Registration No. 333-83165
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Cova Variable Life Account One
(Exact Name of Trust)
B. Cova Financial Services Life Insurance Company
(Name of Depositor)
C. One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Lorry J. Stensrud, President
Cova Financial Services Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 523-1661
Copies to:
Judith A. Hasenauer and Bernard J. Spaulding
Blazzard, Grodd & Hasenauer, P.C. Senior Vice President, General
P.O. Box 5108 Counsel and Secretary
Westport, CT 06881 Cova Financial Services
(203) 226-7866 Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on May 1, 2000 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
E. Flexible Premium Joint and Last Survivor Variable Life Insurance Policy
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
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1 The Variable Insurance Policy
2 Other Information; The Company
3 Not Applicable
4 Other Information
5 The Separate Account
6(a) Not Applicable
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases
11 Investment Options; Appendix B
12 Investment Options; Appendix B
13 Expenses
14 Purchases
15 Purchases
16 Investment Options; Appendix B
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Ownership
25 The Company
26 Expenses
27 The Company
28 The Company
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company; Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Other Information
46 Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 The Company; Purchases
52 Investment Options; Appendix B
53 The Separate Account
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
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EXPLANATORY NOTE
This Registration Statement contains two versions (Version A and Version B)
of the Prospectus. The only differences between the two versions are the
underlying investment options and the Illustrations. Other versions of
Version A may be created in the future. The distribution system for each
version of the Prospectus is different. The Prospectuses will be filed with
the Commission pursuant to Rule 497 under the Securities Act of 1933. The
Registrant undertakes to update this Explanatory Note, as needed,
each time a Post-Effective Amendment is filed.
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PROSPECTUS - VERSION A
Flexible Premium Joint and Last Survivor Variable Life Insurance Policy
issued by
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT ONE
This prospectus describes the Flexible Premium Joint and Last Survivor Variable
Life Insurance Policy that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following ___
Investment Funds listed below which are offered through our Separate Account
(you can invest in up to 15 of the Investment Funds and the General Account at
any one time). When you purchase a Policy, you bear the complete investment
risk. This means that the Cash Value of your Policy may increase and decrease
depending upon the investment performance of the Investment Fund(s) you select.
The duration of the Policy and, under some circumstances, the death benefit will
increase and decrease depending upon investment performance.
AIM Variable Insurance Funds:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital
Management L.P.
Premier Growth Portfolio (Class A)
Real Estate Investment Portfolio (Class A)
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
International Equity Portfolio
Large Cap Stock Portfolio
Quality Bond Portfolio
Select Equity Portfolio
Small Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Developing Growth Portfolio
Large Cap Research Portfolio
Lord Abbett Growth and Income Portfolio
Mid-Cap Value Portfolio
Franklin Templeton Variable Insurance Products Trust*, Class 1 Shares:
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (the surviving fund of the merger with
Mutual Shares Investments Fund)
Advisor: Templeton Asset
Management Ltd.
Templeton Developing Markets Securities Fund (formerly,
Templeton Developing Markets Fund)
Advisor: Templeton Investment
Counsel, Inc.
Templeton International Securities Fund (formerly, Templeton
International Fund)
Advisor: Templeton Global Advisors Limited
Templeton Growth Securities Fund (the surviving fund of the
merger with Templeton Stock Fund).
*Effective May 1, 2000, the portfolios of Templeton Variable Products
Series Fund were merged into similar portfolios of Franklin Templeton
Variable Insurance Products Trust.
General American Capital Company:
Advisor: Conning Asset
Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust ("VIT"):
Advisor: Goldman Sachs
Asset Management, a unit of the Investment Management Division of
Goldman, Sachs & Co.
Goldman Sachs VIT Growth and Income Fund
Goldman Sachs VIT Internet Tollkeeper Fund (not currently
available)
Advisor: Goldman Sachs
Asset Management International
Goldman Sachs VIT Global Income Fund
Goldman Sachs VIT International Equity Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund
Management Inc.
Newport Tiger Fund, Variable Series
MFS Variable Insurance Trust:
Advisor: Massachusetts
Financial Services Company
MFS Emerging Growth Series
MFS Global Governments Series
MFS Growth With Income Series
MFS High Income Series
MFS Research Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment
Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New
Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Variable Insurance Products Fund:
Advisor: Fidelity Management & Research Company
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
Advisor: Fidelity Management & Research Company
VIP II Contrafund(R) Portfolio
Variable Insurance Products Fund III:
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities Portfolio
VIP III Growth & Income Portfolio
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Joint
and Last Survivor Variable Life Insurance Policy. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains information
regarding registrants that file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: May 1, 2000
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
The Variable Life Insurance Policy
Purchases
Investment Choices
Expenses
Death Benefit
Taxes
Access to Your Money
Other Information
Inquiries
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Application for a Policy
Premiums
Unscheduled Premiums
Lapse and Grace Period
Reinstatement
Allocation of Premium
Cash Value of Your Policy
Method of Determining Cash Value of an Investment Fund
Net Investment Factor
Our Right to Reject or Return a Premium Payment
3. INVESTMENT FUNDS
Substitution and Limitations on Further Investments
Transfers
Dollar Cost Averaging
Portfolio Rebalancing
Approved Asset Allocation Programs
4. EXPENSES
Tax Charges
Sales Charge
Selection and Issue Expense Charge
Monthly Policy Charge
Monthly Cost of Insurance
Charges for Additional Benefit Riders
Mortality and Expense Risk Charge
Surrender Charge
Transaction Charges
Investment Fund Expenses
5. DEATH BENEFIT
Change of Death Benefit
Decrease in Face Amount
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Policy Loans
Loan Interest Charged
Security
Repaying Policy Debt
Partial Withdrawals
Pro-Rata Surrender
Full Surrenders
8. OTHER INFORMATION
Cova
Distribution
The Separate Account
Suspension of Payments or Transfers
Ownership
Adjustment of Charges
PART II
Executive Officers and Directors
Voting
Disregard of Voting Instructions
Legal Opinions
Our Right to Contest
Additional Benefits
Federal Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
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
APPENDIX B - Participating Investment Funds
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Attained Age -- The Issue Age of an Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Last Insured's death. A Beneficiary
may be changed as set forth in the Policy and this prospectus.
Cash Value -- The total of the amounts credited to the Owner in the Separate
Account, the General Account and the Loan Account.
Cash Surrender Value -- The Cash Value of a Policy on the date of surrender,
less any Indebtedness, less any unpaid selection and issue expense charge due
for the remainder of the first Policy year, less any unpaid monthly Policy
charge due for the remainder of the first Policy year, and less any surrender
charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the younger Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insureds The persons whose lives are insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office.
Issue Age -- The age of each Insured at his or her nearest birthday as of the
Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Last Insured -- The Insured whose death succeeds the death of all other Insureds
under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Cash Value transferred to the Loan
Account will be allocated to the appropriate Loan Subaccount to reflect the
origin of the Cash Value. At any point in time, the Loan Account will equal the
sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium joint and last survivor variable life insurance
Policy offered by us and described in this Prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the Cash
Value by a given percentage.
Separate Account -- Cova Variable Life Account One, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Services Life Insurance Company, P.O. Box
66757, St. Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insureds' joint age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of both of the persons Insured. This
death benefit is distributed free from Federal income taxes. The Policy can be
used as part of your estate planning or used to save for retirement. The
Insureds are the persons you choose to have their lives insured under the
Policy. You, the Owner, can also be one of the Insureds, but you do not have to
be.
The Policy described in this prospectus is a flexible premium joint and last
survivor variable life insurance policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Cash Value of your Policy, when allocated
to the Investment Funds, may increase or decrease depending upon the investment
results of the selected Investment Funds. The duration of your Policy may vary,
and under certain circumstances, so may your death benefit.
So long as either Insured is alive, you can surrender the Policy for all or part
of its Cash Surrender Value. You may also obtain a Policy loan, using the Policy
as security. We will pay a death benefit when the Last Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum face amount of insurance that we offer is $100,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insureds. We may require each of the
Insureds to provide us with medical records, physician's statement or a complete
paramedical examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. However, you can only put your money in up to 15 of the Investment Funds
and the General Account at any one time. A brief description of the
Investment Funds is contained in Appendix B and a detailed description of the
Investment Funds, their investment policies, restrictions, risks, and charges is
contained in the prospectuses for each Investment Fund. You should read the
prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Cash Value and from the
Investment Funds. These deductions are made for taxes, mortality and expense
risks, administrative expenses, sales charges, the cost of providing life
insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
tax charge. We also deduct a Premium Tax Charge currently equal to 2.10% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Cash Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insureds.
Monthly Policy Charge. This charge is equal to $25 per month for the first
Policy year, and $6 per Policy month thereafter. This amount is deducted from
the Cash Value of your Policy on the Investment Start Date and each Monthly
Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your Cash Value
on the Investment Start Date and each Monthly Anniversary date. The amount of
the deduction varies with the age, sex (except in unisex policies), risk class
of the Insureds, duration, and the amount of death benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
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AIM Variable Insurance Funds
Advisor: A I M Advisors, Inc.
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund .62% .11% .73%
AIM V.I. International Equity Fund .75% .22% .97%
AIM V.I. Value Fund .61% .15% .76%
Alliance Variable Products Series Fund, Inc.
Advisor: Alliance Capital Management L.P.
Premier Growth Portfolio (Class A) 1.00% .05% 1.05%
Real Estate Investment Portfolio
(Class A)(1) .49% .46% .95%
Cova Series Trust (2)
Advisor: J.P. Morgan Investment Management Inc.
International Equity Portfolio .79% .31% 1.10%
Large Cap Stock Portfolio .65% .10% .75%
Quality Bond Portfolio .54% .10% .64%
Select Equity Portfolio .67% .10% .77%
Small Cap Stock Portfolio .85% .19% 1.04%
Advisor: Lord, Abbett &Co.
Bond Debenture Portfolio .75% .10% .85%
Developing Growth Portfolio .90% .30% 1.20%
Large Cap Research Portfolio 1.00% .30% 1.30%
Lord Abbett Growth and Income Portfolio(3) .65% .05% .70%
Mid-Cap Value Portfolio 1.00% .30% 1.30%
Franklin Templeton Variable Insurance Products Trust, Class 1 Shares
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (4) .55% .27% .82%
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (5) .60% .19% .79%
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets
Securities Fund (6) 1.25% .31% 1.56%
Advisor: Templeton Investment Counsel, Inc.
Templeton International Securities
Fund (7) .69% .19% .88%
Advisor: Templeton Global Advisors Limited
Templeton Growth Securities Fund (8) .83% .05% .88%
General American Capital Company
Advisor: Conning Asset Management Company
Money Market Fund .125% .08% .205%
Goldman Sachs Variable Insurance Trust (9)
Advisor: Goldman Sachs Asset Management
Goldman Sachs VIT Growth and Income Fund .75% .25% 1.00%
Goldman Sachs VIT Internet Tollkeeper
FundSM 1.00% .25% 1.25%
Advisor: Goldman Sachs Asset Management International
Goldman Sachs VIT Global Income Fund .90% .25% 1.15%
Goldman Sachs VIT International Equity Fund 1.00% .35% 1.35%
Kemper Variable Series
Advisor: Scudder Kemper Investments, Inc.
Kemper Government Securities Portfolio .55% .08% .63%
Kemper Small Cap Growth Portfolio .65% .06% .71%
Kemper Small Cap Value Portfolio (10) .75% .09% .84%
Liberty Variable Investment Trust
Advisor: Newport Fund Management Inc.
Newport Tiger Fund, Variable Series .90% .31% 1.21%
MFS Variable Insurance Trust (11)
Advisor: Massachusetts Financial Services Company
MFS Emerging Growth Series .75% .09% .84%
MFS Global Governments Series (12) .75% .16% .91%
MFS Growth With Income Series .75% .13% .88%
MFS High Income Series(12) .75% .16% .91%
MFS Research Series .75% .11% .86%
Oppenheimer Variable Account Funds
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA .72% .01% .73%
Oppenheimer Capital Appreciation
Fund/VA .68% .02% .70%
Oppenheimer High Income
Fund/VA .74% .01% .75%
Oppenheimer Main Street Growth &
Income Fund/VA .73% .05% .78%
Oppenheimer Strategic Bond Fund/VA .74% .04% .78%
Putnam Variable Trust
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund -
Class IA Shares .46% .04% .50%
Putnam VT International Growth Fund -
Class IA Shares .80% .22% 1.02%
Putnam VT International New Opport-
unities Fund - Class IA Shares 1.08% .33% 1.41%
Putnam VT New Value Fund -
Class IA Shares .70% .10% .80%
Putnam VT Vista Fund - Class IA Shares .65% .10% .75%
Variable Insurance Products Fund (Initial Class)
Variable Insurance Products Fund II (Initial Class)
Variable Insurance Products Fund III (Initial Class)
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities
Portfolio (Initial Class) (13) .58% .11% .69%
VIP Growth Portfolio (Initial
Class) (13) .58% .08% .66%
VIP II Growth & Income Portfolio
(Initial Class) (13) .48% .12% .60%
VIP Equity-Income Portfolio
(Initial Class) (13) .48% .09% .57%
VIP II Contrafund(R) Portfolio
(Initial Class) (13) .58% .09% .67%
(1) The expenses shown with respect to the Real Estate Investment Portfolio are
net of voluntary reimbursements. Expenses have been capped at .95% annually and
the adviser to the Fund intends to continue such reimbursements for the
foreseeable future. For the year ended December 31, 1999, the expenses for the
Real Estate Investment Portfolio, before reimbursement, were: .90% management
fees and .82% for other expenses.
(2) Cova reimburses the investment portfolios, except the Select Equity,
Small Cap Stock and International Equity Portfolios, for all operating
expenses (exclusive of the management fees) in excess of approximately .30%
for the Mid-Cap Value, Large Cap Research and Developing Growth Portfolios
and in excess of approximately .10% for the other investment portfolios.
Prior to May 1, 1999, Cova had reimbursed expenses in excess of approximately
.10% with respect to the Select Equity, Small Cap Stock, International Equity,
Mid-Cap Value, Large Cap Research and Developing Growth Portfolios. Therefore,
the amounts shown above under "Other Expenses" have been restated to reflect
the estimated expenses for the Select Equity, Small Cap Stock and International
Equity Portfolios for the year ending December 31, 2000. Absent these
expense reimbursement arrangements, the total annual portfolio expenses
for the year ended December 31, 1999 were: 1.09% for the Small Cap
Stock Portfolio; 1.15% for the International Equity Portfolio; .71% for the
Quality Bond Portfolio; .76% for the Large Cap Stock Portfolio; .86% for the
Bond Debenture Portfolio; 1.41% for the Mid-Cap Value Portfolio; 1.38% for the
Large Cap Research Portfolio; and 1.34% for the Developing Growth Portfolio.
(3) The Portfolio commenced investment operations on January 8, 1999.
(4) On 2/8/00, a merger and reorganization was approved that combined the
assets of the fund with a similar fund of Templeton Variable Products Series
Fund, effective 5/1/00. On 2/8/00, fund shareholders approved new management
fees, which apply to the combined fund effective 5/1/00. The table shows
restated total expenses based on the new fees and assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees 0.55%, Other Expenses
0.27%, and Total Fund Operating Expenses 0.82%.
(5) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of 12/31/99,
and not the assets of the combined fund. However, if the table reflected
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.60%, Other Expenses 0.19%, and Total Fund Operating Expenses
0.79%.
(6) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Developing Markets Equity Fund, effective
5/1/00. The shareholders of that fund had approved new management fees, which
apply to the combined fund effective 5/1/00. The table shows restated total
expenses based on the new fees and the assets of the fund as of 12/31/99, and
not the assets of the combined fund. However, if the table reflected both the
new fees and the combined assets, the fund's expenses after 5/1/00 would be
estimated as: Management Fees 1.25%, Other Expenses 0.29%, and Total Fund
Operating Expenses 1.54%.
(7) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton International Equity Fund, effective
5/1/00. The shareholders of that fund had approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees 0.65%, Other Expenses
0.20%, and Total Fund Operating Expenses 0.85%.
(8) On 2/8/00, a merger and reorganization was approved that combined
the fund with a similar fund of Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's assets
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.80%, Other Expenses 0.05%, and Total Fund Operating
Expenses 0.85%. The fund administration fee is paid indirectly through the
management fee.
(9) The investment advisers to the Goldman Sachs VIT Growth and Income, Internet
Tollkeeper, International Equity and Global Income Funds have voluntarily
agreed to reduce or limit certain "Other Expenses" of such Funds (excluding
management fees, taxes, interest, brokerage fees, litigation, indemnification
and other extraordinary expenses) to the extent such expenses exceed 0.25%,
0.25%, 0.35% and 0.25% per annum of such Funds' average daily net assets,
respectively. The expenses shown include this reimbursement. If not included,
the "Other Expenses" and "Total Annual Portfolio Expenses" for the Goldman
Sachs Growth and Income, Internet Tollkeeper, International Equity and Global
Income Funds would be .47% and 1.22%, ___% and ___% (estimated), .77% and 1.77%
and 1.78% and 2.68%, respectively. The reductions or limitations may be
discontinued or modified by the investment advisers in their discretion at
any time. The Fund's expenses shown in the fee table are based on estimated
expenses for the fiscal year ending December 31, 2000.
(10) Pursuant to its agreement with Kemper Variable Series, the investment manager
and the accounting agent have agreed, for the one year period commencing May 1,
2000, to limit their respective fees and to reimburse other operating expenses to
the extent necessary to limit total operating expenses of the Kemper Small Cap
Value Portfolio to .84%. The amounts set forth in the table above reflect
actual expenses for the past fiscal year, which were at or lower than these
expense limits, after the benefit of any custodial credits.
(11) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. The expenses shown above do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(12) MFS has contractually agreed to bear expenses for these series, subject to
reimbursement by these series, such that each series' "Other Expenses" do not
exceed 0.15% of the average daily net assets of the series during the current
fiscal year. Absent the expense reimbursement, the Total Annual Portfolio
Expenses for the year ended December 31, 1999, were 1.05% for the
MFS Global Governments Series and .97% for the High Income Series.
The payments made by MFS on behalf of each series under this arrangement are
subject to reimbursement by the series to MFS, which will be accomplished
by the payment of an expense reimbursement fee by the series to MFS computed
and paid monthly at a percentage of the series' average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment, the series' "Other Expenses" will not exceed the percentage set forth
above for that series. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date provided that the arrangement will
continue for each series until at least May 1, 2001, unless terminated with
the consent of the board of trustees which oversees the series.
(13) A portion of the brokerage commissions that certain funds pay was used
to reduce fund expenses. In addition, through arrangements with certain funds,
or FMR on behalf of certain funds', custodian credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable fund's
expenses. With these reductions, total expenses would have been: .68% for
the Growth Opportunities Portfolio; .65% for the Growth Portfolio; .59% for the
Growth & Income Portfolio; .56% for the Equity-Income Portfolio; and .65% for the
Contrafund Portfolio.
</TABLE>
o Deductions for surrenders, partial withdrawals and transfers.
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the Cash Value
of your Policy to help us recover the costs of selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Last Insured's death;
and
o under some circumstances the Cash Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Cash Value of your Policy on the date of the Last
Insured's death multiplied by the applicable factor. Under this option, the
amount of the death benefit is fixed, except when we use the factor to determine
the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Cash Value of your Policy on the date of
the Last Insured's death, or the Cash Value of your Policy multiplied by the
applicable factor. Under this option, the amount of the death benefit is
variable (but will never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Cash Value on the date of the Last Insured's
death multiplied by an Attained Age factor.
So long as the Policy remains in force, prior to the younger Insured's Attained
Age 100, the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
decrease the Face Amount under certain circumstances.
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 Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 59 1/2 when you take money
out of a MEC, you may also be subject to a 10% federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of either Insured
and we will pay you the Cash Surrender Value of your Policy. At any time during
either of the Insureds' lifetimes and before the Policy has terminated, you may
withdraw a part of your Cash Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Cash Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it (or
whatever period is required in your state) or the 45th day after you sign your
application, whichever period ends later. We will refund all premiums paid (or
whatever amount is required in your state). Upon completion of the underwriting
process, we will allocate your initial Net Premium to the Money Market Fund
until the reallocation date, which occurs upon the expiration of the free look
period. After that, we will invest your Policy's Cash Value and any subsequent
premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of one of the
Insureds, 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 one of the Insureds.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Cash Value between
Investment Funds periodically to keep the allocation you select. We call
this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Services Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
(877)357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insureds. It has a Cash
Value, a death benefit, surrender rights, loan privileges and other
characteristics associated with traditional and universal life insurance.
However, since the Policy is a variable life insurance Policy, the value of your
Policy will increase or decrease depending upon the investment experience of the
Investment Funds you choose. The duration or amount of the death benefit may
also vary based on the investment performance of the underlying Investment
Funds. To the extent you select any of the Investment Funds, you bear the
investment risk. If your Cash Value less any loans, loan interest accrued,
unpaid selection and issue charge due for the remainder of the first Policy
year, and if surrender charges and any partial withdrawal fee is insufficient to
pay the monthly deductions, the Policy may terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When both of the
Insureds die, the death proceeds are paid to your Beneficiary which should be
excludable from the gross income of the Beneficiary. The tax-free death proceeds
make this an excellent way to accumulate money you do not think you will use in
your lifetime. It is also a tax-efficient way to provide for those you leave
behind. If you need access to your money, you can borrow from the Policy, make a
total surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about both of the proposed Insureds. In some cases, we will
ask for additional information. We may request that the proposed Insureds
provide us with medical records, a physician's statement or possibly require
other medical tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment, or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insureds within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Cash Value. If your Policy was issued in Florida, the Grace Period
provisions may be different. Please refer to your policy.
If the Last Insured dies during the grace period, any overdue monthly deductions
will be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that both of the Insureds are still
insurable at the risk class that applies for the latest Face Amount portion
then in effect (if only one Insured is alive on the date the Policy lapsed,
you need only submit proof for the living Insured);
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Cash Value of your Policy on the
reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if an Insured who
was living at the time of lapse dies before the reinstatement date. There will
be a full monthly deduction for the Policy month which includes the
reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Cash Value of your
Policy is allocated to the General Account and/or the Investment Funds in
accordance with your selections requested in the application. For any chosen
allocation, the percentages must be in whole numbers. This allocation is not
subject to the transfer fee provision. However, we reserve the right to limit
the number of selections that you may invest in at any one time.
Cash Value of Your Policy
The Cash Value equals the sum of the amounts in the General Account, the
Investment Funds you have selected, and the Loan Account.
Method of Determining Cash Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Cash Value of the Investment Funds is determined for each Valuation Period.
When we apply your initial premium to an Investment Fund, the Cash Value equals
the Net Premium allocated to the Investment Fund, minus the monthly deduction(s)
due from the Issue Date through the Investment Start Date. Thereafter, on each
Valuation Date, the Cash Value in an Investment Fund will equal:
(1) The Cash Value in the Investment Fund on the preceding Valuation Date,
multiplied by the Investment Fund's Net Investment Factor (defined below)
for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a pro-rata surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or pro-rata surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
(6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently ___ Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of eleven
open-end, diversified management investment companies: (1) AIM Variable
Insurance Funds (2) Alliance Variable Products Series Fund, Inc., (3) Cova
Series Trust, (4) Franklin Templeton Variable Insurance Products Trust (5)
General American Capital Company, (6) Goldman Sachs Variable Insurance Trust,
(7) Kemper Variable Series, (8) Liberty Variable Investment Trust, (9) MFS
Variable Insurance Trust, (10) Oppenheimer Variable Account Funds, (11) Putnam
Variable Trust and (12) Variable Insurance Products Fund, Variable Insurance
Products Fund II and Variable Insurance Products Fund III.
You can only invest in up to 15 of the Investment Funds and the General Account
at any one time. Purchasers should read this prospectus carefully before
investing. Copies of the prospectuses for the Investment Funds will be sent to
you with your Policy. Certain portfolios contained in the fund prospectuses
may not be available with your Policy. (See Appendix B which contains a
summary of investment objectives and strategies for each Investment Fund.)
The investment objective and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher or
lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results of
similar funds will be comparable even though the funds have the same investment
advisers.
A fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a fund with a small asset base. A
fund may not experience similar performance as its assets grow.
The following is a list of the Investment Funds and investment managers
available under the Policy:
AIM Variable Insurance Funds:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital
Management L.P.
Premier Growth Portfolio (Class A)
Real Estate Investment Portfolio (Class A)
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
International Equity Portfolio
Large Cap Stock Portfolio
Quality Bond Portfolio
Select Equity Portfolio
Small Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Developing Growth Portfolio
Large Cap Research Portfolio
Lord Abbett Growth and Income Portfolio
Mid-Cap Value Portfolio
Franklin Templeton Variable Insurance Products Trust*, Class 1 Shares:
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (the surviving fund of the merger with
Mutual Shares Investments Fund)
Advisor: Templeton Asset
Management Ltd.
Templeton Developing Markets Securities Fund (formerly,
Templeton Developing Markets Fund)
Advisor: Templeton Investment
Counsel, Inc.
Templeton International Securities Fund (formerly, Templeton
International Fund)
Advisor: Templeton Global Advisors Limited
Templeton Growth Securities Fund (the surviving fund of the
merger with Templeton Stock Fund).
*Effective May 1, 2000, the portfolios of Templeton Variable Products
Series Fund were merged into similar portfolios of Franklin Templeton
Variable Insurance Products Trust.
General American Capital Company:
Advisor: Conning Asset
Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust ("VIT"):
Advisor: Goldman Sachs
Asset Management, a unit of the Investment Management Division of
Goldman, Sachs & Co.
Goldman Sachs VIT Growth and Income Fund
Goldman Sachs VIT Internet Tollkeeper Fund (not currently available)
Advisor: Goldman Sachs
Asset Management International
Goldman Sachs VIT Global Income Fund
Goldman Sachs VIT International Equity Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund
Management Inc.
Newport Tiger Fund, Variable Series
MFS Variable Insurance Trust:
Advisor: Massachusetts
Financial Services Company
MFS Emerging Growth Series
MFS Global Governments Series
MFS Growth With Income Series
MFS High Income Series
MFS Research Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment
Management, Inc.
Putnam VT Growth and Income Fund Class IA Shares
Putnam VT International Growth Fund Class IA Shares
Putnam VT International New
Opportunities Fund Class IA Shares
Putnam VT New Value Fund Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Variable Insurance Products Fund:
Advisor: Fidelity Management & Research Company
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
Advisor: Fidelity Management & Research Company
VIP II Contrafund(R) Portfolio
Variable Insurance Products Fund III:
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities Portfolio
VIP III Growth & Income Portfolio
Shares of the Investment Funds may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year, or
(b) the previous Policy year's General Account maximum withdrawal amount, not
to exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
Dollar cost averaging may be selected by completing the proper forms. The
minimum transfer amount is $100. The minimum amount that can be allocated to an
Investment Fund is 5% of the amount transferred. You can elect to participate in
this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Cash Value in the
General Account and in the Investment Funds to the percentages determined in
advance. There are two methods of rebalancing available -- periodic and
variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy Anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Cash Value according to the investment percentages you
elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit 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 Funds,
and should we 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 transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.10% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
For Policies issued in the state of Oregon, the amounts shown above are
increased by 2%. The guaranteed sales charge varies for Policies issued in
Texas. As of the date of this prospectus, the current sales charge for Texas
Policies is the same as shown above.
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where Policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insureds. For Policies issued in Texas,
the guaranteed selection and issue expense charge is level for the life of the
Policy to ensure compliance with the Texas non-forfeiture laws.
Monthly Policy Charge
We deduct a monthly policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
For Policies issued in Texas, the Selection and Issue Expense Charge and monthly
policy charge together cannot exceed $10 per month after the Insured attains age
100.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of both Insureds and the
fact that the death benefit is not payable until the death of the Last Insured.
Because the monthly cost of insurance charge depends upon a number of variables,
the charge will vary for each Policy month. We will determine the cost of
insurance charge by multiplying the applicable cost of insurance rate or rates
by the net amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insureds at issue. The monthly cost
of insurance rates generally increase as the Insureds' Attained Ages increase.
The rate class of the Insureds also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Cash Value, an increase in Cash Value will
cause an automatic increase in the death benefit. The rate class for such
increase will be the same as that used for the initial Face Amount.
We currently place Insureds into a preferred rate class, a standard rate class,
or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans; and 1980 CSO Tables NA and SA for unisex policies
issued in compliance with Montana law). All Policies are based on the Attained
Ages of the Insureds. Higher rates apply if either Insured is determined to be
in a substandard risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Cash Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed. We expect to profit from this
charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Cash Value before the withdrawal
and multiplying the result by the surrender charge. Immediately after a
withdrawal, the Policy's remaining surrender charge will equal the amount of the
surrender charge immediately before the withdrawal less the amount deducted in
connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Cash Value. Expenses of the Funds are not fixed or specified
under the terms of the Policy, and actual expenses may vary. These underlying
Investment Fund expenses are taken into consideration in computing each
Investment Fund's net asset value, which is used to calculate the unit values in
the Separate Account. The management fees and other expenses are more fully
described in the prospectus of each individual Investment Fund. The information
relating to the Investment Fund expenses was provided by the Investment Funds
and was not independently verified by us. Except as otherwise specifically
noted, the management fees and other expenses are not currently subject to fee
waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the Cash Value
of your Policy on the date of the Last Insured's death and the death benefit
option (Option A, Option B, or Option C) in effect at that time. The actual
amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Cash Value of your Policy on the date of the Last
Insured's death; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Applicable Percentage of Cash Value Table
For Younger Insureds Less Than Age 100
Younger Insured Policy Cash Value
Person's Age Multiple Percentage
---------------- -------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown in this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable factor from the Table of Attained Age Factors
shown in your Policy.
If your Policy is in force after the younger Insured's Attained Age is 100, then
the Death Benefit will be 101% of the Policy's Cash Value unless the state where
your Policy was issued provides otherwise.
Change of Death Benefit
If the Policy was issued with either death benefit Option A or death benefit
Option B, the death benefit option may be changed unless your Policy was
issued in Florida. A Policy issued under death benefit Option C may not be
changed for the entire lifetime of the Policy. Similarly, a Policy
issued under either death benefit Option A or B may not change to death
benefit Option C for the lifetime of the Policy. A request for change must
be made to us in writing. The Effective Date of such a change will
be the Monthly Anniversary on or following the date we receive the change
request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the Cash Value
on the Effective Date of the change. Satisfactory evidence of insurability must
be submitted to us in connection with a request for a change from death benefit
Option A to death benefit Option B. A change may not be made if it would result
in a Face Amount of less than the minimum Face Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Decrease in Face Amount
Subject to certain limitations set forth below, you may decrease (but not
increase) the Face Amount of a Policy once each Policy year after the first
Policy year. A written request is required for a reduction in the Face Amount. A
reduction in Face Amount may affect the cost of insurance rate and the net
amount at risk, both of which affect your cost of insurance charge. A reduction
in the Face Amount of a Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested decrease must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the Cash
Value may be returned to you (at your election), to the extent necessary to meet
these requirements.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this 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 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.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Last Insured. However, estate taxes may apply.
Taking Money out of Your Policy
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. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC 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 your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such 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 us would be considered the owner of the shares of the
Investment Funds. 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 Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
Owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, 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 Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Cash Value of the Policy on the date the loan request is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500 (in some states this amount may be less). The loan
may be completely or partially repaid at any time while either Insured is
living. When a Policy loan is made, we will deduct Cash Value from your Policy
equal to the amount of the loan, plus interest due and place it in the Loan
Subaccount as security for the loan. This Cash Value amount is expected to earn
interest at a rate ("the earnings rate") which is lower than the rate charged on
the Policy loan ("the borrowing rate"). The Cash Value that we use as security
will accrue interest daily at an annual earnings rate of 4%.
Unless the Owner requests a different allocation, the Cash Value amount used as
security for the loan will be transferred from the Investment Funds and the
General Account on a pro-rata basis to the Loan Account. This will reduce the
Policy's Cash Value in the General Account and the Investment Fund(s). These
transactions will not be considered transfers for purposes of the limitations on
transfers between Investment Funds or to or from the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Cash Value minus the surrender charge
on any Monthly Anniversary, the Policy will lapse, subject to a grace period.
(See "Purchases -- Lapse and Grace Period".) A lapse of the Policy with a loan
outstanding may have Federal income tax consequences (see "Federal Tax Status").
Interest credited to the Cash Value held in the Loan Subaccount as security for
the loan will be allocated on Policy anniversaries to the General Account and
the Investment Funds. The interest credited will also be transferred: (1) when a
new loan is made; (2) when a loan is partially or fully repaid; and (3) when an
amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences (see "Federal Tax
Status").
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Last Insured and as
long as the Policy is in force. Any Indebtedness outstanding will be deducted
before any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Cash Value used for security was allocated. Unpaid loans and
loan interest will be deducted from any settlement of your Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
a) $500 from an Investment Fund or the General Account; or
b) the Policy's Cash Value in an Investment Fund.
For Policies issued in Idaho, there are no minimum amount requirements for
partial withdrawals from the General Account.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Cash Value net of any applicable surrender charges and fees in that
Investment Fund. The total partial withdrawals and transfers from the General
Account over the Policy year may not exceed a maximum amount equal to the
greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Cash Value in each Investment Fund and the General
Account bears to the total Cash Value of the Policy, less the Cash Value in the
Loan Account, on the date the request for a partial withdrawal is received. If
the limitations on withdrawals from the General Account will not permit this
pro-rata allocation, you will be requested to provide an alternate allocation.
No amount may be withdrawn that would result in there being insufficient Cash
Value to meet any surrender charge and applicable fees that would be payable
immediately following the withdrawal upon the surrender of the remaining Cash
Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the Cash
Value, then a partial withdrawal will decrease the Face Amount by an amount by
which the partial withdrawal plus the applicable surrender charge and fees
exceeds the difference between the death benefit and the Face Amount. If death
benefit Option B is in effect, the Face Amount will not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Cash Value by a
percentage chosen by you. This percentage must be any whole number. A Pro-Rata
Surrender may have Federal income tax consequences. The percentage will be
applied to the Face Amount and the Cash Value on the Monthly Anniversary on or
following our receipt of the request.
You may allocate the amount of decrease in Cash Value plus any applicable
surrender charge and fees among the Investment Funds and the General Account. If
no allocation is specified, then the decrease in Cash Value and any applicable
surrender charge and fees will be allocated among the Investment Funds and the
General Account in the same proportion that the Policy's Cash Value in each
Investment Fund and the General Account bears to the total Cash Value of the
Policy, less the Cash Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Cash Value
reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Last Insured must be living at the
time of a surrender. A surrender may have Federal income tax consequences.
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
(General American Life) purchased Cova, which on that date changed its name to
Cova Financial Services Life Insurance Company. On January 6, 2000,
Metropolitan Life Insurance Company (MetLife) acquired GenAmerica Corporation,
the ultimate parent company of General American Life. The acquisition of
GenAmerica Corporation does not affect policy benefits or any other terms or
conditions under your policy. MetLife, headquartered in New York City since
1868, is a leading provider of insurance and financial products and services
to individual and group customers.
Cova is licensed to do business in the District of Columbia and all states
except for California, Maine, New Hampshire, New York and Vermont.
Distribution
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 our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premiums and 4.0% of excess premiums paid in Policy year 1. In renewal years,
the commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and
2.0% in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, an asset-based compensation equal to .25% of Cash Value for all Policy
years beginning the 13th month. Sometimes, Cova enters into an agreement with
the broker-dealer to pay the broker-dealer persistency bonuses in addition to
the standard commission.
The Separate Account
We 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 our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we 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 we may issue.
Suspension of Payments or Transfers
We 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 Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insureds jointly are the Owner of the Policy unless another person or
entity is shown as the Owner in the application. The Owner is entitled to all
rights provided by the Policy. If there is more than one Owner at a given time,
all Owners must exercise the rights of ownership by joint action. If the Owner
dies, and the Owner is not one or both of the Insureds, the Owner's interest in
the Policy becomes the property of his or her estate unless otherwise provided.
Unless otherwise provided, the Policy is jointly owned by all Owners named in
the Policy or by the survivors of those joint Owners. Unless otherwise stated in
the Policy, the final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Last Insured. Unless an irrevocable Beneficiary has been named, you
can change the Beneficiary at any time before the Last Insured dies. If there is
an irrevocable Beneficiary, all Policy changes except premium allocations and
transfers require the consent of the Beneficiary.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement; from the amount of the initial premium payment or
payments; or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
Our directors and executive officers and their principal occupations for the
past 5 years are as follows:
<TABLE>
<CAPTION>
Name of Principal Occupations During
Principal Officers the Past Five 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.
William P. Boscow* Vice President of Cova and CFLIC - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January, 1999.
Constance 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 1998; Vice President of Cova Life
Administration Services Company (CLASC) - 1998 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;
President and Chief Compliance Officer of Cova Life Sales Company (CLSC) from February, 1999 to
present; Vice President and Chief Compliance Officer of CLSC - 1989 to January, 1999.
Philip A. Haley* Executive Vice President of Cova, CFLIC and FCLIC - May 1997 to present; Vice President of Cova and
CFLIC - 1990 to 1997; 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.
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.
E. Thomas 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.
James W. Koeger** Assistant Treasurer of Cova
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 1998; Vice President of CLASC - 1998 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (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 and Director of Cova, CFLIC and FCLIC from 1995 to present; Vice President,
Controller and Director of Cova from 1995 to 1998, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and Director of CFLIC from 1995 to 1998, prior
thereto Vice President, Controller, Treasurer and Director; Director of FCLIC from 1993 to present;
Vice President, Controller and Director of FCLIC from 1992 to 1998; Secretary of FCLIC from 1992 to
1995; 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 Trustee 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 and Director of Cova and CFLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer 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.
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; First Vice President of CLMC from January,
1999 to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFLIC, FCLIC and CLMC since July 1999.
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 Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFLIC - January 1999 to present; prior thereto, Vice President of
Cova and CFLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset Management,
General American - June, 1987 to June, 1998; Director of Cova, CFLIC and FCLIC - September 1999 to
present.
Patricia M. Wersching** Assistant Treasurer of Cova
Peter L. Witkewiz* Vice President and Controller of Cova, CFLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFLIC and FCLIC - 1993 to June, 1998.
<FN>
* 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: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have 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
we determine that we are permitted to vote the shares of the funds in our own
right, we 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 Fund 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 us 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 Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We 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 Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We 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
us that the change would violate state or federal law or the change would not be
consistent with the investment objectives of the Investment Funds 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 us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We cannot contest the validity of the Policy, except in the case of fraud, after
it has been in effect during the lifetime of either Insured for two years. If
the Policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if either 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 Indebtedness and less any surrenders. Depending
on the state where your Policy was issued, additional requirements may apply.
Please refer to your Policy. We also have the right to adjust any benefits
under the Policy if the answers in the application regarding the use of
tobacco are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Anniversary Partial Withdrawal Rider -- This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Cash Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of a Cash Value less any loans, loan
interest due, and any surrender charge being insufficient to pay the monthly
deduction.
The secondary guarantee period is the lesser of twenty Policy Years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Cash Value with a specified monthly premium while the Insured is
totally disabled. The monthly premium selected at issue is not guaranteed to
keep the Policy in force. The Insured must have become disabled after age 5 and
before age 65.
Divorce Split Rider -- This rider allows the Policy to be split into two
separate policies in the event of the divorce of a married couple who are the
Insureds under the Policy. The exercise of this option to split the Policy may,
under certain circumstances, result in adverse tax consequences. Please consult
you tax adviser before exercising any options under this rider.
Estate Preservation Term Rider -- This rider provides joint level term
insurance, payable at the death of the Last Insured, for a period of four years
from the date of the rider.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We 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. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do 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 our 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.
We are taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
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 these Policies,
will 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 funds 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 fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund 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."
We intend that each Investment Fund 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 policyowner 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 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 you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve 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 that the amount of mortality and other expense charges be reasonable.
In establishing these charges, we have 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 we have 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 our 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. You should consult your own tax advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
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. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
owner or Beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 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 or addition of qualified additional
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 with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC 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 MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then 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, including those resulting from
the lapse of the Policy, 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 distributions: (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
beneficiary.
If a Policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the Policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the Policy within the first fifteen years after the Policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the Policy.
Any loans from a Policy which is not classified as a MEC, will be treated as
Indebtedness of the Owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness exceeds the total premiums paid that
are not treated as previously surrendered by the Policy Owner, the excess
generally will be treated as ordinary income.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC 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 policies. You should consult a tax adviser prior to purchasing
more than one MEC 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. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
Policy.
Qualified Plans. The Policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the Policy owner are subject to Federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
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. We are
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 the Company as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, and the statement of assets and liabilities of the Separate
Account as of December 31, 1999, and the related statements of operations and
changes in net assets for the year ended December 31, 1999 and the period ended
December 31, 1998 have been included herein in reliance upon the reports of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
Financial Statements
Financial Statements of the Separate Account and the Company are provided below.
COVA VARIABLE LIFE ACCOUNT ONE
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Cova Variable
Life Account One, Board of Directors
and Shareholder of Cova Financial
Services Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of each of
the sub-accounts comprising Cova Variable Life Account One of Cova Financial
Services Life Insurance Company (the Separate Account), as of December 31, 1999,
and the related statements of operations and changes in net assets for the year
then ended, and the period ended December 31, 1998. These financial statements
are the responsibility of the Separate Account's management. Our responsibility
is to express an opinion on these 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. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
transfer agents. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts of Cova
Variable Life Account One of Cova Financial Services Life Insurance Company as
of December 31, 1999, and the results of their operations and changes in their
net assets for the year then ended, and the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Chicago, Illinois
March 20, 2000
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Cova):
Lord Abbett Growth and
<S> <C> <C> <C>
Income Portfolio 69,693 shares at a net asset value of $24.070563 per share $1,677,540
Bond Debenture Portfolio 32,970 shares at a net asset value of $12.474609 per share 411,294
Developing Growth Portfolio 23,227 shares at a net asset value of $14.885144 per share 345,742
Large Cap Research Portfolio 26,751 shares at a net asset value of $14.991245 per share 401,027
Mid-Cap Value Portfolio 21,633 shares at a net asset value of $11.168093 per share 241,596
Quality Bond Portfolio 8,044 shares at a net asset value of $10.669328 per share 85,826
Small Cap Stock Portfolio 12,303 shares at a net asset value of $17.268582 per share 212,449
Large Cap Stock Portfolio 41,788 shares at a net asset value of $20.674865 per share 863,962
Select Equity Portfolio 53,986 shares at a net asset value of $16.112437 per share 869,854
International Equity Portfolio 9,087 shares at a net asset value of $16.225039 per share 147,444
AIM Variable Insurance Funds,
Inc. (AIM):
AIM V.I. Value Fund 774 shares at a net asset value of $33.50 per share 25,922
AIM V.I. Capital Appreciation Fund 69 shares at a net asset value of $35.58 per share 2,446
General American Capital
Company (GACC):
Money Market Fund 24,972 shares at a net asset value of $20.252283 per share 505,747
Templeton Variable Products Series
Fund (Templeton):
Templeton Bond Fund 10 shares at a net asset value of $9.99 per share 100
Franklin Small Cap Investments Fund 9 shares at a net asset value of $15.79 per share 141
Templeton Stock Fund 92 shares at a net asset value of $24.39 per share 2,254
Templeton International Fund 102 shares at a net asset value of $22.25 per share 2,260
Franklin Growth Investments Fund 7 shares at a net asset value of $16.70 per share 123
------------
Total assets $5,795,727
============
Liabilities:
GACC Money Market $15,040
============
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
Single premium variable life
policies (SPVL):
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income 134,762 accumulation units at $12.448204 per unit $1,677,540
Cova Bond Debenture 38,749 accumulation units at $10.614338 per unit 411,294
Cova Developing Growth 26,493 accumulation units at $13.050371 per unit 345,742
Cova Large Cap Research 29,120 accumulation units at $13.771430 per unit 401,027
Cova Mid-Cap Value 23,875 accumulation units at $10.119059 per unit 241,596
Cova Quality Bond 8,134 accumulation units at $10.551764 per unit 85,826
Cova Small Cap Stock 16,533 accumulation units at $12.850204 per unit 212,449
Cova Large Cap Stock 60,489 accumulation units at $14.283064 per unit 863,962
Cova Select Equity 69,034 accumulation units at $12.600289 per unit 869,854
Cova International Equity 10,864 accumulation units at $13.571289 per unit 147,444
AIM V.I. Value 2,202 accumulation units at $11.774189 per unit 25,922
AIM V.I. Capital Appreciation 176 accumulation units at $13.925402 per unit 2,446
GACC Money Market 44,548 accumulation units at $11.013039 per unit 490,607
Templeton Bond 10 accumulation units at $9.970060 per unit $100
Franklin Small Cap Investments 10 accumulation units at $14.136079 per unit 141
Templeton Stock 205 accumulation units at $11.011283 per unit 2,254
Templeton International 209 accumulation units at $10.827249 per unit 2,260
Franklin Growth Investments 10 accumulation units at $12.333825 per unit 123
------------
5,780,587
Flexible premium variable universal
life policies (FPVUL):
GACC Money Market 10 accumulation units at $10.047103 per unit 100
------------
Total net assets $5,780,687
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - 6,579 - 511 275 925 419
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares 1,170 44 2,822 1,594 1,843 (1,159) 1,137
Realized gain distributions - 2,132 - - - 463 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) 1,170 2,176 2,822 1,594 1,843 (696) 1,137
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 140,732 2,316 66,149 61,046 7,745 (2,378) 63,287
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 141,902 11,071 68,971 63,151 9,863 (2,149) 64,843
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova AIM GACC Lord Abbett
-------------------------------------- ------------------------ ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 995 2,102 560 69 2 - -
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares 6,402 2,488 1,365 30 1 24,709 56,187
Realized gain distributions 21,723 71,329 1,496 361 50 - -
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net realized gain (loss) 28,125 73,817 2,861 391 51 24,709 56,187
----------- ----------- ------------ ----------- ----------- ----------- -----------
Change in unrealized appreciation 61,314 (18,465) 28,256 2,049 300 7,581 (25,472)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 90,434 57,454 31,677 2,509 353 32,290 30,715
=========== =========== ============ =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Templeton
-----------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments Total
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - - 12,437
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares - - - - - 98,633
Realized gain distributions - - - - - 97,554
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) - - - - - 196,187
----------- ----------- ----------- ------------- ----------- -----------
Change in unrealized appreciation - 41 160 167 23 394,851
----------- ----------- ----------- ------------- ----------- -----------
Net increase (decrease) in net
assets from operations $ - 41 160 167 23 603,475
=========== =========== =========== ============= =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Large Small Large
Bond Developing Cap Mid-Cap Quality Cap Cap
Debenture Growth Research Value Bond Stock Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 191 - 126 61 94 3 23
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares - (56) (59) (60) 8 258 467
Realized gain distributions 74 3 - - - 76 76
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) 74 (53) (59) (60) 8 334 543
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 5,181 21,898 11,811 12,587 255 18,574 44,695
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 5,446 21,845 11,878 12,588 357 18,911 45,261
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova GACC Lord Abbett
-------------------------- ----------- -----------
Growth
Select International Money and
Equity Equity Market Income Total
---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 25 652 - 8,782 9,957
---------- -------------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares 112 (117) 12,085 40 12,678
Realized gain distributions 503 8 - 28,237 28,977
---------- -------------- ----------- ----------- -----------
Net realized gain (loss) 615 (109) 12,085 28,277 41,655
---------- -------------- ----------- ----------- -----------
Change in unrealized appreciation 65,356 1,778 4,240 25,472 211,847
---------- -------------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 65,996 2,321 16,325 62,531 263,459
========== ============== =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - 6,579 - 511 275 925 419
Net realized gain (loss) 1,170 2,176 2,822 1,594 1,843 (696) 1,137
Change in unrealized appreciation 140,732 2,316 66,149 61,046 7,745 (2,378) 63,287
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 141,902 11,071 68,971 63,151 9,863 (2,149) 64,843
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - - - -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts
(including fixed account), net 1,568,828 241,298 147,286 215,618 75,796 (43,467) 29,705
Transfers for contract benefits,
terminations and insurance charges (33,190) (7,265) (5,783) (7,043) (5,457) (2,464) (3,603)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 1,535,638 234,033 141,503 208,575 70,339 (45,931) 26,102
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 1,677,540 245,104 210,474 271,726 80,202 (48,080) 90,945
Net assets at beginning of period - 166,190 135,268 129,301 161,394 133,906 121,504
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 1,677,540 411,294 345,742 401,027 241,596 85,826 212,449
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova AIM GACC Lord Abbett
------------------------------------ ------------------------ ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
----------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 995 2,102 560 69 2 - -
Net realized gain (loss) 28,125 73,817 2,861 391 51 24,709 56,187
Change in unrealized appreciation 61,314 (18,465) 28,256 2,049 300 7,581 (25,472)
Net increase (decrease) from ----------- ---------- ----------- ----------- ----------- ----------- -----------
operations 90,434 57,454 31,677 2,509 353 32,290 30,715
----------- ---------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - 100 100 100 -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - 2,511,219 -
Transfers between sub-accounts
(including fixed account), net 531,808 353,369 28,688 23,529 2,001 (2,485,129) (693,373)
Transfers for contract benefits,
terminations and insurance charges (15,573) (18,696) (3,197) (216) (8) (18,975) (253)
Net increase (decrease) in net
assets from contract ----------- ---------- ----------- ----------- ----------- ----------- -----------
transactions 516,235 334,673 25,491 23,413 2,093 7,215 (693,626)
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 606,669 392,127 57,168 25,922 2,446 39,505 (662,911)
Net assets at beginning of period 257,293 477,727 90,276 - - 451,202 662,911
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 863,962 869,854 147,444 25,922 2,446 490,707 -
=========== ========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Templeton
------------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments Total
----------- ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - - - - - 12,437
Net realized gain (loss) - - - - - 196,187
Change in unrealized appreciation - 41 160 167 23 394,851
Net increase (decrease) from ----------- ----------- ----------- ------------- ------------ -----------
operations - 41 160 167 23 603,475
----------- ----------- ----------- ------------- ------------ -----------
Contract transactions:
Cova payments 100 100 100 100 100 800
Cova redemptions - - - - - -
Payments received from contract
owners - - - - - 2,511,219
Transfers between sub-accounts
(including fixed account), net - - 2,001 2,001 - (41)
Transfers for contract benefits,
terminations and insurance charges - - (7) (8) - (121,738)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ------------- ------------ -----------
transactions 100 100 2,094 2,093 100 2,390,240
----------- ----------- ----------- ------------- ------------ -----------
Net increase (decrease) in net
assets 100 141 2,254 2,260 123 2,993,715
Net assets at beginning of period - - - - - 2,786,972
----------- ----------- ----------- ------------- ------------ -----------
Net assets at end of period $ 100 141 2,254 2,260 123 5,780,687
=========== =========== =========== ============= ============ ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Large Small Large
Bond Developing Cap Mid-Cap Quality Cap Cap
Debenture Growth Research Value Bond Stock Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 191 - 126 61 94 3 23
Net realized gain (loss) 74 (53) (59) (60) 8 334 543
Change in unrealized appreciation 5,181 21,898 11,811 12,587 255 18,574 44,695
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 5,446 21,845 11,878 12,588 357 18,911 45,261
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - - - -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 161,726 115,070 119,413 150,800 133,943 105,943 216,611
Transfers for contract benefits,
terminations and insurance charges (982) (1,647) (1,990) (1,994) (394) (3,350) (4,579)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 160,744 113,423 117,423 148,806 133,549 102,593 212,032
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 166,190 135,268 129,301 161,394 133,906 121,504 257,293
Net assets at beginning of period - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 166,190 135,268 129,301 161,394 133,906 121,504 257,293
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova GACC Lord Abbett
--------------------------- ----------- -----------
Growth
Select International Money and
Equity Equity Market Income Total
----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 25 652 - 8,782 9,957
Net realized gain (loss) 615 (109) 12,085 28,277 41,655
Change in unrealized appreciation 65,356 1,778 4,240 25,472 211,847
Net increase (decrease) from ----------- -------------- ----------- ----------- -----------
operations 65,996 2,321 16,325 62,531 263,459
----------- -------------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - -
Cova redemptions - - - - -
Payments received from contract
owners - - 2,605,542 - 2,605,542
Transfers between sub-accounts, net 417,562 91,449 (2,120,328) 607,811 -
Transfers for contract benefits,
terminations and insurance charges (5,831) (3,494) (50,337) (7,431) (82,029)
Net increase (decrease) in net
assets from contract ----------- -------------- ----------- ----------- -----------
transactions 411,731 87,955 434,877 600,380 2,523,513
----------- -------------- ----------- ----------- -----------
Net increase (decrease) in net
assets 477,727 90,276 451,202 662,911 2,786,972
Net assets at beginning of period - - - - -
----------- -------------- ----------- ----------- -----------
Net assets at end of period $ 477,727 90,276 451,202 662,911 2,786,972
=========== ============== =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(1) ORGANIZATION
Cova Variable Life Account One (the Separate Account), a unit
investment trust registered under the Investment Company Act of 1940 as
amended, was established by Cova Financial Services Life Insurance
Company (CFSLIC) and exists in accordance with the regulations of the
Missouri Department of Insurance. The Separate Account is a funding
vehicle for single premium variable life (SPVL) and flexible premium
variable universal life insurance policies (FPVUL) offered by CFSLIC.
On August 26, 1999, CFSLIC's ultimate parent company, GenAmerica
Corporation, entered into a definitive agreement to be acquired by
Metropolitan Life Insurance Company. The acquisition occurred on
January 6, 2000.
The Separate Account is divided into sub-accounts with the assets of
each sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified,
open-end, management investment company registered under the Investment
Company Act of 1940 as amended. The sub-accounts available for
investment may vary between variable life insurance policies offered by
CFSLIC.
<TABLE>
<S> <C>
Cova Series Trust (Cova) 10 portfolios
General American Capital Company (GACC) 1 portfolios
Lord Abbett Series Fund, Inc. (Lord Abbett) 1 portfolios
Russell Insurance Funds (Russell) 5 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 3 portfolios
Alliance Variable Products Series Fund, Inc. (Alliance) 2 portfolios
Liberty Variable Investment Trust (Liberty) 1 portfolios
Goldman Sachs Variable Insurance Trust (Goldman Sachs) 3 portfolios
Investors Fund Series (Kemper) 3 portfolios
MFS Variable Insurance Trust (MFS) 5 portfolios
Oppenheimer Variable Account Funds (Oppenheimer) 5 portfolios
Putnam Variable Trust (Putnam) 5 portfolios
Templeton Variable Products Series Fund (Templeton) 7 portfolios
</TABLE>
<TABLE>
The following sub-accounts commenced operations in 1999:
<S> <C>
Cova Lord Abbett Growth and Income January 8, 1999
AIM V.I. Value May 3, 1999
AIM V.I. Capital Appreciation July 19, 1999
Templeton Bond July 19, 1999
Franklin Small Cap Investments July 19, 1999
Templeton Stock July 19, 1999
Templeton International July 19, 1999
Franklin Growth Investments July 19, 1999
The following sub-accounts ceased operations in 1999:
Lord Abbett Growth and Income January 8, 1999
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) INVESTMENT VALUATION
Investments made in the portfolios of the investment companies are
valued at the reported net asset value of such portfolios, which
value their investment securities at fair value. The average cost
method is used to compute the realized gains and losses on the
sale of portfolio owned by the sub-accounts. Income from dividends
and gains from realized capital gain distributions are recorded on
the ex-distribution date.
(B) REINVESTMENT OF DISTRIBUTIONS
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in
additional shares of the portfolios.
GACC follows the Federal income tax practice known as consent
dividending, whereby substantially all of its net investment
income and realized capital gains are deemed to pass through to
the Separate Account. As a result, GACC does not distribute
dividends and realized capital gains. During December of each
year, the accumulated net investment income and realized capital
gains of the GACC Money Market Fund are allocated to the Separate
Account by increasing the cost basis and recognizing a gain in the
Separate Account.
(C) FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal
income tax return of CFSLIC which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, CFSLIC believes it will be treated
as the owner of the Separate Account assets for federal income tax
purposes and does not expect to incur federal income taxes on the
earnings of the Separate Account to the extent the earnings are
credited to the variable life policies. Based on this, no charge
has been made to the Separate Account for federal income taxes. A
charge may be made in future years for any federal income taxes
that would be attributable to the variable life policies.
(3) CONTRACT FEES
There are fees associated with the variable life insurance policies
that are deducted from the policy account value and Separate Account
that reduce the return on investment. The type, amount, and timing of
the fees may vary between the variable life policies offered by CFSLIC
and include mortality and expense risk, administrative, selection and
issue expense, cost of insurance, tax expense (premium and federal
taxes), contingent deferred sales (surrender) and transfer charges.
(4) SEPARATE ACCOUNT EXPENSES
The mortality and expense fees for FPVUL policies are deducted from the
separate account and are reflected in the accumulation unit value.
There were no fees incurred in 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(5) COST BASIS OF INVESTMENTS
The cost basis of each sub-account's investment at December 31, 1999
follows:
Cova Lord Abbett Growth and Income $1,536,808
Cova Bond Debenture 403,797
Cova Developing Growth 257,695
Cova Large Cap Research 328,170
Cova Mid-Cap Value 221,264
Cova Quality Bond 87,949
Cova Small Cap Stock 130,588
Cova Large Cap Stock 757,953
Cova Select Equity 822,963
Cova International Equity 117,410
AIM V.I. Value 23,873
AIM V.I. Capital Appreciation 2,146
GACC Money Market 493,926
Templeton Bond 100
Franklin Small Cap Investments 100
Templeton Stock 2,093
Templeton International 2,093
Franklin Growth Investments 100
----------
$5,189,028
==========
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(6) UNIT FAIR VALUE
A summary of accumulation unit values, net assets, and total return for
each sub-account follows:
Accumulation Net Assets Total
Unit Value (in thousands) Return
Commenced ----------------------- ---------------------- -------------------
Operations 12/31/99 12/31/98 12/31/99 12/31/98 1999 1998
---------- ---------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SPVL policies:
Cova Lord Abbett Growth
and Income 1/8/99 $12.448204 - $ 1,678 - 11.41% -
Cova Bond Debenture 4/13/98 10.614338 10.262336 411 166 3.43% 0.78%
Cova Developing Growth 4/16/98 13.050371 9.855135 346 135 32.42% -5.41%
Cova Large Cap Research 5/4/98 13.771430 10.972618 401 129 25.51% 4.31%
Cova Mid-Cap Value 3/23/98 10.119059 9.576906 242 161 5.66% -6.17%
Cova Quality Bond 4/13/98 10.551764 10.717509 86 134 -1.55% 6.22%
Cova Small Cap Stock 4/13/98 12.850204 8.891377 212 122 44.52% -14.87%
Cova Large Cap Stock 4/13/98 14.283064 12.135469 864 257 17.70% 13.96%
Cova Select Equity 3/23/98 12.600289 11.480648 870 478 9.75% 9.65%
Cova International Equity 3/23/98 13.571289 10.560451 147 90 28.51% 1.80%
AIM V.I. Value 5/3/99 11.774189 - 26 - 17.74% -
AIM V.I. Capital Appreciation 7/19/99 13.925402 - 2 - 28.36% -
GACC Money Market 2/26/98 11.013039 10.468518 491 451 5.20% 4.69%
Templeton Bond 7/19/99 9.970060 - - - -0.30% -
Franklin Small Cap Investments 7/19/99 14.136079 - - - 41.36% -
Templeton Stock 7/19/99 11.011283 - 2 - 10.11% -
Templeton International 7/19/99 10.827249 - 2 - 8.27% -
Franklin Growth Investments 7/19/99 12.333825 - - - 23.34% -
FPVUL policies:
GACC Money Market 11/29/99 10.047103 - - - 0.47% -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the year ended
December 31, 1999 and the period ended December 31, 1998 follows:
Realized Gain (Loss)
-------------------------------------------------------------
Aggregate Aggregate Cost
Year or Proceeds from Sales of Fund Shares Realized
Period of Fund Shares Redeemed Gain (Loss)
----------- ------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Cova Lord Abbett Growth and Income 1999 $ 98,255 $ 97,085 $ 1,170
1998 - - -
Cova Bond Debenture 1999 4,687 4,643 44
1998 527 527 -
Cova Developing Growth 1999 15,912 13,090 2,822
1998 1,194 1,250 (56)
Cova Large Cap Research 1999 12,192 10,598 1,594
1998 1,809 1,868 (59)
Cova Mid-Cap Value 1999 17,534 15,691 1,843
1998 1,646 1,706 (60)
Cova Quality Bond 1999 97,215 98,374 (1,159)
1998 890 882 8
Cova Small Cap Stock 1999 6,684 5,547 1,137
1998 3,110 2,852 258
Cova Large Cap Stock 1999 49,866 43,464 6,402
1998 4,336 3,869 467
Cova Select Equity 1999 79,613 77,125 2,488
1998 2,999 2,888 111
Cova International Equity 1999 19,787 18,422 1,365
1998 3,171 3,287 (116)
AIM V.I. Value 1999 218 188 30
1998 - - -
AIM V.I. Capital Appreciation 1999 8 7 1
1998 - - -
GACC Money Market 1999 2,543,802 2,519,093 24,709
1998 2,041,400 2,029,315 12,085
Lord Abbett Growth and Income 1999 694,610 638,423 56,187
1998 3,786 3,746 40
Templeton Bond 1999 - - -
1998 - - -
Franklin Small Cap Investments 1999 - - -
1998 - - -
Templeton Stock 1999 8 8 -
1998 - - -
Templeton International 1999 8 8 -
1998 - - -
Franklin Growth Investments 1999 - - -
1998 - - -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION, CONTINUED
Unrealized Appreciation (Depreciation)
-------------------------------------------------------------
Appreciation Appreciation
Year or (Depreciation) (Depreciation)
Period End of Period Beginning of Period Change
----------- ------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Cova Lord Abbett Growth and Income 1999 $ 140,732 $ - $140,732
1998 - - -
Cova Bond Debenture 1999 7,497 5,181 2,316
1998 5,181 - 5,181
Cova Developing Growth 1999 88,047 21,898 66,149
1998 21,898 - 21,898
Cova Large Cap Research 1999 72,857 11,811 61,046
1998 11,811 - 11,811
Cova Mid-Cap Value 1999 20,332 12,587 7,745
1998 12,587 - 12,587
Cova Quality Bond 1999 (2,123) 255 (2,378)
1998 255 - 255
Cova Small Cap Stock 1999 81,861 18,574 63,287
1998 18,574 - 18,574
Cova Large Cap Stock 1999 106,009 44,695 61,314
1998 44,695 - 44,695
Cova Select Equity 1999 46,891 65,356 (18,465)
1998 65,356 - 65,356
Cova International Equity 1999 30,034 1,778 28,256
1998 1,778 - 1,778
AIM V.I. Value 1999 2,049 - 2,049
1998 - - -
AIM V.I. Capital Appreciation 1999 300 - 300
1998 - - -
GACC Money Market 1999 11,821 4,240 7,581
1998 4,240 - 4,240
Lord Abbett Growth and Income 1999 - 25,472 (25,472)
1998 25,472 - 25,472
Templeton Bond 1999 - - -
1998 - - -
Franklin Small Cap Investments 1999 41 - 41
1998 - - -
Templeton Stock 1999 160 - 160
1998 - - -
Templeton International 1999 167 - 167
1998 - - -
Franklin Growth Investments 1999 23 - 23
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS
The change in the number of units for each sub-account follows:
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - - - -
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net - 16,292 13,928 11,988 17,077 12,531 14,067
Contract units redeemed - (98) (202) (204) (225) (37) (402)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/98 - 16,194 13,726 11,784 16,852 12,494 13,665
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net 139,570 23,254 13,287 17,896 7,584 (4,128) 3,239
Contract units redeemed (4,808) (699) (520) (560) (561) (232) (371)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/99 134,762 38,749 26,493 29,120 23,875 8,134 16,533
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Cova AIM GACC Lord Abbett
------------------------------------ -------------------------- ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
---------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - - - -
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - 303,667 -
Contract units transferred, net 21,607 42,165 8,896 - - (205,485) 62,823
Contract units redeemed (405) (554) (347) - - (55,081) (745)
---------- ----------- ----------- ----------- ------------- ----------- -----------
Unit balance at 12/31/98 21,202 41,611 8,549 - - 43,101 62,078
Cova units purchased - - - 9 9 - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - 247,255 -
Contract units transferred, net 40,404 28,968 2,602 2,213 168 (232,315) (62,052)
Contract units redeemed (1,117) (1,545) (287) (20) (1) (13,493) (26)
---------- ----------- ----------- ----------- ------------- ----------- -----------
Unit balance at 12/31/99 60,489 69,034 10,864 2,202 176 44,548 -
========== =========== =========== =========== ============= =========== ===========
FPVUL policies:
Unit balance at 12/31/97 -
Cova units purchased -
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/98 -
Cova units purchased 10
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/99 10
===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Templeton
-----------------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments
----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - -
Cova units purchased - - - - -
Cova units redeemed - - - - -
Contract units purchased - - - - -
Contract units transferred, net - - - - -
Contract units redeemed - - - - -
----------- -------------- ----------- -------------- --------------
Unit balance at 12/31/98 - - - - -
Cova units purchased - - - - -
Cova units redeemed - - - - -
Contract units purchased 10 10 10 10 10
Contract units transferred, net - - 196 200 -
Contract units redeemed - - (1) (1) -
----------- -------------- ----------- -------------- --------------
Unit balance at 12/31/99 10 10 205 209 10
=========== ============== =========== ============== ==============
</TABLE>
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(With Independent Auditors' Report Thereon)
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) (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
February 4, 2000
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Debt securities available-for-sale, at fair value (cost of
$1,575,536 in 1999 and $1,375,198 in 1998) $ 1,481,997 1,371,513
Preferred stock - affiliate, at fair value 6,892 9,000
Common stock, at fair value 12 37
Mortgage loans, net of allowance for potential loan loss
of $1,090 in 1999 and $510 in 1998 376,147 312,865
Policy loans 27,778 26,295
Other invested assets 4,625 --
------------ ------------
Total investments 1,897,451 1,719,710
Cash and cash equivalents - interest-bearing 86,038 94,770
Cash - noninterest-bearing 5,893 5,008
Receivable from sale of securities 1,452 5,845
Accrued investment income 24,992 21,505
Deferred policy acquisition costs 214,120 131,973
Present value of future profits 55,406 42,230
Goodwill 16,157 18,585
Deferred tax asset, net 21,964 4,786
Receivable from OakRe 336,376 720,904
Federal and state income taxes recoverable 1,190 --
Due from affiliates -- 246,198
Other assets 741 829
Separate account assets 2,537,962 1,832,396
------------ ------------
Total assets $ 5,199,742 4,844,739
============ ============
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets, Continued
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
------------- -------------
(IN THOUSANDS)
Liabilities:
<S> <C> <C>
Policyholder deposits $ 2,270,795 2,643,124
Future policy benefits 58,432 54,336
Payable on return of collateral on loaned securities 37,862 25,923
Payable on purchase of securities 516 1,040
Due to affiliates 4,220 --
Federal and state income taxes payable -- 446
Accounts payable and other liabilities 22,905 18,714
Future purchase price payable to OakRe 2,898 6,976
Guaranty fund assessments 9,900 9,700
Separate account liabilities 2,537,652 1,832,394
------------- -------------
Total liabilities 4,945,180 4,592,653
------------- -------------
Shareholder's equity:
Common stock, $2 par value. Authorized
5,000,000 shares; issued and outstanding
2,899,466 shares in 1999 and 1998 5,799 5,799
Additional paid-in capital 260,491 220,491
Retained earnings 12,906 26,410
Accumulated other comprehensive
loss - net of tax (24,634) (614)
------------- -------------
Total shareholder's equity 254,562 252,086
------------- -------------
Total liabilities and shareholder's equity $ 5,199,742 4,844,739
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
Revenues:
<S> <C> <C> <C>
Premiums $ 8,468 23,875 9,368
Net investment income 131,372 127,812 111,661
Net realized (losses) gains on sales
of investments (20,214) (1,600) 563
Separate account fees 30,999 20,820 12,455
Other income 6,142 1,197 2,400
----------- ----------- -----------
Total revenues 156,767 172,104 136,447
----------- ----------- -----------
Benefits and expenses:
Interest on policyholder deposits 102,274 93,759 81,129
Current and future policy benefits 27,409 25,225 11,496
Operating and other expenses 37,270 20,151 16,179
Amortization of purchased
intangible assets 6,087 6,309 6,697
Amortization of deferred policy
acquisition costs 3,621 9,393 6,307
----------- ----------- -----------
Total benefits and expenses 176,661 154,837 121,808
----------- ----------- -----------
(Loss) income before income taxes (19,894) 17,267 14,639
----------- ----------- -----------
Income tax (benefit) expense:
Current (2,146) (1,576) 1,951
Deferred (4,244) 4,949 3,710
----------- ----------- -----------
Total income tax (benefit) expense (6,390) 3,373 5,661
----------- ----------- -----------
Net (loss) income $ (13,504) 13,894 8,978
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
Common stock, balance at beginning
<S> <C> <C> <C>
and end of period $ 5,799 5,799 5,799
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of period 220,491 191,491 166,491
Capital contribution 40,000 29,000 25,000
----------- ----------- -----------
Balance at end of period 260,491 220,491 191,491
----------- ----------- -----------
Retained earnings:
Balance at beginning of period 26,410 12,516 3,538
Net (loss) income (13,504) 13,894 8,978
----------- ----------- -----------
Balance at end of period 12,906 26,410 12,516
----------- ----------- -----------
Accumulated other comprehensive (loss) income:
Balance at beginning of period (614) 2,732 (784)
Change in unrealized (depreciation) appreciation
of debt and equity securities (91,987) (14,571) 14,077
Deferred federal income tax impact 12,934 1,801 (1,893)
Change in deferred policy acquisition costs attributable
to unrealized depreciation (appreciation) 39,975 6,996 (5,342)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 15,058 2,428 (3,326)
----------- ----------- -----------
Balance at end of period (24,634) (614) 2,732
----------- ----------- -----------
Total shareholder's equity $ 254,562 252,086 212,538
=========== =========== ===========
Total comprehensive (loss) income:
Net (loss) income $ (13,504) 13,894 8,978
Other comprehensive (loss) income (change in net unrealized
(depreciation) appreciation of debt and equity securities) (24,020) (3,346) 3,516
----------- ----------- -----------
Total comprehensive (loss) income $ (37,524) 10,548 12,494
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<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, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
(in thousands)
Reconciliations of net income to net cash provided by operating activities:
<S> <C> <C> <C>
Net income (loss) $ (13,504) 13,894 8,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 4,096 15,975 6,019
Increase (decrease) in payables and
accrued liabilities 1,620 (9,419) (9,278)
Increase in accrued investment income (1,483) (903) (5,591)
Amortization of intangible assets and
deferred policy acquisition costs 14,963 15,702 13,004
Amortization and accretion of securities
premiums and discounts (59) (1,767) 1,664
Decrease in recapture commissions payable to OakRe (4,078) (5,197) (4,837)
Net SPDA benefits recaptured from RGA 14,043 -- --
Net realized loss (gain) on sale of investments 20,214 1,600 (563)
Interest accumulated on policyholder deposits 102,274 93,759 81,129
(Decrease) increase in current and
deferred federal income taxes (1,360) 4,083 5,022
Separate account net income 1 (12) (2,637)
Commissions and expenses deferred (45,793) (50,044) (46,142)
Other (8,720) (2,011) 2,413
------------- -------------- ------------
Net cash provided by operating activities 82,214 75,660 49,181
------------- -------------- ------------
Cash flows from investing activities:
Cash used in the purchase of investment securities (560,288) (733,049) (809,814)
Proceeds from investment securities sold and matured 478,398 642,481 382,783
Other (3,524) (1,159) 15,400
------------- -------------- ------------
Net cash used in investing activities $ (85,414) (91,727) (411,631)
------------- -------------- ------------
See accompanying notes to consolidated financial statements.
</TABLE>
<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, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
(in thousands)
Cash flows from financing activities:
<S> <C> <C> <C>
Policyholder deposits $ 740,599 1,014,075 841,174
Transfers from OakRe 441,742 812,520 637,168
Transfer to separate accounts (404,241) (789,872) (450,303)
Return of policyholder deposits (878,516) (889,202) (597,425)
Proceeds from security collateral on securities lending 11,939 25,923 --
Transfers from (to) RGA 43,830 (103,175) (120,411)
Capital contributions received 40,000 29,000 25,000
------------- -------------- ------------
Net cash (used) provided by financing activities (4,647) 99,269 335,203
------------- -------------- ------------
(Decrease) increase in cash and
cash equivalents (7,847) 83,202 (27,247)
Cash and cash equivalents at beginning of period 99,778 16,576 43,823
------------- -------------- ------------
Cash and cash equivalents at end of period $ 91,931 99,778 16,576
============= ============== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company (CFSLIC) and
subsidiaries (the Company) market and service single premium
deferred annuities, immediate annuities, variable annuities, term
life, single premium variable universal life, 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. Single premium whole life insurance policies
provide policy beneficiaries with mortality benefits amounting to
a multiple, which declines with age, of the original premium.
Under the deferred fixed 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.
Under the variable annuity contracts, policyholder deposits are
allocated to various separate account sub-accounts or the general
accounts. A sub-account is valued at the sum of market values of
the securities in its underlying investment portfolio. The
contract value allocated to a sub-account will fluctuate based on
the performance of the sub-accounts. The contract value allocated
to the general accounts is credited with a fixed interest rate for
a specified period. The Company may assess surrender fees against
amounts withdrawn prior to the end of the withdrawal charge
period. Policyholders also may incur certain federal income tax
penalties on withdrawals.
Under the single premium variable life contracts, policyholder
deposits are allocated to various separate account sub-accounts.
The account value allocated to a sub-account will fluctuate based
on the performance of the sub-accounts. The Company guarantees a
minimum death benefit to be paid to the beneficiaries upon the
death of the insured. The Company may assess surrender fees
against amounts withdrawn prior to the end of the surrender charge
period. A deferred premium tax may also be assessed against
amounts withdrawn in the first ten years. Policyholders may also
incur certain federal income tax penalties on withdrawals.
Under the term life insurance policies, policyholders pay a level
premium over a certain period of time to guarantee a death benefit
will be paid to the beneficiaries upon the death of the insured.
This policy has no cash accumulation available to the
policyholder.
Although the Company markets its products through numerous
distributors, including regional brokerage firms, national
brokerage firms, and banks, approximately 86%, 89%, and 73% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated and Edward Jones & Company, in
1999, 1998, and 1997, respectively.
<PAGE>
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Corporation,
which is a wholly owned subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance
company. GALIC is a wholly owned subsidiary of GenAmerica
Corporation, which in turn is wholly owned by the ultimate parent,
General American Mutual Holding Company (GAMHC). The Company owns
100% of the outstanding shares of two subsidiaries, First Cova
Life Insurance Company (a New York domiciled insurance company)
(FCLIC) and Cova Financial Life Insurance Company (a California
domiciled insurance company) (CFLIC).
On August 26, 1999, GAMHC entered into a definitive agreement,
whereby Metropolitan Life Insurance Company (MetLife), a New York
domiciled life insurance company, will acquire GenAmerica
Corporation and all its holdings for $1.2 billion in cash. The
purchase was approved by the Missouri Director of Insurance on
November 10, 1999. The purchase, however, was not consummated as
of December 31, 1999, and, as a result, these financial statements
do not reflect purchase accounting treatment of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles (GAAP) and include the accounts and operations of the
Company. Significant intercompany transactions have been
eliminated. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the amounts reported. Actual results could differ from
these estimates.
DEBT SECURITIES
Investments in all debt 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
securities at December 31, 1999 and 1998 were classified as
available-for-sale. Securities available-for-sale are carried at
fair value, with unrealized holding gains and losses reported as
accumulated other comprehensive income in the shareholder's
equity, net of deferred effects of income tax and related effects
on deferred acquisition costs and present value of future profits.
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").
<PAGE>
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 fair 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.
SECURITIES LENDING
The Company recognizes on its consolidated balance sheet cash
related to collateral controlled on securities lending
transactions and a corresponding obligation to return such
collateral at the termination of such transactions.
PREFERRED STOCK - AFFILIATE
Preferred stock represents an investment in nonredeemable
preferred stock in GenAmerica Management Company, an affiliate.
The security is carried at fair value, which is determined
primarily through published quotes of trading values. Changes to
adjust the carrying value are reported directly in shareholder's
equity. Other-than-temporary declines below cost are recorded as
realized losses.
COMMON STOCK
Common stock represents an investment in common stock warrants.
The security is carried at fair value, which is determined
primarily through published quotes of trading values. Changes to
adjust the carrying value are reported directly in shareholder's
equity. Other-than-temporary declines below cost are recorded as
realized losses.
MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are carried at their unpaid
principal balances. An allowance for mortgage loan losses is
established based on an evaluation of the mortgage loan portfolio,
past credit loss experience, and current economic conditions.
Reserves for loans are established when the Company determines
that collection of all amounts due under the contractual terms is
doubtful and are calculated in conformity with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan -Income
Recognition and Disclosures.
The Company had no impaired loans at December 31, 1999. The
valuation allowance for potential losses on mortgage loans was
$1,090,000 and $510,000 at December 31, 1999 and 1998,
respectively.
<PAGE>
OTHER INVESTED ASSETS
Other invested assets consist of investments in joint ventures in
real estate.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in
banks, U.S. Treasury bills, money market accounts, and commercial
paper with maturities under 90 days, which are not otherwise
restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that
are specifically assigned to variable annuity or life
policyholders in the separate accounts and are not available to
other creditors of the Company. The earnings of separate account
investments are also 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 account and assesses
withdrawal charges in the event of early withdrawals. Separate
account assets are carried at fair 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. The Company's capital investment in the separate
accounts as of December 31, 1999 and 1998 is presented in note 3.
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. The Company sets a
limit on the deferral of acquisition costs incurred from internal
marketing and wholesaling operations in any year at 1% to 1.5% of
premiums and deposits receipts, varying according to specific
product. This limit is based on typical market rates of
independent marketing service and wholesaling organizations. This
practice also avoids possible deferral of costs in excess of
amounts recoverable.
The costs deferred 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 policy 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 are not recognized currently in
income but as an offset to the accumulated other comprehensive
income component of shareholder's 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.
<PAGE>
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below.
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period $ 131,973 84,326 49,833
Commissions and costs deferred 45,793 50,044 46,142
Amortization (3,621) (9,393) (6,307)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) of investments 39,975 6,996 (5,342)
------------ ------------ -------------
Deferred policy acquisition costs, end of period $ 214,120 131,973 84,326
============ ============ =============
Costs expensed that exceeded the established deferred
limit $ 9,789 4,933 3,016
============ ============ =============
</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
date the Company was purchased by GALIC.
Present Value of Future Profits
The Company established an intangible asset which represents
the present value of future profits (PVFP) 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
pretax rate of 18% (12% net after tax).
In addition, as the Company has the option of retaining its
single premium deferred annuity (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 appreciation and
depreciation, 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 PVFP will be adjusted to the
amount that would have existed had the actual experience and
revised estimates been known and applied from inception. The
amortization and adjustments resulting from unrealized
appreciation and depreciation are not recognized currently in
income but as an offset to the accumulated other comprehensive
income reflected as a separate component of shareholder's
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.
<PAGE>
Based on current assumptions, amortization of the original
in-force PVFP asset, expressed as a percentage of the original
in-force asset, is projected to be 7.6%, 7.7%, 7.5%, 6.8%, and
6.4% for the years ended December 31, 2000 through 2004,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results. The average crediting rate on the original
in-force PVFP asset is 6.8% for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
The components of PVFP are shown below.
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 42,230 41,486 46,389
Interest credited 2,695 2,864 3,029
Amortization (4,577) (4,548) (4,606)
Present value of future profits attributable to unrealized
depreciation (appreciation) of investments
15,058 2,428 (3,326)
------------ ------------ -------------
PVFP - end of period $ 55,406 42,230 41,486
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
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 shown below.
1999 1998 1997
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 18,585 19,717 20,849
Amortization (1,132) (1,132) (1,132)
Experience adjustment to future purchase price payable to
OakRe (1,296) -- --
----------- ------------ ------------
Goodwill - end of period $ 16,157 18,585 19,717
=========== ============ ============
</TABLE>
<PAGE>
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 3.50% 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%.
The Company has recorded a future payable that represents the
present value of the anticipated future commission payments
payable to OakRe over the remaining life of the financial
reinsurance agreement discounted at an estimated borrowing
rate of 6.50%. 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 end of
the year 2000.
<TABLE>
<CAPTION>
The components of this future payable are shown below.
1999 1998 1997
----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 6,976 12,173 16,051
Interest added 378 629 959
Payments to OakRe (3,160) (5,826) (4,837)
Experience adjustment to future purchase price
payable to OakRe (1,296) -- --
----------- ------------ -----------
Future payable - end of period $ 2,898 6,976 12,173
=========== ============ ===========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
Xerox Financial Services, Inc. (XFSI) (previous parent of the
Company) 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 Company's assets as
of the date of acquisition was revalued based upon fair market
values. The principal effect of the election was to establish a
tax asset on the tax-basis consolidated balance sheet of
approximately $37.9 million for the value of the business acquired
that is amortizable for tax purposes over ten to fifteen years.
<PAGE>
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 Company's policyholder
deposits as of December 31, 1999 was 5.9%.
FUTURE POLICY BENEFITS
Reserves are held for future policy 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 4.50% to 8.00%, depending upon date of issue.
Current mortality benefits payable are recorded for reported
claims and estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on
annuity policies that subject it to longevity risks. Amounts
collected on annuity policies not subject to longevity risk are
recorded as increases in the policyholder deposits liability. For
term and single premium variable life products, premiums are
recognized as revenue when due.
OTHER INCOME
Other income consists primarily of policy surrender charges and
fees from a modified coinsurance agreement with GALIC.
FEDERAL INCOME TAXES
The Company files a consolidated income tax return with its
subsidiaries. Allocations of federal income taxes are based upon
separate return calculations.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
consolidated financial statement carrying amount of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. 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 in the period that includes the enactment
date.
<PAGE>
COMPREHENSIVE INCOME
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 has no impact on the Company's
consolidated net income or shareholder's equity. The Company's
only component of accumulated other comprehensive income relates
to unrealized appreciation or depreciation on debt and equity
securities held at available-for-sale.
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:
O Investment valuation
O Amortization of deferred policy acquisition costs
O Amortization of present value of future profits
O Recoverability of goodwill
The fair 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.
The amortization of deferred policy 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 PVFP is based on
estimates of long-term future profits from existing policies when
the Company was purchased by GALIC and policies recaptured from
OakRe. 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.
<PAGE>
The Company has considered the recoverability of goodwill and has
concluded that no circumstances have occurred which would give
rise to impairment of goodwill at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, 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 No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Because of this, and further because the value of a business is
also based upon its anticipated earning power, the aggregate fair
value amounts represented do not present the underlying value of
the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Short-term Investments,
and Accrued Investment Income
The carrying value amounts reported in the consolidated
balance sheets for these instruments approximate their fair
values. Short-term debt securities are considered
available-for-sale.
Investment Securities and Mortgage Loans
(Including Mortgage-backed Securities)
Fair values of 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,
certain mortgage-backed securities, and mortgage loans, 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 3 for fair
value disclosures).
<PAGE>
Policy Loans
Fair values of policy loans approximate carrying value as the
interest rates on the majority of policy loans are reset
periodically and, therefore, approximate current interest
rates.
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
5 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, 1999 and 1998, the cash
surrender value of policyholder deposits was approximately
$84.9 million and $103.7 million less than their stated
carrying value. Of the contracts permitting surrender,
substantially all 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 its parent, GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective July 25, 1999, the Company entered into a modified
coinsurance reinsurance agreement with MetLife. Under the
reinsurance agreement, the Company ceded life insurance and
annuity business that was issued or renewed from July 25, 1999
through December 31, 1999 to MetLife amounting to $259 million.
Net earnings to MetLife from that business are experience refunded
to the Company. The agreement does not meet the conditions for
reinsurance accounting under GAAP. In substance, the agreement
represents a guarantee by MetLife of new business and renewed SPDA
business during this period. There was no impact on the Company's
financial statements resulting from the reinsurance transaction
with MetLife.
Effective January 1, 1998, the Company entered into a modified
coinsurance financial reinsurance agreement with GALIC. The
reinsurance agreement provided that the Company would reinsurance
a block of "stable value" annuity business issued by GALIC on a
36% coinsurance basis amounting to $88 million and $635 million in
1999 and 1998, respectively. The agreement does not meet the
conditions for reinsurance accounting under GAAP, and no assets
were transferred. Effective July 1, 1999, the Company terminated
the financing reinsurance agreement with GALIC. The Company
recognized income of $1.6 million from this transaction in both
1999 and 1998.
<PAGE>
Effective January 1, 1997, the Company entered into a financial
reinsurance agreement with RGA Reinsurance Company (RGA), an
affiliate, related to certain of the Company's single premium
deferred annuity products, and transferred assets equal to 60% of
deposits received. The agreement does not meet the conditions for
reinsurance accounting under GAAP. Deposits reinsured under the
contract were approximately $219 million at December 31, 1998, and
are reflected as policyholder deposits of the Company and a "Due
from affiliate" asset in the consolidated balance sheets.
On January 31, 1999, the Company suspended ceding new business to
RGA, and on November 30, 1999, the Company recaptured all of the
obligations and related investments from RGA. The Company
recognized an operating expense of $12.6 million related to the
recapture.
On June 1, 1995, when GALIC formed Cova Corporation and purchased
CSFLIC, then known as Xerox Financial Services Life Insurance
Company (XFSLIC), from XFSI, a wholly owned subsidiary of Xerox
Corporation, it entered into a financing reinsurance transaction
with OakRe Life Insurance Company (OakRe), then a subsidiary of
XFSLIC, for OakRe to assume the economic benefits and risks of the
existing single premium deferred annuity deposits of XFSLIC.
Ownership of OakRe was retained by XFSI subsequent to the sale of
XFSLIC and other affiliates.
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 financing reinsurance agreement entered into with OakRe as
condition to the purchase of the Company does not meet the
criteria for reinsurance accounting under GAAP. The net assets
initially transferred to OakRe were established as a receivable
and are subsequently increased as interest accrued on the
underlying deposits and decrease as funds are transferred back to
the Company when policies reach their crediting rate reset date or
benefits are claimed. 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 by mid-year 2000, and completely by mid-year
2002. The liquidations transfer cash daily 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.
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 since inception of the
agreement.
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, requires all derivative financial
instruments to be recorded on the balance sheet at estimated fair
value. The Company's present accounting policies applies such
accounting treatment only to marketable securities as defined
under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and to off-balance sheet derivative
instruments. SFAS No. 133 will broaden the definition of
derivative instruments to include all classes of financial assets
and liabilities. It also will require separate disclosure of
identifiable derivative instruments embedded in hybrid securities.
The change in the fair value of derivative instruments is to be
recorded each period either in current earnings or other
comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, on the type
of hedge transaction.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 defers for one year
the effective date of Statement of SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans
to adopt the provision of SFAS No. 133 effective January 1, 2001.
At this time the Company does not believe it will have a material
effect on the Company's consolidated financial position or results
of operations.
OTHER
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
<PAGE>
(3) INVESTMENTS
<TABLE>
<CAPTION>
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's equity. The amortized cost, estimated
fair value, and carrying value of investments at December 31, 1999 and
1998, are as follows:
1999
-----------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------- -------------- --------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 28,209 35 (2,665) 25,579 25,579
Government agency
obligations 34,121 76 (318) 33,879 33,879
Corporate securities 1,040,309 1,901 (60,641) 981,569 981,569
Mortgage-backed
securities 199,979 42 (7,335) 192,686 192,686
Asset-backed securities 272,918 389 (25,023) 248,284 248,284
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,575,536 2,443 (95,982) 1,481,997 1,481,997
Preferred stock - affiliate 9,000 -- (2,108) 6,892 6,892
Common stock 37 -- (25) 12 12
Mortgage loans (net) 376,147 -- (1,979) 374,168 376,147
Other invested assets 4,625 -- -- 4,625 4,625
Policy loans 27,778 -- -- 27,778 27,778
-------------- -------------- --------------- --------------- --------------
Total investments $ 1,993,123 2,443 (100,094) 1,895,472 1,897,451
============== ============== =============== =============== ==============
Company's beneficial interest
in separate accounts
$ 310 -- -- 310 310
============== ============== =============== =============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------- -------------- --------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 28,288 249 (84) 28,453 28,453
Government agency
obligations 53,869 1,015 (1) 54,883 54,883
Corporate securities 902,139 16,583 (24,799) 893,923 893,923
Mortgage-backed
securities 253,704 2,118 (1,570) 254,252 254,252
Asset-backed securities 137,198 3,087 (283) 140,002 140,002
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,375,198 23,052 (26,737) 1,371,513 1,371,513
Preferred stock - affiliate 9,000 -- -- 9,000 9,000
Common stock 37 -- -- 37 37
Mortgage loans (net) 312,865 17,500 -- 330,365 312,865
Policy loans 26,295 -- -- 26,295 26,295
-------------- -------------- --------------- --------------- --------------
Total investments $ 1,723,395 40,552 (26,737) 1,737,210 1,719,710
============== ============== =============== =============== ==============
Company's beneficial interest
in separate accounts
$ 2 -- -- 2 2
============== ============== =============== =============== ==============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, 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>
1999
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 65,222 65,553
Due after one year through five years 513,181 488,850
Due after five years through ten years 504,184 465,079
Due after ten years 292,970 269,828
Mortgage-backed securities 199,979 192,687
-------------- --------------
Total $ 1,575,536 1,481,997
============== ==============
</TABLE>
At December 31, 1999, approximately 91.1% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 8.9% noninvestment grade debt securities, 7.3%
are rated as BB, 0.8% are rated as B, and 0.8% are rated C and treated
as impaired.
At December 31, 1999, the Company had nine impaired debt securities with
estimated fair value of $9.4 million, of which seven debt securities,
with estimated fair value of $8.1 million, became non-income producing
in 1999. At December 31, 1998, the Company had two impaired debt
securities with estimated value of $2.1 million, of which one debt
security, with estimated fair value of $0.5 million, became non-income
producing.
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 counterparties to these agreements.
Securities loaned at December 31, 1999 had market values totaling
$36,957,975. Cash of $37,861,652 was held as collateral to secure this
agreement. Income on the Company's security lending program in 1999
was immaterial.
<PAGE>
<TABLE>
<CAPTION>
The components of investment income, realized capital gains (losses),
and unrealized appreciation (depreciation) are as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 100,969 94,876 84,203
Income on cash and cash equivalents 2,459 2,720 2,265
Income on equity securities 563 -- --
Interest on mortgage loans 27,161 28,650 24,890
Income on real estate 103 -- --
Income on policy loans 2,136 1,980 1,852
Income on separate account investments -- 13 2,637
Loss on derivatives -- -- (2,035)
Miscellaneous interest 335 1,715 (215)
------------ ------------ -------------
Total investment income 133,726 129,954 113,597
Investment expenses (2,354) (2,142) (1,936)
------------ ------------ -------------
Net investment income $ 131,372 127,812 111,661
============ ============ =============
Net realized capital (losses) gains are as follows:
Debt securities $ (20,011) (1,600) 537
Equity securities 3 -- --
Mortgage loans -- -- 27
Real estate (38) -- --
Other investments (168) -- (1)
------------ ------------ -------------
Net realized (losses) gains on investments $ (20,214) (1,600) 563
============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(IN THOUSANDS)
Unrealized appreciation (depreciation) are as follows:
<S> <C> <C>
Debt securities $ (93,540) (3,685)
Preferred stock - affiliate (2,108) --
Common stock (25) --
Effects on deferred acquisition costs amortization 43,190 3,215
Effects on PVFP amortization 14,585 (473)
-------------- --------------
Unrealized depreciation before income tax (37,898) (943)
Unrealized income tax benefit 13,264 329
-------------- --------------
Unrealized depreciation on investments $ (24,634) (614)
============== ==============
</TABLE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1999 were $439,069,999. Gross gains of $2,445,497 and
gross losses of $22,456,541 were realized on those sales. Included in
these amounts were $500,674 of gross gains and $1,938,767 of gross
losses realized on the sale of noninvestment grade securities. Net
realized losses include a 1999 impairment adjustment totaling
$18,768,778 related to ten debt securities held by the Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1998 were $486,264,174. Gross gains of $5,102,040 and
gross losses of $6,601,099 were realized on those sales. Included in
these amounts were $1,002,539 of gross gains and $6,011,305 of gross
losses realized on the sale of noninvestment grade securities. Net
realized losses include a 1998 impairment adjustment totaling
approximately $100,000 related to two debt securities held by the
Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1997 were $358,658,091. Gross gains of $1,765,242 and
gross losses of $254,493 were realized on those sales. Included in these
amounts were $681,159 of gross gains and $122,480 of gross losses
realized on the sale of noninvestment grade securities. Net realized
gains include a 1997 impairment adjustment totaling approximately
$974,000 related to one debt security held by the Company.
Securities with a carrying value of approximately $7,019,456 at December
31, 1999 were deposited with government authorities as required by law.
<PAGE>
(4) SECURITIES GREATER THAN 10% OF SHAREHOLDER'S EQUITY
The Company does not have any individual security that exceeds 10% of
shareholder's equity at December 31, 1999 and 1998.
(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
A derivative financial instrument, in very general terms, refers to a
security whose value is derived from the value of an underlying asset,
reference rate, or index.
The Company has a variety of reasons to use derivative instruments, such
as to attempt to protect the Company against possible changes in the
market value of its portfolio and to manage the portfolio's effective
yield, maturity, and duration. All of the Company's holdings are marked
to fair value monthly with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when the disposition closes a hedge. In
this instance, the gain or loss adjusts the unamortized cost of the
hedged security, and the resulting premium or discount is amortized or
accreted over the remaining life of the hedge security.
Summarized below are the specific types of derivative instruments used
by the Company.
INTEREST RATE SWAPS
Under interest rate swaps, the Company agrees with counterparties
to exchange, at specific intervals, the payments between floating
and fixed-rate interest amounts calculated by reference to
notional amounts. Net interest payments are recognized within net
investment income in the consolidated statement of income.
At December 31, 1999, the Company does not have any outstanding
interest rate swap agreements. The swap agreements outstanding at
December 31, 1998 were terminated during 1999 by the
counterparties at a loss of $167,500 to the Company.
At December 31, 1998, the Company had two outstanding interest
rate swap agreements which would have expired in 2002 and 2003.
Under the agreements, the Company received a fixed rate of 6.63%
and 6.70% on a notional amount of $7 and $8 million, respectively,
and paid a floating rate based on London Interbank Offered Rate
(LIBOR). The estimated fair value of the agreements at December
31, 1998 was a net unrealized gain of approximately $0.6 million
which is recognized in the accompanying consolidated balance
sheet.
FUTURES
In order to limit exposure to market fluctuations related to
temporary seed money invested within the separate account, the
Company entered into financial futures contracts on the S&P 500
index during 1997. No financial futures contracts were held during
1999 or 1998. The Company recorded $-0-, $-0-, and $2,035,309 of
losses from terminated contracts as a component of net investment
income during 1999, 1998, and 1997, respectively. The Company also
recorded gains of $-0-, $-0-, and $2,636,999 as a component of net
investment income from market appreciation on the underlying
hedged securities within the separate account during 1999, 1998,
and 1997, respectively.
A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon
price. Upon entering into futures contracts, the Company
maintains, in a segregated account with its custodian, securities
with a value equal to an agreed upon portion of the notional
obligation under the futures contracts. During the period the
futures contract is open, payments are received from or made to
the broker daily based upon changes in the value of the contract
with the related income or loss reflected in the consolidated
statement of income as a contra to changes in fair value of the
hedged securities.
The Company is exposed to credit related risk in the event of
nonperformance by counterparties to financial instruments but does
not expect any counterparties to fail to meet their obligations.
It is the Company's policy to deal only with highly rated
companies.
<PAGE>
<TABLE>
<CAPTION>
(6) COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net (loss) income $ (13,504) 13,894 8,978
------------ ------------ -------------
Other comprehensive (loss) income, before tax -
unrealized (depreciation) appreciation of debt and
equity securities arising during period:
Unrealized holding (depreciation) appreciation
of debt and equity securities (71,773) (12,971) 13,514
Adjustment to deferred acquisition costs
attributable to unrealized depreciation
(appreciation) 31,191 6,228 (5,128)
Adjustment to PVFP attributable to unrealized
depreciation (appreciation) 11,749 2,161 (3,193)
------------ ------------ -------------
Total unrealized (depreciation) appreciation
arising during period (28,833) (4,582) 5,193
------------ ------------ -------------
Less reclassification adjustments for realized losses (gains)
included in net income:
Adjustment for losses (gains) included in
net realized (losses) gains on sales
of investments 20,214 1,600 (563)
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (8,784) (768) 214
Adjustment for (gains) losses included in
amortization of PVFP (3,309) (267) 133
------------ ------------ -------------
Total reclassification adjustments for losses
(gains) included in net income 8,121 565 (216)
------------ ------------ -------------
Other comprehensive (loss) income before related
income tax (benefit) expense (36,954) (5,147) 5,409
Related income tax (benefit) expense (12,934) (1,801) 1,893
------------ ------------ -------------
Other comprehensive (loss) income, net of tax (24,020) (3,346) 3,516
------------ ------------ -------------
Comprehensive (loss) income $ (37,524) 10,548 12,494
============ ============ =============
</TABLE>
<PAGE>
(7) POSTRETIREMENT 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
under 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 1999, 1998, and 1997, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1999, 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 subsidiaries, CFLIC and 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 $0.2 million of state
income tax recoveries.
<TABLE>
<CAPTION>
Income taxes are recorded in the consolidated statement of income and
directly in certain shareholder's equity accounts. Income tax expense
for the years ended December 31 is allocated as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating (loss) income (excluding realized
investment gains and losses) $ (4,830) 3,906 5,464
Realized investment (losses) gains (1,560) (533) 197
------------ ------------ -------------
Income tax (benefit) expense
included in the consolidated
statements of income (6,390) 3,373 5,661
Shareholder's equity -
change in deferred federal income
taxes related to unrealized (depreciation)
appreciation on securities (12,934) (1,801) 1,893
------------ ------------ -------------
Total income tax (benefit) expense $ (19,324) 1,572 7,554
============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The actual federal income tax expense differed from the expected tax
expense computed by applying the U.S. federal statutory rate to income
before taxes on income as follows:
1999 1998 1997
--------------------- --------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax (benefit) expense $ (6,963) (35.0)% $ 6,043 35.0% $ 5,124 35.0%
State income taxes, net (10) -- (8) -- (33) (0.2)
Amortization of intangible assets 396 2.0 396 2.3 396 2.7
Dividend received deduction - separate
account (2,175) (10.9) (3,183) (18.5) -- --
Valuation allowance for permanent impairments
2,996 15.0 -- -- -- --
Return to provision adjustment (759) (3.8) -- -- -- --
Other 125 0.6 125 0.7 174 1.2
--------- ----------- ---------- ---------- --------- ----------
Total $ (6,390) (32.1)% $ 3,373 19.5% $ 5,661 38.7%
========= ========== ========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 follows:
1999 1998
----------- ------------
(IN THOUSANDS)
Deferred tax assets:
<S> <C> <C>
Policy reserves $ 31,657 31,003
Liability for commissions on recapture 1,014 2,896
Tax basis of intangible assets purchased 4,577 5,351
DAC "Proxy Tax" 23,832 20,619
Permanent impairments 5,482 --
Unrealized depreciation on investments 13,264 330
Net operating and capital loss 8,519 --
Other deferred tax assets 7,294 2,690
----------- ------------
Total deferred tax assets 95,639 62,889
Valuation allowance - permanent impairments (2,996) --
----------- ------------
Total deferred tax assets, net of valuation allowance 92,643 62,889
Deferred tax liabilities:
PVFP 10,507 11,013
Deferred policy acquisition costs 59,825 46,190
Other deferred tax liabilities 347 900
----------- ------------
Total deferred tax liabilities 70,679 58,103
----------- ------------
Net deferred tax assets $ 21,964 4,786
=========== ============
</TABLE>
<PAGE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. As of
December 31, 1999, the Company has provided a 55% valuation allowance
against the deferred tax asset related to the permanent impairments,
based on income projections for future years. Management believes that
it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the remaining deferred
tax asset.
(9) RELATED-PARTY TRANSACTIONS
On December 31, 1997, Cova Life Management Company (CLMC) and Navisys
Incorporated (Navisys), both affiliated companies, purchased certain
assets of Johnson & Higgins/Kirke Van Orsdel, Inc. (J&H/KVI), an
unaffiliated Delaware corporation, for $2,500,000, and merged them into
Cova Life Administrative Service Company (CLASC), a joint subsidiary of
CLMC and Navisys. Navisys purchased 51% of CLASC, and the remaining 49%
was purchased by CLMC. The purchased assets are the administrative and
service systems and organization that provide the policy service
functions for the Company's life and annuity products. On October 31,
1999, CLMC purchased the remaining 51% interest in CLASC from Navisys
for $1,184,414.
The Company has entered into management, operations, and servicing
agreements with its affiliated companies. The affiliated companies are
CLMC, a Delaware corporation, which provides management services and the
employees necessary to conduct the activities of the Company; Conning
Asset Management, which provides investment advice; and CLASC, which
provides underwriting, policy issuance, claims, and other policy
administration functions. Additionally, a portion of overhead and other
corporate expenses is allocated by the Company's parent, GALIC. Expenses
and fees paid to affiliated companies in 1999, 1998, and 1997 for the
Company were $28,995,330, $20,923,330, and $9,400,517, respectively.
In 1999 and 1998, the Company's affiliate, CLMC, received approximately
$3.9 million and $3.2 million, respectively, in advisory fees from GALIC
related to advisory services on GALIC's individual annuity products.
<PAGE>
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
GAAP differs 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 nonrecognition 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, adjustments to record the carrying values of debt
securities and certain equity securities at fair value 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 at the date of purchase and shareholder's equity to the net
purchase price.
Statutory accounting does not recognize the purchase method of
accounting.
<TABLE>
<CAPTION>
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP are as
follows:
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 102,041 104,740
Reconciling items:
GAAP investment valuation reserves (1,090) (510)
Statutory asset valuation reserve 7,362 19,206
Statutory interest maintenance reserve 6,466 5,983
GAAP investment adjustments to fair value (95,673) (3,685)
GAAP deferred policy acquisition costs 214,120 131,973
GAAP basis policy reserves (57,802) (52,305)
GAAP deferred federal income taxes (net) 21,964 4,786
GAAP guarantee assessment adjustment (9,900) (9,700)
GAAP goodwill 16,157 18,585
GAAP present value of future profits 55,406 42,230
GAAP future purchase price payable (2,898) (6,976)
Other (1,591) (2,241)
------------- -------------
GAAP shareholder's equity $ 254,562 252,086
============= =============
</TABLE>
<PAGE>
Statutory net losses for CFSLIC for the years ended December 31, 1999,
1998, and 1997 were $46,095,427, $2,830,105, and $9,816,357,
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. Due to the
1999 statutory net loss and the Company's negative earned surplus at
December 31, 1999, no dividends are permissible in 2000 without prior
approval of the insurance commissioner.
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,
1999, the Company's total adjusted capital and authorized control level
RBC were $109,402,439 and $28,033,662 respectively. This level of
adjusted capital qualifies under all tests.
(11) GUARANTY FUND ASSESSMENTS
The Company participates with 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 Company's authority to
issue new business, the Company is contingently liable for its share of
claims covered by the guaranty associations for insolvencies incurred
through 1999, 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 assets as a credit against premium taxes over, most commonly, five
years.
In November 1999, the National Organization of Life and Health Guaranty
Associations 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
$9,900,000 in future assessments on insolvencies that occurred before
December 31, 1999. 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 $9,900,000. The Company paid
approximately $36,000, $1,500,000, and $3,000,000 in guaranty fund
assessments in 1999, 1998, and 1997, respectively. These payments were
substantially reimbursed by OakRe. 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 remaining 20%. The
credits retained for 1999, 1998 and 1997 were not material.
(12) SUBSEQUENT EVENT
The purchase of GenAmerica Corporation and subsidiary, including the
Company, by MetLife was completed on January 6, 2000. On that date also,
the Company's modified coinsurance agreement with MetLife was suspended
for subsequent business.
APPENDIX A --
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. In the first example, we chose a husband and wife age 55. In the
second example, we chose a husband and wife age 65. Our hypothetical Insureds
are non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options; Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $3,500 for the 55-year-old example and $7,000
for the 65-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35% thereafter)
and advisory fee and operating expenses (equal to approximately .91%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.46% for these charges) are approximately -1.46%, 4.54% and
10.54%. The Policy will lapse if you do not make additional premiums where 0% is
used in the illustrations.
It is important to be aware that these illustrations assume 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 Cash Value, Cash
Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of this prospectus.
These charges are:
(1) A Federal tax charge of 1.3% and a Premium Tax Charge of 2.1% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed Insureds' ages, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
Cova Financial Services Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,190 1,233 250,000 2,190 1,233 250,000
2 7,534 4,775 3,819 250,000 4,755 3,799 250,000
3 11,585 7,322 6,366 250,000 7,252 6,295 250,000
4 15,840 9,830 8,873 250,000 9,673 8,716 250,000
5 20,307 12,298 11,342 250,000 12,012 11,056 250,000
6 24,997 14,726 13,876 250,000 14,263 13,413 250,000
7 29,922 17,112 16,475 250,000 16,416 15,778 250,000
8 35,093 19,456 19,031 250,000 18,456 18,031 250,000
9 40,523 21,755 21,542 250,000 20,366 20,153 250,000
10 46,224 24,007 24,007 250,000 22,123 22,123 250,000
15 79,301 37,254 37,254 250,000 30,610 30,610 250,000
20 121,517 47,702 47,702 250,000 29,721 29,721 250,000
25 175,397 52,768 52,768 250,000 6,030 6,030 250,000
30 244,163 44,553 44,553 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,344 1,388 250,000 2,344 1,388 250,000
2 7,534 5,243 4,287 250,000 5,223 4,267 250,000
3 11,585 8,272 7,316 250,000 8,199 7,242 250,000
4 15,840 11,437 10,481 250,000 11,270 10,314 250,000
5 20,307 14,743 13,787 250,000 14,434 13,478 250,000
6 24,997 18,195 17,345 250,000 17,687 16,837 250,000
7 29,922 21,797 21,159 250,000 21,022 20,385 250,000
8 35,093 25,555 25,130 250,000 24,428 24,003 250,000
9 40,523 29,473 29,261 250,000 27,891 27,678 250,000
10 46,224 33,557 33,557 250,000 31,390 31,390 250,000
15 79,301 59,960 59,960 250,000 52,069 52,069 250,000
20 121,517 91,335 91,335 250,000 69,886 69,886 250,000
25 175,397 127,803 127,803 250,000 74,270 74,270 250,000
30 244,163 168,158 168,158 250,000 37,100 37,100 250,000
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,500 1,543 250,000 2,500 1,543 250,000
2 7,534 5,731 4,774 250,000 5,710 4,753 250,000
3 11,585 9,301 8,345 250,000 9,224 8,267 250,000
4 15,840 13,245 12,289 250,000 13,068 12,112 250,000
5 20,307 17,603 16,647 250,000 17,270 16,314 250,000
6 24,997 22,416 21,566 250,000 21,860 21,010 250,000
7 29,922 27,730 27,092 250,000 26,869 26,232 250,000
8 35,093 33,596 33,171 250,000 32,329 31,904 250,000
9 40,523 40,072 39,860 250,000 38,270 38,058 250,000
10 46,224 47,218 47,218 250,000 44,726 44,726 250,000
15 79,301 99,735 99,735 250,000 90,421 90,421 250,000
20 121,517 185,800 185,800 250,000 161,531 161,531 250,000
25 175,397 330,568 330,568 347,097 283,297 283,297 297,462
30 244,163 569,760 569,760 598,248 485,325 485,325 509,592
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,189 1,233 252,189 2,189 1,233 252,189
2 7,534 4,775 3,818 254,775 4,755 3,798 254,755
3 11,585 7,321 6,365 257,321 7,249 6,292 257,249
4 15,840 9,828 8,871 259,828 9,665 8,709 259,665
5 20,307 12,295 11,338 262,295 11,997 11,041 261,997
6 24,997 14,721 13,871 264,721 14,235 13,385 264,235
7 29,922 17,104 16,467 267,104 16,368 15,730 266,368
8 35,093 19,444 19,019 269,444 18,379 17,954 268,379
9 40,523 21,738 21,526 271,738 20,248 20,035 270,248
10 46,224 23,983 23,983 273,983 21,948 21,948 271,948
15 79,301 37,120 37,120 287,120 29,701 29,701 279,701
20 121,517 46,991 46,991 296,991 26,673 26,673 276,673
25 175,397 50,045 50,045 300,045 0 0 0
30 244,163 36,646 36,646 286,646 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,344 1,388 252,344 2,344 1,388 252,344
2 7,534 5,243 4,286 255,243 5,222 4,266 255,222
3 11,585 8,271 7,315 258,271 8,195 7,239 258,195
4 15,840 11,435 10,479 261,435 11,261 10,305 261,261
5 20,307 14,739 13,783 264,739 14,415 13,459 264,415
6 24,997 18,188 17,338 268,188 17,651 16,801 267,651
7 29,922 21,786 21,149 271,786 20,959 20,321 270,959
8 35,093 25,539 25,114 275,539 24,323 23,898 274,323
9 40,523 29,450 29,237 279,450 27,724 27,511 277,724
10 46,224 33,522 33,522 283,522 31,132 31,132 281,132
15 79,301 59,730 59,730 309,730 50,454 50,454 300,454
20 121,517 89,891 89,891 339,891 62,990 62,990 312,990
25 175,397 121,008 121,008 371,008 51,365 51,365 301,365
30 244,163 141,666 141,666 391,666 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,499 1,543 252,499 2,499 1,543 252,499
2 7,534 5,730 4,774 255,730 5,708 4,752 255,708
3 11,585 9,299 8,343 259,299 9,220 8,263 259,220
4 15,840 13,243 12,286 263,243 13,057 12,101 263,057
5 20,307 17,598 16,642 267,598 17,247 16,291 267,247
6 24,997 22,407 21,557 272,407 21,814 20,964 271,814
7 29,922 27,716 27,078 277,716 26,786 26,148 276,786
8 35,093 33,575 33,150 283,575 32,186 31,761 282,186
9 40,523 40,039 39,826 290,039 38,034 37,821 288,034
10 46,224 47,167 47,167 297,167 44,348 44,348 294,348
15 79,301 99,332 99,332 349,332 87,520 87,520 337,520
20 121,517 182,735 182,735 432,735 145,768 145,768 395,768
25 175,397 314,133 314,133 564,133 211,733 211,733 461,733
30 244,163 511,789 511,789 761,789 260,358 260,358 510,358
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,190 1,233 250,000 2,190 1,233 250,000
2 7,534 4,775 3,819 250,000 4,755 3,799 250,000
3 11,585 7,322 6,366 250,000 7,252 6,295 250,000
4 15,840 9,830 8,873 250,000 9,673 8,716 250,000
5 20,307 12,298 11,342 250,000 12,012 11,056 250,000
6 24,997 14,726 13,876 250,000 14,263 13,413 250,000
7 29,922 17,112 16,475 250,000 16,416 15,778 250,000
8 35,093 19,456 19,031 250,000 18,456 18,031 250,000
9 40,523 21,755 21,542 250,000 20,366 20,153 250,000
10 46,224 24,007 24,007 250,000 22,123 22,123 250,000
15 79,301 37,254 37,254 250,000 30,610 30,610 250,000
20 121,517 47,702 47,702 250,000 29,721 29,721 250,000
25 175,397 52,768 52,768 250,000 6,030 6,030 250,000
30 244,163 44,553 44,553 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,344 1,388 250,000 2,344 1,388 250,000
2 7,534 5,243 4,287 250,000 5,223 4,267 250,000
3 11,585 8,272 7,316 250,000 8,199 7,242 250,000
4 15,840 11,437 10,481 250,000 11,270 10,314 250,000
5 20,307 14,743 13,787 250,000 14,434 13,478 250,000
6 24,997 18,195 17,345 250,000 17,687 16,837 250,000
7 29,922 21,797 21,159 250,000 21,022 20,385 250,000
8 35,093 25,555 25,130 250,000 24,428 24,003 250,000
9 40,523 29,473 29,261 250,000 27,891 27,678 250,000
10 46,224 33,557 33,557 250,000 31,390 31,390 250,000
15 79,301 59,960 59,960 250,000 52,069 52,069 250,000
20 121,517 91,335 91,335 250,000 69,886 69,886 250,000
25 175,397 127,803 127,803 250,000 74,270 74,270 250,000
30 244,163 168,158 168,158 250,000 37,100 37,100 250,000
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 3,675 2,500 1,543 250,000 2,500 1,543 250,000
2 7,534 5,731 4,774 250,000 5,710 4,753 250,000
3 11,585 9,301 8,345 250,000 9,224 8,267 250,000
4 15,840 13,245 12,289 250,000 13,068 12,112 250,000
5 20,307 17,603 16,647 250,000 17,270 16,314 250,000
6 24,997 22,416 21,566 250,000 21,860 21,010 250,000
7 29,922 27,730 27,092 250,000 26,869 26,232 250,000
8 35,093 33,596 33,171 250,000 32,329 31,904 250,000
9 40,523 40,072 39,860 250,000 38,270 38,058 250,000
10 46,224 47,218 47,218 250,000 44,726 44,726 250,000
15 79,301 99,735 99,735 250,000 90,421 90,421 250,000
20 121,517 185,655 185,655 293,435 161,519 161,519 255,287
25 175,397 325,755 325,755 452,076 270,575 270,575 375,499
30 244,163 547,457 547,457 687,190 425,496 425,496 534,099
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,527 2,277 250,000 4,477 2,227 250,000
2 15,068 9,704 7,454 250,000 9,449 7,199 250,000
3 23,171 14,800 12,550 250,000 14,158 11,908 250,000
4 31,679 19,811 17,561 250,000 18,576 16,326 250,000
5 40,613 24,736 22,486 250,000 22,671 20,421 250,000
6 49,994 29,570 27,570 250,000 26,403 24,403 250,000
7 59,844 34,308 32,808 250,000 29,703 28,203 250,000
8 70,186 38,944 37,944 250,000 32,524 31,524 250,000
9 81,045 43,466 42,966 250,000 34,758 34,258 250,000
10 92,448 47,865 47,865 250,000 36,294 36,294 250,000
15 158,602 73,414 73,414 250,000 35,239 35,239 250,000
20 243,035 87,155 87,155 250,000 0 0 0
25 350,794 79,022 79,022 250,000 0 0 0
30 488,326 21,287 21,287 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,839 2,589 250,000 4,788 2,538 250,000
2 15,068 10,652 8,402 250,000 10,386 8,136 250,000
3 23,171 16,723 14,473 250,000 16,044 13,794 250,000
4 31,679 23,059 20,809 250,000 21,733 19,483 250,000
5 40,613 29,669 27,419 250,000 27,424 25,174 250,000
6 49,994 36,562 34,562 250,000 33,074 31,074 250,000
7 59,844 43,742 42,242 250,000 38,618 37,118 250,000
8 70,186 51,218 50,218 250,000 44,009 43,009 250,000
9 81,045 58,990 58,490 250,000 49,142 48,642 250,000
10 92,448 67,065 67,065 250,000 53,913 53,913 250,000
15 158,602 119,237 119,237 250,000 75,816 75,816 250,000
20 243,035 178,870 178,870 250,000 67,513 67,513 250,000
25 350,794 255,755 255,755 268,542 0 0 0
30 488,326 355,868 355,868 359,427 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 5,153 2,903 250,000 5,099 2,849 250,000
2 15,068 11,639 9,389 250,000 11,362 9,112 250,000
3 23,171 18,803 16,553 250,000 18,086 15,836 250,000
4 31,679 26,712 24,462 250,000 25,292 23,042 250,000
5 40,613 35,441 33,191 250,000 33,004 30,754 250,000
6 49,994 45,074 43,074 250,000 41,240 39,240 250,000
7 59,844 55,698 54,198 250,000 50,005 48,505 250,000
8 70,186 67,414 66,414 250,000 59,333 58,333 250,000
9 81,045 80,329 79,829 250,000 69,220 68,720 250,000
10 92,448 94,567 94,567 250,000 79,679 79,679 250,000
15 158,602 199,786 199,786 250,000 152,511 152,511 250,000
20 243,035 374,253 374,253 392,966 279,328 279,328 293,294
25 350,794 661,091 661,091 694,146 493,373 493,373 518,042
30 488,326 1,131,993 1,131,993 1,143,313 839,583 839,583 847,979
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,527 2,277 254,527 4,475 2,225 254,475
2 15,068 9,703 7,453 259,703 9,438 7,188 259,438
3 23,171 14,797 12,547 264,797 14,120 11,870 264,120
4 31,679 19,805 17,555 269,805 18,484 16,234 268,484
5 40,613 24,724 22,474 274,724 22,486 20,236 272,486
6 49,994 29,549 27,549 279,549 26,070 24,070 276,070
7 59,844 34,271 32,771 284,271 29,148 27,648 279,148
8 70,186 38,883 37,883 288,883 31,656 30,656 281,656
9 81,045 43,368 42,868 293,368 33,458 32,958 283,458
10 92,448 47,712 47,712 297,712 34,417 34,417 284,417
15 158,602 72,266 72,266 322,266 27,454 27,454 277,454
20 243,035 79,278 79,278 329,278 0 0 0
25 350,794 52,675 52,675 302,675 0 0 0
30 488,326 0 0 0 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,839 2,589 254,839 4,786 2,536 254,786
2 15,068 10,651 8,401 260,651 10,373 8,123 260,373
3 23,171 16,719 14,469 266,719 16,001 13,751 266,001
4 31,679 23,051 20,801 273,051 21,625 19,375 271,625
5 40,613 29,654 27,404 279,654 27,197 24,947 277,197
6 49,994 36,535 34,535 286,535 32,649 30,649 282,649
7 59,844 43,694 42,194 293,694 37,883 36,383 287,883
8 70,186 51,135 50,135 301,135 42,810 41,810 292,810
9 81,045 58,853 58,353 308,853 47,270 46,770 297,270
10 92,448 66,843 66,843 316,843 51,090 51,090 301,090
15 158,602 117,268 117,268 367,268 60,572 60,572 310,572
20 243,035 162,485 162,485 412,485 18,058 18,058 268,058
25 350,794 181,767 181,767 431,767 0 0 0
30 488,326 141,093 141,093 391,093 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 5,152 2,902 255,152 5,097 2,847 255,097
2 15,068 11,637 9,387 261,637 11,348 9,098 261,348
3 23,171 18,799 16,549 268,799 18,037 15,787 268,037
4 31,679 26,703 24,453 276,703 25,165 22,915 275,165
5 40,613 35,423 33,173 285,423 32,726 30,476 282,726
6 49,994 45,039 43,039 295,039 40,701 38,701 290,701
7 59,844 55,634 54,134 305,634 49,035 47,535 299,035
8 70,186 67,302 66,302 317,302 57,687 56,687 307,687
9 81,045 80,136 79,636 330,136 66,539 66,039 316,539
10 92,448 94,242 94,242 344,242 75,455 75,455 325,455
15 158,602 196,346 196,346 446,346 123,130 123,130 373,130
20 243,035 345,183 345,183 595,183 139,858 139,858 389,858
25 350,794 550,551 550,551 800,551 58,600 58,600 308,600
30 488,326 817,720 817,720 1,067,720 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,527 2,277 250,000 4,477 2,227 250,000
2 15,068 9,704 7,454 250,000 9,449 7,199 250,000
3 23,171 14,800 12,550 250,000 14,158 11,908 250,000
4 31,679 19,811 17,561 250,000 18,576 16,326 250,000
5 40,613 24,736 22,486 250,000 22,671 20,421 250,000
6 49,994 29,570 27,570 250,000 26,403 24,403 250,000
7 59,844 34,308 32,808 250,000 29,703 28,203 250,000
8 70,186 38,944 37,944 250,000 32,524 31,524 250,000
9 81,045 43,466 42,966 250,000 34,758 34,258 250,000
10 92,448 47,865 47,865 250,000 36,294 36,294 250,000
15 158,602 73,414 73,414 250,000 35,239 35,239 250,000
20 243,035 87,155 87,155 250,000 0 0 0
25 350,794 79,022 79,022 250,000 0 0 0
30 488,326 21,287 21,287 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 4,839 2,589 250,000 4,788 2,538 250,000
2 15,068 10,652 8,402 250,000 10,386 8,136 250,000
3 23,171 16,723 14,473 250,000 16,044 13,794 250,000
4 31,679 23,059 20,809 250,000 21,733 19,483 250,000
5 40,613 29,669 27,419 250,000 27,424 25,174 250,000
6 49,994 36,562 34,562 250,000 33,074 31,074 250,000
7 59,844 43,742 42,242 250,000 38,618 37,118 250,000
8 70,186 51,218 50,218 250,000 44,009 43,009 250,000
9 81,045 58,990 58,490 250,000 49,142 48,642 250,000
10 92,448 67,065 67,065 250,000 53,913 53,913 250,000
15 158,602 119,237 119,237 250,000 75,816 75,816 250,000
20 243,035 178,870 178,870 250,000 67,513 67,513 250,000
25 350,794 251,932 251,932 294,818 0 0 0
30 488,326 336,158 336,158 371,266 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 7,350 5,153 2,903 250,000 5,099 2,849 250,000
2 15,068 11,639 9,389 250,000 11,362 9,112 250,000
3 23,171 18,803 16,553 250,000 18,086 15,836 250,000
4 31,679 26,712 24,462 250,000 25,292 23,042 250,000
5 40,613 35,441 33,191 250,000 33,004 30,754 250,000
6 49,994 45,074 43,074 250,000 41,240 39,240 250,000
7 59,844 55,698 54,198 250,000 50,005 48,505 250,000
8 70,186 67,414 66,414 250,000 59,333 58,333 250,000
9 81,045 80,329 79,829 250,000 69,220 68,720 250,000
10 92,448 94,567 94,567 250,000 79,679 79,679 250,000
15 158,602 199,707 199,707 278,783 152,511 152,511 250,000
20 243,035 367,331 367,331 461,984 267,681 267,681 336,657
25 350,794 629,572 629,572 736,744 430,054 430,054 503,263
30 488,326 1,033,045 1,033,045 1,140,936 658,401 658,401 727,164
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT 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.
</TABLE>
APPENDIX B
PARTICIPATING INVESTMENT FUNDS
Below are the investment objectives and strategies of each investment
portfolio available under the contract. The fund prospectuses contain more
complete information including a description of the investment objectives,
policies, restrictions and risks. THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT OBJECTIVES WILL BE ACHIEVED.
AIM VARIABLE INSURANCE FUNDS:
AIM Variable Insurance Funds is a mutual fund with multiple portfolios.
A I M Advisors, Inc. is the investment adviser to each portfolio.
The following portfolios are available under the contract:
AIM V.I. CAPITAL APPRECIATION FUND
Investment Objective: The Fund's investment objective is growth of capital
through investment in common stocks, with emphasis on medium- and small-sized
companies. The portfolio managers focus on companies they believe are likely to
benefit from new or innovative products, services or processes as well as those
that have experienced above-average, long-term growth in earnings and have
excellent prospects for future growth.
AIM V.I. INTERNATIONAL EQUITY FUND
Investment Objective: The Fund's investment objective is to achieve long-term
growth of capital by investing in a diversified portfolio of international
equity securities whose issuers are considered to have strong earnings momentum.
AIM V.I. VALUE FUND
Investment Objective: The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by
the Fund's investment advisor to be undervalued relative to the investment
advisor's appraisal of the current or projected earnings of the companies
issuing the securities, or relative to current market values of assets owned
by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
Alliance Variable Products Series Fund, Inc. is a mutual fund with multiple
portfolios. Alliance Capital Management L.P. is the investment adviser to each
portfolio. The following portfolios are available under the contract:
PREMIER GROWTH PORTFOLIO (Class A)
Investment Objective: The Portfolio's investment objective is growth of capital
by pursuing aggressive investment policies. The Portfolio invests primarily
in equity securities of U.S. companies. Normally, the Portfolio invests in
about 40-50 companies, with the 25 most highly regarded of these companies
usually constituting approximately 70% of the Portfolio's net assets.
REAL ESTATE INVESTMENT PORTFOLIO (Class A)
Investment Objective: The Portfolio's investment objective is total return from
long-term growth of capital and income principally through investing in equity
securities of companies that are primarily engaged in or related to the real
estate industry.
COVA SERIES TRUST:
Cova Series Trust is managed by Cova Investment Advisory Corporation (Cova
Advisory), which is an affiliate of Cova. Cova Series Trust is a mutual fund
with multiple portfolios. Cova Advisory has engaged sub-advisers to provide
investment advice for the individual investment portfolios. The following
portfolios are available under the contract:
PORTFOLIOS MANAGED BY J. P. MORGAN INVESTMENT MANAGEMENT INC.:
INTERNATIONAL EQUITY PORTFOLIO
Investment Objective: The International Equity Portfolio seeks to provide a high
total return from a portfolio of equity securities of foreign corporations.
LARGE CAP STOCK PORTFOLIO
Investment Objective: The Large Cap Stock Portfolio seeks to provide long-term
growth of capital and income.
QUALITY BOND PORTFOLIO
Investment Objective: The Quality Bond Portfolio seeks to provide a high total
return consistent with moderate risk of capital and maintenance of liquidity.
SELECT EQUITY PORTFOLIO
Investment Objective: The Select Equity Portfolio seeks to provide long-term
growth of capital and income.
SMALL CAP STOCK PORTFOLIO
Investment Objective: The Small Cap Stock Portfolio seeks to provide a high
total return from a portfolio of equity securities of small companies.
PORTFOLIOS MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO
Investment Objective: The Bond Debenture Portfolio seeks to provide high current
income and the opportunity for capital appreciation to produce a high total
return.
DEVELOPING GROWTH PORTFOLIO
Investment Objective: The Developing Growth Portfolio seeks long-term growth of
capital through a diversified and actively-managed portfolio consisting of
developing growth companies, many of which are traded over the counter.
LARGE CAP RESEARCH PORTFOLIO
Investment Objective: The Large Cap Research Portfolio seeks growth of capital
and growth of income consistent with reasonable risk.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
Investment Objective: The Lord Abbett Growth and Income Portfolio seeks to
achieve long-term growth of capital and income without excessive fluctuation in
market value.
MID-CAP VALUE PORTFOLIO
Investment Objective: The Mid-Cap Value Portfolio seeks capital appreciation
through investments, primarily in equity securities, which are believed to be
undervalued in the marketplace.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, CLASS 1 SHARES:
Franklin Templeton Variable Insurance Products Trust is a mutual fund with
multiple portfolios. Effective May 1, 2000 the portfolios of Templeton Variable
Products Series Fund were merged into similar portfolios of Franklin Templeton
Variable Insurance Products Trust. Each portfolio has two classes of shares:
Class 1 and Class 2. The portfolios available in connection with your contract
are Class 1 shares. Franklin Advisers, Inc. is the investment adviser for the
Franklin Small Cap Fund, Franklin Mutual Advisers, LLC is the investment adviser
for the Mutual Shares Securities Fund, Templeton Investment Counsel, Inc. is the
investment adviser for the Templeton International Securities Fund, and
Templeton Asset Management Ltd. is the investment adviser for the Templeton
Developing Markets Securities Fund. The following portfolios are available under
the contract:
MUTUAL SHARES SECURITIES FUND (the surviving fund of the merger with Mutual
Shares Investments Fund)
Investment Objective and Principal Investments: The Fund's principal goal is
capital appreciation. Its secondary goal is income. Under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities of companies that the manager believes are available at market prices
less than their value based on certain recognized or objective criteria
(intrinsic value).
FRANKLIN SMALL CAP FUND (the surviving fund of the merger with Franklin
Small Cap Investments Fund)
Investment Objective and Principal Investments: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund will invest
at least 65% of its total assets in equity securities of U.S. small
capitalization (small cap) growth companies.
TEMPLETON INTERNATIONAL SECURITIES FUND (formerly, Templeton International
Fund)
Investment Objective and Principal Investments: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund will invest
at least 65% of its total assets in the equity securities of companies located
outside the U.S., including in emerging markets.
TEMPLETON DEVELOPING MARKETS SECURITIES FUND (formerly, Templeton
Developing Markets Fund)
Investment Objective: The Fund's investment goal is long-term capital
appreciation. Under normal market conditions, the Fund will invest at least 65%
of its total assets in emerging market equity securities. Emerging market equity
securities generally include equity securities that trade in emerging markets or
are issued by companies that derive revenue from goods or services produced, or
that have their principal activities or assets in, emerging market countries.
TEMPLETON GROWTH SECURITIES FUND (the surviving fund of the merger
with Templeton Stock Fund)
Investment Objective: The Fund's investment goal is long-term capital growth.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of companies located anywhere in the world,
including in the U.S. and emerging markets.
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios. Each
portfolio is managed by Conning Asset Management Company. The following
portfolio is available under the contract:
MONEY MARKET FUND
Investment Objective: The Money Market Fund's investment objective is to provide
investors with current income while preserving capital and maintaining
liquidity. The Fund seeks to achieve this objective by investing primarily in
high-quality, short-term money market instruments. The Fund purchases securities
that meet the quality, maturity, and diversification requirements applicable to
money market funds.
GOLDMAN SACHS VARIABLE INSURANCE TRUST:
Goldman Sachs Variable Insurance Trust is a mutual fund with multiple
portfolios. Goldman Sachs Asset Management, a unit of the Investment Management
Division of Goldman, Sachs & Co., is the investment adviser for the Goldman
Sachs VIT Growth and Income Fund and Goldman Sachs VIT Internet Tollkeeper Fund
and Goldman Sachs Asset Management International is the investment adviser for
the Goldman Sachs VIT International Equity Fund and the Goldman Sachs VIT Global
Income Fund. The following portfolios are available under the contract:
GOLDMAN SACHS VIT GLOBAL INCOME FUND
Investment Objective: The Fund seeks a high total return, emphasizing current
income, and, to a lesser extent, providing opportunities for capital
appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies.
GOLDMAN SACHS VIT INTERNET TOLLKEEPER FUND
Investment Objective: The Fund seeks long-term growth of capital by investing,
under normal circumstances, at least 90% of its total assets in equity
securities and at least 65% of its total assets in equity securities of
"Internet Tollkeeper" companies, which are companies in the media,
telecommunications, technology and Internet sectors which provide access,
infrastructure, content and services to Internet companies and Internet users.
GOLDMAN SACHS VIT GROWTH AND INCOME FUND
Investment Objective: The Fund seeks long-term growth of capital and growth of
income by investing in large capitalization U.S. stocks that are believed to
be undervalued or undiscovered in the marketplace.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND
Investment Objective: The Fund seeks long-term capital appreciation by investing
primarily in equity securities of companies organized outside the United States
or whose securities are principally traded outside the United States. The Fund
intends to invest in companies with public stock market capitalizations that are
larger than $1 billion at the time of investment.
KEMPER VARIABLE SERIES
Kemper Variable Series is a mutual fund with multiple portfolios. Scudder Kemper
Investments, Inc. is the investment adviser for the Kemper Government Securities
Portfolio, the Kemper Small Cap Growth Portfolio and the Kemper Small Cap Value
Portfolio. The following portfolios are available under the contract:
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Investment Objective: Kemper Government Securities seeks high current return
consistent with preservation of capital. The Portfolio pursues its objective
by investing at least 65% of its total assets in U.S. Government securities
and repurchase agreements of U.S. Government securities.
KEMPER SMALL CAP GROWTH PORTFOLIO
Investment Objective: Kemper Small Cap Growth Portfolio seeks maximum
appreciation of investors' capital. The Portfolio pursues its objective by
investing at least 65% of its total assets in small capitalization stocks
similar in size to those companies comprising the Russell 2000 Index. Many
of these companies would be in the early stages of their life cycle. Equity
securities in which the Portfolio invests consist primarily of common stocks,
but may include convertible securities, including warrants and rights.
KEMPER SMALL CAP VALUE PORTFOLIO
Investment Objective: Kemper Small Cap Value Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in a diversified portfolio of the stocks of small U.S. companies,
which are those similar in size to those comprising the Russell 2000 Index and
that the investment manager believes to be undervalued. Under normal market
conditions, the Portfolio invests at least 65% of its assets in small
capitalization stocks similar in size to those comprising the Russell 2000
Index.
LIBERTY VARIABLE INVESTMENT TRUST:
Liberty Variable Investment Trust is a mutual fund with multiple portfolios.
Liberty Advisory Services Corp. (LASC) is the investment manager to the Trust.
LASC has engaged Newport Fund Management, Inc. as sub-adviser to provide
investment advice for the Newport Tiger Fund, Variable Series. The following
portfolio is available under the contract:
NEWPORT TIGER FUND, VARIABLE SERIES
Investment Objective: The Fund seeks long-term capital appreciation. Under
normal market conditions, the Fund invests primarily in stocks of companies
located in the nine Tiger countries of Asia. The Tigers of Asia are Hong Kong,
Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The People's
Republic of China and the Philippines. The Fund typically invests in stocks of
larger, well-established companies.
MFS VARIABLE INSURANCE TRUST:
MFS Variable Insurance Trust is a mutual fund with multiple portfolios.
Massachusetts Financial Services Company is the investment adviser to each
portfolio. The following portfolios are available under the contract:
MFS EMERGING GROWTH SERIES
Investment Objective: The Series' investment objective is long term growth of
capital. The Series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities of emerging growth
companies.
MFS GLOBAL GOVERNMENTS SERIES
Investment Objective: The Series' investment objective is to provide income
and capital appreciation. The Series invests primarily in U.S. and foreign
government securities.
MFS GROWTH WITH INCOME SERIES
Investment Objective: The Series' investment objective is to provide reasonable
current income and long-term growth of capital and income. The Series invests,
under normal market conditions, at least 65% of its total assets in common
stocks and related securities.
MFS HIGH INCOME SERIES
Investment Objective: The Series' investment objective is to provide high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features.
The Series invests, under normal market conditions, at least 80% of its total
assets in high yield fixed income securities which generally are lower rated
bonds commonly known as junk bonds. Junk bonds are subject to a substantially
higher degree of risk than higher rated bonds.
MFS RESEARCH SERIES
Investment Objective: The Series' investment objective is long-term growth of
capital and future income. The Series invests, under normal market conditions,
at least 80% of its total assets in common stocks and related securities, such
as preferred stocks, convertible securities and depositary receipts.
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
Oppenheimer Variable Account Funds is a mutual fund with multiple portfolios.
OppenheimerFunds, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the contract:
OPPENHEIMER BOND FUND/VA
Investment Objective: The Fund's main objective is to seek a high level of
current income. As a secondary objective, the Fund seeks capital appreciation
when consistent with its primary objective. Normally, the Fund invests at least
65% of its total assets in investment-grade debt securities, U.S. Government
securities and money market instruments.
OPPENHEIMER CAPITAL APPRECIATION FUND/VA
Investment Objective: The Fund seeks capital appreciation by investing in
securities of well-known established companies. The Fund invests mainly in
common stocks of established and well-known U.S. companies.
OPPENHEIMER HIGH INCOME FUND/VA
Investment Objective: The Fund seeks a high level of current income from
investment in high-yield fixed income securities. The Fund invests mainly
in a variety of high-yield fixed-income securities of domestic and foreign
issuers.
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Investment Objective: The Fund's objective is to seek high total return (which
includes growth in the value of its shares as well as current income) from
equity and debt securities. The Fund invests mainly in common stocks of U.S.
companies, and can also invest in other equity securities such as preferred
stocks and securities convertible into common stocks.
OPPENHEIMER STRATEGIC BOND FUND/VA
Investment Objective: The Fund seeks a high level of current income. The Fund
invests mainly in debt securities of issuers in three market sectors: foreign
governments and companies, U.S. government securities and lower-grade high-yield
securities of U.S. companies.
PUTNAM VARIABLE TRUST:
Putnam Variable Trust is a mutual fund with multiple portfolios. Putnam
Investment Management, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the contract:
PUTNAM VT GROWTH AND INCOME FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital growth and current income.
PUTNAM VT INTERNATIONAL GROWTH FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital appreciation.
PUTNAM VT INTERNATIONAL NEW OPPORTUNITIES FUND-CLASS IA SHARES
Investment Objective: The Fund seeks long-term capital appreciation.
PUTNAM VT NEW VALUE FUND-CLASS IA SHARES
Investment Objective: The Fund seeks long-term capital appreciation.
PUTNAM VT VISTA FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital appreciation.
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
Variable Insurance Products Fund, Variable Insurance Products Fund II and
Variable Insurance Products Fund II are each a mutual fund with multiple
portfolios managed by Fidelity Management & Research Company. The following
portfolios are available under the policy:
VARIABLE INSURANCE PRODUCTS FUND
VIP GROWTH PORTFOLIO
Investment Objective: The Growth Portfolio seeks to achieve capital
appreciation.
VIP EQUITY-INCOME PORTFOLIO
Investment Objective: The Equity-Income Portfolio seeks reasonable income. The
Fund will also consider the potential for capital appreciation. The Fund's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the S&P 500.
VARIABLE INSURANCE PRODUCTS FUND II
VIP II CONTRAFUND(R) PORTFOLIO
Investment Objective: The Contrafund(R) Portfolio seeks long-term capital
appreciation.
VARIABLE INSURANCE PRODUCTS FUND III
VIP III GROWTH OPPORTUNITIES PORTFOLIO
Investment Objective: The Growth Opportunities Portfolio seeks to provide
capital growth.
VIP III GROWTH & INCOME PORTFOLIO
Investment Objective: The Growth & Income Portfolio seeks high total return
through a combination of current income and capital appreciation.
PROSPECTUS - VERSION B
Flexible Premium Joint and Last Survivor Variable Life Insurance Policy
issued by
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT ONE
This prospectus describes the Flexible Premium Joint and Last Survivor Variable
Life Insurance Policy that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following 6
Investment Funds listed below which are offered through our Separate Account.
When you purchase a Policy, you bear the complete investment risk. This means
that the Cash Value of your Policy may increase and decrease depending upon the
investment performance of the Investment Fund(s) you select. The duration of the
Policy and, under some circumstances, the death benefit will increase and
decrease depending upon investment performance.
General American Capital Company:
Advisor: Conning Asset Management Company
Money Market Fund
Russell Insurance Funds:
Advisor: Frank Russell Investment
Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Joint
and Last Survivor Variable Life Insurance Policy. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains information
regarding registrants that file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: May 1, 2000
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
The Variable Life Insurance Policy
Purchases
Investment Choices
Expenses
Death Benefit
Taxes
Access to Your Money
Other Information
Inquiries
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Application for a Policy
Premiums
Unscheduled Premiums
Lapse and Grace Period
Reinstatement
Allocation of Premium
Cash Value of Your Policy
Method of Determining Cash Value of an Investment Fund
Net Investment Factor
Our Right to Reject or Return a Premium Payment
3. INVESTMENT FUNDS
Substitution and Limitations on Further Investments
Transfers
Dollar Cost Averaging
Portfolio Rebalancing
Approved Asset Allocation Programs
4. EXPENSES
Tax Charges
Sales Charge
Selection and Issue Expense Charge
Monthly Policy Charge
Monthly Cost of Insurance
Charges for Additional Benefit Riders
Mortality and Expense Risk Charge
Surrender Charge
Transaction Charges
Investment Fund Expenses
5. DEATH BENEFIT
Change of Death Benefit
Decrease in Face Amount
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Policy Loans
Loan Interest Charged
Security
Repaying Policy Debt
Partial Withdrawals
Pro-Rata Surrender
Full Surrenders
8. OTHER INFORMATION
Cova
Distribution
The Separate Account
Suspension of Payments or Transfers
Ownership
Adjustment of Charges
PART II
Executive Officers and Directors
Voting
Disregard of Voting Instructions
Legal Opinions
Our Right to Contest
Additional Benefits
Federal Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
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 - Illustration of Policy Values
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Attained Age -- The Issue Age of an Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Last Insured's death. A Beneficiary
may be changed as set forth in the Policy and this prospectus.
Cash Value -- The total of the amounts credited to the Owner in the Separate
Account, the General Account and the Loan Account.
Cash Surrender Value -- The Cash Value of a Policy on the date of surrender,
less any Indebtedness, less any unpaid selection and issue expense charge due
for the remainder of the first Policy year, less any unpaid monthly Policy
charge due for the remainder of the first Policy year, and less any surrender
charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the younger Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insureds The persons whose lives are insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office.
Issue Age -- The age of each Insured at his or her nearest birthday as of the
Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Last Insured -- The Insured whose death succeeds the death of all other Insureds
under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Cash Value transferred to the Loan
Account will be allocated to the appropriate Loan Subaccount to reflect the
origin of the Cash Value. At any point in time, the Loan Account will equal the
sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium joint and last survivor variable life insurance
Policy offered by us and described in this Prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the Cash
Value by a given percentage.
Separate Account -- Cova Variable Life Account One, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Services Life Insurance Company, P.O. Box
66757, St. Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insureds' joint age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of both of the persons insured. This
death benefit is distributed free from Federal income taxes. The Policy can be
used as part of your estate planning or used to save for retirement. The
Insureds are the persons you choose to have their lives insured under the
Policy. You, the Owner, can also be one of the Insureds, but you do not have to
be.
The Policy described in this prospectus is a flexible premium joint and last
survivor variable life insurance policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Cash Value of your Policy, when allocated
to the Investment Funds, may increase or decrease depending upon the investment
results of the selected Investment Funds. The duration of your Policy may vary,
and under certain circumstances, so may your death benefit.
So long as either Insured is alive, you can surrender the Policy for all or part
of its Cash Surrender Value. You may also obtain a Policy loan, using the Policy
as security. We will pay a death benefit when the Last Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum face amount of insurance that we offer is $100,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insureds. We may require each of the
Insureds to provide us with medical records, physician's statement or a complete
paramedical examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. A detailed description of the Investment Funds, their investment
policies, restrictions, risks, and charges is contained in the prospectuses for
each Investment Fund. You should read the prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Cash Value and from the
Investment Funds. These deductions are made for taxes, mortality and expense
risks, administrative expenses, sales charges, the cost of providing life
insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
tax charge. We also deduct a Premium Tax Charge currently equal to 2.10% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Cash Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insureds.
Monthly Policy Charge. This charge is equal to $25 per month for the first
Policy year, and $6 per Policy month thereafter. This amount is deducted from
the Cash Value of your Policy on the Investment Start Date and each Monthly
Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your Cash Value
on the Investment Start Date and each Monthly Anniversary date. The amount of
the deduction varies with the age, sex (except in unisex policies), risk class
of the Insureds, duration, and the amount of death benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Annual
Management Fees Fund Expenses
(after reimbursement (after reimbursement
and/or waivers and/or waivers
Investment Funds as noted) Other Fund Expenses as noted)
- ---------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Advisor: Conning Asset Management Company
<S> <C> <C> <C>
Money Market Fund 0.125% 0.08% 0.205%
- ------------------------------------------------------------------------------------------------------------------------------
Russell Insurance Funds *
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund 0.77% 0.15% 0.92%
Aggressive Equity Fund 0.86% 0.39% 1.25%
Non-U.S. Fund 0.75% 0.55% 1.30%
Real Estate Securities Fund 0.85% 0.30% 1.15%
Core Bond Fund 0.54% 0.26% 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* The manager of Russell Insurance Funds, Frank Russell Investment Management
company, has contractually agreed to waive, at least until April 30, 2001,
a portion of the management fee, up to the full amount of that fee, equal to
the amount by which the Fund's total operating expenses exceed the amounts
set forth above under "Total Annual Fund Expenses" and to reimburse the
Fund for all remaining expenses, after fee waivers which exceed the amount
set forth above for each fund under "Total Annual Fund Expenses." Absent
such waiver and reimbursement, the management fees and total operating
expenses would be .78% and .93% for the Multi-Style Equity Fund; .95% and
1.34% for the Aggressive Equity Fund; .95% and 1.50% for the Non-U.S. Fund;
and .60% and .66% for the Core Bond Fund.
</FN>
</TABLE>
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the Cash Value
of your Policy to help us recover the costs of selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Last Insured's death;
and
o under some circumstances the Cash Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Cash Value of your Policy on the date of the Last
Insured's death multiplied by the applicable factor. Under this option, the
amount of the death benefit is fixed, except when we use the factor to determine
the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Cash Value of your Policy on the date of
the Last Insured's death, or the Cash Value of your Policy multiplied by the
applicable factor. Under this option, the amount of the death benefit is
variable (but will never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Cash Value on the date of the Last Insured's
death multiplied by an Attained Age factor.
So long as the Policy remains in force, prior to the younger Insured's Attained
Age 100, the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
decrease the Face Amount under certain circumstances.
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 Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 59 1/2 when you take money
out of a MEC, you may also be subject to a 10% federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of either Insured
and we will pay you the Cash Surrender Value of your Policy. At any time during
either of the Insureds' lifetimes and before the Policy has terminated, you may
withdraw a part of your Cash Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Cash Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it (or
whatever period is required in your state) or the 45th day after you sign your
application, whichever period ends later. We will refund all premiums paid (or
whatever amount is required in your state). Upon completion of the underwriting
process, we will allocate your initial Net Premium to the Money Market Fund
until the reallocation date, which occurs upon the expiration of the free look
period. After that, we will invest your Policy's Cash Value and any subsequent
premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of one of the
Insureds, 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 one of the Insureds.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Cash Value between
Investment Funds periodically to keep the allocation you select. We call
this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Services Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
(877)357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insureds. It has a Cash
Value, a death benefit, surrender rights, loan privileges and other
characteristics associated with traditional and universal life insurance.
However, since the Policy is a variable life insurance policy, the value of your
Policy will increase or decrease depending upon the investment experience of the
Investment Funds you choose. The duration or amount of the death benefit may
also vary based on the investment performance of the underlying Investment
Funds. To the extent you select any of the Investment Funds, you bear the
investment risk. If your Cash Value less any loans, loan interest accrued,
unpaid selection and issue charge due for the remainder of the first Policy
year, and if surrender charges and any partial withdrawal fee is insufficient to
pay the monthly deductions, the Policy may terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When both of the
Insureds die, the death proceeds are paid to your Beneficiary which should be
excludable from the gross income of the Beneficiary. The tax-free death proceeds
make this an excellent way to accumulate money you do not think you will use in
your lifetime. It is also a tax-efficient way to provide for those you leave
behind. If you need access to your money, you can borrow from the Policy, make a
total surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about both of the proposed Insureds. In some cases, we will
ask for additional information. We may request that the proposed Insureds
provide us with medical records, a physician's statement or possibly require
other medical tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment; or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insureds within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Cash Value. If your Policy was issued in Florida, the Grace Period
provision may be different. Please refer to your Policy.
If the Last Insured dies during the grace period, any overdue monthly deductions
will be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that both of the Insureds are still
insurable at the risk class that applies for the latest Face Amount portion
then in effect (if only one Insured is alive on the date the Policy lapsed,
you need only submit proof for the living Insured);
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Cash Value of your Policy on the
reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if an Insured who
was living at the time of lapse dies before the reinstatement date. There will
be a full monthly deduction for the Policy month which includes the
reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Cash Value of your
Policy is allocated to the General Account and/or the Investment Funds in
accordance with your selections requested in the application. For any chosen
allocation, the minimum percentage that may be allocated is 5% of the Net
Premium and the percentages must be in whole numbers. This allocation is not
subject to the transfer fee provision. However, we reserve the right to limit
the number of selections that you may invest in at any one time.
Cash Value of Your Policy
The Cash Value equals the sum of the amounts in the General Account, the
Investment Funds you have selected, and the Loan Account.
Method of Determining Cash Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Cash Value of the Investment Funds is determined for each Valuation Period.
When we apply your initial premium to an Investment Fund, the Cash Value equals
the Net Premium allocated to the Investment Fund, minus the monthly
deduction(s)due from the Issue Date through the Investment Start Date.
Thereafter, on each Valuation Date, the Cash Value in an Investment Fund will
equal:
(1) The Cash Value in the Investment Fund on the preceding Valuation Date,
multiplied by the Investment Fund's Net Investment Factor (defined below)
for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a Pro-Rata Surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or Pro-Rata Surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
(6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently 6 Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through two open-end,
diversified management investment companies: General American Capital Company
and Russell Insurance Funds.
Purchasers should read this prospectus and the prospectuses for the above-listed
investment companies carefully before investing.
The following is a list of the Investment Funds and investment managers
available under the Policy:
GENERAL AMERICAN CAPITAL COMPANY
Advisor: Conning Asset Management Company
Money Market Fund
RUSSELL INSURANCE FUNDS
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond Fund
The investment objective and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher or
lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results of
similar funds will be comparable even though the funds have the same investment
advisers.
A fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a fund with a small asset base. A
fund may not experience similar performance as its assets grow.
Shares of the Investment Funds may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year; or
(b) the previous Policy year's General Account maximum withdrawal amount, not
to exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
Dollar cost averaging may be selected by completing the proper forms. The
minimum transfer amount is $100. The minimum amount that can be allocated to an
Investment Fund is 5% of the amount transferred. You can elect to participate in
this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Cash Value in the
General Account and in the Investment Funds to the percentages determined in
advance. There are two methods of rebalancing available -- periodic and
variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy Anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Cash Value according to the investment percentages you
elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit 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 Funds,
and should we 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 transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.10% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
For Policies issued in the state of Oregon, the amounts shown above are
increased by 2%. The guaranteed sales charge varies for Policies issued in
Texas. As of the date of this prospectus, the current sales charge for Texas
Policies is the same as shown above.
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where Policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insureds. For Policies issued in Texas,
the guaranteed selection and issue expense charge is level for the life of the
Policy to ensure compliance with the Texas non-forfeiture laws.
Monthly Policy Charge
We deduct a monthly policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
For Policies issued in Texas, the Selection and Issue Expense Charge and monthly
policy charge together cannot exceed $10 per month after the Insured attains Age
100.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of both Insureds and the
fact that the death benefit is not payable until the death of the Last Insured.
Because the monthly cost of insurance charge depends upon a number of variables,
the charge will vary for each Policy month. We will determine the cost of
insurance charge by multiplying the applicable cost of insurance rate or rates
by the net amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insureds at issue. The monthly cost
of insurance rates generally increase as the Insureds' Attained Ages increase.
The rate class of the Insureds also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Cash Value, an increase in Cash Value will
cause an automatic increase in the death benefit. The rate class for such
increase will be the same as that used for the initial Face Amount.
We currently place Insureds into a preferred rate class, a standard rate class,
or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans; and 1980 CSO Tables NA and SA for unisex policies
issued in compliance with Montana law). All Policies are based on the Attained
Ages of the Insureds. Higher rates apply if either Insured is determined to be
in a substandard risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Cash Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed. We expect to profit from this
charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Cash Value before the withdrawal
and multiplying the result by the surrender charge. Immediately after a
withdrawal, the Policy's remaining surrender charge will equal the amount of the
surrender charge immediately before the withdrawal less the amount deducted in
connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Cash Value. Expenses of the Funds are not fixed or specified
under the terms of the Policy, and actual expenses may vary. These underlying
Investment Fund expenses are taken into consideration in computing each
Investment Fund's net asset value, which is used to calculate the unit values in
the Separate Account. The management fees and other expenses are more fully
described in the prospectus of each individual Investment Fund. The information
relating to the Investment Fund expenses was provided by the Investment Funds
and was not independently verified by us. Except as otherwise specifically
noted, the management fees and other expenses are not currently subject to fee
waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the Cash Value
of your Policy on the date of the Last Insured's death and the death benefit
option (Option A, Option B, or Option C) in effect at that time. The actual
amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Cash Value of your Policy on the date of the Last
Insured's death; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Applicable Percentage of Cash Value Table
For Younger Insureds Less Than Age 100
Younger Insured Policy Cash Value
Person's Age Multiple Percentage
---------------- -------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown in this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable factor from the Table of Attained Age Factors
shown in your Policy.
If your Policy is in force after the younger Insured's Attained Age is 100, then
the Death Benefit will be 101% of the Policy's Cash Value unless the state in
which your Policy was issued provides otherwise.
Change of Death Benefit If the Policy was issued with either death benefit
Option A or death benefit Option B, the death benefit option may be changed
unless your Policy was issued in Florida. A Policy issued under death benefit
Option C may not be changed for the entire lifetime of the Policy. Similarly, a
Policy issued under either death benefit Option A or B may not change to death
benefit Option C for the lifetime of the Policy. A request for change must be
made to us in writing. The Effective Date of such a change will be the Monthly
Anniversary on or following the date we receive the change request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the Cash Value
on the Effective Date of the change. Satisfactory evidence of insurability must
be submitted to us in connection with a request for a change from death benefit
Option A to death benefit Option B. A change may not be made if it would result
in a Face Amount of less than the minimum Face Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Decrease in Face Amount
Subject to certain limitations set forth below, you may decrease (but not
increase) the Face Amount of a Policy once each Policy year after the first
Policy year. A written request is required for a reduction in the Face Amount. A
reduction in Face Amount may affect the cost of insurance rate and the net
amount at risk, both of which affect your cost of insurance charge. A reduction
in the Face Amount of a Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested decrease must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the Cash
Value may be returned to you (at your election), to the extent necessary to meet
these requirements.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this 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 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.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Last Insured. However, estate taxes may apply.
Taking Money out of Your Policy
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. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC 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 your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such 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 us would be considered the owner of the shares of the
Investment Funds. 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 Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
Owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, 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 Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Cash Value of the Policy on the date the loan request is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500 (in some states this amount may be less). The loan
may be completely or partially repaid at any time while either Insured is
living. When a Policy loan is made, we will deduct Cash Value from your Policy
equal to the amount of the loan, plus interest due and place it in the Loan
Subaccount as security for the loan. This Cash Value amount is expected to earn
interest at a rate ("the earnings rate") which is lower than the rate charged on
the Policy loan ("the borrowing rate"). The Cash Value that we use as security
will accrue interest daily at an annual earnings rate of 4%.
Unless the Owner requests a different allocation, the Cash Value amount used as
security for the loan will be transferred from the Investment Funds and the
General Account on a pro-rata basis to the Loan Account. This will reduce the
Policy's Cash Value in the General Account and the Investment Fund(s). These
transactions will not be considered transfers for purposes of the limitations on
transfers between Investment Funds or to or from the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Cash Value minus the surrender charge
on any Monthly Anniversary, the Policy will lapse, subject to a grace period.
(See "Purchases -- Lapse and Grace Period".) A lapse of the Policy with a loan
outstanding may have Federal income tax consequences. (See "Federal Tax
Status".)
Interest credited to the Cash Value held in the Loan Subaccount as security for
the loan will be allocated on Policy anniversaries to the General Account and
the Investment Funds. The interest credited will also be transferred: (1) when a
new loan is made; (2) when a loan is partially or fully repaid; and (3) when an
amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences. (See "Federal Tax
Status".)
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Last Insured and as
long as the Policy is in force. Any Indebtedness outstanding will be deducted
before any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Cash Value used for security was allocated. Unpaid loans and
loan interest will be deducted from any settlement of your Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
a) $500 from an Investment Fund or the General Account; or
b) the Policy's Cash Value in an Investment Fund.
For Policies issued in Idaho, there are no minimum amount requirements for
partial withdrawals from the General Account.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Cash Value net of any applicable surrender charges and fees in that
Investment Fund. The total partial withdrawals and transfers from the General
Account over the Policy year may not exceed a maximum amount equal to the
greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Cash Value in each Investment Fund and the General
Account bears to the total Cash Value of the Policy, less the Cash Value in the
Loan Account, on the date the request for a partial withdrawal is received. If
the limitations on withdrawals from the General Account will not permit this
pro-rata allocation, you will be requested to provide an alternate allocation.
No amount may be withdrawn that would result in there being insufficient Cash
Value to meet any surrender charge and applicable fees that would be payable
immediately following the withdrawal upon the surrender of the remaining Cash
Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the Cash
Value, then a partial withdrawal will decrease the Face Amount by an amount by
which the partial withdrawal plus the applicable surrender charge and fees
exceeds the difference between the death benefit and the Face Amount. If death
benefit Option B is in effect, the Face Amount will not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Cash Value by a
percentage chosen by you. This percentage must be any whole number. A Pro-Rata
Surrender may have Federal income tax consequences. The percentage will be
applied to the Face Amount and the Cash Value on the Monthly Anniversary on or
following our receipt of the request.
You may allocate the amount of decrease in Cash Value plus any applicable
surrender charge and fees among the Investment Funds and the General Account. If
no allocation is specified, then the decrease in Cash Value and any applicable
surrender charge and fees will be allocated among the Investment Funds and the
General Account in the same proportion that the Policy's Cash Value in each
Investment Fund and the General Account bears to the total Cash Value of the
Policy, less the Cash Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Cash Value
reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Last Insured must be living at the
time of a surrender. A surrender may have Federal income tax consequences.
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
(General American Life) purchased Cova, which on that date changed its name to
Cova Financial Services Life Insurance Company. On January 6, 2000,
Metropolitan Life Insurance Company (MetLife) acquired GenAmerica Corporation,
the ultimate parent company of General American Life. The acquisition of
GenAmerica Corporation does not affect policy benefits or any other terms or
conditions under your policy. MetLife, headquartered in New York City since
1868, is a leading provider of insurance and financial products and services to
individual and group customers.
Cova is licensed to do business in the District of Columbia and all states
except for California, Maine, New Hampshire, New York and Vermont.
Distribution
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 our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premiums and 4.0% of excess premiums paid in Policy year 1. In renewal years,
the commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and
2.0% in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, an asset-based compensation equal to .25% of Cash Value for all Policy
years beginning the 13th month. Sometimes, Cova enters into an agreement with
the broker-dealer to pay the broker-dealer persistency bonuses in addition to
the standard commission.
The Separate Account
We 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 our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we 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 we may issue.
Suspension of Payments or Transfers
We 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 Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insureds jointly are the Owner of the Policy unless another person or
entity is shown as the Owner in the application. The Owner is entitled to all
rights provided by the Policy. If there is more than one Owner at a given time,
all Owners must exercise the rights of ownership by joint action. If the Owner
dies, and the Owner is not one or both of the Insureds, the Owner's interest in
the Policy becomes the property of his or her estate unless otherwise provided.
Unless otherwise provided, the Policy is jointly owned by all Owners named in
the Policy or by the survivors of those joint Owners. Unless otherwise stated in
the Policy, the final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Last Insured. Unless an irrevocable Beneficiary has been named, you
can change the Beneficiary at any time before the Last Insured dies. If there is
an irrevocable Beneficiary, all Policy changes except premium allocations and
transfers require the consent of the Beneficiary.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement; from the amount of the initial premium payment or
payments; or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
Our directors and executive officers and their principal occupations for the
past 5 years are as follows:
<TABLE>
<CAPTION>
Name of Principal Occupations During
Principal Officers the Past Five 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.
William P. Boscow* Vice President of Cova and CFLIC - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January, 1999.
Constance 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 1998; Vice President of Cova Life
Administration Services Company (CLASC) - 1998 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;
President and Chief Compliance Officer of Cova Life Sales Company (CLSC) from February, 1999 to
present; Vice President and Chief Compliance Officer of CLSC - 1989 to January, 1999.
Philip A. Haley* Executive Vice President of Cova, CFLIC and FCLIC - May 1997 to present; Vice President of Cova and
CFLIC - 1990 to 1997; 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.
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.
E. Thomas 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 1998; Vice President of CLASC - 1998 to present.
James W. Koeger** Assistant Treasurer of Cova
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (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 and Director of Cova, CFLIC
and FCLIC from 1995 to present; Vice President, Controller and Director of Cova from 1995 to 1998,
prior thereto Vice President, Controller, Treasurer and Director. Vice President, Controller and
Director of CFLIC from 1995 to 1998, prior thereto Vice President, Controller, Treasurer and
Director; Director of FCLIC from 1993 to present; Vice President, Controller and Director of FCLIC
from 1992 to 1998; Secretary of FCLIC from 1992 to 1995; 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 Trustee 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 and Director of Cova and CFLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer 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.
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; First Vice President of CLMC from January, 1999
to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFLIC, FCLIC and CLMC since July 1999.
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 Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFLIC - January 1999 to present; prior thereto, Vice President of
Cova and CFLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset Management,
General American - June, 1987 to June, 1998; Director of Cova, CFLIC and FCLIC - September 1999 to
present.
Patricia M. Wersching** Assistant Treasurer of Cova
Peter L. Witkewiz* Vice President and Controller of Cova, CFLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFLIC and FCLIC - 1993 to June, 1998.
<FN>
* 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: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have 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
we determine that we are permitted to vote the shares of the funds in our own
right, we 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 Fund 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 us 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 Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We 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 Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We 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
us that the change would violate state or federal law or the change would not be
consistent with the investment objectives of the Investment Funds 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 us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We cannot contest the validity of the Policy, except in the case of fraud, after
it has been in effect during the lifetime of either Insured for two years. If
the Policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if either 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 Indebtedness and less any surrenders. Depending on
the state where your Policy was issued, additional provisions may apply. Please
refer to your Policy. We also have the right to adjust any benefits under
the Policy if the answers in the application regarding the use of tobacco
are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Anniversary Partial Withdrawal Rider --This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Cash Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of a Cash Value less any loans, loan
interest due, and any surrender charge being insufficient to pay the monthly
deduction.
The secondary guarantee period is the lesser of twenty Policy years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Cash Value with a specified monthly premium while the Insured is
totally disabled. The monthly premium selected at issue is not guaranteed to
keep the Policy in force. The Insured must have become disabled after age 5 and
before age 65.
Divorce Split Rider -- This rider allows the Policy to be split into two
separate policies in the event of the divorce of a married couple who are the
Insureds under the Policy. The exercise of this option to split the policy may,
under certain circumstances, result in adverse tax consequences. Please consult
your tax adviser before exercising any options under this rider.
Estate Preservation Term Rider -- This rider provides joint level term
insurance, payable at the death of the Last Insured, for a period of four years
from the date of the rider.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We 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. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do 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 our 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.
We are taxed as a life insurance company under the Code. For Federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
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 these Policies,
will 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 funds 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 fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund 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."
We intend that each Investment Fund 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 policyowner 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 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 you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve 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 that the amount of mortality and other expense charges be reasonable.
In establishing these charges, we have 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 we have 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 our 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. You should consult your own tax advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
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. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Owner or Beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 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 or addition of qualified additional
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 with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC 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 MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then 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, including those resulting from
the lapse of the Policy, 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 distributions: (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
beneficiary.
If a Policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the Policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the Policy within the first fifteen years after the Policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the Policy.
Any loans from a Policy which is not classified as a MEC, will be treated as
Indebtedness of the Owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness exceeds the total premiums paid that
are not treated as previously surrendered by the Policy Owner, the excess
generally will be treated as ordinary income.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC 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 policies. You should consult a tax adviser prior to purchasing
more than one MEC 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. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
Policy.
Qualified Plans. The Policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the Policy owner are subject to Federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
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. We are
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 the Company as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholder's equity, and
cash flows for each of the years in the three-year period ended December 31,
1999, and the statement of assets and liabilities of the Separate Account as of
December 31, 1999, and the related statements of operations and changes in net
assets for the year ended December 31, 1999 and the period ended December 31,
1998, have been included herein in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Financial Statements
Financial Statements of the Separate Account and the Company are provided below.
COVA VARIABLE LIFE ACCOUNT ONE
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Cova Variable
Life Account One, Board of Directors
and Shareholder of Cova Financial
Services Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of each of
the sub-accounts comprising Cova Variable Life Account One of Cova Financial
Services Life Insurance Company (the Separate Account), as of December 31, 1999,
and the related statements of operations and changes in net assets for the year
then ended, and the period ended December 31, 1998. These financial statements
are the responsibility of the Separate Account's management. Our responsibility
is to express an opinion on these 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. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
transfer agents. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts of Cova
Variable Life Account One of Cova Financial Services Life Insurance Company as
of December 31, 1999, and the results of their operations and changes in their
net assets for the year then ended, and the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Chicago, Illinois
March 20, 2000
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Cova):
Lord Abbett Growth and
<S> <C> <C> <C>
Income Portfolio 69,693 shares at a net asset value of $24.070563 per share $1,677,540
Bond Debenture Portfolio 32,970 shares at a net asset value of $12.474609 per share 411,294
Developing Growth Portfolio 23,227 shares at a net asset value of $14.885144 per share 345,742
Large Cap Research Portfolio 26,751 shares at a net asset value of $14.991245 per share 401,027
Mid-Cap Value Portfolio 21,633 shares at a net asset value of $11.168093 per share 241,596
Quality Bond Portfolio 8,044 shares at a net asset value of $10.669328 per share 85,826
Small Cap Stock Portfolio 12,303 shares at a net asset value of $17.268582 per share 212,449
Large Cap Stock Portfolio 41,788 shares at a net asset value of $20.674865 per share 863,962
Select Equity Portfolio 53,986 shares at a net asset value of $16.112437 per share 869,854
International Equity Portfolio 9,087 shares at a net asset value of $16.225039 per share 147,444
AIM Variable Insurance Funds,
Inc. (AIM):
AIM V.I. Value Fund 774 shares at a net asset value of $33.50 per share 25,922
AIM V.I. Capital Appreciation Fund 69 shares at a net asset value of $35.58 per share 2,446
General American Capital
Company (GACC):
Money Market Fund 24,972 shares at a net asset value of $20.252283 per share 505,747
Templeton Variable Products Series
Fund (Templeton):
Templeton Bond Fund 10 shares at a net asset value of $9.99 per share 100
Franklin Small Cap Investments Fund 9 shares at a net asset value of $15.79 per share 141
Templeton Stock Fund 92 shares at a net asset value of $24.39 per share 2,254
Templeton International Fund 102 shares at a net asset value of $22.25 per share 2,260
Franklin Growth Investments Fund 7 shares at a net asset value of $16.70 per share 123
------------
Total assets $5,795,727
============
Liabilities:
GACC Money Market $15,040
============
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
Single premium variable life
policies (SPVL):
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income 134,762 accumulation units at $12.448204 per unit $1,677,540
Cova Bond Debenture 38,749 accumulation units at $10.614338 per unit 411,294
Cova Developing Growth 26,493 accumulation units at $13.050371 per unit 345,742
Cova Large Cap Research 29,120 accumulation units at $13.771430 per unit 401,027
Cova Mid-Cap Value 23,875 accumulation units at $10.119059 per unit 241,596
Cova Quality Bond 8,134 accumulation units at $10.551764 per unit 85,826
Cova Small Cap Stock 16,533 accumulation units at $12.850204 per unit 212,449
Cova Large Cap Stock 60,489 accumulation units at $14.283064 per unit 863,962
Cova Select Equity 69,034 accumulation units at $12.600289 per unit 869,854
Cova International Equity 10,864 accumulation units at $13.571289 per unit 147,444
AIM V.I. Value 2,202 accumulation units at $11.774189 per unit 25,922
AIM V.I. Capital Appreciation 176 accumulation units at $13.925402 per unit 2,446
GACC Money Market 44,548 accumulation units at $11.013039 per unit 490,607
Templeton Bond 10 accumulation units at $9.970060 per unit $100
Franklin Small Cap Investments 10 accumulation units at $14.136079 per unit 141
Templeton Stock 205 accumulation units at $11.011283 per unit 2,254
Templeton International 209 accumulation units at $10.827249 per unit 2,260
Franklin Growth Investments 10 accumulation units at $12.333825 per unit 123
------------
5,780,587
Flexible premium variable universal
life policies (FPVUL):
GACC Money Market 10 accumulation units at $10.047103 per unit 100
------------
Total net assets $5,780,687
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - 6,579 - 511 275 925 419
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares 1,170 44 2,822 1,594 1,843 (1,159) 1,137
Realized gain distributions - 2,132 - - - 463 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) 1,170 2,176 2,822 1,594 1,843 (696) 1,137
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 140,732 2,316 66,149 61,046 7,745 (2,378) 63,287
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 141,902 11,071 68,971 63,151 9,863 (2,149) 64,843
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova AIM GACC Lord Abbett
-------------------------------------- ------------------------ ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 995 2,102 560 69 2 - -
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares 6,402 2,488 1,365 30 1 24,709 56,187
Realized gain distributions 21,723 71,329 1,496 361 50 - -
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net realized gain (loss) 28,125 73,817 2,861 391 51 24,709 56,187
----------- ----------- ------------ ----------- ----------- ----------- -----------
Change in unrealized appreciation 61,314 (18,465) 28,256 2,049 300 7,581 (25,472)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 90,434 57,454 31,677 2,509 353 32,290 30,715
=========== =========== ============ =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Year ended December 31,1999
<TABLE>
<CAPTION>
Templeton
-----------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments Total
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - - 12,437
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares - - - - - 98,633
Realized gain distributions - - - - - 97,554
----------- ----------- ----------- ------------- ----------- -----------
Net realized gain (loss) - - - - - 196,187
----------- ----------- ----------- ------------- ----------- -----------
Change in unrealized appreciation - 41 160 167 23 394,851
----------- ----------- ----------- ------------- ----------- -----------
Net increase (decrease) in net
assets from operations $ - 41 160 167 23 603,475
=========== =========== =========== ============= =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Large Small Large
Bond Developing Cap Mid-Cap Quality Cap Cap
Debenture Growth Research Value Bond Stock Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 191 - 126 61 94 3 23
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares - (56) (59) (60) 8 258 467
Realized gain distributions 74 3 - - - 76 76
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) 74 (53) (59) (60) 8 334 543
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 5,181 21,898 11,811 12,587 255 18,574 44,695
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 5,446 21,845 11,878 12,588 357 18,911 45,261
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Operations
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova GACC Lord Abbett
-------------------------- ----------- -----------
Growth
Select International Money and
Equity Equity Market Income Total
---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 25 652 - 8,782 9,957
---------- -------------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares 112 (117) 12,085 40 12,678
Realized gain distributions 503 8 - 28,237 28,977
---------- -------------- ----------- ----------- -----------
Net realized gain (loss) 615 (109) 12,085 28,277 41,655
---------- -------------- ----------- ----------- -----------
Change in unrealized appreciation 65,356 1,778 4,240 25,472 211,847
---------- -------------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 65,996 2,321 16,325 62,531 263,459
========== ============== =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - 6,579 - 511 275 925 419
Net realized gain (loss) 1,170 2,176 2,822 1,594 1,843 (696) 1,137
Change in unrealized appreciation 140,732 2,316 66,149 61,046 7,745 (2,378) 63,287
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 141,902 11,071 68,971 63,151 9,863 (2,149) 64,843
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - - - -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts
(including fixed account), net 1,568,828 241,298 147,286 215,618 75,796 (43,467) 29,705
Transfers for contract benefits,
terminations and insurance charges (33,190) (7,265) (5,783) (7,043) (5,457) (2,464) (3,603)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 1,535,638 234,033 141,503 208,575 70,339 (45,931) 26,102
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 1,677,540 245,104 210,474 271,726 80,202 (48,080) 90,945
Net assets at beginning of period - 166,190 135,268 129,301 161,394 133,906 121,504
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 1,677,540 411,294 345,742 401,027 241,596 85,826 212,449
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Cova AIM GACC Lord Abbett
------------------------------------ ------------------------ ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
----------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 995 2,102 560 69 2 - -
Net realized gain (loss) 28,125 73,817 2,861 391 51 24,709 56,187
Change in unrealized appreciation 61,314 (18,465) 28,256 2,049 300 7,581 (25,472)
Net increase (decrease) from ----------- ---------- ----------- ----------- ----------- ----------- -----------
operations 90,434 57,454 31,677 2,509 353 32,290 30,715
----------- ---------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - 100 100 100 -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - 2,511,219 -
Transfers between sub-accounts
(including fixed account), net 531,808 353,369 28,688 23,529 2,001 (2,485,129) (693,373)
Transfers for contract benefits,
terminations and insurance charges (15,573) (18,696) (3,197) (216) (8) (18,975) (253)
Net increase (decrease) in net
assets from contract ----------- ---------- ----------- ----------- ----------- ----------- -----------
transactions 516,235 334,673 25,491 23,413 2,093 7,215 (693,626)
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 606,669 392,127 57,168 25,922 2,446 39,505 (662,911)
Net assets at beginning of period 257,293 477,727 90,276 - - 451,202 662,911
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 863,962 869,854 147,444 25,922 2,446 490,707 -
=========== ========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Year ended December 31,1999
<TABLE>
<CAPTION>
Templeton
------------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments Total
----------- ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - - - - - 12,437
Net realized gain (loss) - - - - - 196,187
Change in unrealized appreciation - 41 160 167 23 394,851
Net increase (decrease) from ----------- ----------- ----------- ------------- ------------ -----------
operations - 41 160 167 23 603,475
----------- ----------- ----------- ------------- ------------ -----------
Contract transactions:
Cova payments 100 100 100 100 100 800
Cova redemptions - - - - - -
Payments received from contract
owners - - - - - 2,511,219
Transfers between sub-accounts
(including fixed account), net - - 2,001 2,001 - (41)
Transfers for contract benefits,
terminations and insurance charges - - (7) (8) - (121,738)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ------------- ------------ -----------
transactions 100 100 2,094 2,093 100 2,390,240
----------- ----------- ----------- ------------- ------------ -----------
Net increase (decrease) in net
assets 100 141 2,254 2,260 123 2,993,715
Net assets at beginning of period - - - - - 2,786,972
----------- ----------- ----------- ------------- ------------ -----------
Net assets at end of period $ 100 141 2,254 2,260 123 5,780,687
=========== =========== =========== ============= ============ ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Large Small Large
Bond Developing Cap Mid-Cap Quality Cap Cap
Debenture Growth Research Value Bond Stock Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 191 - 126 61 94 3 23
Net realized gain (loss) 74 (53) (59) (60) 8 334 543
Change in unrealized appreciation 5,181 21,898 11,811 12,587 255 18,574 44,695
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 5,446 21,845 11,878 12,588 357 18,911 45,261
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - - - -
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 161,726 115,070 119,413 150,800 133,943 105,943 216,611
Transfers for contract benefits,
terminations and insurance charges (982) (1,647) (1,990) (1,994) (394) (3,350) (4,579)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 160,744 113,423 117,423 148,806 133,549 102,593 212,032
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 166,190 135,268 129,301 161,394 133,906 121,504 257,293
Net assets at beginning of period - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 166,190 135,268 129,301 161,394 133,906 121,504 257,293
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statements of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Cova GACC Lord Abbett
--------------------------- ----------- -----------
Growth
Select International Money and
Equity Equity Market Income Total
----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 25 652 - 8,782 9,957
Net realized gain (loss) 615 (109) 12,085 28,277 41,655
Change in unrealized appreciation 65,356 1,778 4,240 25,472 211,847
Net increase (decrease) from ----------- -------------- ----------- ----------- -----------
operations 65,996 2,321 16,325 62,531 263,459
----------- -------------- ----------- ----------- -----------
Contract transactions:
Cova payments - - - - -
Cova redemptions - - - - -
Payments received from contract
owners - - 2,605,542 - 2,605,542
Transfers between sub-accounts, net 417,562 91,449 (2,120,328) 607,811 -
Transfers for contract benefits,
terminations and insurance charges (5,831) (3,494) (50,337) (7,431) (82,029)
Net increase (decrease) in net
assets from contract ----------- -------------- ----------- ----------- -----------
transactions 411,731 87,955 434,877 600,380 2,523,513
----------- -------------- ----------- ----------- -----------
Net increase (decrease) in net
assets 477,727 90,276 451,202 662,911 2,786,972
Net assets at beginning of period - - - - -
----------- -------------- ----------- ----------- -----------
Net assets at end of period $ 477,727 90,276 451,202 662,911 2,786,972
=========== ============== =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(1) ORGANIZATION
Cova Variable Life Account One (the Separate Account), a unit
investment trust registered under the Investment Company Act of 1940 as
amended, was established by Cova Financial Services Life Insurance
Company (CFSLIC) and exists in accordance with the regulations of the
Missouri Department of Insurance. The Separate Account is a funding
vehicle for single premium variable life (SPVL) and flexible premium
variable universal life insurance policies (FPVUL) offered by CFSLIC.
On August 26, 1999, CFSLIC's ultimate parent company, GenAmerica
Corporation, entered into a definitive agreement to be acquired by
Metropolitan Life Insurance Company. The acquisition occurred on
January 6, 2000.
The Separate Account is divided into sub-accounts with the assets of
each sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified,
open-end, management investment company registered under the Investment
Company Act of 1940 as amended. The sub-accounts available for
investment may vary between variable life insurance policies offered by
CFSLIC.
<TABLE>
<S> <C>
Cova Series Trust (Cova) 10 portfolios
General American Capital Company (GACC) 1 portfolios
Lord Abbett Series Fund, Inc. (Lord Abbett) 1 portfolios
Russell Insurance Funds (Russell) 5 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 3 portfolios
Alliance Variable Products Series Fund, Inc. (Alliance) 2 portfolios
Liberty Variable Investment Trust (Liberty) 1 portfolios
Goldman Sachs Variable Insurance Trust (Goldman Sachs) 3 portfolios
Investors Fund Series (Kemper) 3 portfolios
MFS Variable Insurance Trust (MFS) 5 portfolios
Oppenheimer Variable Account Funds (Oppenheimer) 5 portfolios
Putnam Variable Trust (Putnam) 5 portfolios
Templeton Variable Products Series Fund (Templeton) 7 portfolios
</TABLE>
<TABLE>
The following sub-accounts commenced operations in 1999:
<S> <C>
Cova Lord Abbett Growth and Income January 8, 1999
AIM V.I. Value May 3, 1999
AIM V.I. Capital Appreciation July 19, 1999
Templeton Bond July 19, 1999
Franklin Small Cap Investments July 19, 1999
Templeton Stock July 19, 1999
Templeton International July 19, 1999
Franklin Growth Investments July 19, 1999
The following sub-accounts ceased operations in 1999:
Lord Abbett Growth and Income January 8, 1999
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) INVESTMENT VALUATION
Investments made in the portfolios of the investment companies are
valued at the reported net asset value of such portfolios, which
value their investment securities at fair value. The average cost
method is used to compute the realized gains and losses on the
sale of portfolio owned by the sub-accounts. Income from dividends
and gains from realized capital gain distributions are recorded on
the ex-distribution date.
(B) REINVESTMENT OF DISTRIBUTIONS
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in
additional shares of the portfolios.
GACC follows the Federal income tax practice known as consent
dividending, whereby substantially all of its net investment
income and realized capital gains are deemed to pass through to
the Separate Account. As a result, GACC does not distribute
dividends and realized capital gains. During December of each
year, the accumulated net investment income and realized capital
gains of the GACC Money Market Fund are allocated to the Separate
Account by increasing the cost basis and recognizing a gain in the
Separate Account.
(C) FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal
income tax return of CFSLIC which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, CFSLIC believes it will be treated
as the owner of the Separate Account assets for federal income tax
purposes and does not expect to incur federal income taxes on the
earnings of the Separate Account to the extent the earnings are
credited to the variable life policies. Based on this, no charge
has been made to the Separate Account for federal income taxes. A
charge may be made in future years for any federal income taxes
that would be attributable to the variable life policies.
(3) CONTRACT FEES
There are fees associated with the variable life insurance policies
that are deducted from the policy account value and Separate Account
that reduce the return on investment. The type, amount, and timing of
the fees may vary between the variable life policies offered by CFSLIC
and include mortality and expense risk, administrative, selection and
issue expense, cost of insurance, tax expense (premium and federal
taxes), contingent deferred sales (surrender) and transfer charges.
(4) SEPARATE ACCOUNT EXPENSES
The mortality and expense fees for FPVUL policies are deducted from the
separate account and are reflected in the accumulation unit value.
There were no fees incurred in 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
(5) COST BASIS OF INVESTMENTS
The cost basis of each sub-account's investment at December 31, 1999
follows:
Cova Lord Abbett Growth and Income $1,536,808
Cova Bond Debenture 403,797
Cova Developing Growth 257,695
Cova Large Cap Research 328,170
Cova Mid-Cap Value 221,264
Cova Quality Bond 87,949
Cova Small Cap Stock 130,588
Cova Large Cap Stock 757,953
Cova Select Equity 822,963
Cova International Equity 117,410
AIM V.I. Value 23,873
AIM V.I. Capital Appreciation 2,146
GACC Money Market 493,926
Templeton Bond 100
Franklin Small Cap Investments 100
Templeton Stock 2,093
Templeton International 2,093
Franklin Growth Investments 100
----------
$5,189,028
==========
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(6) UNIT FAIR VALUE
A summary of accumulation unit values, net assets, and total return for
each sub-account follows:
Accumulation Net Assets Total
Unit Value (in thousands) Return
Commenced ----------------------- ---------------------- -------------------
Operations 12/31/99 12/31/98 12/31/99 12/31/98 1999 1998
---------- ---------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SPVL policies:
Cova Lord Abbett Growth
and Income 1/8/99 $12.448204 - $ 1,678 - 11.41% -
Cova Bond Debenture 4/13/98 10.614338 10.262336 411 166 3.43% 0.78%
Cova Developing Growth 4/16/98 13.050371 9.855135 346 135 32.42% -5.41%
Cova Large Cap Research 5/4/98 13.771430 10.972618 401 129 25.51% 4.31%
Cova Mid-Cap Value 3/23/98 10.119059 9.576906 242 161 5.66% -6.17%
Cova Quality Bond 4/13/98 10.551764 10.717509 86 134 -1.55% 6.22%
Cova Small Cap Stock 4/13/98 12.850204 8.891377 212 122 44.52% -14.87%
Cova Large Cap Stock 4/13/98 14.283064 12.135469 864 257 17.70% 13.96%
Cova Select Equity 3/23/98 12.600289 11.480648 870 478 9.75% 9.65%
Cova International Equity 3/23/98 13.571289 10.560451 147 90 28.51% 1.80%
AIM V.I. Value 5/3/99 11.774189 - 26 - 17.74% -
AIM V.I. Capital Appreciation 7/19/99 13.925402 - 2 - 28.36% -
GACC Money Market 2/26/98 11.013039 10.468518 491 451 5.20% 4.69%
Templeton Bond 7/19/99 9.970060 - - - -0.30% -
Franklin Small Cap Investments 7/19/99 14.136079 - - - 41.36% -
Templeton Stock 7/19/99 11.011283 - 2 - 10.11% -
Templeton International 7/19/99 10.827249 - 2 - 8.27% -
Franklin Growth Investments 7/19/99 12.333825 - - - 23.34% -
FPVUL policies:
GACC Money Market 11/29/99 10.047103 - - - 0.47% -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the year ended
December 31, 1999 and the period ended December 31, 1998 follows:
Realized Gain (Loss)
-------------------------------------------------------------
Aggregate Aggregate Cost
Year or Proceeds from Sales of Fund Shares Realized
Period of Fund Shares Redeemed Gain (Loss)
----------- ------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Cova Lord Abbett Growth and Income 1999 $ 98,255 $ 97,085 $ 1,170
1998 - - -
Cova Bond Debenture 1999 4,687 4,643 44
1998 527 527 -
Cova Developing Growth 1999 15,912 13,090 2,822
1998 1,194 1,250 (56)
Cova Large Cap Research 1999 12,192 10,598 1,594
1998 1,809 1,868 (59)
Cova Mid-Cap Value 1999 17,534 15,691 1,843
1998 1,646 1,706 (60)
Cova Quality Bond 1999 97,215 98,374 (1,159)
1998 890 882 8
Cova Small Cap Stock 1999 6,684 5,547 1,137
1998 3,110 2,852 258
Cova Large Cap Stock 1999 49,866 43,464 6,402
1998 4,336 3,869 467
Cova Select Equity 1999 79,613 77,125 2,488
1998 2,999 2,888 111
Cova International Equity 1999 19,787 18,422 1,365
1998 3,171 3,287 (116)
AIM V.I. Value 1999 218 188 30
1998 - - -
AIM V.I. Capital Appreciation 1999 8 7 1
1998 - - -
GACC Money Market 1999 2,543,802 2,519,093 24,709
1998 2,041,400 2,029,315 12,085
Lord Abbett Growth and Income 1999 694,610 638,423 56,187
1998 3,786 3,746 40
Templeton Bond 1999 - - -
1998 - - -
Franklin Small Cap Investments 1999 - - -
1998 - - -
Templeton Stock 1999 8 8 -
1998 - - -
Templeton International 1999 8 8 -
1998 - - -
Franklin Growth Investments 1999 - - -
1998 - - -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION, CONTINUED
Unrealized Appreciation (Depreciation)
-------------------------------------------------------------
Appreciation Appreciation
Year or (Depreciation) (Depreciation)
Period End of Period Beginning of Period Change
----------- ------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Cova Lord Abbett Growth and Income 1999 $ 140,732 $ - $140,732
1998 - - -
Cova Bond Debenture 1999 7,497 5,181 2,316
1998 5,181 - 5,181
Cova Developing Growth 1999 88,047 21,898 66,149
1998 21,898 - 21,898
Cova Large Cap Research 1999 72,857 11,811 61,046
1998 11,811 - 11,811
Cova Mid-Cap Value 1999 20,332 12,587 7,745
1998 12,587 - 12,587
Cova Quality Bond 1999 (2,123) 255 (2,378)
1998 255 - 255
Cova Small Cap Stock 1999 81,861 18,574 63,287
1998 18,574 - 18,574
Cova Large Cap Stock 1999 106,009 44,695 61,314
1998 44,695 - 44,695
Cova Select Equity 1999 46,891 65,356 (18,465)
1998 65,356 - 65,356
Cova International Equity 1999 30,034 1,778 28,256
1998 1,778 - 1,778
AIM V.I. Value 1999 2,049 - 2,049
1998 - - -
AIM V.I. Capital Appreciation 1999 300 - 300
1998 - - -
GACC Money Market 1999 11,821 4,240 7,581
1998 4,240 - 4,240
Lord Abbett Growth and Income 1999 - 25,472 (25,472)
1998 25,472 - 25,472
Templeton Bond 1999 - - -
1998 - - -
Franklin Small Cap Investments 1999 41 - 41
1998 - - -
Templeton Stock 1999 160 - 160
1998 - - -
Templeton International 1999 167 - 167
1998 - - -
Franklin Growth Investments 1999 23 - 23
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS
The change in the number of units for each sub-account follows:
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - - - -
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net - 16,292 13,928 11,988 17,077 12,531 14,067
Contract units redeemed - (98) (202) (204) (225) (37) (402)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/98 - 16,194 13,726 11,784 16,852 12,494 13,665
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net 139,570 23,254 13,287 17,896 7,584 (4,128) 3,239
Contract units redeemed (4,808) (699) (520) (560) (561) (232) (371)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/99 134,762 38,749 26,493 29,120 23,875 8,134 16,533
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Cova AIM GACC Lord Abbett
------------------------------------ -------------------------- ----------- -----------
Large V.I. Growth
Cap Select International V.I. Capital Money and
Stock Equity Equity Value Appreciation Market Income
---------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - - - -
Cova units purchased - - - - - - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - 303,667 -
Contract units transferred, net 21,607 42,165 8,896 - - (205,485) 62,823
Contract units redeemed (405) (554) (347) - - (55,081) (745)
---------- ----------- ----------- ----------- ------------- ----------- -----------
Unit balance at 12/31/98 21,202 41,611 8,549 - - 43,101 62,078
Cova units purchased - - - 9 9 - -
Cova units redeemed - - - - - - -
Contract units purchased - - - - - 247,255 -
Contract units transferred, net 40,404 28,968 2,602 2,213 168 (232,315) (62,052)
Contract units redeemed (1,117) (1,545) (287) (20) (1) (13,493) (26)
---------- ----------- ----------- ----------- ------------- ----------- -----------
Unit balance at 12/31/99 60,489 69,034 10,864 2,202 176 44,548 -
========== =========== =========== =========== ============= =========== ===========
FPVUL policies:
Unit balance at 12/31/97 -
Cova units purchased -
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/98 -
Cova units purchased 10
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/99 10
===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Templeton
-----------------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Bond Investments Stock International Investments
----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/97 - - - - -
Cova units purchased - - - - -
Cova units redeemed - - - - -
Contract units purchased - - - - -
Contract units transferred, net - - - - -
Contract units redeemed - - - - -
----------- -------------- ----------- -------------- --------------
Unit balance at 12/31/98 - - - - -
Cova units purchased - - - - -
Cova units redeemed - - - - -
Contract units purchased 10 10 10 10 10
Contract units transferred, net - - 196 200 -
Contract units redeemed - - (1) (1) -
----------- -------------- ----------- -------------- --------------
Unit balance at 12/31/99 10 10 205 209 10
=========== ============== =========== ============== ==============
</TABLE>
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(With Independent Auditors' Report Thereon)
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) (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
February 4, 2000
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Debt securities available-for-sale, at fair value (cost of
$1,575,536 in 1999 and $1,375,198 in 1998) $ 1,481,997 1,371,513
Preferred stock - affiliate, at fair value 6,892 9,000
Common stock, at fair value 12 37
Mortgage loans, net of allowance for potential loan loss
of $1,090 in 1999 and $510 in 1998 376,147 312,865
Policy loans 27,778 26,295
Other invested assets 4,625 --
------------ ------------
Total investments 1,897,451 1,719,710
Cash and cash equivalents - interest-bearing 86,038 94,770
Cash - noninterest-bearing 5,893 5,008
Receivable from sale of securities 1,452 5,845
Accrued investment income 24,992 21,505
Deferred policy acquisition costs 214,120 131,973
Present value of future profits 55,406 42,230
Goodwill 16,157 18,585
Deferred tax asset, net 21,964 4,786
Receivable from OakRe 336,376 720,904
Federal and state income taxes recoverable 1,190 --
Due from affiliates -- 246,198
Other assets 741 829
Separate account assets 2,537,962 1,832,396
------------ ------------
Total assets $ 5,199,742 4,844,739
============ ============
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets, Continued
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
------------- -------------
(IN THOUSANDS)
Liabilities:
<S> <C> <C>
Policyholder deposits $ 2,270,795 2,643,124
Future policy benefits 58,432 54,336
Payable on return of collateral on loaned securities 37,862 25,923
Payable on purchase of securities 516 1,040
Due to affiliates 4,220 --
Federal and state income taxes payable -- 446
Accounts payable and other liabilities 22,905 18,714
Future purchase price payable to OakRe 2,898 6,976
Guaranty fund assessments 9,900 9,700
Separate account liabilities 2,537,652 1,832,394
------------- -------------
Total liabilities 4,945,180 4,592,653
------------- -------------
Shareholder's equity:
Common stock, $2 par value. Authorized
5,000,000 shares; issued and outstanding
2,899,466 shares in 1999 and 1998 5,799 5,799
Additional paid-in capital 260,491 220,491
Retained earnings 12,906 26,410
Accumulated other comprehensive
loss - net of tax (24,634) (614)
------------- -------------
Total shareholder's equity 254,562 252,086
------------- -------------
Total liabilities and shareholder's equity $ 5,199,742 4,844,739
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
Revenues:
<S> <C> <C> <C>
Premiums $ 8,468 23,875 9,368
Net investment income 131,372 127,812 111,661
Net realized (losses) gains on sales
of investments (20,214) (1,600) 563
Separate account fees 30,999 20,820 12,455
Other income 6,142 1,197 2,400
----------- ----------- -----------
Total revenues 156,767 172,104 136,447
----------- ----------- -----------
Benefits and expenses:
Interest on policyholder deposits 102,274 93,759 81,129
Current and future policy benefits 27,409 25,225 11,496
Operating and other expenses 37,270 20,151 16,179
Amortization of purchased
intangible assets 6,087 6,309 6,697
Amortization of deferred policy
acquisition costs 3,621 9,393 6,307
----------- ----------- -----------
Total benefits and expenses 176,661 154,837 121,808
----------- ----------- -----------
(Loss) income before income taxes (19,894) 17,267 14,639
----------- ----------- -----------
Income tax (benefit) expense:
Current (2,146) (1,576) 1,951
Deferred (4,244) 4,949 3,710
----------- ----------- -----------
Total income tax (benefit) expense (6,390) 3,373 5,661
----------- ----------- -----------
Net (loss) income $ (13,504) 13,894 8,978
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
Common stock, balance at beginning
<S> <C> <C> <C>
and end of period $ 5,799 5,799 5,799
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of period 220,491 191,491 166,491
Capital contribution 40,000 29,000 25,000
----------- ----------- -----------
Balance at end of period 260,491 220,491 191,491
----------- ----------- -----------
Retained earnings:
Balance at beginning of period 26,410 12,516 3,538
Net (loss) income (13,504) 13,894 8,978
----------- ----------- -----------
Balance at end of period 12,906 26,410 12,516
----------- ----------- -----------
Accumulated other comprehensive (loss) income:
Balance at beginning of period (614) 2,732 (784)
Change in unrealized (depreciation) appreciation
of debt and equity securities (91,987) (14,571) 14,077
Deferred federal income tax impact 12,934 1,801 (1,893)
Change in deferred policy acquisition costs attributable
to unrealized depreciation (appreciation) 39,975 6,996 (5,342)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 15,058 2,428 (3,326)
----------- ----------- -----------
Balance at end of period (24,634) (614) 2,732
----------- ----------- -----------
Total shareholder's equity $ 254,562 252,086 212,538
=========== =========== ===========
Total comprehensive (loss) income:
Net (loss) income $ (13,504) 13,894 8,978
Other comprehensive (loss) income (change in net unrealized
(depreciation) appreciation of debt and equity securities) (24,020) (3,346) 3,516
----------- ----------- -----------
Total comprehensive (loss) income $ (37,524) 10,548 12,494
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<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, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
(in thousands)
Reconciliations of net income to net cash provided by operating activities:
<S> <C> <C> <C>
Net income (loss) $ (13,504) 13,894 8,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 4,096 15,975 6,019
Increase (decrease) in payables and
accrued liabilities 1,620 (9,419) (9,278)
Increase in accrued investment income (1,483) (903) (5,591)
Amortization of intangible assets and
deferred policy acquisition costs 14,963 15,702 13,004
Amortization and accretion of securities
premiums and discounts (59) (1,767) 1,664
Decrease in recapture commissions payable to OakRe (4,078) (5,197) (4,837)
Net SPDA benefits recaptured from RGA 14,043 -- --
Net realized loss (gain) on sale of investments 20,214 1,600 (563)
Interest accumulated on policyholder deposits 102,274 93,759 81,129
(Decrease) increase in current and
deferred federal income taxes (1,360) 4,083 5,022
Separate account net income 1 (12) (2,637)
Commissions and expenses deferred (45,793) (50,044) (46,142)
Other (8,720) (2,011) 2,413
------------- -------------- ------------
Net cash provided by operating activities 82,214 75,660 49,181
------------- -------------- ------------
Cash flows from investing activities:
Cash used in the purchase of investment securities (560,288) (733,049) (809,814)
Proceeds from investment securities sold and matured 478,398 642,481 382,783
Other (3,524) (1,159) 15,400
------------- -------------- ------------
Net cash used in investing activities $ (85,414) (91,727) (411,631)
------------- -------------- ------------
See accompanying notes to consolidated financial statements.
</TABLE>
<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, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
(in thousands)
Cash flows from financing activities:
<S> <C> <C> <C>
Policyholder deposits $ 740,599 1,014,075 841,174
Transfers from OakRe 441,742 812,520 637,168
Transfer to separate accounts (404,241) (789,872) (450,303)
Return of policyholder deposits (878,516) (889,202) (597,425)
Proceeds from security collateral on securities lending 11,939 25,923 --
Transfers from (to) RGA 43,830 (103,175) (120,411)
Capital contributions received 40,000 29,000 25,000
------------- -------------- ------------
Net cash (used) provided by financing activities (4,647) 99,269 335,203
------------- -------------- ------------
(Decrease) increase in cash and
cash equivalents (7,847) 83,202 (27,247)
Cash and cash equivalents at beginning of period 99,778 16,576 43,823
------------- -------------- ------------
Cash and cash equivalents at end of period $ 91,931 99,778 16,576
============= ============== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Services Life Insurance Company (CFSLIC) and
subsidiaries (the Company) market and service single premium
deferred annuities, immediate annuities, variable annuities, term
life, single premium variable universal life, 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. Single premium whole life insurance policies
provide policy beneficiaries with mortality benefits amounting to
a multiple, which declines with age, of the original premium.
Under the deferred fixed 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.
Under the variable annuity contracts, policyholder deposits are
allocated to various separate account sub-accounts or the general
accounts. A sub-account is valued at the sum of market values of
the securities in its underlying investment portfolio. The
contract value allocated to a sub-account will fluctuate based on
the performance of the sub-accounts. The contract value allocated
to the general accounts is credited with a fixed interest rate for
a specified period. The Company may assess surrender fees against
amounts withdrawn prior to the end of the withdrawal charge
period. Policyholders also may incur certain federal income tax
penalties on withdrawals.
Under the single premium variable life contracts, policyholder
deposits are allocated to various separate account sub-accounts.
The account value allocated to a sub-account will fluctuate based
on the performance of the sub-accounts. The Company guarantees a
minimum death benefit to be paid to the beneficiaries upon the
death of the insured. The Company may assess surrender fees
against amounts withdrawn prior to the end of the surrender charge
period. A deferred premium tax may also be assessed against
amounts withdrawn in the first ten years. Policyholders may also
incur certain federal income tax penalties on withdrawals.
Under the term life insurance policies, policyholders pay a level
premium over a certain period of time to guarantee a death benefit
will be paid to the beneficiaries upon the death of the insured.
This policy has no cash accumulation available to the
policyholder.
Although the Company markets its products through numerous
distributors, including regional brokerage firms, national
brokerage firms, and banks, approximately 86%, 89%, and 73% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated and Edward Jones & Company, in
1999, 1998, and 1997, respectively.
<PAGE>
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Corporation,
which is a wholly owned subsidiary of General American Life
Insurance Company (GALIC), a Missouri domiciled life insurance
company. GALIC is a wholly owned subsidiary of GenAmerica
Corporation, which in turn is wholly owned by the ultimate parent,
General American Mutual Holding Company (GAMHC). The Company owns
100% of the outstanding shares of two subsidiaries, First Cova
Life Insurance Company (a New York domiciled insurance company)
(FCLIC) and Cova Financial Life Insurance Company (a California
domiciled insurance company) (CFLIC).
On August 26, 1999, GAMHC entered into a definitive agreement,
whereby Metropolitan Life Insurance Company (MetLife), a New York
domiciled life insurance company, will acquire GenAmerica
Corporation and all its holdings for $1.2 billion in cash. The
purchase was approved by the Missouri Director of Insurance on
November 10, 1999. The purchase, however, was not consummated as
of December 31, 1999, and, as a result, these financial statements
do not reflect purchase accounting treatment of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles (GAAP) and include the accounts and operations of the
Company. Significant intercompany transactions have been
eliminated. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the amounts reported. Actual results could differ from
these estimates.
DEBT SECURITIES
Investments in all debt 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
securities at December 31, 1999 and 1998 were classified as
available-for-sale. Securities available-for-sale are carried at
fair value, with unrealized holding gains and losses reported as
accumulated other comprehensive income in the shareholder's
equity, net of deferred effects of income tax and related effects
on deferred acquisition costs and present value of future profits.
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").
<PAGE>
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 fair 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.
SECURITIES LENDING
The Company recognizes on its consolidated balance sheet cash
related to collateral controlled on securities lending
transactions and a corresponding obligation to return such
collateral at the termination of such transactions.
PREFERRED STOCK - AFFILIATE
Preferred stock represents an investment in nonredeemable
preferred stock in GenAmerica Management Company, an affiliate.
The security is carried at fair value, which is determined
primarily through published quotes of trading values. Changes to
adjust the carrying value are reported directly in shareholder's
equity. Other-than-temporary declines below cost are recorded as
realized losses.
COMMON STOCK
Common stock represents an investment in common stock warrants.
The security is carried at fair value, which is determined
primarily through published quotes of trading values. Changes to
adjust the carrying value are reported directly in shareholder's
equity. Other-than-temporary declines below cost are recorded as
realized losses.
MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are carried at their unpaid
principal balances. An allowance for mortgage loan losses is
established based on an evaluation of the mortgage loan portfolio,
past credit loss experience, and current economic conditions.
Reserves for loans are established when the Company determines
that collection of all amounts due under the contractual terms is
doubtful and are calculated in conformity with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan -Income
Recognition and Disclosures.
The Company had no impaired loans at December 31, 1999. The
valuation allowance for potential losses on mortgage loans was
$1,090,000 and $510,000 at December 31, 1999 and 1998,
respectively.
<PAGE>
OTHER INVESTED ASSETS
Other invested assets consist of investments in joint ventures in
real estate.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in
banks, U.S. Treasury bills, money market accounts, and commercial
paper with maturities under 90 days, which are not otherwise
restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that
are specifically assigned to variable annuity or life
policyholders in the separate accounts and are not available to
other creditors of the Company. The earnings of separate account
investments are also 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 account and assesses
withdrawal charges in the event of early withdrawals. Separate
account assets are carried at fair 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. The Company's capital investment in the separate
accounts as of December 31, 1999 and 1998 is presented in note 3.
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. The Company sets a
limit on the deferral of acquisition costs incurred from internal
marketing and wholesaling operations in any year at 1% to 1.5% of
premiums and deposits receipts, varying according to specific
product. This limit is based on typical market rates of
independent marketing service and wholesaling organizations. This
practice also avoids possible deferral of costs in excess of
amounts recoverable.
The costs deferred 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 policy 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 are not recognized currently in
income but as an offset to the accumulated other comprehensive
income component of shareholder's 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.
<PAGE>
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below.
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period $ 131,973 84,326 49,833
Commissions and costs deferred 45,793 50,044 46,142
Amortization (3,621) (9,393) (6,307)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) of investments 39,975 6,996 (5,342)
------------ ------------ -------------
Deferred policy acquisition costs, end of period $ 214,120 131,973 84,326
============ ============ =============
Costs expensed that exceeded the established deferred
limit $ 9,789 4,933 3,016
============ ============ =============
</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
date the Company was purchased by GALIC.
Present Value of Future Profits
The Company established an intangible asset which represents
the present value of future profits (PVFP) 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
pretax rate of 18% (12% net after tax).
In addition, as the Company has the option of retaining its
single premium deferred annuity (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 appreciation and
depreciation, 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 PVFP will be adjusted to the
amount that would have existed had the actual experience and
revised estimates been known and applied from inception. The
amortization and adjustments resulting from unrealized
appreciation and depreciation are not recognized currently in
income but as an offset to the accumulated other comprehensive
income reflected as a separate component of shareholder's
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.
<PAGE>
Based on current assumptions, amortization of the original
in-force PVFP asset, expressed as a percentage of the original
in-force asset, is projected to be 7.6%, 7.7%, 7.5%, 6.8%, and
6.4% for the years ended December 31, 2000 through 2004,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results. The average crediting rate on the original
in-force PVFP asset is 6.8% for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
The components of PVFP are shown below.
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 42,230 41,486 46,389
Interest credited 2,695 2,864 3,029
Amortization (4,577) (4,548) (4,606)
Present value of future profits attributable to unrealized
depreciation (appreciation) of investments
15,058 2,428 (3,326)
------------ ------------ -------------
PVFP - end of period $ 55,406 42,230 41,486
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
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 shown below.
1999 1998 1997
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 18,585 19,717 20,849
Amortization (1,132) (1,132) (1,132)
Experience adjustment to future purchase price payable to
OakRe (1,296) -- --
----------- ------------ ------------
Goodwill - end of period $ 16,157 18,585 19,717
=========== ============ ============
</TABLE>
<PAGE>
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 3.50% 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%.
The Company has recorded a future payable that represents the
present value of the anticipated future commission payments
payable to OakRe over the remaining life of the financial
reinsurance agreement discounted at an estimated borrowing
rate of 6.50%. 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 end of
the year 2000.
<TABLE>
<CAPTION>
The components of this future payable are shown below.
1999 1998 1997
----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 6,976 12,173 16,051
Interest added 378 629 959
Payments to OakRe (3,160) (5,826) (4,837)
Experience adjustment to future purchase price
payable to OakRe (1,296) -- --
----------- ------------ -----------
Future payable - end of period $ 2,898 6,976 12,173
=========== ============ ===========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
Xerox Financial Services, Inc. (XFSI) (previous parent of the
Company) 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 Company's assets as
of the date of acquisition was revalued based upon fair market
values. The principal effect of the election was to establish a
tax asset on the tax-basis consolidated balance sheet of
approximately $37.9 million for the value of the business acquired
that is amortizable for tax purposes over ten to fifteen years.
<PAGE>
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 Company's policyholder
deposits as of December 31, 1999 was 5.9%.
FUTURE POLICY BENEFITS
Reserves are held for future policy 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 4.50% to 8.00%, depending upon date of issue.
Current mortality benefits payable are recorded for reported
claims and estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on
annuity policies that subject it to longevity risks. Amounts
collected on annuity policies not subject to longevity risk are
recorded as increases in the policyholder deposits liability. For
term and single premium variable life products, premiums are
recognized as revenue when due.
OTHER INCOME
Other income consists primarily of policy surrender charges and
fees from a modified coinsurance agreement with GALIC.
FEDERAL INCOME TAXES
The Company files a consolidated income tax return with its
subsidiaries. Allocations of federal income taxes are based upon
separate return calculations.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
consolidated financial statement carrying amount of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. 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 in the period that includes the enactment
date.
<PAGE>
COMPREHENSIVE INCOME
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 has no impact on the Company's
consolidated net income or shareholder's equity. The Company's
only component of accumulated other comprehensive income relates
to unrealized appreciation or depreciation on debt and equity
securities held at available-for-sale.
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:
O Investment valuation
O Amortization of deferred policy acquisition costs
O Amortization of present value of future profits
O Recoverability of goodwill
The fair 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.
The amortization of deferred policy 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 PVFP is based on
estimates of long-term future profits from existing policies when
the Company was purchased by GALIC and policies recaptured from
OakRe. 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.
<PAGE>
The Company has considered the recoverability of goodwill and has
concluded that no circumstances have occurred which would give
rise to impairment of goodwill at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, 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 No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Because of this, and further because the value of a business is
also based upon its anticipated earning power, the aggregate fair
value amounts represented do not present the underlying value of
the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Short-term Investments,
and Accrued Investment Income
The carrying value amounts reported in the consolidated
balance sheets for these instruments approximate their fair
values. Short-term debt securities are considered
available-for-sale.
Investment Securities and Mortgage Loans
(Including Mortgage-backed Securities)
Fair values of 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,
certain mortgage-backed securities, and mortgage loans, 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 3 for fair
value disclosures).
<PAGE>
Policy Loans
Fair values of policy loans approximate carrying value as the
interest rates on the majority of policy loans are reset
periodically and, therefore, approximate current interest
rates.
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
5 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, 1999 and 1998, the cash
surrender value of policyholder deposits was approximately
$84.9 million and $103.7 million less than their stated
carrying value. Of the contracts permitting surrender,
substantially all 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 its parent, GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective July 25, 1999, the Company entered into a modified
coinsurance reinsurance agreement with MetLife. Under the
reinsurance agreement, the Company ceded life insurance and
annuity business that was issued or renewed from July 25, 1999
through December 31, 1999 to MetLife amounting to $259 million.
Net earnings to MetLife from that business are experience refunded
to the Company. The agreement does not meet the conditions for
reinsurance accounting under GAAP. In substance, the agreement
represents a guarantee by MetLife of new business and renewed SPDA
business during this period. There was no impact on the Company's
financial statements resulting from the reinsurance transaction
with MetLife.
Effective January 1, 1998, the Company entered into a modified
coinsurance financial reinsurance agreement with GALIC. The
reinsurance agreement provided that the Company would reinsurance
a block of "stable value" annuity business issued by GALIC on a
36% coinsurance basis amounting to $88 million and $635 million in
1999 and 1998, respectively. The agreement does not meet the
conditions for reinsurance accounting under GAAP, and no assets
were transferred. Effective July 1, 1999, the Company terminated
the financing reinsurance agreement with GALIC. The Company
recognized income of $1.6 million from this transaction in both
1999 and 1998.
<PAGE>
Effective January 1, 1997, the Company entered into a financial
reinsurance agreement with RGA Reinsurance Company (RGA), an
affiliate, related to certain of the Company's single premium
deferred annuity products, and transferred assets equal to 60% of
deposits received. The agreement does not meet the conditions for
reinsurance accounting under GAAP. Deposits reinsured under the
contract were approximately $219 million at December 31, 1998, and
are reflected as policyholder deposits of the Company and a "Due
from affiliate" asset in the consolidated balance sheets.
On January 31, 1999, the Company suspended ceding new business to
RGA, and on November 30, 1999, the Company recaptured all of the
obligations and related investments from RGA. The Company
recognized an operating expense of $12.6 million related to the
recapture.
On June 1, 1995, when GALIC formed Cova Corporation and purchased
CSFLIC, then known as Xerox Financial Services Life Insurance
Company (XFSLIC), from XFSI, a wholly owned subsidiary of Xerox
Corporation, it entered into a financing reinsurance transaction
with OakRe Life Insurance Company (OakRe), then a subsidiary of
XFSLIC, for OakRe to assume the economic benefits and risks of the
existing single premium deferred annuity deposits of XFSLIC.
Ownership of OakRe was retained by XFSI subsequent to the sale of
XFSLIC and other affiliates.
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 financing reinsurance agreement entered into with OakRe as
condition to the purchase of the Company does not meet the
criteria for reinsurance accounting under GAAP. The net assets
initially transferred to OakRe were established as a receivable
and are subsequently increased as interest accrued on the
underlying deposits and decrease as funds are transferred back to
the Company when policies reach their crediting rate reset date or
benefits are claimed. 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 by mid-year 2000, and completely by mid-year
2002. The liquidations transfer cash daily 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.
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 since inception of the
agreement.
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, requires all derivative financial
instruments to be recorded on the balance sheet at estimated fair
value. The Company's present accounting policies applies such
accounting treatment only to marketable securities as defined
under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and to off-balance sheet derivative
instruments. SFAS No. 133 will broaden the definition of
derivative instruments to include all classes of financial assets
and liabilities. It also will require separate disclosure of
identifiable derivative instruments embedded in hybrid securities.
The change in the fair value of derivative instruments is to be
recorded each period either in current earnings or other
comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, on the type
of hedge transaction.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 defers for one year
the effective date of Statement of SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans
to adopt the provision of SFAS No. 133 effective January 1, 2001.
At this time the Company does not believe it will have a material
effect on the Company's consolidated financial position or results
of operations.
OTHER
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
<PAGE>
(3) INVESTMENTS
<TABLE>
<CAPTION>
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's equity. The amortized cost, estimated
fair value, and carrying value of investments at December 31, 1999 and
1998, are as follows:
1999
-----------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------- -------------- --------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 28,209 35 (2,665) 25,579 25,579
Government agency
obligations 34,121 76 (318) 33,879 33,879
Corporate securities 1,040,309 1,901 (60,641) 981,569 981,569
Mortgage-backed
securities 199,979 42 (7,335) 192,686 192,686
Asset-backed securities 272,918 389 (25,023) 248,284 248,284
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,575,536 2,443 (95,982) 1,481,997 1,481,997
Preferred stock - affiliate 9,000 -- (2,108) 6,892 6,892
Common stock 37 -- (25) 12 12
Mortgage loans (net) 376,147 -- (1,979) 374,168 376,147
Other invested assets 4,625 -- -- 4,625 4,625
Policy loans 27,778 -- -- 27,778 27,778
-------------- -------------- --------------- --------------- --------------
Total investments $ 1,993,123 2,443 (100,094) 1,895,472 1,897,451
============== ============== =============== =============== ==============
Company's beneficial interest
in separate accounts
$ 310 -- -- 310 310
============== ============== =============== =============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------- -------------- --------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 28,288 249 (84) 28,453 28,453
Government agency
obligations 53,869 1,015 (1) 54,883 54,883
Corporate securities 902,139 16,583 (24,799) 893,923 893,923
Mortgage-backed
securities 253,704 2,118 (1,570) 254,252 254,252
Asset-backed securities 137,198 3,087 (283) 140,002 140,002
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,375,198 23,052 (26,737) 1,371,513 1,371,513
Preferred stock - affiliate 9,000 -- -- 9,000 9,000
Common stock 37 -- -- 37 37
Mortgage loans (net) 312,865 17,500 -- 330,365 312,865
Policy loans 26,295 -- -- 26,295 26,295
-------------- -------------- --------------- --------------- --------------
Total investments $ 1,723,395 40,552 (26,737) 1,737,210 1,719,710
============== ============== =============== =============== ==============
Company's beneficial interest
in separate accounts
$ 2 -- -- 2 2
============== ============== =============== =============== ==============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, 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>
1999
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 65,222 65,553
Due after one year through five years 513,181 488,850
Due after five years through ten years 504,184 465,079
Due after ten years 292,970 269,828
Mortgage-backed securities 199,979 192,687
-------------- --------------
Total $ 1,575,536 1,481,997
============== ==============
</TABLE>
At December 31, 1999, approximately 91.1% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 8.9% noninvestment grade debt securities, 7.3%
are rated as BB, 0.8% are rated as B, and 0.8% are rated C and treated
as impaired.
At December 31, 1999, the Company had nine impaired debt securities with
estimated fair value of $9.4 million, of which seven debt securities,
with estimated fair value of $8.1 million, became non-income producing
in 1999. At December 31, 1998, the Company had two impaired debt
securities with estimated value of $2.1 million, of which one debt
security, with estimated fair value of $0.5 million, became non-income
producing.
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 counterparties to these agreements.
Securities loaned at December 31, 1999 had market values totaling
$36,957,975. Cash of $37,861,652 was held as collateral to secure this
agreement. Income on the Company's security lending program in 1999
was immaterial.
<PAGE>
<TABLE>
<CAPTION>
The components of investment income, realized capital gains (losses),
and unrealized appreciation (depreciation) are as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 100,969 94,876 84,203
Income on cash and cash equivalents 2,459 2,720 2,265
Income on equity securities 563 -- --
Interest on mortgage loans 27,161 28,650 24,890
Income on real estate 103 -- --
Income on policy loans 2,136 1,980 1,852
Income on separate account investments -- 13 2,637
Loss on derivatives -- -- (2,035)
Miscellaneous interest 335 1,715 (215)
------------ ------------ -------------
Total investment income 133,726 129,954 113,597
Investment expenses (2,354) (2,142) (1,936)
------------ ------------ -------------
Net investment income $ 131,372 127,812 111,661
============ ============ =============
Net realized capital (losses) gains are as follows:
Debt securities $ (20,011) (1,600) 537
Equity securities 3 -- --
Mortgage loans -- -- 27
Real estate (38) -- --
Other investments (168) -- (1)
------------ ------------ -------------
Net realized (losses) gains on investments $ (20,214) (1,600) 563
============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(IN THOUSANDS)
Unrealized appreciation (depreciation) are as follows:
<S> <C> <C>
Debt securities $ (93,540) (3,685)
Preferred stock - affiliate (2,108) --
Common stock (25) --
Effects on deferred acquisition costs amortization 43,190 3,215
Effects on PVFP amortization 14,585 (473)
-------------- --------------
Unrealized depreciation before income tax (37,898) (943)
Unrealized income tax benefit 13,264 329
-------------- --------------
Unrealized depreciation on investments $ (24,634) (614)
============== ==============
</TABLE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1999 were $439,069,999. Gross gains of $2,445,497 and
gross losses of $22,456,541 were realized on those sales. Included in
these amounts were $500,674 of gross gains and $1,938,767 of gross
losses realized on the sale of noninvestment grade securities. Net
realized losses include a 1999 impairment adjustment totaling
$18,768,778 related to ten debt securities held by the Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1998 were $486,264,174. Gross gains of $5,102,040 and
gross losses of $6,601,099 were realized on those sales. Included in
these amounts were $1,002,539 of gross gains and $6,011,305 of gross
losses realized on the sale of noninvestment grade securities. Net
realized losses include a 1998 impairment adjustment totaling
approximately $100,000 related to two debt securities held by the
Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1997 were $358,658,091. Gross gains of $1,765,242 and
gross losses of $254,493 were realized on those sales. Included in these
amounts were $681,159 of gross gains and $122,480 of gross losses
realized on the sale of noninvestment grade securities. Net realized
gains include a 1997 impairment adjustment totaling approximately
$974,000 related to one debt security held by the Company.
Securities with a carrying value of approximately $7,019,456 at December
31, 1999 were deposited with government authorities as required by law.
<PAGE>
(4) SECURITIES GREATER THAN 10% OF SHAREHOLDER'S EQUITY
The Company does not have any individual security that exceeds 10% of
shareholder's equity at December 31, 1999 and 1998.
(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
A derivative financial instrument, in very general terms, refers to a
security whose value is derived from the value of an underlying asset,
reference rate, or index.
The Company has a variety of reasons to use derivative instruments, such
as to attempt to protect the Company against possible changes in the
market value of its portfolio and to manage the portfolio's effective
yield, maturity, and duration. All of the Company's holdings are marked
to fair value monthly with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when the disposition closes a hedge. In
this instance, the gain or loss adjusts the unamortized cost of the
hedged security, and the resulting premium or discount is amortized or
accreted over the remaining life of the hedge security.
Summarized below are the specific types of derivative instruments used
by the Company.
INTEREST RATE SWAPS
Under interest rate swaps, the Company agrees with counterparties
to exchange, at specific intervals, the payments between floating
and fixed-rate interest amounts calculated by reference to
notional amounts. Net interest payments are recognized within net
investment income in the consolidated statement of income.
At December 31, 1999, the Company does not have any outstanding
interest rate swap agreements. The swap agreements outstanding at
December 31, 1998 were terminated during 1999 by the
counterparties at a loss of $167,500 to the Company.
At December 31, 1998, the Company had two outstanding interest
rate swap agreements which would have expired in 2002 and 2003.
Under the agreements, the Company received a fixed rate of 6.63%
and 6.70% on a notional amount of $7 and $8 million, respectively,
and paid a floating rate based on London Interbank Offered Rate
(LIBOR). The estimated fair value of the agreements at December
31, 1998 was a net unrealized gain of approximately $0.6 million
which is recognized in the accompanying consolidated balance
sheet.
FUTURES
In order to limit exposure to market fluctuations related to
temporary seed money invested within the separate account, the
Company entered into financial futures contracts on the S&P 500
index during 1997. No financial futures contracts were held during
1999 or 1998. The Company recorded $-0-, $-0-, and $2,035,309 of
losses from terminated contracts as a component of net investment
income during 1999, 1998, and 1997, respectively. The Company also
recorded gains of $-0-, $-0-, and $2,636,999 as a component of net
investment income from market appreciation on the underlying
hedged securities within the separate account during 1999, 1998,
and 1997, respectively.
A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon
price. Upon entering into futures contracts, the Company
maintains, in a segregated account with its custodian, securities
with a value equal to an agreed upon portion of the notional
obligation under the futures contracts. During the period the
futures contract is open, payments are received from or made to
the broker daily based upon changes in the value of the contract
with the related income or loss reflected in the consolidated
statement of income as a contra to changes in fair value of the
hedged securities.
The Company is exposed to credit related risk in the event of
nonperformance by counterparties to financial instruments but does
not expect any counterparties to fail to meet their obligations.
It is the Company's policy to deal only with highly rated
companies.
<PAGE>
<TABLE>
<CAPTION>
(6) COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net (loss) income $ (13,504) 13,894 8,978
------------ ------------ -------------
Other comprehensive (loss) income, before tax -
unrealized (depreciation) appreciation of debt and
equity securities arising during period:
Unrealized holding (depreciation) appreciation
of debt and equity securities (71,773) (12,971) 13,514
Adjustment to deferred acquisition costs
attributable to unrealized depreciation
(appreciation) 31,191 6,228 (5,128)
Adjustment to PVFP attributable to unrealized
depreciation (appreciation) 11,749 2,161 (3,193)
------------ ------------ -------------
Total unrealized (depreciation) appreciation
arising during period (28,833) (4,582) 5,193
------------ ------------ -------------
Less reclassification adjustments for realized losses (gains)
included in net income:
Adjustment for losses (gains) included in
net realized (losses) gains on sales
of investments 20,214 1,600 (563)
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (8,784) (768) 214
Adjustment for (gains) losses included in
amortization of PVFP (3,309) (267) 133
------------ ------------ -------------
Total reclassification adjustments for losses
(gains) included in net income 8,121 565 (216)
------------ ------------ -------------
Other comprehensive (loss) income before related
income tax (benefit) expense (36,954) (5,147) 5,409
Related income tax (benefit) expense (12,934) (1,801) 1,893
------------ ------------ -------------
Other comprehensive (loss) income, net of tax (24,020) (3,346) 3,516
------------ ------------ -------------
Comprehensive (loss) income $ (37,524) 10,548 12,494
============ ============ =============
</TABLE>
<PAGE>
(7) POSTRETIREMENT 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
under 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 1999, 1998, and 1997, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1999, 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 subsidiaries, CFLIC and 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 $0.2 million of state
income tax recoveries.
<TABLE>
<CAPTION>
Income taxes are recorded in the consolidated statement of income and
directly in certain shareholder's equity accounts. Income tax expense
for the years ended December 31 is allocated as follows:
1999 1998 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating (loss) income (excluding realized
investment gains and losses) $ (4,830) 3,906 5,464
Realized investment (losses) gains (1,560) (533) 197
------------ ------------ -------------
Income tax (benefit) expense
included in the consolidated
statements of income (6,390) 3,373 5,661
Shareholder's equity -
change in deferred federal income
taxes related to unrealized (depreciation)
appreciation on securities (12,934) (1,801) 1,893
------------ ------------ -------------
Total income tax (benefit) expense $ (19,324) 1,572 7,554
============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The actual federal income tax expense differed from the expected tax
expense computed by applying the U.S. federal statutory rate to income
before taxes on income as follows:
1999 1998 1997
--------------------- --------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax (benefit) expense $ (6,963) (35.0)% $ 6,043 35.0% $ 5,124 35.0%
State income taxes, net (10) -- (8) -- (33) (0.2)
Amortization of intangible assets 396 2.0 396 2.3 396 2.7
Dividend received deduction - separate
account (2,175) (10.9) (3,183) (18.5) -- --
Valuation allowance for permanent impairments
2,996 15.0 -- -- -- --
Return to provision adjustment (759) (3.8) -- -- -- --
Other 125 0.6 125 0.7 174 1.2
--------- ----------- ---------- ---------- --------- ----------
Total $ (6,390) (32.1)% $ 3,373 19.5% $ 5,661 38.7%
========= ========== ========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 follows:
1999 1998
----------- ------------
(IN THOUSANDS)
Deferred tax assets:
<S> <C> <C>
Policy reserves $ 31,657 31,003
Liability for commissions on recapture 1,014 2,896
Tax basis of intangible assets purchased 4,577 5,351
DAC "Proxy Tax" 23,832 20,619
Permanent impairments 5,482 --
Unrealized depreciation on investments 13,264 330
Net operating and capital loss 8,519 --
Other deferred tax assets 7,294 2,690
----------- ------------
Total deferred tax assets 95,639 62,889
Valuation allowance - permanent impairments (2,996) --
----------- ------------
Total deferred tax assets, net of valuation allowance 92,643 62,889
Deferred tax liabilities:
PVFP 10,507 11,013
Deferred policy acquisition costs 59,825 46,190
Other deferred tax liabilities 347 900
----------- ------------
Total deferred tax liabilities 70,679 58,103
----------- ------------
Net deferred tax assets $ 21,964 4,786
=========== ============
</TABLE>
<PAGE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. As of
December 31, 1999, the Company has provided a 55% valuation allowance
against the deferred tax asset related to the permanent impairments,
based on income projections for future years. Management believes that
it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the remaining deferred
tax asset.
(9) RELATED-PARTY TRANSACTIONS
On December 31, 1997, Cova Life Management Company (CLMC) and Navisys
Incorporated (Navisys), both affiliated companies, purchased certain
assets of Johnson & Higgins/Kirke Van Orsdel, Inc. (J&H/KVI), an
unaffiliated Delaware corporation, for $2,500,000, and merged them into
Cova Life Administrative Service Company (CLASC), a joint subsidiary of
CLMC and Navisys. Navisys purchased 51% of CLASC, and the remaining 49%
was purchased by CLMC. The purchased assets are the administrative and
service systems and organization that provide the policy service
functions for the Company's life and annuity products. On October 31,
1999, CLMC purchased the remaining 51% interest in CLASC from Navisys
for $1,184,414.
The Company has entered into management, operations, and servicing
agreements with its affiliated companies. The affiliated companies are
CLMC, a Delaware corporation, which provides management services and the
employees necessary to conduct the activities of the Company; Conning
Asset Management, which provides investment advice; and CLASC, which
provides underwriting, policy issuance, claims, and other policy
administration functions. Additionally, a portion of overhead and other
corporate expenses is allocated by the Company's parent, GALIC. Expenses
and fees paid to affiliated companies in 1999, 1998, and 1997 for the
Company were $28,995,330, $20,923,330, and $9,400,517, respectively.
In 1999 and 1998, the Company's affiliate, CLMC, received approximately
$3.9 million and $3.2 million, respectively, in advisory fees from GALIC
related to advisory services on GALIC's individual annuity products.
<PAGE>
(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
GAAP differs 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 nonrecognition 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, adjustments to record the carrying values of debt
securities and certain equity securities at fair value 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 at the date of purchase and shareholder's equity to the net
purchase price.
Statutory accounting does not recognize the purchase method of
accounting.
<TABLE>
<CAPTION>
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP are as
follows:
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 102,041 104,740
Reconciling items:
GAAP investment valuation reserves (1,090) (510)
Statutory asset valuation reserve 7,362 19,206
Statutory interest maintenance reserve 6,466 5,983
GAAP investment adjustments to fair value (95,673) (3,685)
GAAP deferred policy acquisition costs 214,120 131,973
GAAP basis policy reserves (57,802) (52,305)
GAAP deferred federal income taxes (net) 21,964 4,786
GAAP guarantee assessment adjustment (9,900) (9,700)
GAAP goodwill 16,157 18,585
GAAP present value of future profits 55,406 42,230
GAAP future purchase price payable (2,898) (6,976)
Other (1,591) (2,241)
------------- -------------
GAAP shareholder's equity $ 254,562 252,086
============= =============
</TABLE>
<PAGE>
Statutory net losses for CFSLIC for the years ended December 31, 1999,
1998, and 1997 were $46,095,427, $2,830,105, and $9,816,357,
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. Due to the
1999 statutory net loss and the Company's negative earned surplus at
December 31, 1999, no dividends are permissible in 2000 without prior
approval of the insurance commissioner.
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,
1999, the Company's total adjusted capital and authorized control level
RBC were $109,402,439 and $28,033,662 respectively. This level of
adjusted capital qualifies under all tests.
(11) GUARANTY FUND ASSESSMENTS
The Company participates with 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 Company's authority to
issue new business, the Company is contingently liable for its share of
claims covered by the guaranty associations for insolvencies incurred
through 1999, 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 assets as a credit against premium taxes over, most commonly, five
years.
In November 1999, the National Organization of Life and Health Guaranty
Associations 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
$9,900,000 in future assessments on insolvencies that occurred before
December 31, 1999. 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 $9,900,000. The Company paid
approximately $36,000, $1,500,000, and $3,000,000 in guaranty fund
assessments in 1999, 1998, and 1997, respectively. These payments were
substantially reimbursed by OakRe. 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 remaining 20%. The
credits retained for 1999, 1998 and 1997 were not material.
(12) SUBSEQUENT EVENT
The purchase of GenAmerica Corporation and subsidiary, including the
Company, by MetLife was completed on January 6, 2000. On that date also,
the Company's modified coinsurance agreement with MetLife was suspended
for subsequent business.
APPENDIX
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. In the first example, we chose a husband and wife age 55. In the
second example, we chose a husband and wife age 65. Our hypothetical Insureds
are non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options; Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $4,000 for the 55-year-old example and $8,500
for the 65-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35%
thereafter)and advisory fee and operating expenses (equal to approximately
.94%). When these costs are taken into account, the net annual investment return
rates (net of an average of 1.49% for these charges) are approximately -1.49,
4.51% and 10.51%. The Policy will lapse if you do not make additional premiums
where 0% is used in the illustrations.
It is important to be aware that these illustrations assume 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 Cash Value, Cash
Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of this prospectus.
These charges are:
(1) A Federal tax charge of 1.3% and a Premium Tax Charge of 2.1% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed Insureds' ages, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,640 1,684 250,000 2,640 1,684 250,000
2 8,610 5,669 4,713 250,000 5,649 4,693 250,000
3 13,241 8,652 7,695 250,000 8,582 7,625 250,000
4 18,103 11,588 10,632 250,000 11,432 10,476 250,000
5 23,208 14,478 13,552 250,000 14,195 13,239 250,000
6 28,568 17,321 16,471 250,000 16,863 16,013 250,000
7 34,196 20,116 19,478 250,000 19,427 18,790 250,000
8 40,106 22,861 22,436 250,000 21,874 21,449 250,000
9 46,312 25,556 25,343 250,000 24,186 23,974 250,000
10 52,827 28,197 28,197 250,000 26,343 26,343 250,000
15 90,630 43,406 43,406 250,000 36,920 36,920 250,000
20 138,877 55,747 55,747 250,000 38,355 38,355 250,000
25 200,454 62,881 62,881 250,000 18,121 18,121 250,000
30 279,043 57,472 57,472 250,000 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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,822 1,866 250,000 2,822 1,866 250,000
2 8,610 6,220 5,264 250,000 6,200 5,244 250,000
3 13,241 9,770 8,814 250,000 9,697 8,740 250,000
4 18,103 13,478 12,522 250,000 13,312 12,356 250,000
5 23,208 17,351 16,395 250,000 17,046 16,089 250,000
6 28,568 21,395 20,545 250,000 20,893 20,043 250,000
7 34,196 25,615 24,997 250,000 24,850 24,213 250,000
8 40,106 30,018 29,593 250,000 28,909 28,484 250,000
9 46,312 34,610 34,398 250,000 33,055 32,843 250,000
10 52,827 39,397 39,397 250,000 37,273 37,273 250,000
15 90,630 69,954 69,954 250,000 62,336 62,336 250,000
20 138,877 106,654 106,654 250,000 86,416 86,416 250,000
25 200,454 150,507 150,507 250,000 101,836 101,836 250,000
30 279,043 202,665 202,665 250,000 90,225 90,225 250,000
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,005 2,049 250,000 3,005 2,049 250,000
2 8,610 6,794 5,838 250,000 6,773 5,817 250,000
3 13,241 10,980 10,024 250,000 10,903 9,947 250,000
4 18,103 15,604 14,648 250,000 15,428 14,472 250,000
5 23,208 20,712 19,756 250,000 20,382 19,426 250,000
6 28,568 26,352 25,502 250,000 25,804 24,954 250,000
7 34,196 32,580 31,943 250,000 31,733 31,095 250,000
8 40,106 39,456 39,031 250,000 38,211 37,786 250,000
9 46,312 47,046 46,833 250,000 45,282 45,069 250,000
10 52,827 55,422 55,422 250,000 52,992 52,992 250,000
15 90,630 116,496 116,496 250,000 107,661 107,661 250,000
20 138,877 216,971 216,971 250,000 195,300 195,300 250,000
25 200,454 385,569 385,569 404,848 346,097 346,097 363,401
30 279,043 663,310 663,310 696,476 590,539 590,539 620,065
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,640 1,684 252,640 2,640 1,684 252,640
2 8,610 5,668 4,712 255,668 5,648 4,692 255,648
3 13,241 8,650 7,694 258,650 8,578 7,622 258,578
4 18,103 11,586 10,630 261,586 11,423 10,467 261,423
5 23,208 14,475 13,518 264,475 14,177 13,221 264,177
6 28,568 17,315 16,465 267,315 16,830 15,980 266,830
7 34,196 20,107 19,469 270,107 19,370 18,733 269,370
8 40,106 22,848 22,423 272,848 21,783 21,358 271,783
9 46,312 25,536 25,324 275,536 24,047 23,834 274,047
10 52,827 28,170 28,170 278,170 26,136 26,136 276,136
15 90,630 43,250 43,250 293,250 35,838 35,838 285,838
20 138,877 54,918 54,918 304,918 34,624 34,624 284,624
25 200,454 59,683 59,683 309,683 9,440 9,440 259,440
30 279,043 47,894 47,894 297,894 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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,822 1,866 252,822 2,822 1,866 252,822
2 8,610 6,219 5,263 256,219 6,199 5,242 256,199
3 13,241 9,769 8,812 259,769 9,693 8,736 259,693
4 18,103 13,476 12,519 263,476 13,302 12,346 263,302
5 23,208 17,347 16,390 267,347 17,023 16,067 267,023
6 28,568 21,387 20,537 271,387 20,851 20,001 270,851
7 34,196 25,603 24,965 275,603 24,776 24,138 274,776
8 40,106 30,000 29,575 280,000 28,785 28,360 278,785
9 46,312 34,583 34,370 284,583 32,858 32,646 282,858
10 52,827 39,357 39,357 289,357 36,969 36,969 286,969
15 90,630 69,686 69,686 319,686 60,420 60,420 310,420
20 138,877 104,970 104,970 354,970 78,106 78,106 328,106
25 200,454 142,560 142,560 392,560 73,026 73,026 323,026
30 279,043 171,327 171,327 421,327 13,199 13,199 263,199
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,005 2,049 253,005 3,005 2,049 253,005
2 8,610 6,793 5,837 256,793 6,772 5,816 256,772
3 13,241 10,978 10,022 260,978 10,889 9,942 260,899
4 18,103 15,601 14,645 265,601 15,416 14,460 265,416
5 23,208 20,706 19,750 270,706 20,355 19,399 270,355
6 28,568 26,343 25,493 276,343 25,750 24,900 275,750
7 34,196 32,565 31,927 282,565 31,635 30,998 281,635
8 40,106 39,431 39,006 289,431 38,043 37,618 288,043
9 46,312 47,007 46,794 297,007 45,003 44,791 295,003
10 52,827 55,363 55,363 305,363 52,545 52,545 302,545
15 90,630 116,025 116,025 366,025 104,226 104,226 354,226
20 138,877 213,395 213,395 463,395 176,484 176,484 426,484
25 200,454 367,997 367,997 617,997 265,789 265,789 515,789
30 279,043 603,996 603,996 853,996 353,140 353,140 603,140
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,640 1,684 250,000 2,640 1,684 250,000
2 8,610 5,669 4,713 250,000 5,649 4,693 250,000
3 13,241 8,652 7,695 250,000 8,582 7,625 250,000
4 18,103 11,588 10,632 250,000 11,432 10,476 250,000
5 23,208 14,478 13,522 250,000 14,195 13,239 250,000
6 28,568 17,321 16,471 250,000 16,863 16,013 250,000
7 34,196 20,116 19,478 250,000 19,427 18,790 250,000
8 40,106 22,861 22,436 250,000 21,874 21,449 250,000
9 46,312 25,556 25,343 250,000 24,186 23,974 250,000
10 52,827 28,197 28,197 250,000 26,343 26,343 250,000
15 90,630 43,406 43,406 250,000 36,920 36,920 250,000
20 138,877 55,747 55,747 250,000 38,355 38,355 250,000
25 200,454 62,881 62,881 250,000 18,121 18,121 250,000
30 279,043 57,472 57,472 250,000 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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,822 1,866 250,000 2,822 1,866 250,000
2 8,610 6,220 5,264 250,000 6,200 5,244 250,000
3 13,241 9,770 8,814 250,000 9,697 8,740 250,000
4 18,103 13,478 12,522 250,000 13,312 12,356 250,000
5 23,208 17,351 16,395 250,000 17,046 16,089 250,000
6 28,568 21,395 20,545 250,000 20,893 20,043 250,000
7 34,196 25,615 24,977 250,000 24,850 24,213 250,000
8 40,106 30,018 29,593 250,000 28,909 28,484 250,000
9 46,312 34,610 34,398 250,000 33,055 32,843 250,000
10 52,827 39,397 39,397 250,000 37,273 37,273 250,000
15 90,630 69,954 69,954 250,000 62,336 62,336 250,000
20 138,877 106,654 106,654 250,000 86,416 86,416 250,000
25 200,454 150,507 150,507 250,000 101,836 101,836 250,000
30 279,043 202,629 202,629 254,349 90,225 90,225 250,000
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 3,005 2,049 250,000 3,005 2,049 250,000
2 8,610 6,794 5,838 250,000 6,773 5,817 250,000
3 13,241 10,980 10,024 250,000 10,903 9,947 250,000
4 18,103 15,604 14,648 250,000 15,428 14,472 250,000
5 23,208 20,712 19,756 250,000 20,382 19,426 250,000
6 28,568 26,352 25,502 250,000 25,804 24,954 250,000
7 34,196 32,580 31,943 250,000 31,733 31,095 250,000
8 40,106 39,456 39,031 250,000 38,211 37,786 250,000
9 46,312 47,046 46,833 250,000 45,282 45,069 250,000
10 52,827 55,422 55,422 250,000 52,992 52,992 250,000
15 90,630 116,496 116,496 250,000 107,661 107,661 250,000
20 138,877 216,397 216,397 342,025 193,998 193,998 306,622
25 200,454 378,815 378,815 525,712 323,435 323,435 448,856
30 279,043 635,498 635,498 797,703 506,991 506,991 636,395
<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 death benefit, Cash 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.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,925 5,879 3,629 250,000 5,829 3,579 250,000
2 18,296 12,387 10,137 250,000 12,134 9,884 250,000
3 28,136 18,793 16,543 250,000 18,160 15,910 250,000
4 38,468 25,094 22,844 250,000 23,882 21,632 250,000
5 49,316 31,288 29,038 250,000 29,272 27,022 250,000
6 60,707 37,373 35,373 250,000 34,295 32,295 250,000
7 72,667 43,343 41,843 250,000 38,890 37,390 250,000
8 85,226 49,194 48,194 250,000 43,018 42,018 250,000
9 98,412 54,915 54,415 250,000 46,582 46,082 250,000
10 112,258 60,499 60,499 250,000 49,487 49,487 250,000
15 192,589 92,172 92,172 250,000 56,987 56,987 250,000
20 295,114 113,204 113,204 250,000 23,903 23,903
25 425,964 117,201 117,201 250,000 0 0 0
30 592,967 85,553 86,553 250,000 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 death benefit, Cash 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.
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities
and Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Cova Financial
Services Life Insurance Company ("Company") hereby represents that the fees and
charges deducted under the Policy described in the Prospectus, in the aggregate,
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
INDEMNIFICATION
The Bylaws of the Company (Article IV, Section 1) provide that:
Each person who is or was a director, officer or employee of the corporation or
is or was serving at the request of the corporation as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person) shall be indemnified by the corporation as of right to the full extent
permitted or authorized by the laws of the State of Missouri, as now in effect
and as hereafter amended, against any liability, judgment, fine, amount paid in
settlement, cost and expenses (including attorney's fees) assessed or out of his
status as a director, officer or employee of the corporation or if serving at
the request of the corporation, as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided by this bylaw provision shall not be exclusive of any
other rights to which those indemnified may be entitled under any other bylaw or
under any agreement, vote of shareholders or disinterested directors or
otherwise, and shall not limit in any way any right which the corporation may
have to make different or further indemnification with respect to the same or
different persons or classes of persons.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling person of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet
The Prospectus consisting of ___ pages.
Undertakings to file reports.
The signatures.
The following exhibits.
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2.
1. Resolution of the Board of Directors of the Company*
2. Not Applicable+++
3.a. Principal Underwriter's Agreement+++
3.b. Selling Agreement+++
3.c. Schedules of Commissions+++
4. Not Applicable
5. Flexible Premium Joint and Last Survivor Variable Life Insurance
Policy++
5.a. Waiver of Specified Premium Rider++
5.b. Anniversary Partial Withdrawal Rider++
5.c. Estate Preservation Term Rider++
5.d. Joint Supplemental Coverage Rider++
5.e. Lifetime Coverage Rider++
5.f. Secondary Guarantee Rider++
5.g. Divorce Split Policy Option Rider++
6.a. Articles of Incorporation of the Company*
6.b. Bylaws of the Company*
7. Not Applicable
8. Not Applicable
9.a. Form of Fund Participation Agreement by and among AIM Variable
Insurance Funds, Inc., A I M Distributors, Inc., Cova Financial
Services life Insurance Company, on behalf of itself and its
Separate Accounts, and Cova Life Sales Company***
9.b. Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and Cova Financial
Services Life Insurance Company****
9.c. Form of Fund Participation Agreement among MFS Variable Insurance
Trust, Cova Financial Services Life Insurance Company and
Massachusetts Financial Services Company+
9.d. Form of Fund Participation Agreement among Cova Financial Services
Life Insurance Company, Cova Life Sales Company, Alliance Capital
Management LP and Alliance Fund Distributors, Inc.+
9.e. Form of Fund Participation Agreement among Oppenheimer Variable
Account Funds, OppenheimerFunds, Inc. and Cova Financial Services Life
Insurance Company***
9.f. Form of Fund Participation Agreement among Putnam Variable Trust,
Putnam Mutual Funds Corp. and Cova Financial Services Life Insurance
Company***
9.g. Form of Fund Participation Agreement among Investors Fund Series,
Zurich Kemper Investments, Inc., Zurich Kemper Distributors, Inc. and
Cova Financial Services Life Insurance Company***
9.h. Form of Participation Agreement by and between Goldman Sachs Variable
Insurance Trust, Goldman, Sachs & Co. and Cova Financial Services Life
Insurance Company***
9.i. Form of Participation Agreement among Liberty Variable Investment
Trust, Liberty Financial Investments, Inc. and Cova Financial Services
Life Insurance Company***
9.j. Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and Cova Financial
Services Life Insurance Company****
9.k. Form of Participation Agreement among Russell Insurance Funds, Russell
Fund Distributors, Inc. and Cova Financial Services Life Insurance
Company***
9.l. Form of Participation Agreement among Variable Insurance Products
Fund,
Fidelity Distributors Corporation and Cova Financial Services Life
Insurance Company++++
9.m. Form of Participation Agreement among Variable Insurance Products
Fund II, Fidelity Distributors Corporation and Cova Financial Services
Life Insurance Company++++
9.n. Form of Participation Agreement among Variable Insurance Products
Fund III, Fidelity Distributors Corporation and Cova Financial
Services
Life Insurance Company++++
10. Application Forms++
11. Powers of Attorney*
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Consent of Independent Auditors
* Incorporated by reference to Form S-6 (File No. 333-17963)
electronically filed on December 16, 1996.
** Incorporated by reference to Pre-Effective Amendment No. 1 to
Form S-6 (File No. 333-17963) electronically filed on March 24, 1997.
*** Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4
(File Nos. 333-34741 and 811-5200) as electronically filed on January
26, 1998.
**** Incorporated by reference to Post-Effective Amendment No. 3 to Form
S-6 (File No. 333-17963) as electronically filed on April 30, 1999.
+ Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4
(File Nos. 333-34741 and 811-5200) as electronically filed on November
19, 1997.
++ Incorporated by reference to Form S-6 (File No. 333-83165) as
electronically filed on July 19, 1999.
+++ Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6
(File No. 333-83165) as electronically filed on October 22, 1999.
++++Incorporated by reference to Post-Effective Amendment No. 11 to Form N-4
(File Nos. 33-39100 and 811-5200) as electronically filed on April 29,
1998.
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that
it meets the requirements of Securities Act Rule 485(b) for effectiveness of
this Registration Statement and has caused this Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized in the
City of Oakbrook Terrace and State of Illinois on this 28th day of April,
2000.
COVA VARIABLE LIFE ACCOUNT ONE
Registrant
By: COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY
By: /s/BERNARD J. SPAULDING
______________________________
Senior Vice President, General Counsel
and Secretary
COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY
Attest: /s/MARK E. REYNOLDS
-----------------------------
Executive Vice President
/s/PETER L. WITKEWIZ
- ----------------------
(Name)
Controller
________________________________
Title
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board and
- ---------------------- Director -------
Richard A. Liddy Date
/s/LORRY J. STENSRUD President and Director 4-28-00
- --------------------- -------
Lorry J. Stensrud Date
J. Robert Hopson* Director 4-28-00
- ----------------- -------
J. Robert Hopson Date
William C. Mair* Director 4-28-00
- ----------------------- -------
William C. Mair Date
E. Thomas Hughes, Jr.* 4-28-00
- ---------------------- Treasurer and Director -------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 4-28-00
- ---------------------- -------
Matthew P. McCauley Date
John W. Barber* Director 4-28-00
- ---------------------- -------
John W. Barber Date
/s/MARK E. REYNOLDS Director 4-28-00
- --------------------- -------
Mark E. Reynolds Date
/s/J. TERRI TANAKA 4-28-00
- --------------------- Director -------
J. Terri Tanaka Date
/s/PETER L. WITKEWIZ 4-28-00
- --------------------- Controller -------
Peter L. Witkewiz Date
</TABLE>
*By: /s/LORRY J. STENSRUD
______________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
INDEX NO. PAGE
EX-99.B Opinion and Consent of Counsel
EX-99.C Consent of Actuary
EX-99.D Consent of Independent Auditors
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 28, 2000
Board of Directors
Cova Financial Services Life
Insurance Company
One Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181-4644
RE: Opinion of Counsel - Cova Variable Life Account One
---------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended, of Post-Effective Amendment No. 1 to a Registration Statement
on Form S-6 for the Flexible Premium Joint and Last Survivor Variable Life
Insurance Policies to be issued by Cova Financial Services Life Insurance
Company and its separate account, Cova Variable Life Account One.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. Cova Variable Life Account One is a Unit Investment Trust as that
term is defined in Section 4(2) of the Investment Company Act of 1940
(the "Act"), and is currently registered with the Securities and Exchange
Commission, pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premiums paid by an Owner pursuant to a
Policy issued in accordance with the Prospectus contained in the Registration
Statement and upon compliance with applicable law, such an Owner will have
a legally-issued, fully paid, non-assessable contractual interest under
such Policy.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration
Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/LYNN KORMAN STONE
-------------------------
Lynn Korman Stone
To the United States Securities and Exchange Commission:
In my capacity as Product Actuary for General American Life Insurance
Company, I have provided actuarial advice to Cova Financial Services
Life Insurance Company, a General American affiliate, concerning a variable
life insurance product funded through Cova Variable Life Account One.
It is my professional opinion that:
1. The fees and charges deducted under the contract, in the aggregate,
are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the insurance
company.
2. The illustrations of cash values, death benefits, and accumulated
premiums in the Appendix to the prospectus contained in the
Registration Statement are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policy.
The rate structure of the Policy has not been designed so as to make
the relationship between premium and benefits, as shown in the
illustrations, appear to be more favorable to prospective purchasers
of Policies at the ages shown in the rate class illustrated than to
prospective purchasers of Policies at other ages.
3. The information contained in the examples set forth in the section of
the prospectus entitled "Death Benefits" is based on the assumptions
stated in the examples, and is consistent with the provisions of the
Policy.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the heading "Experts" in the
prospectus.
/s/D. KENT HOLBROOK
- -------------------------------------------
D. Kent Holbrook
Consent of Independent Auditors
The Board of Directors
Cova Financial Services Life Insurance Company
We consent to the use of our reports on the consolidated financial statements of
Cova Financial Services Life Insurance Company and subsidiaries (the Company)
dated February 4, 2000, and on the financial statements of the sub-accounts of
Cova Variable Life Account One dated March 20, 2000, and to the reference to our
firm under the heading "Experts" in the Prospectus, in the Post-Effective
Amendment No. 1 to the Registration Statement (Form S-6, File No. 333-83165) of
Cova Variable Life Account One.
/s/KPMG LLP
--------------
KPMG LLP
Chicago, Illinois
April 28, 2000
