed amounts from such combination of contracts. Policy
owners should consult a tax adviser prior to purchasing more than one modified
endowment contract in any calendar year period.
TAX TREATMENT OF ASSIGNMENTS. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. Policy owners should therefore
consult competent tax advisers should they wish to assign or change the owner of
their Policies.
QUALIFIED PLANS. The Policies may be used in conjunction with certain qualified
plans. Because the rules governing such use are complex, a purchaser should not
do so until he has consulted a competent qualified plans consultant.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includable in gross income of
the Policy owner are subject to federal income tax withholding. However, the
Policy owner in most cases may elect not to have taxes withheld. The Policy
owner may be required to pay penalties under the estimated tax rules, if the
Policy owner's withholding and estimated tax payments are insufficient.
REPORTS TO OWNERS
Cova will send to each owner semi-annual and annual reports of the investment
portfolios. Within 30 days after each Policy Anniversary, an annual statement
will be sent to each owner. The statement will show the current amount of death
benefit payable under the Policy, the current Account Value, the current Cash
Surrender Value, current debt and will show all transactions previously
confirmed. The statement will also show premiums paid and all charges deducted
during the Policy Year.
Confirmations will be mailed to Policy owners within seven days of the
transaction of: (a) the receipt of premium; (b) any transfer between investment
portfolios; (c) any loan, interest repayment, or loan repayment; (d) any
surrender; (e) exercise of the free look privilege; and (f) payment of the death
benefit under the Policy. Upon request a Policy owner shall be entitled to a
receipt of premium payment.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. Cova is
not involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The consolidated balance sheets of Cova as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholder's equity and cash flows
for the year ended December 31, 1996 and the periods from June 1, 1995 through
December 31, 1995 and January 1 through May 31, 1995 and for the year ended
December 31, 1994 included herein, have been included in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
FINANCIAL STATEMENTS
There are no financial statements for the Separate Account because it has not
yet commenced operations.
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Services Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Cova Financial
Services Life Insurance Company and subsidiaries (a wholly owned subsidiary of
Cova Corporation) as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders equity and cash flows for the
year ended December 31, 1996 and the period from June 1, 1995 to December 31,
1995 (Successor periods), and from January 1, 1995 to May 31, 1995, and for
the year ended December 31, 1994 (Predecessor periods). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cova
Financial Services Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the Successor periods, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned Predecessor consolidated
financial statements present fairly, in all material respects, the results of
their operations and their cash flows for the Predecessor periods presented,
in conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $952,817 in 1996 and $583,868 in 1995) $ 949,611 $ 594,556
Mortgage loans (net) 244,103 77,472
Policy loans 22,336 19,125
Short-term investments at cost which approximates
market 4,404 7,859
---------- ----------
Total investments 1,220,454 699,012
---------- ----------
Cash and cash equivalents - interest bearing 38,322 59,312
Cash - non-interest bearing 5,501 2,944
Receivable from sale of securities 1,064 --
Accrued investment income 15,011 9,116
Deferred policy acquisition costs 49,833 14,468
Present value of future profits 46,389 38,155
Goodwill 20,849 23,358
Federal and state income taxes recoverable 1,461 397
Deferred tax benefits (net) 13,537 13,556
Receivable from OakRe 1,973,813 2,391,982
Reinsurance receivables 3,504 8,891
Other assets 2,205 2,425
Separate account assets 641,871 410,449
---------- ----------
Total Assets $4,033,814 $3,674,065
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets (Continued)
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $3,135,325 $3,033,763
Future policy benefits 32,342 28,071
Payable on purchase of securities 15,978 5,327
Accounts payable and other liabilities 19,764 20,143
Future purchase price payable to OakRe 16,051 23,967
Guaranty fund assessments 12,409 14,259
Separate account liabilities 626,901 410,449
----------- -----------
Total Liabilities 3,858,770 3,535,979
----------- -----------
Shareholders equity:
Common stock, $2 par value. (Authorized
5,000,000 shares; issued and outstanding
2,899,446 shares in 1996 and 1995) 5,799 5,799
Additional paid-in capital 166,491 129,586
Retained earnings 3,538 (63)
Net unrealized appreciation/(depreciation)
on securities, net of tax (784) 2,764
----------- -----------
Total Shareholders Equity 175,044 138,086
----------- -----------
Total Liabilities and Shareholders Equity $4,033,814 $3,674,065
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 3,154 $ 921 $ 1,097 $ 2,787
Net investment income 70,629 24,188 92,486 277,616
Net realized gain (loss) on sale of investments 472 1,324 (12,414) (101,361)
Separate Account charges 7,205 2,957 1,818 3,992
Other income 1,320 725 1,037 2,713
------- -------- ---------- -----------
Total revenues 82,780 30,115 84,024 185,747
------- -------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 50,100 17,706 97,867 249,905
Current and future policy benefits 5,130 1,785 1,830 5,259
Operating and other expenses 14,573 7,126 12,777 24,479
Amortization of purchased intangible assets 2,332 3,030 -- --
Amortization of deferred acquisition costs 4,389 100 11,157 125,357
------- -------- ---------- -----------
Total Benefits and Expenses 76,524 29,747 123,631 405,000
------- -------- ---------- -----------
Income/(loss) before income taxes 6,256 368 (39,607) (219,253)
------- -------- ---------- -----------
Income Taxes:
Current 1,740 1,011 (16,404) (46,882)
Deferred 915 (580) 6,340 (30,118)
------- -------- ---------- -----------
Total income tax expense/(benefit) 2,655 431 (10,064) (77,000)
------- -------- ---------- -----------
Net Income/(Loss) $ 3,601 $ (63) $ (29,543) $(142,253))
======= ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($2 par value common stock;
Authorized 5,000,000 shares; issued and
outstanding 2,899,446 in 1996, 1995 and 1994
Balance at beg. of period) $ 5,799 $ 5,799 $ 5,799 $ 5,632
Par value of additional shares issued -- -- -- 167
--------- --------- ----------
Balance at end of period 5,799 5,799 5,799 5,799
--------- --------- --------- ----------
Additional paid-in capital:
Balance at beginning of period 129,586 137,749 136,534 120,763
Adjustment to reflect purchase acquisition
indicated in note 2 -- (52,163) -- --
Capital contribution 36,905 44,000 1,215 15,771
--------- --------- --------- ----------
Balance at end of period 166,491 129,586 137,749 136,534
--------- --------- --------- ----------
Retained earnings/(deficit):
Balance at beginning of period (63) (36,441) 1,506 143,759
Adjustment to reflect purchase acquisition -- 36,441 -- --
indicated in note 2
Net income/(loss) 3,601 (63) (29,543) (142,253)
Dividends to shareholder -- -- (8,404) --
--------- --------- --------- ----------
Balance at end of period $ 3,538 $ (63) $(36,441) $ 1,506
--------- --------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholders Equity (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation)of securities:
Balance at beginning of period 2,764 $(28,837) $ (65,228) $ (321)
Adjustment to reflect purchase acquisition
indicated in note 2 -- 28,837 -- --
Implementation of change in accounting for
marketable debt and equity securities,
net of effects of deferred taxes
of $18,375 and deferred acquisition
costs of $42,955 -- -- -- 34,125
Change in unrealized appreciation/(depreciation)
of debt and equity securities (13,915) 10,724 178,010 (357,502)
Change in deferred Federal income taxes 1,910 (1,489) (18,458) 53,324
Change in deferred acquisition costs attributable
to unrealized losses/(gains) 1,561 -- (123,161) 205,146
Change in present value of future profits
attributable to unrealized losses/(gains) 6,896 (6,471) -- --
--------- --------- ----------
Balance at end of period (784) 2,764 (28,837) (65,228)
--------- --------- ---------- ----------
Total Shareholders Equity $175,044 $138,086 $ 78,270 $ 78,611
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 68,622 $ 18,744 $ 131,439 $ 309,856
Premiums received 3,154 921 1,097 2,787
Insurance and annuity benefit payments (3,729) (2,799) (1,809) (3,755)
Operating disbursements (17,158) (10,480) (9,689) (26,023)
Taxes on income refunded (paid) (3,016) 60 48,987 17,032
Commissions and acquisition costs paid (36,735) (17,456) (23,872) (26,454)
Other 937 529 1,120 836
---------- ---------- ----------- ------------
Net cash provided by/(used in) operating
activities 12,075 (10,481) 147,273 274,279
---------- ---------- ----------- ------------
Cash flows from investing activities:
Cash used for the purchase of investment
securities (715,274) (875,994) (575,891) (1,935,353)
Proceeds from investment securities sold and
matured 262,083 253,814 2,885,053 3,040,474
Other (14,166) 179 (8,557) (8,185)
---------- ---------- ----------- ------------
Net cash provided by/(used in) investing
activities $(467,357) $(622,003) $2,300,605 $ 1,096,936
---------- ---------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 446,784 $ 132,752 $ 130,660 $ 274,960
Transfers from/(to) OakRe 574,010 628,481 (3,048,531) --
Transfer to Separate Accounts (119,592) (37,946) (4,835) (33,548)
Return of policyholder deposits (491,025) (436,271) (290,586) (608,868)
Dividends to Shareholder -- -- (8,404) --
Capital contributions received 20,000 44,000 1,215 15,938
---------- ---------- ------------- -----------
Net cash provided by/(used in) financing
activities 430,177 331,016 (3,220,481) (351,518)
---------- ---------- ------------- -----------
Increase/(decrease) in cash and cash
equivalents (25,105) (301,468) (772,603) 1,019,697
Cash and cash equivalents at beginning of
period 62,256 363,724 1,136,327 116,630
CFLIC contributed cash (Note 9) 6,672 -- -- --
Cash and cash equivalents at end of period $ 43,823 $ 62,256 $ 363,724 $1,136,327
========== ========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows, Continued
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss)to net cash
provided by operating activities:
Net income/(loss) $ 3,601 $ (63) $(29,543) $(142,253)
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Increase/(decrease) in future policy
benefits (net of reinsurance) 680 (1,013) 11 1,494
Increase/(decrease) in payables and accrued
liabilities 2,900 (392) (10,645) 3,830
Decrease/(increase) in accrued investment
income (4,778) (7,904) 32,010 21,393
Amortization of intangible assets 6,721 3,831 11,309 125,722
Amortization and accretion of securities
premiums and discounts 2,751 307 2,410 3,635
Recapture commissions paid to OakRe (4,483) (4,777) -- --
Net realized losson sale of
investments (472) (1,324) 12,414 101,361
Interest accumulated on policyholder
deposits 50,100 17,706 97,867 249,905
Investment expenses paid 1,151 642 2,373 7,296
Decrease/(Increase)in guaranty assessments -- (104) 5,070 (935)
Increase/(decrease) in current and deferred
Federal income taxes (351) 491 38,923 (59,263)
Separate account net loss (2,008) 1 1 2
Deferral of acquisition costs (34,803) (14,568) (13,354) (30,024)
Other (8,934) (3,314) (1,573) (7,884)
--------- ----------
Net cash provided by operating activities $ 12,075 $(10,481) $147,273 $ 274,279
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company (CFSLIC) and subsidiaries (the
Company), formerly Xerox Financial Services Life Insurance Company (the
Predecessor), market and service single premium deferred annuities, immediate
annuities, variable annuities, and single premium whole-life insurance
policies. The Company is licensed to do business in 47 states and the
District of Columbia. Most of the policies issued present no significant
mortality nor longevity risk to the Company, but rather represent investment
deposits by the policyholders. Life insurance policies provide policy
beneficiaries with mortality benefits amounting to a multiple, which declines
with age, of the original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 66%, 59% and 57% of the companies sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated. and Edward Jones
& Company in 1996, 1995 and 1994, respectively.
ORGANIZATION
Prior to June 1, 1995 Xerox Financial Services, Inc. (XFSI) owned 100% or
2,899,446 shares of the Predecessor. XFSI is a wholly owned subsidiary of
Xerox Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance company, in
exchange for approximately $91.4 million in cash and $22.7 million in future
payables. In conjunction with this Agreement, the Predecessor also entered
into a financing reinsurance transaction that caused OakRe Life Insurance
Company(OakRe),a subsidiary of the Predecessor, to assume the economic
benefits and risks of the existing single premium deferred annuity deposits
(SPDAs) of Cova Financial Services Life Insurance Company, which had an
aggregate carrying value at June 1, 1995 of $2,982.0 million. In exchange,
the Predecessor transferred specifically identified assets to OakRe with a
market value at June 1, 1995 of $2,986.0 million. Ownership of OakRe was
retained by XFSI subsequent to the sale of the Predecessor and other
affiliates. The Receivable from OakRe to the Company that was created by this
transaction will be liquidated over the remaining crediting rate guaranty
periods (which will be substantially expired in four years) by the transfer of
cash in the amount of the then current account value, less a recapture
commission fee to OakRe on policies retained beyond their 30-day no-fee
surrender window by the Company, upon the next crediting rate reset date of
each annuity policy. The Company may then reinvest that cash for those
policies that are retained and thereafter assume the benefits and risks of
those deposits.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the periods ending December 31, 1996 and 1995.
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date.
The Company owns 100% of the outstanding shares of First Cova Life Insurance
Company (a New York domiciled insurance company) (FCLIC) and Cova Financial
Life Insurance Company (a California domiciled insurance company) (CFLIC).
Ownership of Cova Financial Life Insurance Company was obtained on December
31, 1996 as the result of a capital contribution by Cova Corporation. The
Company has presented the consolidated financial position and results of
operations for its subsidiaries from the dates of actual ownership (see note
9).
(2) CHANGE IN ACCOUNTING
Upon closing the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price for the Company and its then sole subsidiary FCLIC of $91.4
million according to the fair values of the acquired assets and liabilities,
including the estimated present value of future profits. These allocated
values were dependent upon policies in force and market conditions at the time
of closing, however, these allocations were not finalized until 1996. The
table below summarizes the final allocation of purchase price:
<TABLE>
<CAPTION>
(In Millions)
<S> <C> June 1, 1995
--------------
Assets acquired:
Debt securities $ 32.4
Policy loans 18.3
Cash and cash equivalents 363.7
Present value of future profits 47.4
Goodwill 20.5
Deferred tax benefit 24.9
Receivable from OakRe 2,969.0
Other assets 5.9
Separate account assets 332.7
--------------
3,814.8
--------------
Liabilities assumed:
Policyholder deposits 3,299.2
Future policy benefits 27.2
Future purchase price payable 22.7
Deferred Federal income taxes 12.6
Other liabilities 29.0
Separate account liabilities 332.7
--------------
3,723.4
--------------
Adjusted purchase price $ 91.4
==============
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in an increase in shareholders equity of $13.1
million in 1995 reflecting the application of push down purchase accounting.
The Companys consolidated financial statements subsequent to June 1, 1995
reflect this new basis of accounting.
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on predecessor historical costs. The periods ending on or after
such date are labeled The Company, and are based on the new cost basis of the
Company or fair values at June 1, 1995 and subsequent results of operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES
Investments in all debt securities and those equity securities with readily
determinable market values are classified into one of three categories:
held-to-maturity, trading, or available-for-sale. Classification of
investments is based on management's current intent. All debt and equity
securities at December 31, 1996 and 1995 were classified as
available-for-sale. Securities available-for-sale are carried at market value,
with unrealized holding gains and losses reported as a separate component of
stockholders equity, net of deferred effects of income tax and related effects
on deferred acquisition costs.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income. Gains or losses on
financial future or option contracts which qualify as hedges of investments
are treated as basis adjustments and are recognized in income over the life of
the hedged investments.
MORTGAGE LOANS AND OTHER INVESTED ASSETS
Mortgage loans and policy loans are carried at their unpaid principal
balances. Real estate is carried at cost less accumulated depreciation.
Other invested assets are carried at lower of cost or market.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS 114), indicate a likelihood of loss.
Prior to 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan.
In 1995, the Company adopted Statement of Financial Accounting Standards No.
118, Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures (SFAS 118). SFAS 118 amends SFAS 114, providing clarification
of income recognition issues and requiring additional disclosures relating to
impaired loans. The adoption of SFAS 114 and 118 had no effect on the
Companys financial position or results of operations at or for the period
ended December 31, 1995. The Company had no impaired loans, but did establish
a valuation allowance for potential losses on mortgage loans of $88 thousand
at December 31, 1996.
Prior to 1995, when an investment supported by real estate collateral was
deemed "in-substance" foreclosed, the investment was reclassified as real
estate and recorded at its fair value, with any reduction in carrying value
recorded as a realized loss. The change in this valuation was recorded as a
realized capital gain or loss in the statements of income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
SEPARATE ACCOUNT ASSETS
The separate account investments are assigned to the policyholders in the
separate accounts, and are not guaranteed or supported by the other general
investments of the Company. The Company earns mortality and expense risk fees
from the separate accounts and assesses withdrawal charges in the event of
early withdrawals. Separate accounts assets are valued at fair market value.
In order to provide for optimum policyholder returns, and to allow for the
replication of the investment performance of existing cloned mutual funds, the
Company has periodically transferred capital to the separate account to
provide for the initial purchase of investments in new portfolios. As
additional funds have been received through policyholder deposits, the Company
has periodically reduced its capital investment in the separate accounts. As
of December 31, 1996, approximately $15.0 million of capital investments
remained within the separate accounts.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses, interest credited to
accounts, surrender fees, mortality costs, and policy maintenance expenses.
The estimated gross profit streams are periodically reevaluated and the
unamortized balance of deferred acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised estimates been
known and applied from the inception of the policies and contracts. The
amortization and adjustments resulting from unrealized gains and losses is not
recognized currently in income but as an offset to the unrealized gains and
losses reflected as a separate component of equity.
The components of deferred policy acquisition costs are shown below. The
effects on deferred policy acquisition costs of the consolidation of CFLIC
(see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In Thousands) 1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $14,468 $ 92,398 $ 213,362 $ 146,504
Effects of push down purchase
accounting -- (92,398) -- --
Commissions and expenses deferred 34,803 14,568 13,354 30,025
Amortization (4,389) (100) (11,157) (125,357)
Deferred policy acquisition costs
attributable to unrealized gains/(losses) 1,561 -- (123,161) 162,190
Effects on deferred policy acquisition
costs of CFLIC consolidation 3,390 -- -- --
--------
Deferred policy acquistion costs,
end of period $49,833 $ 14,468 $ 92,398 $ 213,362
======== ========= ========== ==========
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
PRESENT VALUE OF FUTURE PROFITS
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted at a pre-tax
rate of 18% (12% net after tax).
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
In addition, as the Company has the option of retaining its SPDA policies
after they reach their next interest rate reset date and are recaptured from
OakRe, a component of this asset represents estimates of future profits on
recaptured business. This asset will be amortized in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, interest
credited to accounts, surrender fees, mortality costs, and policy maintenance
expenses. The estimated gross profit streams are periodically reevaluated and
the unamortized balance of present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. The amortization and
adjustments resulting from unrealized gains and losses is not recognized
currently in income but as an offset to the unrealized gains and losses
reflected as a separate component of equity. The amortization period is the
remaining life of the policies, which is estimated to be 20 years from the
date of original policy issue.
Based on current assumptions, amortization of the original in-force PVFP
asset, expressed as a percentage of the original in-force asset, are projected
to be 6.8%, 5.8%, 4.6%, 4.5% and 4.7% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill and the future payable. This final
allocation and the resulting impact on inception to date amortization was
recorded, in its entirety, in 1996. No restatement of the June 1, 1995
opening Balance Sheet was made.
The components of present value of future profits are below. The effects on
present value of future profits of the consolidation of CFLIC (see note 9)
with the Company are presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period 38,155 46,709
Interest added 3,274 1,941
Net amortization (3,747) (4,024)
Present value of future profits attributable to unrealized gains 6,896 (6,471)
Adjustment due to revised push down purchase accounting 698 --
Effects on present value of future profits of CFLIC consolidation 1,113 --
Present value of future profits - end of period $46,389 $38,155
</TABLE>
Future payable
Pursuant to the financial reinsurance agreement with OakRe, the receivable
from OakRe becomes due in installments when the SPDA policies reach their next
crediting rate reset date. For any recaptured policies that continue in force
into the next guarantee period, the Company will pay a commission to OakRe of
1.75% up to 40% of policy account values originally reinsured and 3.5%
thereafter. On policies that are recaptured and subsequently exchanged to a
variable annuity policy, the Company will pay a commission to OakRe of 0.50%.
(continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The Company has recorded a future payable that represents the present value
ofthe anticipated future commission payments payable to OakRe over the
remaining life of the financial reinsurance agreement discounted at an
estimated borrowing rate of 6.5%. This liability represents a contingent
purchase price payable for the policies transferred to OakRe on the purchase
date and has been pushed down to the Company through the financial reinsurance
agreement. The Company expects that this payable will be substantially
extinguished by the year 2000.
The components of this future payable are below. The effects on the future
payable of the consolidation of CFLIC (see note 9) with the Company are
presented separately.
<TABLE>
<CAPTION>
The Company
7 Months
Ended
(In Thousands) 1996 12/31/95
<S> <C> <C>
Future payable - beginning of period $23,967 $27,797
Interest added 943 947
Payments to OakRe (4,483) (4,777)
Adjustment due to revised push down purchase accounting (5,059) --
Effects on future payable of CFLIC consolidation 683 --
--------
Future payable - end of period $16,051 $23,967
======== ========
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Goodwill
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period. The components of goodwill are below. The effects on goodwill of the
consolidation of CFLIC (see note 9) with the Company are presented separately.
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 23,358 $ 24,060
Amortization (916) (702)
Adjustment due to revised push down purchase accounting
(3,626) --
Effects on goodwill of CFLIC consolidation 2,033 --
--------------------
Goodwill - end of period $ 20,849 $ 23,358
</TABLE>
Deferred Tax Assets and Liabilities
XFSI and GALIC agreed to file an election to treat the acquisition of the
Company as an asset acquisition under the provisions of Internal Revenue Code
Section 338(h)(10). As a result of that election, the tax basis of the
Companys assets as of the date of acquisition were revalued based upon fair
market values. The principal effect of the election was to establish a tax
asset on the tax-basis balance sheet of approximately $35.3 million for the
value of the business acquired that is amortizable for tax purposes over ten
to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred as the amounts are not
material to the financial statements.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
Subsequent to June 1, 1995, the Company filed its own separate income tax
return, independent from its ultimate parent, GALIC.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income to the period that includes
the enactment date.
RISKS AND UNCERTAINTIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the consolidated financial statements are most
affected by the use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of Goodwill
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies.
These gross profits are dependent upon policy retention and lapses, the spread
between investment earnings and crediting rates, and the level of maintenance
expenses. Changes in circumstances or estimates may cause retrospective
adjustment to the periodic amortization expense and the carrying value of the
asset.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS 121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The Predecessor adopted Statement of Financial Accounting Standard No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS #119), as of December 31, 1994. SFAS #119 requires
increased disclosures about derivative financial instruments including the
amount, nature, and terms of all derivative financial instruments as well as
disclosure of the purposes for which derivative financial instruments are
held, end-of-period fair values and any net gains or losses arising from
trading of derivative financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale."
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures). Fair values for mortgages are based on
management estimates and incorporate independent appraisals of underlying real
property. As of December 31, 1996, fair value of the Companys mortgage loans
are equivalent to their carrying value.
INTEREST RATE SWAPS AND FINANCIAL FUTURES CONTRACTS:
The fair value of interest rate swaps and financial futures contracts are the
amounts the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account the current unrealized gains or
losses of open contracts. Amounts are based on quoted market prices or
pricing models or formulas using current assumptions. (See note 6 for fair
value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were approximately $29.1 million and $2.2
million less than their stated carrying value, respectively. Of the contracts
permitting surrender, 90% provide the option to surrender without fee or
adjustment during the 30 days following reset of guaranteed crediting rates.
The Company has not determined a practical method to determine the present
value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
REINSURANCE:
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). The net assets initially transferred to OakRe were
established as a receivable and are subsequently increased as interest is
accrued on the underlying liabilities and decreased as funds are transferred
back to the Company when policies reach their crediting rate reset date or
benefits are claimed.
OTHER
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(4) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of shareholder equity. The carrying value and amortized cost of investments at
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 7,175 $ 29 ($50) $ 7,175 $ 7,196
Collateralized mortgage obligations 382,335 985 (2,721) 382,335 384,071
Corporate, state, municipalities, and
political subdivisions 560,101 3,971 (5,427) 560,101 561,557
Total debt securities 949,611 4,985 (8,198) 949,611 952,824
Mortgage loans 244,103 -- -- 244,103 244,103
Policy loans 22,336 -- -- 22,336 22,336
Short term investments 4,404 21 -- 4,404 4,383
Total investments $1,220,454 $5,006 ($8,198) $1,220,454 $1,223,646
Companys beneficial interest in
separate accounts $ 14,970 -- -- $ 14,970 --
</TABLE>
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMORTIZED
VALUE GAINS LOSSES VALUE
COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 4,307 $ 156 -- $ 4,307 $ 4,151
Collateralized mortgage obligations 252,148 4,344 $ (237) 252,148 248,041
Corporate, state, municipalities, and
political subdivisions 338,101 7,261 (836) 338,101 331,676
-------- ------- --------- -------- --------
Total debt securities 594,556 11,761 (1,073) 594,556 583,868
-------- ------- --------- -------- --------
Mortgage loans 77,472 -- -- 77,472 77,472
Policy loans 19,125 -- -- 19,125 19,125
Short term investments 7,859 36 -- 7,859 7,823
-------- ------- --------- -------- --------
Total investments $699,012 $11,797 $ (1,073) $699,012 $688,288
======== ======= ========= ======== ========
<FN>
As of December 31, 1996, the Company had no impaired investments. The Company did
establish a valuation allowance for potential losses on mortgage loans of $88 thousand as
of December 31, 1996.
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $233,232 $234,493
Due after five years through ten years 283,884 281,155
Due after ten years 51,630 51,628
Mortgage-backed securities 384,078 382,335
Total $952,824 $949,611
<FN>
At December 31, 1996, approximately 98.7% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 1.3% non-investment grade debt securities, all are rated as BB+.
</TABLE>
Included in debt securities in 1994 and the first five months of 1995 are
investments in interest-only mortgage-backed stripped securities (IOs) and
similar IOettes. Accounting for investments in "high risk" (interest only)
collateralized mortgage obligations (CMOs), is in accordance with the
provisions of EITF Nos. 89-4 and 93-18. An effective yield is calculated for
each high risk CMO based on the current amortized cost of the investment and
the current estimate of future cash flow. The recalculated effective yield is
used to record interest income in subsequent periods (the "prospective
method"). If the anticipated cash flow for any "high risk" CMO discounted at
the comparable risk-free rate is less than the unamortized cost, an impairment
loss is recorded and the unamortized cost adjusted. The write-down is treated
as a realized loss. Write-downs of $3,341,163 were recorded in 1994. No IOs
or IOettes were held by the Company at December 31, 1996 or 1995. The
weighted average of the effective yield that was used to accrue interest
income in 1994 was 11.88%.
The Company participates in a securities lending program whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
agreement with a custodian bank facilitating such lending requires a minimum
of 102% of the initial market value of the domestic loaned securities to be
maintained in a collateral pool. To further minimize the credit risk related
to this lending program, the Company monitors the financial condition of the
counter parties to these agreements. Securities loaned at December 31, 1996
had market values totaling $16,612,411. Cash, letters of credit, and
government securities of $17,251,070 was held by the custodian bank as
collateral to secure this agreement. Income on the Companys security lending
program in 1996 was immaterial.
No debt securities were non-income producing during the years ended December
31, 1996 and 1995.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
Information related to troubled debt restructurings during 1994 is as follows:
<TABLE>
<CAPTION>
THE
PREDECESSOR
DEBT MORTGAGE
SECURITIES LOANS TOTAL
(in thousands of dollars)
<S> <C> <C> <C>
Aggregate carrying value at December 31, 1994 $3,306 -- $3,306
Gross interest income included in net income
during 1994 205 -- 205
Gross interest income that would have been
earned during 1994 if there had been no
restructuring 538 -- 538
</TABLE>
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses) were as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(in thousands of dollars)
<S> <C> <C> <C> <C>
Income on debt securities $53,632 $19,629 $ 63,581 $ 267,958
Income on equity securities -- -- 302 645
Income on short-term investments 2,156 2,778 28,060 11,705
Income on cash on deposit -- -- -- 316
Income on interest rate swaps -- -- 377 (244)
Income on policy loans 1,454 868 624 1,376
Interest on mortgage loans 13,633 1,444 248 1,162
Income on foreign exchange -- -- 184 (433)
Income of real estate -- -- 1,508 3,278
Income on separate account investments 772 -- (1) 2
Miscellaneous interest 133 109 (24) (853)
-------- --------- -----------------
Total investment income 71,780 24,828 94,859 284,912
---------
Investment expenses (1,151) (640) (2,373) (7,296)
-------- -------- ---------
Net investment income $70,629 $24,188 $ 92,486 $ 277,616
======== ======== ========= =================
Realized capital gains/(losses) were as follows:
Debt securities 469 $ 1,344 $(16,749) $ (79,300)
Mortgage loans 4 -- 1,431 (3,452)
Equity securities -- -- (423) (76)
Real estate -- -- (124) --
Short-term investments (1) (20) (1,933) (282)
Other assets -- -- (76) 147
Interest rate swaps -- -- 5,460 -- (18,398)
--------- -----------------
Net realized gains/(losses) on investments $ 472 $ 1,324 $(12,414) $ (101,361)
======== ======== ========= =================
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
(In thousands
of dollars)
<S> <C> <C> <C> <C>
Unrealized gains/(losses) were as follows:
Debt securities ($3,213) $10,688 $(85,410) $(261,947)
Short-term investments 21 36 879 (594)
Effects on deferred acquisition costs amortization 1,561 -- 39,030 162,190
Effects on present value of future profits 425 (6,471) -- --
Unrealized gains/(losses) before income tax (1,206) 4,253 (45,501) (100,351)
Unrealized income tax benefit/(expense) 422 (1,489) 16,664 35,123
Net unrealized gains (losses) on investments ($784) $ 2,764 $(28,837) ($65,228)
======== ========= ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1996 were
$223,430,495. Gross gains of $1,158,518 and gross losses of $687,126 were
realized on those sales. Included in these amounts were $28,969 of gross
gains realized on the sale of non-investment grade securities.
Proceeds from sales of investments in debt securities for the Company during
1995 were $214,811,186, and for the Predecessor were $2,786,998,780. Gross
gains of $1,533,501 and gross losses of $190,899 were realized by the Company
on its sales. Included in these amounts for the Company are $373,768 of
gross gains realized on the sale of non-investment grade securities. The
Predecessor realized gross gains of $9,499,191 and gross losses of $26,249,279
on its sales. Included in these amounts are $6,367,297 of gross gains and
$7,607,167 of gross losses realized on the sale of non-investment grade
securities.
Proceeds from sales of investments in debt securities during 1994 were
$3,081,863,341. Gross gains of $59,472,808 and gross losses of $136,394,109
were realized on those sales. Included in these amounts are $6,455,887 of
gross gains and $6,692,683 of gross losses realized on the sale of
non-investment grade securities.
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(13,900,000),
$10,688,000, $176,537,000, and $(357,401,000), respectively. Unrealized
appreciation/(depreciation)of debt securities is calculated as the change
between the cost and market values of debt securities for the years then
ended.
Securities with a book value of approximately $7,032,267 at December 31, 1996
were deposited with government authorities as required by law.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $19,347,536
FNMA Remic Tr 1996-50 A1 19,104,500
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders equity:
<TABLE>
<CAPTION>
LONG-TERM DEBT CARRYING
SECURITIES VALUE
<S> <C>
Countrywide Mtg. 1993-12 A4 $18,726,875
American Airlines 15,080,392
</TABLE>
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
FINANCIAL FUTURES CONTRACTS
Futures contracts are contracts for delayed delivery of securities in which
the seller agrees to make delivery at a specified future date for a specific
price. Gains or losses are realized in daily cash settlements. Risks arise
from the possible inability of counter parties to meet the terms of their
contracts and from movements in securities values and interest rates. When
future contracts are designated as hedges, additional risks arise due to the
possibility that the futures contract will provide an imperfect correlation to
the hedged security.
The Company periodically enters into financial futures contracts in order to
hedge its short term investment spread risks encountered during occasional
periods of unusually large recapture activity. Gains and losses from these
anticipatory hedges are applied to the cost basis of the assets acquired with
recaptured funds. In 1996, $381,105 in net losses were recorded as basis
adjustments to hedged debt securities.
In order to limit its exposure to market fluctuations while it holds temporary
seed money investments within the separate account (see note 3), the Company
has adopted a hedging policy that involves holdings of futures contracts. As
of December 31, 1996, the Company held 35 S&P 500 index futures contracts, 5
5-year T-Note futures contracts and 10 10-year T-Note futures contracts with a
total notional face amount of $14,528,750 and a total fair market value of
$14,652,969. Collateral requirements set by the Chicago Board of Trade
averaged $9,800 per contract at December 31, 1996. At December 31, 1996, the
Company recorded as a component of net investment income, $1,639,717 of gross
losses from terminated contracts and $406,141 of gross gains from open
contracts. In 1996, the Company also recorded, as an offsetting component of
net investment income, a net gain of $2,007,720 from market appreciation on
the underlying hedged securities within the separate account.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
(7) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 CLMC had no retired
employees nor any employees fully eligible for retirement and had no
disbursements for such benefit commitments. The expense arising from these
obligations is not material.
(8) INCOME TAXES
The Company will file a consolidated Federal Income Tax return with its
wholly-owned subsidiary, FCLIC. Amounts payable or recoverable related to
periods before June 1, 1995 are subject to an indemnification agreement with
XFSI, which has the effect that the Company is not at risk for any income
taxes nor entitled to recoveries related to those periods, except for
approximately $1.4 million of state income tax recoveries.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 2,493 $ (85) $ (5,038) $ (39,511)
Realized investment gains/(losses) 162 516 (5,026) (37,489)
-------- -------
Income tax expense/(benefit) included
in the statements of income 2,655 431 (10,064) (77,000)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (1,910) 1,489 18,458 (53,324)
Total income tax expense/(benefit) $ 745 $1,920 $ 8,394 $(130,324)
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of COVA Corporation)
Notes to Consolidated Financial Statements
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
1996 1995 1995 1994
7 MONTHS 5 MONTHS
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $2,190 35.0% $129 35.0% $(13,862) 35.0% $(76,739) 35.0%
State income taxes, net 77 1.23 11 3.0 (306) 0.8 (1,552) 0.7
Tax-exempt bond interest -- -- (22) (6.0) (332) 0.8 (1,208) 0.6
Amortization of intangible assets 320 5.12 254 69.0 -- -- 111 (0.1)
Permanent difference due to derivative transfer
-- -- -- -- 4,399 (11.1) -- --
Other 68 1.09 59 16.1 37 (.1) 2,388 (1.1)
Total $2,655 42.44% $431 117.1% $(10,064) 25.4% $(77,000) 35.1%
====== ====== ===== ====== ========= ====== ========= =====
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 &
1995 follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands of dollars)
<S> <C> <C>
Deferred tax assets:
PVFP $ 1,639 --
Policy Reserves 19,237 $ 7,601
Liability for commissions on recapture 6,073 8,868
Tax basis of intangible assets purchased 6,230 13,141
DAC Proxy Tax 9,032 4,749
Unrealized losses on investments 422 --
Other deferred tax assets 827 2,860
Total assets $43,460 $37,219
------- -------
Deferred tax liabilities:
PVFP $19,169 $16,774
Unrealized gains on investments -- 1,489
Deferred Acquisition Costs 10,694 5,316
Other deferred tax liabilities 60 84
Total liabilities 29,923 23,663
-------
Net Deferred Tax Asset $13,537 $13,556
======= =======
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
expectation of the reversal of existing temporary differences, anticipated
future earnings, and consideration of all other available evidence.
Accordingly no valuation allowance is established.
(9) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and services agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporation, which provides
management services and the employees necessary to conduct the activities of
the Company, and Conning Asset Management, which provides investment advice.
Additionally, a portion of overhead and other corporate expenses are allocated
by the Companys ultimate parent, GALIC. The unaffiliated companies are
Johnson & Higgins, a New Jersey corporation, and Johnson & Higgins/Kirke Van
Orsdel, a Delaware corporation, which provide various services for the Company
including underwriting, claims and administrative functions. The affiliated
and unaffiliated service providers are reimbursed for the cost of their
services and are paid a service fee. Expenses and fees paid to affiliated
companies during 1996 and the 7 months of 1995 for the Company were
$6,618,303, and $7,139,525, respectively, and the five months of 1995 and the
year 1994 for the Predecessor were 6,364,609, and $8,553,028, respectively.
On December 31, 1996 Cova Corporation transferred its ownership of Cova
Financial Life Insurance Company (CFLIC), an affiliated life insurer domiciled
in the state of California, to the Company. The transfer of ownership was
recorded as additional paid in capital and increased Shareholders Equity on
the Companys December 31, 1996 Balance Sheet by approximately $16.9 million.
This change in direct ownership had no effect on the operations of either the
Company or CFLIC as both entities had existed under common management and
control prior to the December 31, 1996 transfer. Although CFLICs Balance
Sheet is fully consolidated with the Companys December 31, 1996 Balance Sheet,
CFLICs 1996 Income Statement and Cash Flow have not been consolidated with the
Companys 1996 Income Statement or Cash Flow Statement. However, CFLICs
year-end cash balance of $6.7 million is included in the Cash Flow Statement.
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the recognition of deferred taxes under GAAP reporting, the
non-recognition of financial reinsurance for GAAP reporting, the establishment
of an Asset Valuation Reserve as a contingent liability based on the credit
quality of the Company's investment securities, and an Interest Maintenance
Reserve as an unearned liability to defer the realized gains and losses of
fixed income investments presumably resulting from changes to interest rates
and amortize them into income over the remaining life of the investment sold.
In addition, SFAS #115 adjustments to record the carrying values of debt
securities and certain equity securities at market are applied only under GAAP
reporting and capital contributions in the form of notes receivable from an
affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their estimated fair values and shareholders
equity to the net purchase price. Statutory accounting does not recognize the
purchase method of accounting.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $ 75,354 $ 59,682
Reconciling items:
GAAP investment valuation reserves (88) --
Statutory Asset Valuation Reserves 17,599 13,378
Interest Maintenance Reserve 2,301 1,892
GAAP investment adjustments to fair value (3,191) 10,724
Deferred policy acquisition costs 49,833 14,468
GAAP basis policy reserves (30,202) (11,233)
Deferred federal income taxes (net) 13,537 13,556
Modified coinsurance -- --
Goodwill 20,849 23,358
Present value of future profits 46,389 38,155
Future purchase price payable (16,051) (23,967)
Other (1,286) (1,927)
GAAP Shareholders' Equity $175,044 $138,086
========= =========
</TABLE>
Statutory net losses for CFSLIC for the years ended December 31, 1996, 1995
and 1994 were $(13,575,788), $(74,012,650), and $(92,952,989), respectively.
The maximum amount of dividends which can be paid by State of Missouri
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory earned surplus or statutory
net gain from operations for the preceding year. Accordingly, the maximum
dividend permissible during 1997 will be $0.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $92,953,237, and $21,058,220
respectively. This level of adjusted capital qualifies under all tests.
(11) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed throughout
the United States, in associations formed to guarantee benefits to
policyholders of insolvent life insurance companies. Under state laws, as a
condition for maintaining the Companys authority to issue new business, the
Company is contingently liable for its share of claims covered by the guaranty
associations for insolvencies incurred through 1996, but for which assessments
have not yet been determined nor assessed, to a maximum in each state
generally of 2% of statutory premiums per annum in the given state. Most
states then permit recovery of assessments as a credit against premium or
other state taxes over, most commonly, five years.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
At December 31, 1996, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $12.4 million in
future assessments on insolvencies that occurred before December 31, 1996.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded a receivable from Oakre for approximately $12.3
million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments, and may retain the
APPENDIX A
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 55 and 70 and a husband and wife age 65. Our
hypothetical insureds are in good health which means the Policy would be issued
with standard rates. The initial premium was $10,000 and is 100% of the Maximum
Premium Limit.
There are three illustrations -- all of which are based on the above. We also
assumed that the underlying investment portfolio had gross rates of return of
0%, 6%, 12%. This means that the underlying investment portfolio would earn
these rates of return before the deduction of the advisory fee and operating
expenses. When these costs are taken into account, the net annual investment
return rates (net of an average of 0.82% for these charges) are approximately
- -0.82%, 5.18% and 11.18%.
It is important to be aware that this illustration assumes a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you
how the Policy actually works, we calculated values for the Account Value, Cash
Surrender Value and the net death benefit. The net death benefit is the death
benefit minus any outstanding loans and loan interest accrued. We used the
charges we described in the Expenses Section of the Prospectus. These charges
are: (1) mortality and expense risk charge equal to an annual rate of 0.90% of
the Account Value in the investment portfolios for the first ten years and 0.75%
after that; (2) an administrative charge equal to an annual rate of 0.40% of the
Account Value; (3) a tax expense charge equal to an annual rate of 0.40% of the
Account Value for the first 10 years; (4) any surrender charges or deferred
premium tax charge which may be applicable in determining the Cash Surrender
Values; and (5) the policy maintenance charge. We also deducted for the cost of
insurance based on both the current charges and the guaranteed charges.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how $10,000 grows if it was invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed insured's age, risk classification, Face Amount, the
proposed initial premium, and reflecting both the current cost of insurance and
the guaranteed cost of insurance.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,658 8,791 27,290 9,532 8,678 27,290
- ------ ----- ----- ------ ----- ----- ------
2 11,025 9,327 8,516 27,290 9,052 8,267 27,290
- ------ ----- ----- ------ ----- ----- ------
3 11,576 9,006 8,248 27,290 8,559 7,843 27,290
- ------ ----- ----- ------ ----- ----- ------
4 12,155 8,695 8,103 27,290 8,051 7,507 27,290
- ------ ----- ----- ------ ----- ----- ------
5 12,763 8,393 7,919 27,290 7,524 7,104 27,290
- ------ ----- ----- ------ ----- ----- ------
6 13,401 8,101 7,736 27,290 6,975 6,666 27,290
- ------ ----- ----- ------ ----- ----- ------
7 14,071 7,819 7,555 27,290 6,399 6,189 27,290
- ------ ----- ----- ------ ----- ----- ------
8 14,775 7,545 7,376 27,290 5,789 5,664 27,290
- ------ ----- ----- ------ ----- ----- ------
9 15,513 7,279 7,198 27,290 5,139 5,085 27,290
- ------ ----- ----- ------ ----- ----- ------
10 16,289 7,022 7,022 27,290 4,443 4,443 27,290
-- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,018 6,018 27,290 57 57 27,290
-- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,137 5,137 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,364 4,364 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
30 43,219 3,686 3,686 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
<S>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,239 9,339 27,290 10,114 9,214 27,290
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,485 9,610 27,290 10,215 9,340 27,290
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,737 9,887 27,290 10,302 9,452 27,290
- - ------ ------ ----- ------ ------ ----- ------
4 12,155 10,996 10,306 27,290 10,374 9,684 27,290
- - ------ ------ ------ ------ ------ ----- ------
5 12,763 11,262 10,687 27,290 10,427 9,852 27,290
- - ------ ------ ------ ------ ------ ----- ------
6 13,401 11,536 11,076 27,290 10,460 10,000 27,290
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 11,816 11,471 27,290 10,467 10,122 27,290
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 12,104 11,874 27,290 10,444 10,214 27,290
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 12,400 12,285 27,290 10,385 10,270 27,290
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 12,704 12,704 27,290 10,286 10,286 27,290
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 14,754 14,754 27,290 9,256 9,256 27,290
- -- ------ ------ ------ ------ ----- ----- ------
20 26,533 17,161 17,161 27,290 5,625 5,625 27,290
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 19,986 19,986 27,290 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 23,303 23,303 27,290 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,821 9,921 27,290 10,696 9,796 27,290
- ------ ------ ----- ------ ------ ----- ------
2 11,025 11,711 10,836 27,290 11,447 10,572 27,290
- ------ ------ ------ ------ ------ ------ ------
3 11,576 12,677 11,827 27,290 12,260 11,410 27,290
- ------ ------ ------ ------ ------ ------ ------
4 12,155 13,725 13,035 27,290 13,142 12,452 27,290
- ------ ------ ------ ------ ------ ------ ------
5 12,763 14,862 14,287 27,290 14,100 13,525 27,290
- ------ ------ ------ ------ ------ ------ ------
6 13,401 16,097 15,637 27,290 15,145 14,685 27,290
- ------ ------ ------ ------ ------ ------ ------
7 14,071 17,436 17,091 27,290 16,286 15,941 27,290
- ------ ------ ------ ------ ------ ------ ------
8 14,775 18,889 18,659 27,290 17,536 17,306 27,290
- ------ ------ ------ ------ ------ ------ ------
9 15,513 20,465 20,350 27,290 18,910 18,795 27,290
- ------ ------ ------ ------ ------ ------ ------
10 16,289 22,179 22,179 27,290 20,426 20,426 27,290
-- ------ ------ ------ ------ ------ ------ ------
15 20,789 34,290 34,290 39,776 31,482 31,482 36,520
-- ------ ------ ------ ------ ------ ------ ------
20 26,533 53,281 53,281 57,011 48,877 48,877 52,298
-- ------ ------ ------ ------ ------ ------ ------
25 33,864 83,681 83,681 87,865 76,764 76,764 80,602
-- ------ ------ ------ ------ ------ ------ ------
30 43,219 130,270 130,270 136,784 119,492 119,492 125,466
-- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,658 8,791 17,020 9,424 8,580 17,020
- - ------ ----- ----- ------ ----- ----- ------
2 11,025 9,327 8,516 17,020 8,807 8,045 17,020
- - ------ ----- ----- ------ ----- ----- ------
3 11,576 9,006 8,248 17,020 8,137 7,459 17,020
- - ------ ----- ----- ------ ----- ----- ------
4 12,155 8,695 8,103 17,020 7,401 6,906 17,020
- - ------ ----- ----- ------ ----- ----- ------
5 12,763 8,393 7,919 17,020 6,585 6,223 17,020
- - ------ ----- ----- ------ ----- ----- ------
6 13,401 8,101 7,736 17,020 5,671 5,427 17,020
- - ------ ----- ----- ------ ----- ----- ------
7 14,071 7,819 7,555 17,020 4,640 4,496 17,020
- - ------ ----- ----- ------ ----- ----- ------
8 14,775 7,545 7,376 17,020 3,470 3,404 17,020
- - ------ ----- ----- ------ ----- ----- ------
9 15,513 7,279 7,198 17,020 2,134 2,117 17,020
- - ------ ----- ----- ------ ----- ----- ------
10 16,289 7,022 7,022 17,020 593 593 17,020
- -- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,018 6,018 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,137 5,137 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,364 4,364 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
30 43,219 3,686 3,686 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,239 9,339 17,020 10,011 9,111 17,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,485 9,610 17,020 9,993 9,119 17,020
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,737 9,887 17,020 9,940 9,096 17,020
- - ------ ------ ----- ------ ----- ----- ------
4 12,155 10,996 10,306 17,020 9,843 9,165 17,020
- - ------ ------ ------ ------ ----- ----- ------
5 12,763 11,262 10,687 17,020 9,694 9,138 17,020
- - ------ ------ ------ ------ ----- ----- ------
6 13,401 11,536 11,076 17,020 9,482 9,048 17,020
- - ------ ------ ------ ------ ----- ----- ------
7 14,071 11,816 11,471 17,020 9,196 8,881 17,020
- - ------ ------ ------ ------ ----- ----- ------
8 14,775 12,104 11,874 17,020 8,821 8,621 17,020
- - ------ ------ ------ ------ ----- ----- ------
9 15,513 12,400 12,285 17,020 8,340 8,246 17,020
- - ------ ------ ------ ------ ----- ----- ------
10 16,289 12,704 12,704 17,020 7,727 7,727 17,020
- -- ------ ------ ------ ------ ----- ----- ------
15 20,789 14,754 14,754 17,020 1,095 1,095 17,020
- -- ------ ------ ------ ------ ----- ----- ------
20 26,533 17,161 17,161 18,019 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 20,118 20,118 20,319 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 23,793 23,793 24,030 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,821 9,921 17,020 10,598 9,698 17,020
------ ------ ----- ------ ------ ----- ------
2 11,025 11,711 10,836 17,020 11,253 10,378 17,020
- - ------ ------ ------ ------ ------ ------ ------
3 11,576 12,677 11,827 17,020 11,973 11,123 17,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 13,725 13,035 17,020 12,774 12,084 17,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 14,862 14,287 17,020 13,675 13,100 17,020
- - ------ ------ ------ ------ ------ ------ ------
6 13,401 16,105 15,645 17,020 14,701 14,241 17,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 17,504 17,159 18,379 15,888 15,543 17,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 19,023 18,793 19,974 17,256 17,026 18,118
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 20,670 20,555 21,703 18,747 18,632 19,684
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 22,455 22,455 23,578 20,364 20,364 21,382
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 34,777 34,777 36,516 31,518 31,518 33,094
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 53,617 53,617 56,298 48,247 48,247 50,660
- -- ------ ------ ------ ------ ------ ------ ------
25 33,864 83,726 83,726 84,563 75,014 75,014 75,764
- -- ------ ------ ------ ------ ------ ------ ------
30 43,219 132,989 132,989 134,319 119,106 119,106 120,297
- -- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,714 8,842 28,020 9,714 8,842 28,020
- - ------ ----- ----- ------ ----- ----- ------
2 11,025 9,418 8,598 28,020 9,418 8,598 28,020
- - ------ ----- ----- ------ ----- ----- ------
3 11,576 9,126 8,357 28,020 9,108 8,341 28,020
- - ------ ----- ----- ------ ----- ----- ------
4 12,155 8,842 8,239 28,020 8,781 8,183 28,020
- - ------ ----- ----- ------ ----- ----- ------
5 12,763 8,567 8,081 28,020 8,432 7,955 28,020
- - ------ ----- ----- ------ ----- ----- ------
6 13,401 8,298 7,924 28,020 8,053 7,691 28,020
- - ------ ----- ----- ------ ----- ----- ------
7 14,071 8,038 7,766 28,020 7,639 7,382 28,020
- - ------ ----- ----- ------ ----- ----- ------
8 14,775 7,784 7,610 28,020 7,176 7,017 28,020
- - ------ ----- ----- ------ ----- ----- ------
9 15,513 7,538 7,454 28,020 6,652 6,579 28,020
- - ------ ----- ----- ------ ----- ----- ------
10 16,289 7,298 7,298 28,020 6,050 6,050 28,020
- -- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,372 6,372 28,020 1,247 1,247 28,020
- -- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,546 5,546 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,808 4,808 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
30 43,219 4,149 4,149 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,299 9,399 28,020 10,299 9,399 28,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,591 9,716 28,020 10,591 9,716 28,020
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,885 10,035 28,020 10,874 10,024 28,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 11,187 10,497 28,020 11,145 10,455 28,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 11,499 10,924 28,020 11,400 10,825 28,020
- - ------ ------ ------ ------ ------- ------ ------
6 13,401 11,820 11,360 28,020 11,634 11,174 28,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 12,151 11,806 28,020 11,841 11,496 28,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 12,492 12,262 28,020 12,014 11,784 28,020
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 12,843 12,728 28,020 12,141 12,026 28,020
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 13,205 13,205 28,020 12,213 12,213 28,020
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 15,615 15,615 28,020 11,610 11,610 28,020
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 18,495 18,495 28,020 6,040 6,040 28,020
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 21,935 21,935 28,020 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 26,045 26,045 28,020 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C>
1 10,500 10,884 9,984 28,020 10,884 9,984 28,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 11,833 10,958 28,020 11,833 10,958 28,020
- - ------ ------ ------ ------ ------ ------ ------
3 11,576 12,855 12,005 28,020 12,853 12,003 28,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 13,967 13,277 28,020 13,950 13,260 28,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 15,178 14,603 28,020 15,130 14,555 28,020
- - ------ ------ ------ ------ ------ ------ ------
6 13,401 16,497 16,037 28,020 16,402 15,942 28,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 17,933 17,588 28,020 17,776 17,431 28,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 19,497 19,267 28,020 19,264 19,034 28,020
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 21,199 21,084 28,020 20,881 20,766 28,020
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 23,053 23,053 28,020 22,649 22,649 28,020
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 36,269 36,269 38,083 35,558 35,558 37,336
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 57,002 57,002 59,852 55,770 55,770 58,558
- -- ------ ------ ------ ------ ------ ------ ------
25 33,864 89,685 89,685 94,169 86,387 86,387 90,707
- -- ------ ------ ------ ------ ------ ------ ------
30 43,219 141,459 141,459 142,874 134,690 134,690 136,037
- -- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA
Cova Financial Services Life Insurance Company
Marketing and Executive Office
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
800-523-1661
Life Service Office
P.O. Box 10366
Des Moines, IA 50306
515-243-5834
800-343-8496
CL-1086(12/97) Policy Form Series CL-1020 21-SPVL-MO 12/97
