THE MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
COVA VARIABLE LIFE ACCOUNT ONE
AND
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
This prospectus describes the Modified Single Premium Variable Life Insurance
Policy (Policy) offered by Cova Financial Services Life Insurance Company
(Cova).
The Policy has been designed to be used for estate and retirement planning and
other insurance needs of individuals.
The Policy offers you eighteen (18) investment portfolios listed below. The
investment portfolios are part of Cova Series Trust, General American Capital
Company, Templeton Variable Products Series Fund and AIM Variable Insurance
Funds, Inc. When you buy a Policy, you bear the complete investment risk.
Your Account Value and, under certain circumstances, the death benefit under the
Policy may increase or decrease or the duration of the death benefit may vary
depending on the investment experience of the investment portfolio(s) you
select.
AIM Variable Insurance Funds, Inc.:
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
Cova Series Trust:
Managed by J.P. Morgan Investment Management Inc.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
Managed by Lord, Abbett & Co.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
General American Capital Company:
Managed by Conning Asset Management Company
Money Market
Templeton Variable Products Series Fund, Class 1 Shares:
Managed by Franklin Advisers, Inc.
Franklin Growth Investments
Franklin Small Cap Investments
Managed by Templeton Investment Counsel, Inc.
Templeton Bond
Templeton International
Templeton Stock
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Cova Modified Single
Premium Variable Life Insurance Policy. The SEC maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding companies that file electronically with the SEC.
The Policies:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or government agency
* are not guaranteed and may be subject to loss of principal
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
May 1, 1999.
TABLE OF CONTENTS Page
SPECIAL TERMS 3
SUMMARY 4
PART I 7
1. THE VARIABLE LIFE INSURANCE POLICY 7
2. PURCHASES 7
Premiums 7
Application for a Policy 7
Allocation of Premiums 7
Grace Period 8
Accumulation Unit Values 8
3. INVESTMENT OPTIONS 8
AIM Variable Insurance Funds, Inc. 8
Cova Series Trust 8
General American Capital Company 9
Templeton Variable Products Series Fund 9
Transfers 9
Dollar Cost Averaging Program 9
Automatic Rebalancing Program 9
Approved Asset Allocation Programs 10
Substitution 10
4. EXPENSES 10
Insurance Charges 10
Mortality and Expense Risk Charge 10
Administrative Charge 10
Tax Expense Charge 10
Cost of Insurance Charge 10
Annual Policy Maintenance Fee 11
Annual Withdrawal Amount 11
Surrender Charge 11
Nursing Home Waiver 11
Deferred Premium Tax Charge 11
Transfer Fee 12
Taxes 12
Investment Portfolio Expenses 13
5. DEATH BENEFIT 15
Accelerated Death Benefit 15
Joint Lives 15
6. TAXES 15
Life Insurance in General 15
Taking Money Out of Your Policy 15
Diversification 16
7. ACCESS TO YOUR MONEY 16
Loans 16
Loan Amount 16
Loan Account 16
Loan Interest 16
Interest Credited 16
Preferred Loan 16
Effect of Loan 16
Loan Repayments 16
Total Surrender 17
Partial Surrenders 17
Termination of the Policy 17
Reinstatement 17
8. OTHER INFORMATION 17
Cova 17
Year 2000 17
The Separate Account 18
Distributor 18
Suspension of Payments or Transfers 18
Ownership 18
Owner 18
Joint Owner 18
Beneficiary 18
Assignment 18
PART II 19
Cova 19
Executive Officers and Directors of Cova 19
Voting 22
Disregard of Voting Instructions 22
The Separate Account 22
Legal Opinions 22
Reduction or Elimination of Surrender Charge 22
Misstatement of Age or Sex 23
Cova's Right to Contest 23
Settlement Options 23
Tax Status 23
Introduction 23
Diversification 23
Tax Treatment of the Policy 24
Policy Proceeds 24
Joint Lives 24
Tax Treatment of Loans and Surrenders 24
Multiple Policies 25
Tax Treatment of Assignments 25
Qualified Plans 25
Income Tax Withholding 25
Reports to Owners 25
Legal Proceedings 26
Experts 26
Financial Statements 26
APPENDIX A
Illustration of Policy Values A-1
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Policy, however, certain technical words or
terms are unavoidable and need an explanation. We have identified some of those
words or terms. For several of these terms we have provided a definition. For
the remainder, we believe that you will find an adequate discussion in the text.
For those terms, we have identified them in the text in italic and the page
number that is indicated below is where we believe you will find the best
explanation for the word or term.
Account Value - The total value of your Policy. It is equal to the sum of the
Policy values allocated to the investment portfolios and the Policy values
allocated to the loan account.
Accumulation Unit - An accounting unit used to calculate Policy values when they
are allocated to the investment portfolios.
Cash Value - Your Policy's Account Value less any surrender charge and less any
deferred premium tax charge and less any policy maintenance fee.
Cash Surrender Value - Your Policy's Cash Value less any outstanding loans and
accrued loan interest.
Coverage Amount - It is the difference between the death benefit and the Account
Value.
Face Amount - The amount of coverage that you have chosen (unless later reduced
by a partial surrender) and which will be used to determine the death benefit.
Maximum Premium Limit - This is the maximum amount of premium that Cova will
accept under a Policy. We can also refer to this as MPL. Cova's MPL has been
designed not to exceed the maximum premium allowed under the Internal Revenue
Code for a specified Face Amount of insurance for a given age.
Policy Date, Policy Anniversary, Policy Year - The Policy Date is the day your
premium was initially invested in the Money Market Fund which may be before we
actually issue the Policy. It is the date from which Policy Anniversaries and
Policy Years are determined.
Page
Annual Withdrawal Amount 11
Beneficiary 18
Business Day 8
Death Benefit 15
Insured 4
Investment Portfolio 8
Issue Date 10
Joint Owner 18
Loan Account 16
Monthly Deduction 10
Owner 18
Net Death Benefit or Death Proceeds 15
Premium 7
Processing Date 10
Right to Examine Period 8
Surrender Charge 11
SUMMARY
The prospectus is divided into three sections:
* Summary,
* Part I, and
* Part II
The sections in this Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Even more detailed information is
contained in Part II.
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy offered by Cova is a contract between you,
the owner, and Cova, an insurance company.
The Policy provides for the payment of death proceeds to your selected
beneficiary upon the death of the insured. The death proceeds are free from
federal income taxes. The Policy can be used:
* as part of your estate planning, or
* to save for retirement.
The insured is the person whose life is insured under the Policy. The insured
can be the same as the owner but does not have to be.
You can choose among eighteen (18) investment portfolios which are listed in
Item 3. The investment portfolios are the investment options available under the
Policy. You can allocate your unloaned Account Value to any or all of the
investment portfolios. You can transfer between investment portfolios up to 12
times a year without charge and without being taxed. If you make more than 12
transfers in a year, we will charge you a transfer fee.
While the Policy is in force, the Account Value and, under certain
circumstances, the death benefit, will vary, up or down, or the duration of the
death benefit may vary with the investment performance of the investment
portfolios you choose.
You are not taxed on the earnings until you surrender or borrow from your
Policy.
2. PURCHASES
You can purchase the Policy with a single premium. Under certain conditions, you
can make additional premiums. Your registered representative can help you fill
out the proper forms.
The minimum initial premium we will accept is generally $10,000. There is no
minimum required for additional premiums. However, the total of all premiums
paid will be limited to that which is required to qualify the Policy as life
insurance under the Internal Revenue Code. We call this the Maximum Premium
Limit.
We may also require additional information. In some circumstances, the insured
may be required to provide us with medical records or a complete paramedical
examination.
3. INVESTMENT OPTIONS
You can put your money in any or all of these investment portfolios which are
described in the prospectuses for the funds:
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
Managed by J.P. Morgan Investment
Management Inc.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
Managed by Lord, Abbett & Co.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
Managed by Conning Asset Management Company
Money Market
Managed by Franklin Advisers, Inc.
Franklin Growth Investments
Franklin Small Cap Investments
Managed by Templeton Investment Counsel, Inc.
Templeton Bond
Templeton International
Templeton Stock
Depending upon market conditions and the performance of the investment
portfolio(s) you select, you can make or lose money in any of these investment
portfolios.
4. EXPENSES
The Policy has both insurance features and investment features, and there are
costs related to each that reduce the return on your investment. Your Policy
could lapse if your Cash Surrender Value is insufficient to cover any charges
due.
* Each year Cova deducts a $30 policy maintenance fee from your Policy. Cova
will not deduct this charge if the Account Value of your Policy is at least
$50,000 at the time the deduction is to be made. If you make a complete
surrender of your Policy, we will deduct the policy maintenance fee,
regardless of your Account Value at that time.
* Cova also deducts insurance charges on a monthly basis. For the first ten
years, the total charges are equal, on an annual basis, to 1.70% of the
value of your Policy, with 1/12 of that amount charged monthly. After the
tenth year, the total for insurance charges is .90% annually, with 1/12 of
that amount charged monthly. These totals exclude the charge assessed to
cover the cost of insurance.
* Each month Cova will also deduct an additional insurance charge to cover
the cost of insurance. This charge will depend upon the:
* sex of the insured,
* age of the insured,
* rating classification of the insured, and
* whether your initial premium was 100% of the Maximum Premium Limit.
* There are also daily investment charges which apply to the average daily
value of the investment portfolio and vary depending upon the investment
portfolio. These annual charges range from .205% to 1.30%.
* If you make more than 12 transfers in a year, Cova deducts a transfer fee
of $25 or 2% of the amount transferred, whichever is less.
* If you take out more than the annual withdrawal amount, Cova may assess a
surrender charge which ranges from 7.5% of the premium surrendered in the
first year to 0% in the tenth year. Each year you may withdraw up to the
sum of the excess of your Account Value over premiums paid which have not
been previously surrendered; plus 10% of premiums without incurring this
surrender charge. We call this amount the annual withdrawal amount. If you
withdraw premiums before the tenth year, Cova will assess a deferred
premium tax charge which declines from 2.25% of premium surrendered in the
first year to 0% in the tenth year. After the tenth year there is no
surrender charge or deferred premium tax when you withdraw your money.
5. DEATH BENEFIT/DEATH PROCEEDS
The Policy provides for a Face Amount of insurance. The actual amount payable to
your beneficiary is the death benefit less any loans plus accrued loan interest
under the Policy. This amount is called the death proceeds. It may also be
called the net death benefit.
The death benefit will be the greater of:
(1) your Face Amount, or
(2) your Account Value multiplied by a specified percentage.
These percentages vary by the age of the insured and are shown in your Policy.
Therefore, increases in your Account Value may increase the death benefit. A
decrease in Account Value may decrease the death benefit, but the death benefit
will never be less than the Face Amount (so long as the Policy remains in
force). Also, a partial surrender will reduce the Face Amount in the same
proportion as the Account Value was reduced.
All or part of the death proceeds may be paid in a lump sum or applied under one
of the Settlement Options contained in the Policy.
The Policy is offered on a single life or on a "joint life" basis. Under "joint
life" coverage, death proceeds are paid after the second insured's death.
At the time of application for a Policy, you designate a beneficiary who is the
person or persons who will receive the death proceeds. You can change your
beneficiary unless you have designated an irrevocable beneficiary. The
beneficiary does not have to be a natural person.
6. TAXES
Your earnings are not taxed until you take them out. In most cases, your Policy
will be a modified endowment contract unless it was exchanged for a contract
issued before June 21, 1988. Money taken out of a modified endowment contract is
considered to come from earnings first and is taxed as income. Also, if you are
younger than 59-1/2 when you take money out, you may be charged a 10% federal
tax penalty on the earnings withdrawn.
Death proceeds are paid to your beneficiary tax free.
7. ACCESS TO YOUR MONEY
Under the Policy you have access to a portion of your Account Value equal to
earnings without charge. You may also withdraw up to 10% of premium each year,
without incurring the surrender charge. Premiums withdrawn in excess of this 10%
will incur a surrender charge during the first 10 years. However, a deferred
premium tax charge will be assessed on all premiums surrendered during the first
ten years.
The minimum partial surrender that you can make is $500. You can also borrow
some of your Cash Value. The minimum loan amount is $500.
8. OTHER INFORMATION
Right to Examine
If you cancel your Policy within ten days after you receive it (or whatever
period is required in your state), we will return to you the greater of
(1) the premium(s) you paid, or
(2) your Account Value on the day we, or the agent through whom it was
purchased, received the returned Policy.
Until the end of the time you are allowed to examine your Policy (10 days or the
required period in your state) plus five days, your premium will remain in the
Money Market Fund. After that, we will invest your Account Value as you
requested.
Who Should Purchase the Policy?
The Policy is designed for an individual who wants to:
* create or conserve his/her estate;
* supplement retirement income; and
* retain access to cash through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of an insured.
Cova will not issue a Policy on insureds older than 90.
Additional Features
* You can arrange to have a regular amount of money automatically invested in
selected investment portfolios each month, theoretically giving you a lower
average cost per unit over time than a single one time purchase. The amount
you selected will be placed in the Money Market Fund and will be
transferred to the selected investment portfolios monthly. We call this
feature Dollar Cost Averaging. There is no additional charge for this
feature.
* You can arrange to automatically readjust your unloaned Account Value
between investment portfolios periodically to keep the allocation you
select. We call this feature Automatic Rebalancing. There is no additional
charge for this feature.
* In the event the insured is terminally ill, you can request to receive up
to 50% of the death benefit up to a maximum of $500,000. If you have
selected the Joint Life option, the provision will only be available on the
second life after the death of the first. We call this feature the
Accelerated Death Benefit. There is no additional charge for this feature.
* If you or the joint owner are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins after the first
Policy Year, you can make a full or partial surrender and we will waive the
surrender charge. We call this feature the Nursing Home Waiver. There is no
additional charge for this feature.
* You can elect to have the death benefit payable upon the death of a second
person. This benefit is written on spouses only. We call this option the
Joint Life Option.
These features may not be available in your state. They may not be suitable for
your particular situation.
9. INQUIRIES
If you need more information, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policy owner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at:
Cova Financial Services Life Insurance Company
P.O. Box 10366
Des Moines, IA 50306
515-243-5834
800-343-8496
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
This variable life insurance policy is a contract between you, the owner, and
Cova, an insurance company. This kind of policy is most commonly used for
retirement and/or estate planning.
During the insured's lifetime, you can select among the investment portfolios
offered in the Policy. (There are currently eighteen(18) investment portfolios
offered. They are listed in Item 3.) You can transfer between them up to 12
times a year without charge. The Account Value and, under some circumstances,
the death benefit will go up or down or the duration of the death benefit may
vary depending upon the investment experience of the investment portfolio(s) you
select. This gives you the opportunity to capture the upside potential of the
market. It also means you could lose money.
While your money remains in the Policy, you pay no current income taxes on
earnings or gains. This is called tax-deferred accumulation. It helps your money
grow faster. Subject to some limitations, you may take money out at any time
through loans or partial surrenders. Any money you take out, however, is taxed
as earnings until all earnings have been removed from the Policy. If you are
younger than age 59-1/2 when you take money out, you may also incur an
additional 10% federal tax penalty. If you purchased a Policy in exchange for a
policy issued prior to June 21, 1988, different tax rules may apply. (See
Section 6. Taxes. Part II also contains more detailed information regarding
taxes.)
Because this is a life insurance policy, it provides a death benefit, which is
an amount greater than your Account Value. When the insured dies, the death
benefit (minus any loans and any accrued loan interest) is paid to your
beneficiary free from federal income tax. The tax-free death benefit combined
with the ability to use your money while you're alive, makes this an excellent
way to accumulate money you do not think you will use in your lifetime and a
tax-efficient way to provide for those you leave behind.
2. PURCHASES
Premiums
Premiums are the monies you give us to purchase the Policy. The minimum initial
premium we will accept is generally $10,000. When you apply for the Policy, you
request a specific amount of insurance. We call this amount the Face Amount of
the Policy. Your initial premium must be 80%, 90% or 100% of the Maximum Premium
Limit (MPL). The Internal Revenue Code (Code) has established certain criteria
which must be met in order for a life insurance policy to qualify as life
insurance under the Code. The MPL satisfies one of the criteria. Cova's MPL has
been designed not to exceed the Maximum Premium Limit allowed under the Code for
a specified Face Amount of insurance for a given age.
You can invest additional premiums up to the MPL. However, if the additional
premium increases the amount of insurance, we will require evidence of the
insurability of the insured. If all of your premiums total $1,000,000 or more,
you will need Cova's prior approval before you add premiums. If the additional
premium would cause the Policy to fail to meet the criteria established by the
Code to qualify as life insurance, Cova will send the premium back within 60
days of the anniversary of the Policy Date (Policy Anniversary). The amount and
frequency of additional premiums will affect the Account Value of your Policy
and may affect the amount or duration of your insurance.
Application for a Policy
To purchase a Policy, you may be required to submit an application to Cova which
requests some information regarding the proposed insured. In some cases, we will
ask for additional information. We may request that the insured provide us with
medical records or possibly require other medical tests.
Cova will not issue a Policy if the insured is over age 90.
Cova will review all the information it has about the insured and determine
whether or not the insured meets Cova's standards for issuing the Policy. This
process is called underwriting. If the insured meets all of Cova's underwriting
requirements, we will issue a Policy. There are several underwriting classes
under which the Policy may be issued.
During the underwriting period, which could be up to 60 days or longer from the
time the application is signed, we offer fixed insurance called conditional
insurance. The initial premium must be submitted with the application before the
conditional insurance is provided.
* The conditional insurance is effective up to 60 days from when the
application is signed.
* For applicants 65 or younger, conditional insurance will be for the lesser
of $500,000 plus the initial premium paid or the amount of insurance
applied for.
* If the applicant is 66 or older, the conditional insurance will be the
lesser of $200,000 plus the initial premium paid or the amount of insurance
applied for.
* The conditional insurance is subject to a number of restrictions and is
only applicable if the proposed insured was an acceptable risk for the
insurance applied for.
Allocation of Premiums
When you purchase a Policy, we will initially invest your money in the Money
Market Fund. After 15 days from the issue date (or the period required in your
state plus five days), we will allocate your Account Value to the investment
portfolios as you requested in the application. All allocation directions must
be in whole percentages. If you make additional premiums, we will allocate them
in the same way as your first premium unless you tell us otherwise.
If you change your mind about owning a Policy, you can cancel it within 10 days
after receiving it (or the period required in your state (right to examine
period)). When you cancel the Policy within this time period, Cova will not
assess a surrender charge or a deferred premium tax charge. Cova will give you
back the greater of your premium payment or your Account Value.
If your application for the Policy is in good order, Cova will invest your first
premium in the Money Market Fund two days after it is received, even if our
underwriting is not yet complete and the Policy is not yet issued. The day we
invest your premium in the Money Market Fund is called the Policy Date. The
money will stay in the Money Market Fund for 15 days after the issue date. (In
some states, the period may be longer.) At the end of that period, we will
re-allocate those funds as you selected in the application.
If, as a result of underwriting review, Cova does not issue you a Policy, we
will return your premium to you (plus interest required by your state).
If we do issue a Policy, on the issue date, we will deduct the monthly
deductions for the period from the Policy Date through the next processing date.
Grace Period
Your Policy will stay in effect as long as your Cash Surrender Value is
sufficient to cover the monthly deductions and the policy maintenance fee. If
the Cash Surrender Value of your Policy is not enough to cover these deductions
to be made from the Policy, Cova will mail you a notice. You will have 61 days
from the time the notice is mailed to you to send Cova the required premium
payment. This is called the grace period. If the premium is not paid by the end
of the grace period, the Policy will terminate without value.
Accumulation Unit Values
The value of your Policy that is invested in the investment portfolios will go
up or down depending upon the investment performance of the investment
portfolio(s) you choose. In order to keep track of the value of your Policy, we
use a unit of measure we call an Accumulation Unit. (An Accumulation Unit works
like a share of a mutual fund.)
Every business day we determine the value of an Accumulation Unit for each of
the investment portfolios. The value of an Accumulation Unit for any given
business day is determined by multiplying a factor we call the net investment
factor times the value of an Accumulation Unit for the previous business day. We
do this for each investment portfolio. The net investment factor is a number
that reflects the change (up or down) in an underlying investment portfolio
share.
Our business days are each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 P.M. Eastern time.
The value of an Accumulation Unit may go up or down from day to day.
When you make a premium payment, we credit your Policy with Accumulation Units.
Cova determines the number of Accumulation Units to credit to your policy by
dividing the amount of premiums allocated to an investment portfolio by the
value of the Accumulation Unit for that investment portfolio.
We calculate the value of an Accumulation Unit for each investment portfolio
after the New York Stock Exchange closes each day and then apply it to your
Policy.
When Cova assesses the monthly deductions and the annual policy maintenance fee,
we do so by deducting Accumulation Units from your Policy. When you have
selected more than one investment portfolio, we make the deductions pro rata
from all of the investment portfolios.
3. INVESTMENT OPTIONS
The Policy offers eighteen (18) investment portfolios which are listed below.
Additional investment portfolios may be available in the future.
You should read the prospectuses for these funds carefully before investing.
Copies of these fund prospectuses are attached to this prospectus. Certain
portfolios contained in the fund prospectuses may not be available with your
Policy.
AIM Variable Insurance Funds, Inc.
AIM Variable Insurance Funds, Inc. 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 Policy:
AIM V.I. Capital Appreciation Fund
AIM V.I. Value Fund
Cova Series Trust
Cova Series Trust is managed by Cova Investment Advisory Corporation, which is
an indirect subsidiary of Cova. Cova Series Trust is a mutual fund with multiple
portfolios. Each investment portfolio has a different investment objective. Cova
Investment Advisory Corporation has engaged subadvisers to provide investment
advice for the individual investment portfolios. The following investment
portfolios are available under the Policy:
J.P. Morgan Investment Management Inc. is the sub-adviser to the following
portfolios:
Select Equity Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Lord, Abbett & Co. is the sub-adviser to the following portfolios:
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
General American Capital Company
General American Capital Company is a mutual fund with multiple portfolios. Only
the following portfolio is available under the Policy and is managed by Conning
Asset Management Company:
Money Market Fund
Templeton Variable Products Series Fund
Templeton Variable Products Series Fund is a mutual fund with multiple
portfolios. Templeton Variable Products Series Fund has two classes of shares -
Class 1 and Class 2. Only shares of Class 1 are available under your Policy.
Franklin Advisers, Inc. is the investment manager of the Franklin Growth
Investments Fund and the Franklin Small Cap Investments Fund; Templeton
Investment Counsel, Inc. is the investment manager for the Templeton
International Fund, the Templeton Bond Fund and the Templeton Stock Fund. The
following portfolios are available under the Policy:
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton International Fund
Shares of the investment portfolios 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 Cova. Certain
investment portfolios may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
Cova may enter into certain arrangements under which it is reimbursed by the
investment portfolios' advisers, distributors and/or affiliates for the
administrative services which it provides to the portfolios.
Transfers
You can transfer money among the eighteen (18) investment portfolios.
You can make 12 transfers every Policy Year without charge while the insured is
alive. If you make more than 12 transfers in a year, there is a transfer fee
deducted. (We measure years from your Policy Date.) The following apply to any
transfer:
1. the minimum amount which you can transfer is $500 or your entire value in
the investment portfolio.
2. your request for transfer must clearly state the amount to be transferred
and which investment portfolios are involved in the transfer.
3. if a transfer fee applies, the charge will be deducted from the amount
transferred.
We have reserved the right to modify your transfer rights if we decide that the
exercise of this right by you, your authorized agent, or any owner is or would
be disadvantageous to other owners. We have also reserved the right to restrict
transfers to a maximum of 12 per year and to restrict transfers from being made
on consecutive business days.
Telephone Transfers. You can make transfers by telephone. Prior to making a
transfer by telephone, you will need to complete a written pre-authorization
form. If you own the Policy with a joint owner, unless Cova is instructed
otherwise, Cova will accept instructions from either you or the other owner.
Cova will use reasonable procedures to confirm that instructions given to us by
telephone are genuine. If Cova fails to use such procedures, we may be liable
for any losses due to unauthorized or fraudulent instructions. Cova records all
telephone instructions.
Dollar Cost Averaging Program
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Fund to any of the other investment
portfolio(s). By allocating amounts on a regular schedule as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations.
You must have at least $5,000 in the Money Market Fund (or the amount required
to complete your program, if more) in order to participate in the Dollar Cost
Averaging Program. There is no additional charge for this feature.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
Automatic Rebalancing Program
Once your money has been allocated to the investment portfolios, the performance
of each portfolio may cause your allocation to shift. You can direct us to
automatically readjust your non-loaned Account Value between investment
portfolios to keep the blend you selected. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
Policy Date.
There is no additional charge for this feature. The transfer date will be the
1st business day after the end of the period you selected. If you participate in
the Automatic Rebalancing Program, the transfers made under the program are not
taken into account in determining any transfer fee.
You cannot participate in both the Dollar Cost Averaging and Automatic
Rebalancing Programs at the same time.
Approved Asset Allocation Programs
Cova recognizes the value to certain owners of having available, on a continuous
basis, advice for the allocation of your money among the investment portfolios
available under the Policy. Certain providers of these types of services have
agreed to provide such services to owners in accordance with Cova's
administrative rules regarding such programs.
Cova has made no independent investigation of these programs. Cova has only
established that these programs are compatible with our administrative systems
and rules.
Even though Cova permits the use of approved asset allocation programs, the
Policy was not designed for professional market timing organizations. Repeated
patterns of frequent transfers are disruptive to the operations of the
investment portfolios, and should Cova become aware of such disruptive
practices, we may modify the transfer privilege either on an individual or class
basis.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transfer fee.
Substitution
Cova may elect to substitute one of the investment portfolios you have selected
with another portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intent to do
this. Cova may also limit further investment in an investment portfolio if it
deems the investment inappropriate.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. These charges and expenses are:
Insurance Charges
Each month, Cova will make certain deductions from your Policy on the processing
date. The processing date is the day each month that we deduct certain charges
from your Policy. The first processing date is the issue date. The issue date is
the date on which we issue you a Policy. After that, it is the same day each
month as the Policy Date.
The insurance charges are:
(1) mortality and expense risk charge;
(2) administrative charge;
(3) tax expense charge; and
(4) cost of insurance charge.
Collectively, we refer to these charges as the monthly deduction. When you have
selected more than one investment portfolio, we make the deduction pro rata from
all of the investment portfolios you have selected.
Mortality and Expense Risk Charge. For the first ten years, this charge is
equal, on an annual basis, to .90%, 1/12 of which is charged each month, of the
Account Value of your Policy invested in the investment portfolios. For the
eleventh year and after, the charge is .50%, 1/12 of which is charged each
month. This charge cannot be increased.
Administrative Charge. This charge is equal, on an annual basis, to .40%, 1/12
of which is charged each month, of the Account Value of your Policy. This charge
cannot be increased.
Tax Expense Charge. This deduction is the sum of the premium tax charge and the
federal tax charge. It is deducted monthly for the first ten years. It is equal,
on an annual basis, to .40% (.15% for federal tax charge and .25% for premium
tax charge), 1/12 of which is charged each month, of the Account Value of your
Policy.
This charge compensates Cova for its expenses incurred for federal taxes
incurred as a result of issuing the Policy. It also compensates Cova for the
state and local premium taxes it incurred as a result of issuing the Policy.
Premium taxes range from 0% to 4%. You will be assessed the premium tax charge
regardless of what the total actual premium tax is in your state or local
jurisdiction.
If you surrender all or part of your Policy during the first 10 years, Cova will
charge a deferred premium tax charge. See below.
Cost of Insurance Charge. This charge compensates Cova for insurance coverage
provided during the month.
The guaranteed cost of insurance charge is determined by multiplying the
Coverage Amount by the cost of insurance rate. The Coverage Amount is the
difference between the death benefit and the Account Value. The cost of
insurance rate is based upon the:
* sex of the insured,
* age of the insured,
* rate classification of the insured, and
* whether you paid 100%, or 90%, or 80% of the MPL.
The rate classification of the insured is determined through our underwriting
process.
The Policy provides that for standard risks, the guaranteed cost of insurance
rate is based on the 1980 Commissioners Standard Ordinary Mortality Table, age
last birthday (1980 CSO Table).
For substandard risks, the guaranteed cost of insurance rate will be higher and
will be based upon a multiple of the 1980 CSO Table. The multiple will be based
on the insured's substandard rating. Tables setting forth the guaranteed cost of
insurance rates are included in each Policy.
Cova can use rates that are less than the guaranteed cost of insurance rates
shown in the Policy. Cova refers to these as the current cost of insurance
rates.
If 100% of the MPL is paid, Cova's current cost of insurance rate is a
percentage of the Account Value. The basis and amount of this charge may change
in the future, but can never be more than the guaranteed cost of insurance rates
contained in the Policy. For a better understanding of how the cost of insurance
rate and the other charges affect Policy values, you can request personalized
illustrations from your registered representative.
Annual Policy Maintenance Fee
Every year on the Policy Anniversary, currently Cova deducts $30 as a policy
maintenance fee. This charge cannot be increased once the Policy is issued. Cova
will not deduct this charge, if when the deduction is to be made, your Account
Value is $50,000 or more. Cova may some time in the future discontinue this
practice for new policies issued and deduct the charge. If you make a complete
surrender of your Policy on other than a Policy Anniversary, the policy
maintenance fee will be deducted, regardless of your Account Value at that time.
When you have selected more than one investment portfolio, we make the deduction
pro rata from all of the investment portfolios you have selected.
Annual Withdrawal Amount
While the Policy is in force, prior to the death of the insured and after the
expiration of the right to examine period, you can make a total or partial
surrender of the Account Value of your Policy up to the Cash Surrender Value. A
surrender may be subject to:
* a surrender charge, and
* a deferred premium tax charge.
When you request a surrender, we will determine what portion, if any, is part of
your annual withdrawal amount. The annual withdrawal amount is equal to:
1. the excess of the Account Value over premiums paid which have not been
previously surrendered. Neither the surrender charge nor deferred premium
tax charge is assessed on this amount; and
2. 10% of your premium payments each year (you may not carry this amount over
to the next year). This portion of the annual withdrawal amount is subject
to the deferred premium tax charge.
Surrender Charge
During the first 10 years, the surrender charge is assessed against any premium
surrendered, which is not part of the annual withdrawal amount. The surrender
charge, which is a percent of premiums surrendered, is shown in the table below:
Policy Surrender Policy Surrender
Year Charge Year Charge
_________ ______________ _________ _______________
1 7.5% 6 4.0%
2 7.5% 7 3.0%
3 7.5% 8 2.0%
4 6.0% 9 1.0%
5 5.0% 10+ 0%
Nursing Home Waiver
If you or the joint owner, if any, are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins during the first ten
years, under the Nursing Home Waiver rider, you can make a full or partial
surrender and we will waive the surrender charge. The Nursing Home Waiver goes
into effect after the first Policy Anniversary. There is no additional charge
for this feature.
Deferred Premium Tax Charge
When you purchase a Policy there are various premium taxes assessed by state and
local governmental entities that we must pay on the Policy. You are charged a
portion of that each month for the first ten years as part of the tax expense
charge. (See the discussion of the Tax Expense Charge in Section 4 above.) The
deferred premium tax charge enables Cova to collect that portion of the premium
tax charge it has not collected when you surrender all or part of your Policy.
The deferred premium tax charge is assessed only on premiums surrendered from
the Policy during the first ten years.
The deferred premium tax charge, which is a percent of premiums surrendered, is
shown in the table below:
Deferred Deferred
Policy Premium Policy Premium
Year Tax Charge Year Tax Charge
_________ ______________ _________ _______________
1 2.25% 6 1.00%
2 2.00% 7 .75%
3 1.75% 8 .50%
4 1.50% 9 .25%
5 1.25% 10+ 0%
Transfer Fee
You can make 12 free transfers every year. We measure a year from the Policy
Date. If you make more than 12 transfers a year, we will deduct a transfer fee
of $25 or 2% of the amount that is transferred, whichever is less. If we do
assess a transfer fee, it will be deducted from the amount transferred.
If the transfer is part of the Dollar Cost Averaging Program, the Automatic
Rebalancing Program or an Approved Asset Allocation Program, it will not count
in determining the transfer fee.
Taxes
Cova may assess a charge against a Policy for any taxes attributable to the
Separate Account. Cova does not expect to incur such taxes.
Investment Portfolio Expenses
There are deductions from and expenses paid out of the assets of the various
investment portfolios, which are summarized below. See the fund prospectuses for
a complete description.
<TABLE>
<CAPTION>
Investment Portfolio Expenses
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management certain Portfolios - Total Annual
Fees see Note 1 below) Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds, Inc.
Managed by A I M Advisors, Inc.
<S> <C> <C> <C>
AIM V.I. Capital Appreciation .62% .05% .67%
AIM V.I. Value .61% .05% .66%
- ------------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust (1)
Managed by J.P. Morgan Investment Management Inc.
Select Equity .68% .18% .86%
Small Cap Stock .85% .27% 1.12%
Large Cap Stock .65% .10% .75%
International Equity .80% .28% 1.08%
Quality Bond .55% .10% .65%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Lord, Abbett & Co.
Bond Debenture .75% .10% .85%
Mid-Cap Value 1.00% .30% 1.30%
Large Cap Research 1.00% .30% 1.30%
Developing Growth .90% .30% 1.20%
Lord Abbett Growth and Income (2) .65% .07% .72%
- ------------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Managed by Conning Asset Management Company
Money Market .125% .08% .205%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Portfolio Expenses (continued)
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management certain Portfolios - Total Annual
Fees see Note 1 below) Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Templeton Variable Products Series Fund, Class 1 Shares
Managed by Templeton Investment Counsel, Inc.
Templeton Bond .50% .23% .73%
Templeton International .69% .17% .86%
Templeton Stock .70% .19% .89%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Franklin Advisers, Inc.
Franklin Growth Investments (3) .00% 1.00% 1.00%
Franklin Small Cap Investments (3) .15% .85% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Since May 1, 1996, Cova has been reimbursing the investment portfolios of
Cova Series Trust for all operating expenses (exclusive of the management fees)
in excess of approximately .10%. Beginning May 1, 1999, Cova will discontinue
this reimbursement arrangement for the Select Equity, Small Cap Stock and
International Equity Portfolios. Therefore, the amounts shown above under "Other
Expenses" have been restated to reflect the actual expenses for these Portfolios
for the year ended December 31, 1998. Also beginning May 1, 1999, Cova will
reimburse the Mid-Cap Value, Large Cap Research and Developing Growth Portfolios
for all operating expenses (exclusive of the management fees) in excess of
approximately .30%, instead of .10%. This change is reflected above under "Other
Expenses" for these three Portfolios. Absent the expense reimbursement, the
percentages shown for total annual portfolio expenses for the year ended
December 31, 1998 would have been .86% for the Quality Bond Portfolio, .94% for
the Large Cap Stock Portfolio, .93% for the Bond Debenture Portfolio, 1.68% for
the Mid-Cap Value Portfolio, 1.95% for the Large Cap Research Portfolio, and
1.70% for the Developing Growth Portfolio.
(2) Estimated. The Portfolio commenced investment operations on January 8, 1999.
(3) Figures reflect expenses from the Fund's inception on May 1, 1998 and are
annualized. The investment manager agreed in advance to limit management fees
and make certain payments to reduce Fund expenses as necessary so that Total
Annual Portfolio Expenses did not exceed 1.00% of the Fund's Class 1 net assets
in 1998. The investment manager has agreed to continue this arrangement through
1999. Management Fees, Other Expenses and Total Annual Portfolio Expenses in
1998 before any waivers were as follows: 0.60%, 4.08% and 4.68% for the Franklin
Growth Investments Fund and 0.75%, 1.00% and 1.75% for the Franklin Small Cap
Investments Fund.
</FN>
</TABLE>
5. DEATH BENEFIT
The primary purpose of the Policy is to provide death benefit protection on the
life of the insured. While the Policy is in force, if the insured dies, the
beneficiary(ies) will receive the death proceeds. The death proceeds equal the
death benefit under the Policy less any loans and accrued loan interest.
The death benefit is the greater of:
(1) the Face Amount of the Policy; and
(2) the minimum death benefit. (The minimum death benefit is the Account Value
multiplied by a percentage.)
Cova has included the minimum death benefit in order to assure that the Policy
will continue to qualify as life insurance under the Internal Revenue Code.
You can choose to have the death proceeds paid:
* in a lump sum, or
* under a Settlement Option.
If you have not made a choice before the insured dies, the beneficiary will
choose the method of payment. If a method of payment has not been chosen within
90 days after receiving proof of death, Cova may pay the death proceeds in a
lump sum.
The death benefit payable during the grace period is the death benefit in effect
immediately prior to the start of the grace period less any loans, accrued loan
interest and any overdue deductions. See discussion of grace period above.
Accelerated Death Benefit
If the insured is terminally ill, under the Accelerated Death Benefit rider,
Cova will pre-pay a portion of the death benefit. You may elect to have an
Accelerated Death Benefit of up to 50% of the death benefit but no greater than
$500,000.
You can only elect to receive an Accelerated Death Benefit once. The Accelerated
Death Benefit must first be used to repay any outstanding loans and accrued loan
interest. After repayment of the outstanding loans and accrued loan interest,
any remaining amount will be paid as a lump sum or under a payment plan.
The subsequent amount available for loans or surrenders or as a death benefit
will be reduced by the amount of the Accelerated Death Benefit, plus interest
accrued at the Policy loan interest rate.
This benefit may not be available in your state or may have different provisions
in your state.
Joint Lives
Cova offers a rider to the Policy that provides that the death benefit will be
paid only upon the death of a second person. This option is only available to
spouses.
The cost of insurance charge reflects the anticipated life expectancy of both
insureds. It also reflects the fact that the death benefit is payable at the
death of the last surviving insured.
If you wish to reinstate a lapsed Policy with a Joint Life rider attached, both
insureds must be alive and provide satisfactory evidence of insurability.
The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both insureds.
If a Joint Life rider is issued in conjunction with the Policy, the Accelerated
Death Benefit will only be payable on the terminal illness of the last surviving
insured.
This benefit may not be available in your state.
6. TAXES
NOTE: Cova has prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any person. You
should consult your own tax adviser about your own circumstances. Cova has
included in Part II an additional discussion regarding taxes.
Life Insurance in General
Life insurance, such as the Policy, is a means of providing for death protection
and setting aside money for future needs. Congress recognized the importance of
such planning and provided special rules in the Internal Revenue Code (Code) for
life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance policy until you take the money out. The
beneficiaries are not taxed when they receive the death proceeds upon the death
of the insured.
You, as the owner, will not be taxed on increases in the value of your Policy
until a distribution occurs - either as a surrender or as a loan. When you
receive a distribution, you are taxed on the amount of the withdrawal that is
earnings.
Taking Money Out of Your Policy
For tax purposes, your Policy will be treated as a modified endowment contract,
unless, under certain circumstances, it was exchanged for a policy issued before
June 21, 1988. Consequently, if you make a withdrawal or a loan from your
Policy, the Code treats it as first coming from earnings and then from your
premiums. These earnings are included in taxable income.
The Code also provides that any amount received from an insurance policy which
is included in income may be subject to a 10% penalty. The penalty will not
apply if the income received is:
(1) paid on or after the taxpayer reaches age 59-1/2;
(2) paid if the taxpayer becomes totally disabled (as that term is defined in
the Code); or
(3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If you purchased a Policy in exchange for a policy issued prior to June 21,
1988, different tax rules may apply.
See "Tax Status" in Part II for more details.
Diversification
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. Cova believes that the investment portfolios are being
managed so as to comply with the requirements.
Under current federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not Cova would be considered the owner of the shares of the
investment portfolios. If you are considered the owner of the investments, it
will result in the loss of the favorable tax treatment for the Policy. It is
unknown to what extent owners are permitted to select investment portfolios, to
make transfers among the investment portfolios or the number and type of
investment portfolios owners may select from without being considered the owner
of the investments. If guidance from the Internal Revenue Service is provided
which is considered a new position, then the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the owner of the
Policy, could be treated as the owner of the investment portfolios.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
The Cash Surrender Value in your Policy is available:
(1) by making a surrender (either a partial or a complete surrender), or
(2) by taking a loan from your Policy.
Loans
You may borrow money from Cova while the Policy is still in force. The Policy
will be the only security Cova will require for a Policy loan. You cannot borrow
against your Policy:
* until the end of the right to examine period, and
* if the Policy is in a grace period.
Loans are considered distributions from the Policy for tax purposes. The portion
of the loan that has come from earnings will be taxable to you and may be
subject to a 10% penalty tax.
See "Tax Status" in Part II for more details.
Loan Amount. The maximum loan amount is equal to 90% of the Account Value
* less loan interest due on the next Policy Anniversary,
* less the surrender charge,
* less the policy maintenance fee, if any, and
* less the deferred premium tax charge, if any.
The minimum loan amount is $500. If total loans equal or exceed the Cash Value,
the Policy will terminate at the end of the grace period if Cova does not
receive an appropriate loan repayment.
Loan Account. When you make a loan, a portion of your Account Value equal to the
loan will be transferred on a pro rata basis from the investment portfolios to
the loan account. The loan account is a portion of Cova's general account that
contains Account Values attributable to Policy loans.
Loan Interest. Loan interest due on the Policy loan will accrue daily at a
current rate of 6.0% per annum. The loan interest is due each Policy Anniversary
and if not paid will become part of the loan. When that happens, Cova will
transfer a portion of the Account Value equal to the loan interest due, on a pro
rata basis, from the investment portfolios to the loan account.
Interest Credited. Amounts held in the loan account will be credited daily with
interest, at a current rate of 4.0% annually.
Preferred Loan. The part of your loan equal to earnings is the Preferred Loan. A
preferred loan will be credited interest daily at a current rate of 6.0%
annually.
Effect of Loan. When you make a loan against your Policy, Cova will redeem
Accumulation Units from the investment portfolios equal to the loan request and
transfer that amount to the loan account.
A Policy loan, whether or not repaid, will have a permanent effect on the
Policy. This is because the loan account does not share in the investment
results of the investment portfolio(s). If it is not repaid, the Policy loan and
accrued loan interest will reduce the amount of Cash Value. It will also reduce
the amount payable at death because outstanding loans and accrued loan interest
are deducted from the death benefit.
Loan Repayments. You can repay all or part of a loan at any time while your
Policy is in force and the insured is alive. There is no minimum loan repayment
amount. If you want to repay a loan in full, the loan repayment must equal the
loan plus all the accrued loan interest.
When you repay a loan, Cova will transfer the amount held in the loan account to
the investment portfolios according to your most recent instructions.
Unless you tell Cova otherwise, any payment Cova receives from you will:
* go first to pay any interest due,
* then to repay any loan,
* and then will be considered a premium payment.
Total Surrender
You can terminate your Policy by notifying Cova in writing. Cova will pay you
the Cash Surrender Value. When that happens, the Policy will be terminated and
there will be no other benefits. When you make a total surrender there may be
surrender charges and deferred premium tax charges and the policy maintenance
fee will be deducted.
Partial Surrenders
You can surrender some of the Cash Surrender Value by making a request in
writing to Cova. The minimum amount you can surrender is $500, unless your Cash
Surrender Value is less.
Cova requires that you maintain a minimum Account Value in your Policy of at
least $5,000 after you make a partial surrender. If you do not, the Policy will
terminate and Cova will send you the entire Cash Surrender Value.
When you make a partial surrender, there may be surrender charges and deferred
premium tax charges.
When you make a partial surrender, the Face Amount of your Policy will be
reduced. The Face Amount is reduced in the same proportion that the Account
Value is reduced by the partial surrender. When you make a partial surrender,
the amount of the surrender is deducted on a pro rata basis from Account Value
allocated to the investment portfolios, unless you specify otherwise.
Termination of the Policy
Your Policy will terminate if:
(1) you make a total surrender of the Policy,
(2) the grace period has ended, or
(3) the insured has died.
Reinstatement
If your Policy terminates while the insured is still alive you can have it
reinstated provided the Policy did not terminate because you made a total
surrender. You can only reinstate your Policy within 5 years after the end of
the grace period. If there are joint insureds, both insureds must be alive.
When you reinstate your Policy you must provide Cova with satisfactory evidence
of insurability and you must either repay any outstanding loan and accrued
interest or you must reinstate the loan along with any accrued interest. You
must also pay a sufficient premium to:
(1) cover all the monthly deductions and any policy maintenance fee that were
unpaid during the grace period, and
(2) be sufficient to keep the Policy in force for at least 2 months after the
date of reinstatement.
When you reinstate your Policy, the Face Amount of the reinstated Policy will be
the Face Amount of your original Policy at the time the Policy terminated,
unless you direct Cova otherwise. You cannot select a Face Amount that is larger
than that. The Account Value adjusted for the past due charges of your Policy
when you reinstate it will be the Account Value at the time of termination plus
the additional premium paid at the time of reinstatement. The past due monthly
deductions and policy maintenance fee, if any, will be deducted from this
amount. The surrender charge, if any, and the deferred premium tax charge, if
any, are based on the number of Policy Years from the original Policy Date.
The effective date of the reinstated Policy is the next processing date
following Cova's approval of your application for reinstatement.
8. OTHER INFORMATION
Cova
Cova Financial Services Life Insurance Company (Cova) was incorporated on August
17, 1981, as Assurance Life Company, a Missouri corporation, and changed its
name to Xerox Financial Services Life Insurance Company in 1985. On June 1,
1995, a wholly-owned subsidiary of General American Life Insurance Company
purchased Cova, which on that date changed its name to Cova Financial Services
Life Insurance Company.
Cova is licensed to do business in the District of Columbia and all states
except for California, Maine, New Hampshire, New York and Vermont.
Year 2000
Cova has developed and initiated plans to assure that its computer systems will
function properly in the year 2000 and later years. These efforts have included
receiving assurances from outside service providers that their computer systems
will also function properly in this context. Included within these plans are the
computer systems of the advisers and sub-advisers of the various investment
portfolios underlying the Separate Account.
Although an assessment of the total cost of implementing these plans has not
been completed, the total amounts to be expended are not expected to have a
material effect on Cova's financial position or results of operations. Cova
believes that it has taken all reasonable steps to address these potential
problems. There can be no guarantee, however, that the steps taken will be
adequate to avoid any adverse impact.
The Separate Account
Cova has established a separate account, Cova Variable Life Account One
(Separate Account), to hold the assets that underlie the Policies.
The assets of the Separate Account are held in Cova's name on behalf of the
Separate Account and legally belong to Cova. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business Cova may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or charged against the
Policies and not against any other policies Cova may issue.
The Separate Account is divided into sub-accounts.
Distributor
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is an affiliate of Cova.
Commissions will be paid to broker-dealers who sell the Policies. Broker-dealers
will be paid commissions up to 5.5% of premiums and a trail commission up to
.25% for years two through nine which increases up to .40% in year 10 or later.
Sometimes, Cova enters into an agreement with the broker-dealer to pay the
broker-dealer persistency bonuses, in addition to the standard commission.
Suspension of Payments or Transfers
Cova may be required to suspend or postpone any payments or transfers for any
period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or Cova cannot
reasonably value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
Ownership
Owner. You, as the owner of the Policy, have all of the rights under the Policy.
If you die while the Policy is still in force and the insured is living,
ownership passes to a successor owner or if none, then your estate becomes the
owner.
Joint Owner. The Policy can be owned by joint owners. Authorization of both
joint owners is required for all Policy changes except for telephone transfers.
Beneficiary. The beneficiary is the person(s) or entity you name to receive any
death benefit. The beneficiary is named at the time the Policy is issued, unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the insured dies. If there is an
irrevocable beneficiary, all Policy changes except premium allocations and
transfers require the consent of the beneficiary.
Assignment. You can assign the Policy.
PART II
More Information
Cova
Cova Financial Services Life Insurance Company (Cova) was originally
incorporated on August 17, 1981 as Assurance Life Company, a Missouri
corporation and changed its name to Xerox Financial Services Life Insurance
Company in 1985. On June 1, 1995, a wholly-owned subsidiary of General American
Life Insurance Company (General American) purchased Cova from Xerox Financial
Services, Inc. On June 1, 1995, Cova changed its name to Cova Financial Services
Life Insurance Company. Cova presently is licensed to do business in the
District of Columbia and all states except California, Maine, New Hampshire, New
York and Vermont.
General American is a St. Louis-based mutual company with more than $300 billion
of life insurance in force and approximately $24 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individual and groups.
Executive Officers and Directors of Cova
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
<TABLE>
<CAPTION>
Principal Occupation During
Name the Past 5 Years
- ---- ----------------
<S> <C>
John W. Barber*** Director of Cova, First Cova Life Insurance Company (FCLIC) and Cova Financial
Life Insurance Company (CFLIC) - June, 1995 to present; Vice President and
Controller of General American - December, 1984 to present; President and Director
of Equity Intermediary Company - October, 1988 to present.
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.
Frances S. Cook* First Vice President and Associate General Counsel of Cova - July, 1997 to
present, prior thereto Vice President and Assistant General Counsel 1996 to 1997,
prior thereto Assistant General Counsel 1993 to 1997; Secretary of CFLIC, Cova and
FCLIC - 1997 to present; First Vice President of CLMC - July, 1997 to present,
prior thereto Vice President and Assistant General Counsel 1996 to 1997, prior
thereto Assistant General Counsel 1993 to 1997; Secretary of Cova Investment
Advisory Corporation (Advisory) - 1997 to present; Assistant Secretary of Cova
Life Sales Company (CLSC) - 1993 to present.
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 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 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.
Thomas E. Hughes, Jr.** Treasurer and Director of Cova and CFLIC - June, 1995 to present; Treasurer of
FCLIC - June, 1995 to present; Corporate Actuary and Treasurer of General American
- October, 1994 to present. Formerly, Executive Vice President - Group Pensions
General American - March, 1990 to October, 1994. In addition to the Cova
companies, Director of the following General American subsidiary companies:
Paragon Life Insurance Company and RGA Reinsurance Company - October, 1994 to
present. Treasurer of the following General American subsidiary companies: Paragon
Life Insurance Company, General Life Insurance Company of America, General Life
Insurance Company, General American Holding Company, Red Oak Realty Company, Gen
Mark Incorporated, Walnut Street Securities, Inc., Walnut Street Advisers Inc.,
White Oak Royalty Company, Walnut Street Funds, Inc. and RGA Reinsurance Company -
October, 1994 to present.
Douglas E. Jacobs* Vice President of Cova, CFLIC and CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President
from 1990 to 1996; Vice President of CFLIC - 1997 to present, prior thereto
Assistant Vice President from 1988 to 1996; Vice President of FCLIC - 1997 to
present, prior thereto Assistant Vice President from 1993 to 1996; Vice President
of J&H/KVI - 1985 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC, CLMC, Advisory and Cova
Investment Allocation Corporation (Allocation) - April, 1997 to present; Chairman
of the Board, President and Chief Executive Officer of General American - May,
1992 to present; Mr. Liddy also holds various positions with the General American
subsidiaries as follows: Chairman of the Board and President of General American
Mutual Holding Company, GenAmerica Corporation and General American Holding
Company; Chairman of the Board of Security Equity Life Insurance Company, Conning
Corporation, The Walnut Street Funds, Inc., General American Capital Company,
Reinsurance Group of America, Inc., RGA Life Reinsurance Company of Canada and RGA
Reinsurance Company.
William C. Mair* Vice President 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.
Leonard M. Rubenstein** Director of Cova, CFLIC, FCLIC and CLMC - January, 1996 to present; Director of
Advisory and Allocation from 1995 to present; Executive Vice President and
Director of General American - 1992 to present. Mr. Rubenstein also holds various
positions with the General American subsidiaries as follows: Director and
Treasurer of General American Capital Company; Senior Vice President Investments,
Treasurer and Director of Reinsurance Group of America, Incorporated; Director of
Paragon Life Insurance Company; Director of General American Holding Company;
Chief Executive Officer, Chairman and Director of Conning Corporation; Director of
the following: General Life Insurance Company, Security Equity Life Insurance
Company, BHIF America de Vida Seguros S.A. (Chile), Manatial Seguros de Vida, S.A.
(Argentina), Red Oak Realty Company, General Life Insurance Company of America;
RGA Reinsurance Company; Secretary and Director for RGA Sud America S.A.
Myron H. Sandberg* Vice President of Cova and CFLIC - 1985 to present; Vice President of CLMC - 1989
to present.
John W. Schaus* Vice President of Cova and CFLIC - 1988 to present; 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.
Lorry J. Stensrud* President and Director of Cova, CFLIC, FCLIC and CLMC from June, 1995 to present,
prior thereto Executive Vice President; President and Director of Advisory from
1993 to present; President and Director of Allocation from 1994 to present.
Director of CLSC from 1989 to present; President, Chief Executive Officer and
Director of Cova Series Trust - 1996 to present.
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.
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: J&H/KVI, 1776 West Lakes Parkway, West Des Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with its view of present applicable law, Cova will vote the shares
of the investment portfolios at special meetings of shareholders in accordance
with instructions received from owners having a voting interest. Cova will vote
shares for which it has not received instructions in the same proportion as it
votes shares for which it has received instructions. Cova will vote shares it
owns in the same proportion as it votes shares for which it has received
instructions. The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation under it should be
amended or if the present interpretations should change, and as a result Cova
determines that it is permitted to vote the shares of the funds in its own
right, it may elect to do so.
The voting interests of the owner in the funds will be determined as follows:
owners may cast one vote for each $100 of Account Value of a Policy which is
allocated to an investment portfolio on the record date. Fractional votes are
counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by Cova not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each owner having such a voting interest will receive periodic reports relating
to the investment portfolios in which he or she has an interest, proxy material
and a form with which to give such voting instructions.
Disregard of Voting Instructions. Cova may, when required to do so by state
insurance authorities, vote shares of the funds without regard to instructions
from owners if such instructions would require the shares to be voted to cause
an investment portfolio to make, or refrain from making, investments which would
result in changes in the sub-classification or investment objectives of the
investment portfolio. Cova may also disapprove changes in the investment policy
initiated by owners or trustees/directors of the funds, if the disapproval is
reasonable and is based on a good faith determination by Cova that the change
would violate state or federal law or the change would not be consistent with
the investment objectives of the investment portfolios or which varies from the
general quality and nature of investments and investment techniques used by
other funds with similar investment objectives underlying other variable
contracts offered by Cova or of an affiliated company. In the event Cova does
disregard voting instructions, a summary of this action and the reasons for such
action will be included in the next semi-annual report to owners.
The Separate Account
Cova has established the separate account, Cova Variable Life Account One
(Separate Account), to hold the assets that underlie the Policies. The Board of
Directors of Cova adopted a resolution to establish the Separate Account under
Missouri insurance law on February 24, 1987. Cova has registered the Separate
Account with the Securities and Exchange Commission as a unit investment trust
under the Investment Company Act of 1940.
The investment program of the Separate Account will not be changed without the
approval by the Insurance Commissioner of the state of Missouri. If required,
the approval process is on file with the Commissioner of the state in which this
Policy is issued.
If the New York Stock Exchange is closed (except for holidays and weekends) or
trading is restricted due to an emergency as defined by the Securities and
Exchange Commission so that Cova cannot value Accumulation Units, Cova may
postpone all procedures which require valuation of the Accumulation Units until
valuation is possible.
Legal Opinions
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.
Reduction or Elimination of Surrender Charge
The amount of the surrender charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the surrender charge will be determined by Cova after examination
of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Policies with fewer sales contacts.
2. The total amount of premium payments to be received will be considered. Per
Policy sales expenses are likely to be less on larger premium payments than
on smaller ones.
3. Any prior or existing relationship with Cova will be considered. Per Policy
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Policy with
fewer sales contacts.
4. There may be other circumstances, of which Cova is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, Cova determines that there
will be a reduction in sales expenses, Cova may provide for a reduction or
elimination of the surrender charge.
The surrender charge may be eliminated when the Policies are issued to an
officer, director or employee of Cova or any of its affiliates. In no event will
any reduction or elimination of the surrender charge be permitted where the
reduction or elimination will be unfairly discriminatory to any person.
Misstatement of Age or Sex
If the age or sex of the insured(s) has been incorrectly stated, the death
benefit will be adjusted to reflect the death benefit that would have been
provided by the last cost of insurance at the correct age and/or sex of the
insured.
Cova's Right to Contest
Cova cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the insured's lifetime for two years from the
Policy Date. If the Policy is reinstated, the two-year period is measured from
the date of reinstatement. In addition, if the insured commits suicide in the
two-year period, or such period as specified in state law, the benefit payable
will be limited to premiums paid less debt and less any surrenders.
Settlement Options
The Cash Surrender Value or the death proceeds may be paid in a lump sum or may
be applied to one of the Settlement Options. The Settlement Options are:
Option 1: Life Annuity
Option 2: Life Annuity with 5, 10 or 20 years Guaranteed
Option 3: Joint and Last Survivor Annuity
Option 4: Payments for a Designated Period
You or the beneficiary can select to have the Settlement Options payable on
either a fixed or variable basis.
Tax Status
NOTE: The following description is based upon Cova's understanding of current
federal income tax law applicable to life insurance in general. Cova cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. Cova
believes that the policies to be issued will qualify as "life insurance
contracts" under section 7702. Cova does not guarantee the tax status of the
policies. Purchasers bear the complete risk that the policies may not be treated
as "life insurance" under federal income tax laws. Purchasers should consult
their own tax advisers. It should be further understood that the following
discussion is not exhaustive and that special rules not described in this
prospectus may be applicable in certain situations.
Introduction. The discussion in this prospectus is general in nature. It is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. Cova has not considered any applicable state or other tax laws.
Moreover, the discussion in this prospectus is based upon Cova's understanding
of current federal income tax laws as they are currently interpreted. Cova makes
no representation regarding the likelihood of continuation of those current
federal income tax laws or of the current interpretations by the Internal
Revenue Service.
Cova is taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from Cova and its
operations form a part of Cova.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy.
The Code contains a safe harbor provision which provides that life insurance
policies such as the Policies meet the diversification requirements if, as of
the close of each quarter, the underlying assets meet the diversification
standards for a regulated investment company and no more than fifty-five (55%)
percent of the total assets consist of: cash, cash items, U.S. Government
securities, and securities of other regulated investment companies. There is an
exception for securities issued by the U.S. Treasury in connection with variable
life insurance policies.
The Treasury Department issued Regulations which established diversification
requirements for the investment portfolios underlying variable contracts such as
the Policies. The Regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an alternative to the safe
harbor provision described above. Under the Regulations, an investment portfolio
will be deemed adequately diversified if:
(i) no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
(ii) no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
(iii)no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
(iv) no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
For purposes of these Regulations, all securities of the same issuer are treated
as a single investment.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
have been met, "each United States government agency or instrumentality shall be
treated as a separate issuer".
Cova intends that each investment portfolio underlying the Policies will be
managed by the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered as the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. The Code requires the use of
reasonable mortality and other expense charges.
In establishing these charges, Cova has relied on the interim guidance provided
in IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While Cova has attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not agree with Cova's interpretations of Section 7702 that were
made in determining such compliance. In the event the Policy is determined not
to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies.
You should consult your own tax adviser with respect to the tax consequences of
purchasing the Policy.
Policy Proceeds. Loan proceeds and/or surrender payments, including those
resulting from the lapse of the Policy, from the Policies are fully taxable to
the extent of income in the Policy and may further be subject to an additional
10% federal income tax penalty. (See "Tax Treatment of Loans and Surrenders".)
Otherwise, the Policy should receive the same federal income tax treatment as
any other type of life insurance. As such, the death benefit thereunder is
excludable from the gross income of the beneficiary under the Code and any
benefits paid under the Accelerated Death Benefit Rider should also be
excludable from gross income under the Code. Furthermore, you are not deemed to
be in constructive receipt of the Account Value or Cash Surrender Value,
including increments thereon, under a Policy until you make a surrender. If the
death proceeds are to be paid under one of the Settlement Options, the payments
will be pro rated between the amount attributable to the death benefit which
will be excludable from the beneficiary's income and the amount attributable to
interest which will be includable in the beneficiary's income.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Policy owner or beneficiary. Owners and beneficiaries should consult their tax
advisers.
Joint Lives. The Policy may be issued with a Joint Life Rider providing for the
payment of the death benefit upon the death of the last surviving insured. While
Cova believes that a Policy issued on this basis complies with Section 7702 of
the Code, such circumstances are not directly addressed in either Section 7702
or the related regulations. In the absence of regulations or other guidelines,
there is some uncertainty as to whether a Policy with such a joint life feature
meets the requirements of Section 7702 of the Code.
Tax Treatment of Loans and Surrenders. The Code alters the tax treatment
accorded to loans and certain distributions from life insurance policies which
are deemed to be "modified endowment contracts". The Policy's premium
requirements are such that Policies issued on or after June 21, 1988 will be
treated as modified endowment contracts. A Policy received in exchange for a
modified endowment contract is also a modified endowment contract regardless of
whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the Policy will not cause the Policy to be
treated as a modified endowment contract if no additional premiums are paid.
A Policy that was entered into prior to June 21, 1988 may be deemed to be a
modified endowment contract if:
* it is materially changed, and
* fails to meet the 7-pay test.
A Policy fails to meet the 7-pay test when the cumulative amount paid under the
Policy at any time during the first 7 Policy Years exceeds the sum of the net
level premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven (7) level annual
premiums.
A material change would include any increase in the future benefits provided
under a Policy unless the increase is attributable to:
(1) the payment of premiums necessary to fund the lowest death benefit and
qualified additional benefits payable in the first seven Policy Years; or
(2) the crediting of interest or other earnings (including policyholder
dividends) with respect to such premiums.
Assuming that the Policy will be treated as a modified endowment contract,
surrenders and/or loan proceeds are taxable to the extent of income in the
Policy. Such distributions are deemed to be on a last-in, first-out basis, which
means the taxable income is distributed first. Loan proceeds and/or surrender
payments may also be subject to an additional 10% federal income tax penalty
applied to the income portion of such distribution. The penalty shall not apply,
however, to any distribution:
(1) made on or after the date on which the taxpayer reaches age 59-1/2;
(2) which is attributable to the taxpayer becoming disabled (within the meaning
of Section 72(m)(7) of the Code); or
(3) which is part of a series of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and his or her beneficiary.
Furthermore, only under limited circumstances will interest paid on Policy loans
be tax deductible.
If a Policy is not classified as a modified endowment contract, 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 under 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 modified endowment
contract, will be treated as indebtedness of the owner and not a distribution.
Upon complete surrender or lapse of the Policy or when maturity benefits are
paid, if the amount received plus the policy debt 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.
You should seek competent tax advice on the tax consequences of taking loans,
making a partial or total surrender or making any material modifications to your
Policy.
Multiple Policies. The Code further provides that multiple modified endowment
contracts that are issued within a calendar year period to the same owner by one
company or its affiliates are treated as one modified endowment contract for
purposes of determining the taxable portion of any loans or distributions. Such
treatment may result in adverse tax consequences including more rapid taxation
of the loans or distributed amounts from such combination of contracts. You
should consult a tax adviser prior to purchasing more than one modified
endowment contract in any calendar year period.
Tax Treatment of Assignments. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. You should therefore consult a
competent tax adviser if 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 includable in gross income of
the Policy owner are subject to federal income tax withholding. However, the
Policy owner in most cases may elect not to have taxes withheld. The Policy
owner may be required to pay penalties under the estimated tax rules, if the
Policy owner's withholding and estimated tax payments are insufficient.
Reports to Owners
Cova will send you semi-annual and annual reports of the investment portfolios.
Within 30 days after each Policy Anniversary, Cova will send you an annual
statement. The statement will show:
* the current amount of death benefit payable under the Policy,
* the current Account Value,
* the current Cash Surrender Value,
* current debt, and
* all transactions previously confirmed.
The statement will also show premiums paid and all charges deducted during the
Policy Year.
Cova will mail you a confirmation within seven days of the transaction of:
(a) the receipt of premium;
(b) any transfer between investment portfolios;
(c) any loan, interest repayment, or loan repayment;
(d) any surrender;
(e) exercise of the free look privilege; and
(f) payment of the death benefit under the Policy.
Upon request, you are entitled to a receipt of premium payment.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. Cova is
not involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
Experts
The consolidated balance sheets of the Company as of December 31, 1998 and 1997,
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,
1998, and the statement of assets and liabilities of the Separate Account as of
December 31, 1998, and the related statements of operations and changes in net
assets for the period from commencement of operations through 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 of the Company are provided
below.
COVA VARIABLE
LIFE ACCOUNT ONE
Financial Statements
December 31, 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 the
Bond Debenture, Developing Growth, Large Cap Research, Mid Cap Value,
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity, and
International Equity sub-accounts (investment options within the Cova
Series Trust), the Growth and Income sub-account (investment option within
the Lord Abbett Series Fund, Inc.), and the Money Market sub-account
(investment option within the General American Capital Company) of Cova
Variable Life Account One of Cova Financial Services Life Insurance Company
(the Separate Account) as of December 31, 1998 and the related statement of
operations and statement of changes in net assets for the period from
commencement of operations through 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the sub-accounts of
Cova Variable Life Account One of Cova Financial Services Life Insurance
Company as of December 31, 1998, and the results of their operations and
the changes in their net assets for the period presented, in conformity
with generally accepted accounting principles.
Chicago, Illinois
March 1, 1999
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<S> <C>
Assets:
Investments:
Cova Series Trust (Trust):
Bond Debenture Portfolio - 13,423 shares at a net asset value of $12.38 per share
(cost $161,009) $ 166,190
Developing Growth Portfolio - 12,034 shares at a net asset value of $11.24 per share
(cost $113,370) 135,268
Large Cap Research Portfolio - 10,807 shares at a net asset value of $11.96 per share
(cost $117,490) 129,301
Mid-Cap Value Portfolio - 15,251 shares at a net asset value of $10.58 per share
(cost $148,807) 161,394
Quality Bond Portfolio - 12,152 shares at a net asset value of $11.02 per share
(cost $133,651) 133,906
Small Cap Stock Portfolio - 10,140 shares at a net asset value of $11.98 per share
(cost $102,930) 121,504
Large Cap Stock Portfolio - 14,203 shares at a net asset value of $18.12 per share
(cost $212,598) 257,293
Select Equity Portfolio - 29,716 shares at a net asset value of $16.08 per share
(cost $412,371) 477,727
International Equity Portfolio - 7,021 shares at a net asset value of $12.86 per share
(cost $88,498) 90,276
Lord Abbett Series Fund, Inc. (Lord Abbett) Growth and Income Portfolio - 32,104 shares at a
net asset value of $20.65 per share (cost $637,439) 662,911
General American Capital Company (GACC) Money Market Portfolio - 26,049 shares at a
net asset value of $19.25 per share (cost $497,220) 501,460
-------------
Total assets $ 2,837,230
=============
Liabilities:
GACC Money Market $ 50,258
=============
Net assets:
Trust Bond Debenture - 16,194 accumulation units at $10.262336 per unit $ 166,190
Trust Developing Growth - 13,726 accumulation units at $9.855135 per unit 135,268
Trust Large Cap Research -11,784 accumulation units at $10.972618 per unit 129,301
Trust Mid-Cap Value - 16,852 accumulation units at $9.576906 per unit 161,394
Trust Quality Bond - 12,494 accumulation units at $10.717509 per unit 133,906
Trust Small Cap Stock - 13,665 accumulation units at $8.891377 per unit 121,504
Trust Large Cap Stock - 21,202 accumulation units at $12.135469 per unit 257,293
Trust Select Equity - 41,611 accumulation units at $11.480648 per unit 477,727
Trust International Equity - 8,549 accumulation units at $10.560451 per unit 90,276
Lord Abbett Growth and Income - 62,078 accumulation units at $10.678727 per unit 662,911
GACC Money Market - 43,101 accumulation units at $10.468518 per unit 451,202
-------------
Net assets $ 2,786,972
=============
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Operations
Period ended December 31, 1998
Trust
-----------------------------------------------------------------------------------
Large Mid- Small
Bond Developing Cap Cap Quality Cap
Debenture Growth Research Value Bond Stock
------------------------------- ------------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income -
dividends $ 191 -- 126 61 94 3
-------------- --------------- ------------- --------- --------- ----------
Realized gain (loss) on investments:
Realized gain (loss) on sale of
fund shares -- (56) (59) (60) 8 258
Realized gain distributions 74 3 -- -- -- 76
-------------- --------------- ------------- --------- --------- ----------
Net realized gain (loss) 74 (53) (59) (60) 8 334
-------------- --------------- ------------- --------- --------- ----------
Change in unrealized appreciation
during the year 5,181 21,898 11,811 12,587 255 18,574
-------------- --------------- ------------- --------- --------- ----------
Net increase in net assets from
operations $ 5,446 21,845 11,878 12,588 357 18,911
============== =============== ============= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Operations
Period ended December 31, 1998
Trust Lord Abbett
------------------------------------------- ----------------
Large Growth GACC
-----------
Cap Select International and Money
Stock Equity Equity Income Market Total
---------- ---------- ----------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income -
dividends $ 23 25 652 8,782 - 9,957
---------- ---------- ----------------- ----------------- ----------- ----------
Realized gain (loss) on investments:
Realized gain (loss) on sale of
fund shares 467 112 (117) 40 12,085 12,678
Realized gain distributions 76 503 8 28,237 - 28,977
---------- ---------- ----------------- ----------------- ---------- -----------
Net realized gain (loss) 543 615 (109) 28,277 12,085 41,655
---------- ---------- ----------------- ----------------- ----------- -----------
Change in unrealized appreciation
during the year 44,695 65,356 1,778 25,472 4,240 211,847
---------- ---------- ----------------- ----------------- ----------- -----------
Net increase in net assets from
operations $ 45,261 65,996 2,321 62,531 16,325 263,459
========== ========== ================= ================= =========== ==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Period ended December 31, 1998
Trust
------------------------------------------------------------------------------
Large Mid-
Bond Developing Cap Cap Quality
Debenture Growth Research Value Bond
---------------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Increase in net assets from operations:
Investment income $ 191 -- 126 61 94
Net realized gain (loss) 74 (53) (59) (60) 8
Unrealized appreciation during
the year 5,181 21,898 11,811 12,587 255
---------------- ---------------- -------------- ------------ -----------
Net increase from operations 5,446 21,845 11,878 12,588 357
---------------- ---------------- -------------- ------------ -----------
Contract transactions:
Payments received from contract
owners -- -- -- -- --
Transfers between sub-accounts, net 161,726 115,070 119,413 150,800 133,943
Transfers for contract benefits,
terminations and insurance charges (982) (1,647) (1,990) (1,994) (394)
---------------- ---------------- -------------- ------------ -----------
Net increase in net assets
from contract transactions 160,744 113,423 117,423 148,806 133,549
---------------- ---------------- -------------- ------------ -----------
Net increase in net assets 166,190 135,268 129,301 161,394 133,906
Net assets at beginning of period -- -- -- -- --
---------------- ---------------- -------------- ------------ -----------
Net assets at end of period $ 166,190 135,268 129,301 161,394 133,906
================ ================ ============== ============ ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Period ended December 31, 1998
Trust
------------------------------------------------------------
Small Large
Cap Cap Select International
Stock Stock Equity Equity
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Increase in net assets from
operations:
Investment income $ 3 23 25 652
Net realized gain (loss) 334 543 615 (109)
Unrealized appreciation during
the year 18,574 44,695 65,356 1,778
----------- ----------- ----------- -----------------
Net increase from operations 18,911 45,261 65,996 2,321
----------- ----------- ----------- -----------------
Contract transactions:
Payments received from contract
owners - - - -
Transfers between sub-accounts, net 105,943 216,611 417,562 91,449
Transfers for contract benefits,
terminations and insurance charges (3,350) (4,579) (5,831) (3,494)
----------- ----------- ----------- -----------------
Net increase in net assets
from contract transactions 102,593 212,032 411,731 87,955
----------- ----------- ----------- -----------------
Net increase in net assets 121,504 257,293 477,727 90,276
Net assets at beginning of period - - - -
----------- ----------- ----------- -----------------
Net assets at end of period $ 121,504 257,293 477,727 90,276
=========== =========== =========== =================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Period ended December 31, 1998
Lord Abbett
-----------------
Growth GACC
--------------
and Money
Income Market Total
---------------- -------------- -----------------
<S> <C> <C> <C>
Increase in net assets from
operations:
Investment income $ 8,782 - 9,957
Net realized gain (loss) 28,277 12,085 41,655
Unrealized appreciation during
the year 25,472 4,240 211,847
---------------- -------------- -----------------
Net increase from operations 62,531 16,325 263,459
---------------- -------------- -----------------
Contract transactions:
Payments received from contract
owners - 2,605,542 2,605,542
Transfers between sub-accounts, net 607,811 (2,120,328) -
Transfers for contract benefits,
terminations and insurance charges (7,431) (50,337) (82,029)
---------------- -------------- -----------------
Net increase in net assets
from contract transactions 600,380 434,877 2,523,513
---------------- -------------- -----------------
Net increase in net assets 662,911 451,202 2,786,972
Net assets at beginning of period - - -
---------------- -------------- -----------------
Net assets at end of period $ 662,911 451,202 2,786,972
================ ============== =================
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 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 (Cova)
and exists in accordance with the regulations of the Missouri Department
of Insurance. The Separate Account is a funding vehicle for variable
life contracts issued by Cova. The Separate Account is divided into
sub-accounts with the assets of each sub-account invested in the
corresponding portfolios of the following investment companies:
Cova Series Trust (Trust) 9 portfolios
Lord Abbett Series Fund, Inc. (Lord Abbett) 1 portfolio
General American Capital Company (GACC) 1 portfolio
Each investment company is a diversified, open-end, management
investment company registered under the Investment Company Act of 1940
as amended. Not all sub-accounts are available for investment depending
upon the terms of the variable life contracts offered for sale by Cova.
<TABLE>
<CAPTION>
The Separate Account commenced operations on February 26, 1998 and the
sub-accounts commenced operations as follows:
<S> <C> <C> <C>
Trust Bond Debenture April 13, 1998 Trust Large Cap Stock April 13, 1998
Trust Developing Growth April 16, 1998 Trust Select Equity March 23, 1998
Trust Large Cap Research May 4, 1998 Trust International Equity March 23, 1998
Trust Mid-Cap Value March 23, 1998 Lord Abbett Growth and Income March 23, 1998
Trust Quality Bond April 13, 1998 GACC Money Market February 26, 1998
Trust Small Cap Stock April 13, 1998
</TABLE>
(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 shares owned by the sub-accounts. Income from
dividends and gains from realized gain distributions are recorded
on the ex-distribution date.
(B) REINVESTMENT OF DIVIDENDS
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in
additional shares of the portfolio.
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 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 capital gain in the
Separate Account.
(C) FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal
income tax return of Cova, which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, Cova 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 contracts. Based on this, no charge
is being made currently 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 contracts.
(3) CONTRACT CHARGES AND FEES
There are contract charges and fees associated with the variable life
insurance policy that are deducted from the policy account value that
reduce the return on investment.
(A) INSURANCE CHARGES
The insurance charges are: (1) mortality and expense risk, (2)
administrative, (3) tax expense, and (4) cost of insurance. These
charges are deducted from the policy account value on a monthly
basis.
For the first 10 years, the mortality and expense charge is equal,
on an annual basis, to 0.90% of the policy account value, 1/12 of
which is deducted each month. In succeeding years, the mortality
and expense charge is equal, on an annual basis, to 0.75% of the
policy account value, 1/12 of which is deducted each month. The
administrative charge is equal, on an annual basis, to 0.40% of
the policy account value, 1/12 of which is deducted each month. In
1998, mortality and expense risk and administrative charges of
$12,998 were deducted from the contract values in the Separate
Account.
During the first 10 years, a tax expense charge is deducted. The
tax expense charge is equal, on an annual basis, to 0.40% (.15%
for federal tax and .25% for premium tax) of the policy account
value, 1/12 of which is deducted each month. Premium taxes range
from 0% to 4%. The premium tax charge is assessed regardless of
the owner's actual state or local jurisdiction. In 1998, tax
expense charges of $4,029 were deducted from the contract values
in the Separate Account.
The cost of insurance charge deducted each month from the policy
account value depends upon the sex, age, and rating classification
of the insured and whether the initial premium is 100% of the
Maximum Premium Limit. In 1998, cost of insurance charges of
$6,363 were deducted from the contract values in the Separate
Account.
(B) SURRENDER CHARGES
During the first 10 years, a surrender charge is deducted on
withdrawals in excess of the Annual Withdrawal Amount. The
surrender charge is a percentage of the premium surrendered as
follows:
policy years 1-3 7.5%
policy year 4 6.0%
policy year 5 5.0%
policy year 6 4.0%
policy year 7 3.0%
policy year 8 2.0%
policy year 9 1.0%
policy year 10+ 0.0%
In 1998, no surrender charges were deducted from the contract
values in the Separate Account.
During the first 10 years, a deferred premium tax charge is
deducted on premium surrendered. The deferred premium tax charge
is a percentage of the premium surrendered as follows:
policy year 1 2.25%
policy year 2 2.00%
policy year 3 1.75%
policy year 4 1.50%
policy year 5 1.25%
policy year 6 1.00%
policy year 7 0.75%
policy year 8 0.50%
policy year 9 0.25%
policy year 10+ 0.00%
In 1998, no deferred premium tax charges were deducted from the
contract values in the Separate Account.
(C) CONTRACT FEES
An annual contract maintenance fee of $30 is imposed on all
variable life contracts with contract values less than $50,000 on
their policy anniversary. This fee covers the cost of contract
administration for the previous year and is prorated between the
sub-accounts to which the contract value is allocated. In 1998,
there were no contract maintenance fees deducted from the contract
values in the Separate Account.
Subject to certain restrictions, the contract owner may transfer
all or a part of the accumulated value of the contract among the
available sub-accounts of the Separate Account. If more than 12
transfers have been made in the contract year, a transfer fee of
$25 per transfer or, if less, 2% of the amount transferred, will
be deducted from the contract account value. Transfers made in the
Dollar Cost Average program are not subject to the transfer fee.
In 1998, there were no transfer fees deducted from the contract
values in the Separate Account.
(4) SUBSEQUENT EVENT
On January 8, 1999, the Lord Abbett Growth and Income sub-account ceased
operations and its assets were transferred to the Trust Lord Abbett
Growth and Income sub-account which commenced operations on January 8,
1999. The Trust Lord Abbett Growth and Income sub-account invests in the
Trust Lord Abbett Growth and Income Portfolio which commenced operations
on January 8, 1999. The Trust Lord Abbett Growth and Income Portfolio is
managed by Lord Abbett who also manages the Lord Abbett Growth and
Income Portfolio.
(5) TOTAL RETURN
The total return for each sub-account since commencement of operations
through December 31, 1998 follows:
Trust Bond Debenture 0.78%
Trust Developing Growth (5.41)%
Trust Large Cap Research 4.31%
Trust Mid-Cap Value (6.17)%
Trust Quality Bond (6.22)%
Trust Small Cap Stock (14.87)%
Trust Large Cap Stock 13.96%
Trust Select Equity 9.65%
Trust International Equity 1.80%
Lord Abbett Growth and Income 2.09%
GACC Money Market 4.69%
(6) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
<TABLE>
<CAPTION>
The table below summarizes the realized gain (loss) on the sale of fund
shares and the change in unrealized appreciation since commencement of
operations through December 31, 1998.
<S> <C>
Realized gain (loss) on sale of fund shares:
Trust Bond Debenture:
Aggregate proceeds from sales of fund shares $ 527
Aggregate cost of fund shares redeemed 527
--------------
Realized gain (loss) $ --
==============
Trust Developing Growth:
Aggregate proceeds from sales of fund shares $ 1,194
Aggregate cost of fund shares redeemed 1,250
--------------
Realized gain (loss) $ (56)
==============
Trust Large Cap Research:
Aggregate proceeds from sales of fund shares $ 1,809
Aggregate cost of fund shares redeemed 1,868
--------------
Realized gain (loss) $ (59)
==============
Realized gain (loss) on sale of fund shares, continued:
Trust Mid-Cap Value:
Aggregate proceeds from sales of fund shares $ 1,646
Aggregate cost of fund shares redeemed 1,706
--------------
Realized gain (loss) $ (60)
==============
Trust Quality Bond:
Aggregate proceeds from sales of fund shares $ 890
Aggregate cost of fund shares redeemed 882
--------------
Realized gain (loss) $ 8
==============
Trust Small Cap Stock:
Aggregate proceeds from sales of fund shares $ 3,110
Aggregate cost of fund shares redeemed 2,852
--------------
Realized gain (loss) $ 258
==============
Trust Large Cap Stock:
Aggregate proceeds from sales of fund shares $ 4,336
Aggregate cost of fund shares redeemed 3,869
--------------
Realized gain (loss) $ 467
==============
Trust Select Equity:
Aggregate proceeds from sales of fund shares $ 2,999
Aggregate cost of fund shares redeemed 2,887
--------------
Realized gain (loss) $ 112
==============
Trust International Equity:
Aggregate proceeds from sales of fund shares $ 3,170
Aggregate cost of fund shares redeemed 3,287
--------------
Realized gain (loss) $ (117)
==============
Lord Abbett Growth and Income:
Aggregate proceeds from sales of fund shares 3,786
Aggregate cost of fund shares redeemed 3,746
--------------
Realized gain (loss) $ 40
==============
Realized gain (loss) on sale of fund shares, continued:
GACC Money Market:
Aggregate proceeds from sales of fund shares $ 2,041,400
Aggregate cost of fund shares redeemed 2,029,315
--------------
Realized gain (loss) $ 12,085
==============
Unrealized appreciation:
Trust Bond Debenture:
Appreciation, end of period $ 5,181
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 5,181
==============
Trust Developing Growth:
Appreciation, end of period $ 21,898
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 21,898
==============
Trust Large Cap Research:
Appreciation, end of period $ 11,811
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 11,811
==============
Trust Mid-Cap Value:
Appreciation, end of period $ 12,587
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 12,587
==============
Trust Quality Bond:
Appreciation, end of period $ 255
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 255
==============
Trust Small Cap Stock:
Appreciation, end of period $ 18,574
Appreciation, beginning of period --
==============
Unrealized appreciation $ 18,574
==============
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
<S> <C>
Unrealized appreciation, continued:
Trust Large Cap Stock:
Appreciation, end of period $ 44,695
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 44,695
==============
Trust Select Equity:
Appreciation, end of period $ 65,356
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 65,356
==============
Trust International Equity:
Appreciation, end of period $ 1,778
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 1,778
==============
Lord Abbett Growth and Income:
Appreciation, end of period $ 25,472
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 25,472
==============
GACC Money Market:
Appreciation, end of period $ 4,240
Appreciation, beginning of period --
--------------
Unrealized appreciation $ 4,240
==============
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) UNIT TRANSACTIONS
The change in the number of accumulation units is as follows:
Trust
-------------------------------------------------------------------------------------
Large Mid- Small
Bond Developing Cap Cap Quality Cap
Debenture Growth Research Value Bond Stock
-------------------------------- ------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit balance at beginning of period
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 end of period 16,194 13,726 11,784 16,852 12,494 13,665
============== ================ ============= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) UNIT TRANSACTIONS
The change in the number of accumulation units is as follows:
Trust Lord Abbett
--------------------------------------------- ------------------------------
Large Growth GACC
------------
Cap Select International and Money
Stock Equity Equity Income Market
-- --------- --------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Unit balance at beginning of period
Contract units purchased -- -- -- -- 303,667
Contract units transferred, net 21,607 42,165 8,896 62,823 (205,485)
Contract units redeemed (405) (554) (347) (745) (55,081)
-- --------- --------- ---------------- ---------------- ------------
Unit balance at end of period 21,202 41,611 8,549 62,078 43,101
== ========= ========= ================ ================ ============
</TABLE>
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
March 4, 1999
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Debt securities available-for-sale, at fair value (cost of
$1,375,198 in 1998 and $1,269,362 in 1997) $ 1,371,513 1,280,247
Equity securities, at fair value 9,037 --
Mortgage loans, net of allowance for potential loan loss
of $510 in 1998 and $237 in 1997 312,865 348,206
Policy loans 26,295 24,228
------------- -------------
Total investments 1,719,710 1,652,681
Cash and cash equivalents - interest-bearing 94,770 12,910
Cash - noninterest-bearing 5,008 3,666
Receivable from sale of securities 5,845 1,870
Accrued investment income 21,505 20,602
Deferred policy acquisition costs 131,973 84,326
Present value of future profits 42,230 41,486
Goodwill 18,585 19,717
Deferred tax asset, net 4,786 7,933
Receivable from OakRe 720,904 1,426,261
Due from affiliates 246,198 127,599
Other assets 829 2,184
Separate account assets 1,832,396 1,108,125
------------- -------------
Total assets $ 4,844,739 4,509,360
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Balance Sheets, Continued
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Policyholder deposits $ 2,643,124 3,098,287
Future policy benefits 54,336 38,361
Payable on return of collateral on loaned securities 25,923 --
Payable on purchase of securities 1,040 7,261
Federal and state income taxes payable 446 1,312
Accounts payable and other liabilities 18,714 21,912
Future purchase price payable to OakRe 6,976 12,173
Guaranty fund assessments 9,700 9,700
Separate account liabilities 1,832,394 1,107,816
------------ -------------
Total liabilities 4,592,653 4,296,822
------------ -------------
Shareholder's equity:
Common stock, $2 par value. (Authorized
5,000,000 shares; issued and outstanding
2,899,466 shares in 1998 and 1997) 5,799 5,799
Additional paid-in capital 220,491 191,491
Retained earnings 26,410 12,516
Accumulated other comprehensive
income - net of tax (614) 2,732
------------ -------------
Total shareholder's equity 252,086 212,538
------------ -------------
Total liabilities and shareholder's equity $ 4,844,739 4,509,360
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 23,875 9,368 3,154
Net investment income 127,812 111,661 70,629
Net realized gains (losses) on sales
of investments (1,600) 563 472
Separate account fees 20,820 12,455 7,205
Other income 5,372 4,950 3,304
----------- ----------- ----------
Total revenues 176,279 138,997 84,764
----------- ----------- ----------
Benefits and expenses:
Interest on policyholder deposits 93,759 81,129 50,100
Current and future policy benefits 25,225 11,496 5,130
Operating and other expenses 27,190 21,758 16,557
Amortization of purchased
intangible assets 3,445 3,668 2,332
Amortization of deferred policy
acquisition costs 9,393 6,307 4,389
----------- ----------- ----------
Total benefits and expenses 159,012 124,358 78,508
----------- ----------- ----------
Income before income taxes 17,267 14,639 6,256
----------- ----------- ----------
Income tax expense (benefit):
Current (1,576) 1,951 1,740
Deferred 4,949 3,710 915
----------- ----------- ----------
Total income tax expense 3,373 5,661 2,655
----------- ----------- ----------
Net income $ 13,894 8,978 3,601
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
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, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Common stock, balance at beginning
and end of period $ 5,799 5,799 5,799
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of period 191,491 166,491 129,586
Capital contribution 29,000 25,000 36,905
----------- ----------- -----------
Balance at end of period 220,491 191,491 166,491
----------- ----------- -----------
Retained earnings (deficit):
Balance at beginning of period 12,516 3,538 (63)
Net income 13,894 8,978 3,601
----------- ----------- -----------
Balance at end of period 26,410 12,516 3,538
----------- ----------- -----------
Accumulated other comprehensive income:
Balance at beginning of period 2,732 (784) 2,764
Change in unrealized appreciation
(depreciation) of debt and equity
securities (14,571) 14,077 (13,915)
Deferred federal income tax impact 1,801 (1,893) 1,910
Change in deferred policy acquisition costs attributable
to unrealized depreciation (appreciation) 6,996 (5,342) 1,561
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 2,428 (3,326) 6,896
----------- ----------- -----------
Balance at end of period (614) 2,732 (784)
----------- ----------- -----------
Total shareholder's equity $ 252,086 212,538 175,044
=========== =========== ===========
Total comprehensive income:
Net income $ 13,894 8,978 3,601
Other comprehensive income (change in net unrealized
appreciation (depreciation) of debt and equity securities) (3,346) 3,516 (3,548)
----------- ----------- -----------
Total comprehensive income $ 10,548 12,494 53
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Reconciliations of net income to net cash provided by
operating activities:
Net income $ 13,894 8,978 3,601
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 15,975 6,019 680
Increase (decrease) in payables and
accrued liabilities (3,198) (1,194) 2,900
Increase in accrued investment income (903) (5,591) (4,778)
Amortization of intangible assets and 12,838 9,975 6,721
deferred policy acquisition costs
Amortization and accretion of securities
premiums and discounts (1,767) 1,664 2,751
Recapture commissions paid to OakRe (5,197) (4,837) (4,483)
Net realized loss (gain) on sale of investments 1,600 (563) (472)
Interest accumulated on policyholder deposits 93,759 81,129 50,100
Increase (decrease) in current and
deferred federal income taxes 2,281 5,917 (351)
Separate account net income (12) (2,637) (2,008)
Commissions and expenses deferred (50,044) (46,142) (34,803)
Other (3,566) (3,537) (578)
------------- ------------ ------------
Net cash provided by operating activities 75,660 49,181 19,280
------------- ------------ ------------
Cash flows from investing activities:
Cash used in the purchase of investment securities (733,049) (809,814) (715,274)
Proceeds from investment securities sold and matured 642,481 382,783 262,083
Other (1,159) 15,400 (14,166)
------------- ------------ ------------
Net cash used in investing activities $ (91,727) (411,631) (467,357)
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
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, 1998, 1997, and 1996
1998 1997 1996
------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 1,014,075 841,174 446,784
Transfers from OakRe 812,520 637,168 574,010
Transfer to separate accounts (789,872) (450,303) (126,797)
Return of policyholder deposits (889,202) (597,425) (491,025)
Proceeds from security collaterals on securities lending 25,923 -- --
Transfers to RGA (103,175) (120,411) --
Capital contributions received 29,000 25,000 20,000
------------- ------------ ------------
Net cash provided by financing activities 99,269 335,203 422,972
------------- ------------ ------------
Increase (decrease) in cash and
cash equivalents 83,202 (27,247) (25,105)
Cash and cash equivalents at beginning of period 16,576 43,823 62,256
CFLIC contributed cash (note 9) -- -- 6,672
------------- ------------ ------------
Cash and cash equivalents at end of period $ 99,778 16,576 43,823
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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 89%, 73%, and 66% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated and Edward Jones & Company in
1998, 1997, and 1996, respectively.
ORGANIZATION
CFSLIC, formerly Xerox Financial Services Life Insurance Company
(XFSLIC), is a wholly owned subsidiary of Cova Corporation, a
subsidiary of General American Life Insurance Company (GALIC), a
Missouri domiciled life insurance company. When Cova Corporation
purchased CSFLIC from Xerox Financial Services, Inc. (XFSI), a
wholly owned subsidiary of Xerox Corporation, it entered into a
financing reinsurance transaction with OakRe Life Insurance
Company (OakRe), a subsidiary of XFSLIC, to assume the economic
benefits and risks of the existing single premium deferred annuity
deposits (SPDAs) of CFSLIC. Ownership of OakRe was retained by
XFSI subsequent to the sale of XFSLIC and other affiliates. The
receivable from OakRe to the Company that was created by this
transaction will be liquidated over the remaining crediting rate
guaranty periods which will be substantially expired by the end of
the year 2000, from the transfer of cash in the amount of the then
current account value, less a recapture commission fee to OakRe on
policies retained beyond their 30-day-no-fee surrender window by
the Company, upon the next crediting rate reset date of each
annuity policy. The Company may then reinvest that cash for those
policies that are retained and thereafter assume the benefits and
risks of those deposits.
In the event that both OakRe and XFSI default on the receivable,
the Company may draw funds from a standby bank irrevocable letter
of credit established by XFSI in the amount of $500 million. No
funds were drawn on this letter of credit during the periods ended
December 31, 1998 and 1997.
In substance, terms of the agreement have allowed the seller,
XFSI, to retain substantially all of the existing financial
benefits and risks of the existing business, while the purchaser,
GALIC, obtained the corporate operating and product licenses,
marketing, and administrative capabilities of the Company and
access to the retention of the policyholder deposit base that
persists beyond the next crediting rate reset date.
The Company owns 100% of the outstanding shares of First Cova Life
Insurance Company (a New York domiciled insurance company) (FCLIC)
and Cova Financial Life Insurance Company (a California domiciled
insurance company) (CFLIC). Ownership of CFLIC was obtained on
December 31, 1996 as the result of a capital contribution by Cova
Corporation. The Company has presented the consolidated financial
position and results of operations for its subsidiaries from the
dates of actual ownership (see note 9).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1998 and 1997 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").
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.
EQUITY SECURITIES
Equity securities represent investments in nonredeemable preferred
stock and common stock warrants. These securities are 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, and the valuation allowance for
potential losses on mortgage loans was $510,000 and $237,000, at
December 31, 1998 and 1997, respectively.
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, 1998 and 1997, 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. These deferred
costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses,
interest credited to accounts, surrender fees, mortality costs,
and policy maintenance expenses. The estimated gross profit
streams are periodically reevaluated and the unamortized balance
of deferred 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.
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below. The effects on deferred policy acquisition costs of the
consolidation of CFLIC (see note 9) with the Company are presented
separately.
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period $ 84,326 49,833 14,468
Commissions and expenses deferred 50,044 46,142 34,803
Amortization (9,393) (6,307) (4,389)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) 6,996 (5,342) 1,561
Effects on deferred policy acquisition costs of CFLIC
consolidation -- -- 3,390
------------ ------------ -------------
Deferred policy acquisition costs, end of period $ 131,973 84,326 49,833
============ ============ =============
</TABLE>
PURCHASE-RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related
to accrued purchase price consideration were established as of the
purchase date.
Present Value of Future Profits
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
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 present value of
future profits will be adjusted to the amount that would have
existed had the actual experience and revised estimates been
known and applied from 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.
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 4.8%, 6.2%, 6.9%, 7.3%, and
7.1% for the years ended December 31, 1999 through 2003,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results.
During 1996, the Company adjusted its original purchase
accounting to include a revised estimate of the ultimate
renewal (recapture) rate. This adjustment resulted in a
reallocation of the net purchased intangible asset between
PVFP, goodwill, and the future payable. This final allocation
and the resulting impact on inception to date amortization was
recorded, in its entirety, in 1996.
<TABLE>
<CAPTION>
The components of PVFP are shown below. The effects on PVFP of
the consolidation of CFLIC (see note 9) with the Company are
presented separately.
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 41,486 46,389 38,155
Net amortization (1,684) (1,577) (473)
Present value of future profits attributable to unrealized
depreciation (appreciation) 2,428 (3,326) 6,896
Adjustment due to revised push-down purchase accounting
-- -- 698
Effects on present value of future profits of CFLIC
consolidation -- -- 1,113
------------ ------------ -------------
PVFP - end of period $ 42,230 41,486 46,389
============ ============ =============
</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. The effects on goodwill of the
consolidation of CFLIC (see note 9) with the Company are presented separately.
1998 1997 1996
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 19,717 20,849 23,358
Amortization (1,132) (1,132) (916)
Adjustment due to revised push-down purchase accounting
-- -- (3,626)
Effects on goodwill of CFLIC consolidation -- -- 2,033
----------- ------------ ------------
Goodwill - end of period $ 18,585 19,717 20,849
=========== ============ ============
</TABLE>
Future Payable
Pursuant to the financial reinsurance agreement with OakRe,
the receivable from OakRe becomes due in installments when the
SPDA policies reach their next crediting rate reset date. For
any recaptured policies that continue in force into the next
guarantee period, the Company will pay a commission to OakRe
of 1.75% up to 40% of policy account values originally
reinsured and 3.50% 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. The effects on the future
payable on the consolidation of CFLIC (see note 9) with the Company are
presented separately.
1998 1997 1996
----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 12,173 16,051 23,967
Interest added 629 959 943
Payments to OakRe (5,826) (4,837) (4,483)
Adjustment due to revised push-down purchase
accounting -- -- (5,059)
Effects on goodwill of CFLIC consolidation -- -- 683
----------- ------------ -----------
Future payable - end of period $ 6,976 12,173 16,051
=========== ============ ===========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
XFSI and GALIC agreed to file an election to treat the acquisition
of the Company as an asset acquisition under the provisions of
Internal Revenue Code Section 338(h)(10). As a result of that
election, the tax basis of the 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.
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, 1998 was 5.86%.
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 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported
claims and estimates of amounts incurred but not reported.
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,
servicing fee from OakRe for administrating their policies, and
advisory fees received from GALIC for advisory services rendered
on their individual annuity products.
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.
RISKS AND UNCERTAINTIES
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
The following elements of the consolidated financial statements
are most affected by the use of estimates and assumptions:
- Investment valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- 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.
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, 1998.
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).
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, 1998 and 1997, the cash
surrender value of policyholder deposits was approximately
$103.2 million and $151.5 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 the acquirer, GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective in December 1998, the Company entered into a financing
reinsurance agreement with GALIC. The reinsurance agreement
provides that the Company will reinsurance a block of annuity
business issued by GALIC on a 36% coinsurance basis. The Company
recognized income and a corresponding receivable for $1.6 million
related to the reinsurance agreement.
The financing reinsurance agreement entered into with OakRe as a
condition to the purchase of the Company does not meet the
conditions for reinsurance accounting under generally accepted
accounting principles (GAAP). The net assets initially transferred
to OakRe were established as a receivable and are subsequently
increased as interest is accrued on the underlying liabilities and
decreased as funds are transferred back to the Company when
policies reach their crediting rate reset date or benefits are
claimed.
During 1997, the Company entered into a financing reinsurance
agreement with RGA Reinsurance Company (RGA), an affiliate,
related to certain of the Company's single premium deferred
annuity products. The agreement contains recapture provisions, at
the option of the Company, beginning in 1999 at a rate of 20% per
year. Deposits recorded under the contract were approximately $219
million and $120 million and are reflected as policyholder
deposits in the consolidated balance sheets at December 31, 1998
and 1997, respectively.
RECENTLY ADOPTED ACCOUNTING STANDARDS
On January 1, 1998, SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
became fully effective. Previously, the Financial Accounting
Standards Board (the FASB) had deferred until that date certain
provisions of SFAS No. 125 pertaining to repurchase agreements,
securities lending, and similar financing transactions. As a
result of adopting the deferred provisions of SFAS No. 125, the
Company has recognized on its December 31, 1998 consolidated
balance sheet cash of approximately $25,923,000 related to
collateral controlled on securities lending transactions and a
corresponding obligation to return such collateral at the
termination of such transactions. Restatement of prior period
financial statements is not permitted.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is
effective for the fiscal year beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided is required for comparative purposes. The Company has
elected to adopt SFAS No. 130 in 1998. The adoption of 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 and
depreciation on debt and equity securities.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. SFAS No. 133 requires all
derivative instruments to be recorded on the balance sheet at
estimated fair value. The Company's present accounting policies
would apply 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. 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.
SFAS No. 133 is effective for the Company beginning January 1,
2000. The Company's management is currently evaluating the impact
of SFAS No. 133; at present, the management does not believe it
will have a material effect on the Company's consolidated
financial position or results of operations.
OTHER
Certain 1997 and 1996 amounts have been reclassified to conform to
the 1998 presentation.
<TABLE>
<CAPTION>
(3) INVESTMENTS
The Company's investments in debt and equity securities are considered
available-for-sale and carried at estimated fair value, with the
aggregate unrealized appreciation or depreciation being recorded as a
separate component of shareholder's equity. The amortized cost, estimated
fair value, and carrying value of investments at December 31, 1998 and
1997, are as follows:
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. Government
treasuries $ 28,288 249 (84) 28,453 28,453
Collateralized mortgage
obligations 303,577 3,067 (1,571) 305,073 305,073
Corporate, state,
municipalities, and
political subdivisions 1,043,333 19,736 (25,082) 1,037,987 1,037,987
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,375,198 23,052 (26,737) 1,371,513 1,371,513
Equity securities 9,037 -- -- 9,037 9,037
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>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
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. Government
treasuries $ 8,067 121 -- 8,188 8,188
Collateralized mortgage
obligations 370,802 4,504 (524) 374,782 374,782
Corporate, state,
municipalities, and
political subdivisions 890,493 14,867 (8,083) 897,277 897,277
-------------- -------------- --------------- --------------- --------------
Total debt securities 1,269,362 19,492 (8,607) 1,280,247 1,280,247
Mortgage loans (net) 348,206 24,346 -- 372,552 348,206
Policy loans 24,228 -- -- 24,228 24,228
-------------- -------------- --------------- --------------- --------------
Total investments $ 1,641,796 43,838 (8,607) 1,677,027 1,652,681
============== ============== =============== =============== ==============
Company's beneficial interest
in separate accounts
$ 300 9 -- 309 309
============== ============== =============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and estimated fair value of debt securities at December 31,
1998, 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.
1998
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 55,653 54,942
Due after one year through five years 504,712 498,469
Due after five years through ten years 390,086 392,828
Due after ten years 121,170 120,201
Mortgage-backed securities 303,577 305,073
-------------- --------------
Total $ 1,375,198 1,371,513
============== ==============
</TABLE>
At December 31, 1998, approximately 89.8% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 10.2% noninvestment grade debt securities, 7.4%
are rated as BB, 2.4% are rated as B, and 0.4% are rated C and treated
as impaired.
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, 1998 had market values totaling
$25,247,750. Cash of $25,923,295 was held as collateral to secure this
agreement.
Income on the Company's security lending program in 1998 was immaterial.
The Company had two impaired debt securities, of which one became
nonincome producing on December 31, 1998. All debt securities were
income producing at December 31, 1997.
<TABLE>
<CAPTION>
The components of investment income, realized capital gains (losses), and
unrealized appreciation (depreciation) are as follows:
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 94,876 84,203 53,632
Income on short-term investments 2,720 2,265 2,156
Income on interest rate swaps 71 43 --
Income on policy loans 1,980 1,852 1,454
Interest on mortgage loans 28,650 24,890 13,633
Income on separate account investments 13 2,637 772
Loss on derivatives -- (2,035) (1,640)
Miscellaneous interest 1,644 (258) 1,773
------------ ------------ -------------
Total investment income 129,954 113,597 71,780
Investment expenses (2,142) (1,936) (1,151)
------------ ------------ -------------
Net investment income $ 127,812 111,661 70,629
Net realized capital gains (losses) are as follows:
Debt securities $ (1,600) 537 469
Mortgage loans -- 27 4
Short-term investments -- (1) (1)
------------ ------------ -------------
Net realized gains (losses) on investments $ (1,600) 563 472
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized appreciation (depreciation) are as follows:
Debt securities $ (3,685) 10,885 (3,192)
Effects on deferred acquisition costs
amortization 3,215 (3,781) 1,561
Effects on PVFP amortization (473) (2,901) 425
------------ ------------ -------------
Unrealized appreciation (depreciation)
before income tax (943) 4,203 (1,206)
Unrealized income tax benefit (expense) 329 (1,471) 422
------------ ------------ -------------
Net unrealized appreciation (depreciation)
on investments $ (614) 2,732 (784)
============ ============ =============
</TABLE>
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.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1996 were $223,430,495. Gross gains of $1,158,518 and
gross losses of $687,126 were realized on those sales. Included in these
amounts were $28,969 of gross gains realized on the sale of
noninvestment grade securities.
Securities with a carrying value of approximately $6,400,000 at
December 31, 1998 were deposited with government authorities as
required by law.
(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, 1998 and 1997.
(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 recognition of gain or loss is postponed until the
disposal of the security underlying the option or futures contract.
Summarized below are the specific types of derivative instruments used
by the Company.
INTEREST RATE SWAPS
At December 31, 1998, the Company had two outstanding interest
rate swap agreements which expire at 2002 and 2003. Under the
agreements, the Company receives a fixed rate of 6.63% and 6.70%
on a notional amount of $7 and $8 million, respectively, and pays
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.
At December 31, 1997, the Company has one outstanding interest
rate swap agreement which expires in 2002. Under the agreement,
the Company receives a fixed rate of 6.63% on $7.0 million and
pays a floating rate based on LIBOR. At December 31, 1997, the
estimated fair value of the agreement was immaterial.
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.
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 during 1997 and
1996. No financial futures contracts were held during 1998. The
Company recorded $-0-, $2,035,309, and $1,639,717 of losses from
terminated contracts as a component of net investment income
during 1998, 1997 and 1996, respectively. The Company also
recorded gains of $-0-, $2,636,999, and $2,007,720 as a component
of net investment income from market appreciation on the
underlying hedged securities within the separate account during
1998, 1997, and 1996, respectively.
A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon
price. The Company utilized futures on the S&P 500 index in 1997.
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.
<TABLE>
<CAPTION>
(6) COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 13,894 8,978 3,601
------------ ------------ -------------
Other comprehensive income (loss), before tax -
unrealized appreciation (depreciation) of debt and
equity securities arising during period:
Unrealized holding appreciation (depreciation)
of debt and equity securities (12,971) 13,514 (14,387)
Adjustment to deferred acquisition costs
attributable to unrealized
(appreciation) depreciation 6,228 (5,128) 1,614
Adjustment to PVFP attributable to unrealized
(appreciation) depreciation 2,161 (3,193) 7,130
------------ ------------ -------------
Total unrealized appreciation (depreciation)
arising during period (4,582) 5,193 (5,643)
Less reclassification adjustments for realized (gains) losses
included in net income:
Adjustment for (gains) losses included in
net realized gains (losses) on sales
of investments 1,600 (563) (472)
Adjustment for (gains) losses included in
amortization of PVFP (768) 214 53
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (267) 133 234
------------ ------------ -------------
Total reclassification adjustments for (gains)
losses included in net income 565 (216) (185)
------------ ------------ -------------
Other comprehensive income (loss) before related
income tax expense (benefit) (5,147) 5,409 (5,458)
Related income tax expense (benefit) (1,801) 1,893 (1,910)
------------ ------------ -------------
Other comprehensive income (loss), net of tax (3,346) 3,516 (3,548)
------------ ------------ -------------
Comprehensive income $ 10,548 12,494 53
============ ============ =============
</TABLE>
(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 by
contract by Cova Life Management Company (CLMC), a wholly owned
subsidiary of Cova Corporation. The Company is allocated a portion of
certain health care and life insurance benefits for future retired
employees of CLMC. In 1998, 1997, and 1996, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1998, 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:
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating income (excluding realized
investment gains and losses) $ 3,906 5,464 2,493
Realized investment gains (losses) (533) 197 162
------------ ------------ -------------
Income tax expense (benefit)
included in the consolidated
statements of income 3,373 5,661 2,655
Shareholder's equity -
change in deferred federal income
taxes related to unrealized
appreciation (depreciation)
on securities (1,801) 1,893 (1,910)
------------ ------------ -------------
Total income tax expense $ 1,572 7,554 745
============ ============ =============
</TABLE>
<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:
1998 1997 1996
------------------ ------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 6,043 35.0% $ 5,124 35.0% $ 2,190 35.0%
State income taxes, net (8) -- (33) (0.2) 77 1.2
Amortization of intangible assets 396 2.3 396 2.7 320 5.1
Dividend received deduction - separate
account (3,183) (18.5) -- -- -- --
Other 125 0.7 174 1.2 68 1.1
--------- -------- -------- ---------- --------- ----------
Total $ 3,373 19.5% $ 5,661 38.7% $ 2,655 42.4%
========= ======== ======== ========== ========= ==========
</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, 1998 and
1997 follows:
1998 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Policy reserves $ 31,003 25,312
Liability for commissions on recapture 2,896 4,715
Tax basis of intangible assets purchased 5,351 5,791
DAC "Proxy Tax" 20,619 14,594
Other deferred tax assets 2,690 31
----------- ------------
Total deferred tax assets 62,559 50,443
----------- ------------
Deferred tax liabilities:
PVFP 11,013 9,734
Unrealized (depreciation) appreciation on investments (330) 1,472
Deferred policy acquisition costs 46,190 29,514
Other deferred tax liabilities 900 1,790
----------- ------------
Total deferred tax liabilities 57,773 42,510
----------- ------------
Net deferred tax assets $ 4,786 7,933
=========== ============
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Management
believes the deferred tax assets will be fully realized in the future
based upon expectation of the reversal of existing temporary
differences, anticipated future earnings, and consideration of all other
available evidence. Accordingly, no valuation allowance is established.
(9) RELATED-PARTY TRANSACTIONS
On December 31, 1997, CLMC and Navisys Incorporated, affiliated
companies, purchased certain assets of Johnson & Higgins/Kirke Van
Orsdel, Inc. (J&H/KVI), an unaffiliated Delaware corporation, for
$2,500,000. The purchased assets are the administrative and service
systems that provide the marketing, underwriting, claims, and
administrative functions for the Company's life and annuity products. On
January 1, 1998, the purchased assets of J&H/KVI were merged into Cova
Life Administrative Service Company (CLASC). Navisys Incorporated
purchased 51% of CLASC, the remaining 49% was purchased by CLMC.
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; and
Conning Asset Management, which provides investment advice.
Additionally, a portion of overhead and other corporate expenses are
allocated by the Company's ultimate parent, GALIC. CLASC provides
various services for the Company including underwriting, claims, and
administrative functions. Expenses and fees paid to affiliated companies
in 1998, 1997, and 1996 for the Company were $20,923,330, $9,400,517,
and $6,618,303, respectively.
In 1998 and 1997, the Company received approximately $3.2 million and
$1.1 million, respectively, in advisory fees from GALIC related to
advisory services on GALIC's individual annuity products.
On December 31, 1996, Cova Corporation transferred its ownership of
CFLIC to the Company. The transfer of ownership was recorded as
additional paid-in capital and increased shareholder's equity on the
Company's December 31, 1996 balance sheet by approximately $16.9
million. This change in direct ownership had no effect on the operations
of either the Company or CFLIC as both entities had existed under common
management and control prior to the December 31, 1996 transfer. Although
CFLIC's balance sheet is fully consolidated with the Company's December
31, 1996 balance sheet, CFLIC's 1996 income and cash flows statements
have not been consolidated with the Company's 1996 income or cash flows
statements. However, CFLIC's December 31, 1996 cash balance of $6.7
million is included in the Company's consolidated cash flows statement.
(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 tax 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 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:
1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 104,740 90,439
Reconciling items:
GAAP investment valuation reserves (510) (237)
Statutory asset valuation reserve 19,206 18,301
Statutory interest maintenance reserve 5,983 3,080
GAAP investment adjustments to fair value (3,685) 10,885
GAAP deferred policy acquisition costs 131,973 84,326
GAAP basis policy reserves (52,305) (39,921)
GAAP deferred federal income taxes (net) 4,786 7,933
GAAP guarantee assessment adjustment (9,700) (9,700)
GAAP goodwill 18,373 19,457
GAAP present value of future profits 42,230 41,486
GAAP future purchase price payable (6,976) (12,173)
Other (2,029) (1,338)
------------- -------------
GAAP shareholder's equity $ 252,086 212,538
============= =============
</TABLE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a wholly owned subsidiary of Cova Corporation)
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Statutory net losses for CFSLIC for the years ended
December 31, 1998, 1997, and 1996 were $2,830,105,
$9,816,357, and $13,575,788, 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
1998 statutory net loss and the Company's negative earned surplus at
December 31, 1998, no dividends are permissible in 1999 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,
1998, the Company's total adjusted capital and authorized control level
RBC were $123,947,126 and $27,386,910, 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 1998, 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 of other state taxes over, most
commonly, five years.
In November 1998, 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
$9,700,000 in future assessments on insolvencies that occurred before
December 31, 1998. 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 $9,700,000. The Company paid
approximately $1,500,000, $3,000,000, and $2,000,000 in guaranty fund
assessments in 1998, 1997, and 1996, 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 1998 were not material.
(12) SUBSEQUENT EVENT
On January 31, 1999, the Company modified its financing reinsurance
agreement with RGA related to the Company's certain single premium
deferred annuity products. Under the modified financing reinsurance
agreement, the Company will no longer reinsure any new single premium
deferred annuity product policies with RGA.
APPENDIX A
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 55 and 70 and a husband and wife age 65. Our
hypothetical insureds are in good health which means the Policy would be issued
with standard rates. The initial premium was $10,000 and is 100% of the Maximum
Premium Limit.
There are three illustrations - all of which are based on the above. We also
assumed that the underlying investment portfolio had gross rates of return of
0%, 6%, 12%. This means that the underlying investment portfolio would earn
these rates of return before the deduction of the advisory fee and operating
expenses. When these costs are taken into account, the net annual investment
return rates (net of an average of .88% for these charges) are approximately
- -.88%, 5.12% and 11.12%.
It is important to be aware that this illustration assumes a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Account Value, Cash
Surrender Value and the net death benefit. The net death benefit is the death
benefit minus any outstanding loans and loan interest accrued. We used the
charges we described in the Expenses Section of the Prospectus. These charges
are:
(1) mortality and expense risk charge equal to an annual rate of 0.90% of the
Account Value in the investment portfolios for the first ten years and
0.75% after that;
(2) an administrative charge equal to an annual rate of 0.40% of the Account
Value;
(3) a tax expense charge equal to an annual rate of 0.40% of the Account Value
for the first 10 years;
(4) any surrender charges or deferred premium tax charge which may be
applicable in determining the Cash Surrender Values; and
(5) the policy maintenance charge.
We also deducted for the cost of insurance based on both the current charges and
the guaranteed charges.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how $10,000 grows if it was invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed insured's age, risk classification, Face Amount, the
proposed initial premium, and reflecting both the current cost of insurance and
the guaranteed cost of insurance.
<TABLE>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ ______________ __________ _________________ ____________ ________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,652 8,786 27,290 9,526 8,672 27,290
2 11,025 9,315 8,505 27,290 9,040 8,257 27,290
3 11,576 8,988 8,232 27,290 8,542 7,827 27,290
4 12,155 8,673 8,082 27,290 8,029 7,487 27,290
5 12,763 8,367 7,894 27,290 7,497 7,079 27,290
6 13,401 8,070 7,707 27,290 6,944 6,637 27,290
7 14,071 7,784 7,522 27,290 6,363 6,155 27,290
8 14,775 7,506 7,338 27,290 5,750 5,626 27,290
9 15,513 7,237 7,157 27,290 5,097 5,044 27,290
10 16,289 6,977 6,977 27,290 4,398 4,398 27,290
15 20,789 6,035 6,035 27,290 33 33 27,290
20 26,533 5,201 5,201 27,290 0 0 0
25 33,864 4,463 4,463 27,290 0 0 0
30 43,219 3,809 3,809 27,290 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,233 9,333 27,290 10,107 9,207 27,290
2 11,025 10,472 9,597 27,290 10,202 9,327 27,290
3 11,576 10,717 9,867 27,290 10,282 9,432 27,290
4 12,155 10,968 10,278 27,290 10,346 9,656 27,290
5 12,763 11,227 10,652 27,290 10,391 9,816 27,290
6 13,401 11,492 11,032 27,290 10,415 9,955 27,290
7 14,071 11,764 11,419 27,290 10,413 10,068 27,290
8 14,775 12,043 11,813 27,290 10,380 10,150 27,290
9 15,513 12,329 12,214 27,290 10,311 10,196 27,290
10 16,289 12,623 12,623 27,290 10,201 10,201 27,290
15 20,789 14,798 14,798 27,290 9,247 9,247 27,290
20 26,533 17,375 17,375 27,290 5,706 5,706 27,290
25 33,864 20,429 20,429 27,290 0 0 0
30 43,219 24,048 24,048 27,290 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,814 9,914 27,290 10,689 9,789 27,290
2 11,025 11,696 10,821 27,290 11,432 10,557 27,290
3 11,576 12,653 11,803 27,290 12,236 11,386 27,290
4 12,155 13,691 13,001 27,290 13,107 12,417 27,290
5 12,763 14,816 14,241 27,290 14,053 13,478 27,290
6 13,401 16,036 15,576 27,290 15,082 14,622 27,290
7 14,071 17,359 17,014 27,290 16,206 15,861 27,290
8 14,775 18,793 18,563 27,290 17,436 17,206 27,290
9 15,513 20,349 20,234 27,290 18,786 18,671 27,290
10 16,289 22,038 22,038 27,290 20,275 20,275 27,290
15 20,789 34,341 34,341 39,836 31,497 31,497 36,536
20 26,533 53,745 53,745 57,507 49,250 49,250 52,698
25 33,864 84,916 84,916 89,162 77,815 77,815 81,706
30 43,219 132,870 132,870 139,514 121,637 121,637 127,719
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,652 8,786 17,020 9,418 8,575 17,020
2 11,025 9,315 8,505 17,020 8,795 8,034 17,020
3 11,576 8,988 8,232 17,020 8,119 7,443 17,020
4 12,155 8,673 8,082 17,020 7,378 6,884 17,020
5 12,763 8,367 7,894 17,020 6,556 6,196 17,020
6 13,401 8,070 7,707 17,020 5,637 5,395 17,020
7 14,071 7,784 7,522 17,020 4,601 4,459 17,020
8 14,775 7,506 7,338 17,020 3,427 3,361 17,020
9 15,513 7,237 7,157 17,020 2,086 2,070 17,020
10 16,289 6,977 6,977 17,020 541 541 17,020
15 20,789 6,035 6,035 17,020 0 0 0
20 26,533 5,201 5,201 17,020 0 0 0
25 33,864 4,463 4,463 17,020 0 0 0
30 43,219 3,809 3,809 17,020 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,233 9,333 17,020 10,004 9,104 17,020
2 11,025 10,472 9,597 17,020 9,980 9,107 17,020
3 11,576 10,717 9,867 17,020 9,919 9,076 17,020
4 12,155 10,968 10,278 17,020 9,813 9,137 17,020
5 12,763 11,227 10,652 17,020 9,655 9,101 17,020
6 13,401 11,492 11,032 17,020 9,432 9,001 17,020
7 14,071 11,764 11,419 17,020 9,134 8,822 17,020
8 14,775 12,043 11,813 17,020 8,747 8,548 17,020
9 15,513 12,329 12,214 17,020 8,250 8,157 17,020
10 16,289 12,623 12,623 17,020 7,620 7,620 17,020
15 20,789 14,798 14,798 17,020 935 935 17,020
20 26,533 17,375 17,375 18,244 0 0 0
25 33,864 20,516 20,516 20,721 0 0 0
30 43,219 24,306 24,306 24,550 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,814 9,914 17,020 10,591 9,691 17,020
2 11,025 11,696 10,821 17,020 11,237 10,362 17,020
3 11,576 12,653 11,803 17,020 11,948 11,098 17,020
4 12,155 13,690 13,000 17,020 12,737 12,047 17,020
5 12,763 14,815 14,240 17,020 13,622 13,047 17,020
6 13,401 16,042 15,582 17,020 14,630 14,170 17,020
7 14,071 17,413 17,068 18,284 15,794 15,449 17,020
8 14,775 18,900 18,670 19,845 17,131 16,901 17,988
9 15,513 20,508 20,393 21,533 18,586 18,471 19,516
10 16,289 22,248 22,248 23,360 20,160 20,160 21,168
15 20,789 34,630 34,630 36,361 31,332 31,332 32,899
20 26,533 53,891 53,891 56,586 48,036 48,036 50,437
25 33,864 84,461 84,461 85,305 74,568 74,568 75,314
30 43,219 132,649 132,649 133,976 116,592 116,592 117,758
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,710 8,839 30,490 9,710 8,839 30,490
2 11,025 9,417 8,597 30,490 9,417 8,597 30,490
3 11,576 9,119 8,351 30,490 9,117 8,349 30,490
4 12,155 8,830 8,228 30,490 8,808 8,208 30,490
5 12,763 8,549 8,065 30,490 8,487 8,007 30,490
6 13,401 8,276 7,903 30,490 8,149 7,782 30,490
7 14,071 8,011 7,741 30,490 7,788 7,526 30,490
8 14,775 7,754 7,580 30,490 7,396 7,231 30,490
9 15,513 7,503 7,419 30,490 6,962 6,885 30,490
10 16,289 7,260 7,260 30,490 6,471 6,471 30,490
15 20,789 6,399 6,399 30,490 2,750 2,750 30,490
20 26,533 5,622 5,622 30,490 0 0 0
25 33,864 4,923 4,923 30,490 0 0 0
30 43,219 4,292 4,292 30,490 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,295 9,395 30,490 10,295 9,395 30,490
2 11,025 10,589 9,714 30,490 10,589 9,714 30,490
3 11,576 10,879 10,029 30,490 10,879 10,029 30,490
4 12,155 11,174 10,484 30,490 11,165 10,475 30,490
5 12,763 11,478 10,903 30,490 11,442 10,867 30,490
6 13,401 11,791 11,331 30,490 11,709 11,249 30,490
7 14,071 12,114 11,769 30,490 11,960 11,615 30,490
8 14,775 12,446 12,216 30,490 12,188 11,958 30,490
9 15,513 12,787 12,672 30,490 12,386 12,271 30,490
10 16,289 13,140 13,140 30,490 12,543 12,543 30,490
15 20,789 15,684 15,684 30,490 12,860 12,860 30,490
20 26,533 18,752 18,752 30,490 9,240 9,240 30,490
25 33,864 22,452 22,452 30,490 0 0 0
30 43,219 26,915 26,915 30,490 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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>
<CAPTION>
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
_______ _______________ ____________ _____________ _________ __________________ ______________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,880 9,980 30,490 10,880 9,980 30,490
2 11,025 11,829 10,954 30,490 11,829 10,954 30,490
3 11,576 12,854 12,004 30,490 12,854 12,004 30,490
4 12,155 13,960 13,270 30,490 13,960 13,270 30,490
5 12,763 15,161 14,586 30,490 15,154 14,579 30,490
6 13,401 16,467 16,007 30,490 16,445 15,985 30,490
7 14,071 17,889 17,544 30,490 17,841 17,496 30,490
8 14,775 19,437 19,207 30,490 19,352 19,122 30,490
9 15,513 21,121 21,006 30,490 20,989 20,874 30,490
10 16,289 22,953 22,953 30,490 22,768 22,768 30,490
15 20,789 36,433 36,433 38,255 36,063 36,063 37,866
20 26,533 57,827 57,827 60,719 57,143 57,143 60,001
25 33,864 91,839 91,839 96,431 89,183 89,183 93,642
30 43,219 145,871 145,871 147,329 139,206 139,206 140,598
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A 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.
[Back Cover]
COVA
Cova Financial Services Life Insurance Company
Marketing and Executive Office
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
800-523-1661
Life Service Office
P.O. Box 10366
Des Moines, IA 50306
800-343-8496
CL-1086 (5/99) Policy Form Series CL-1020 21-SPVL-MO 5/99
