Flexible Premium Joint and Last Survivor Variable Life Insurance Policy
issued by
COVA FINANCIAL SERVICES
LIFE INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT ONE
This prospectus describes the Flexible Premium Joint and Last Survivor Variable
Life Insurance Policy that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following 41
Investment Funds listed below which are offered through our Separate Account
(you can invest in up to 15 of the Investment Funds and the General Account at
any one time). When you purchase a Policy, you bear the complete investment
risk. This means that the Cash Value of your Policy may increase and decrease
depending upon the investment performance of the Investment Fund(s) you select.
The duration of the Policy and, under some circumstances, the death benefit will
increase and decrease depending upon investment performance.
AIM Variable Insurance Funds, Inc.:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital Management L.P.
Premier Growth Portfolio
Real Estate Investment Portfolio
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
Select Equity Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Large Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
General American Capital Company:
Advisor: Conning Asset Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust:
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Small Cap Value Portfolio
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund Management Inc.
Newport Tiger Fund, Variable Series
MFS(R) Variable Insurance TrustSM:
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS High Income Series
MFS Global Governments Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New
Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Templeton Variable Products Series Fund:
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund, Class 1
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund, Class 1
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund, Class 1
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Joint
and Last Survivor Variable Life Insurance Policy. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains information
regarding registrants that file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: November 8, 1999
TABLE OF CONTENTS Page
SPECIAL TERMS 4
SUMMARY 5
The Variable Life Insurance Policy 5
Purchases 5
Investment Choices 5
Expenses 5
Death Benefit 9
Taxes 9
Access to Your Money 9
Other Information 9
Inquiries 10
PART I 11
1. THE VARIABLE LIFE INSURANCE POLICY 11
2. PURCHASES 11
Application for a Policy 11
Premiums 11
Unscheduled Premiums 11
Lapse and Grace Period 11
Reinstatement 12
Allocation of Premium 12
Cash Value of Your Policy 12
Method of Determining Cash Value of an Investment Fund 12
Net Investment Factor 13
Our Right to Reject or Return a Premium Payment 13
3. INVESTMENT FUNDS 13
Substitution and Limitations on Further Investments 14
Transfers 14
Dollar Cost Averaging 15
Portfolio Rebalancing 15
Approved Asset Allocation Programs 15
4. EXPENSES 16
Tax Charges 16
Sales Charge 16
Selection and Issue Expense Charge 16
Monthly Policy Charge 16
Monthly Cost of Insurance 16
Charges for Additional Benefit Riders 17
Mortality and Expense Risk Charge 17
Surrender Charge 17
Transaction Charges 18
Investment Fund Expenses 18
5. DEATH BENEFIT 18
Change of Death Benefit 19
Decrease in Face Amount 19
6. TAXES 19
Life Insurance in General 19
Taking Money Out of Your Policy 19
Diversification 19
7. ACCESS TO YOUR MONEY 20
Policy Loans 20
Loan Interest Charged 20
Security 21
Repaying Policy Debt 21
Partial Withdrawals 21
Pro-Rata Surrender 21
Full Surrenders 22
8. OTHER INFORMATION 22
Cova 22
Distribution 22
Year 2000 22
The Separate Account 22
Suspension of Payments or Transfers 22
Ownership 23
Adjustment of Charges 23
PART II 23
Executive Officers and Directors 23
Voting 25
Disregard of Voting Instructions 25
Legal Opinions 26
Our Right to Contest 26
Additional Benefits 26
Federal Tax Status 26
Introduction 26
Diversification 27
Tax Treatment of the Policy 27
Policy Proceeds 27
Tax Treatment of Loans and Surrenders 28
Multiple Policies 28
Tax Treatment of Assignments 28
Qualified Plans 28
Income Tax Withholding 28
Reports to Owners 28
Legal Proceedings 29
Experts 29
Financial Statements 29
APPENDIX A-1
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Attained Age -- The Issue Age of an Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Last Insured's death. A Beneficiary
may be changed as set forth in the Policy and this prospectus.
Cash Value -- The total of the amounts credited to the Owner in the Separate
Account, the General Account and the Loan Account.
Cash Surrender Value -- The Cash Value of a Policy on the date of surrender,
less any Indebtedness, less any unpaid selection and issue expense charge due
for the remainder of the first Policy year, less any unpaid monthly Policy
charge due for the remainder of the first Policy year, and less any surrender
charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the younger Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insureds -- The persons whose lives are insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office.
Issue Age -- The age of each Insured at his or her nearest birthday as of the
Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Last Insured -- The Insured whose death succeeds the death of all other Insureds
under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Cash Value transferred to the Loan
Account will be allocated to the appropriate Loan Subaccount to reflect the
origin of the Cash Value. At any point in time, the Loan Account will equal the
sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium joint and last survivor variable life insurance
Policy offered by us and described in this Prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the Cash
Value by a given percentage.
Separate Account -- Cova Variable Life Account One, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Services Life Insurance Company, P.O. Box
66757, St. Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insureds' joint age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of both of the persons Insured. This
death benefit is distributed free from Federal income taxes. The Policy can be
used as part of your estate planning or used to save for retirement. The
Insureds are the persons you choose to have their lives insured under the
Policy. You, the Owner, can also be one of the Insureds, but you do not have to
be.
The Policy described in this prospectus is a flexible premium joint and last
survivor variable life insurance policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Cash Value of your Policy, when allocated
to the Investment Funds, may increase or decrease depending upon the investment
results of the selected Investment Funds. The duration of your Policy may vary,
and under certain circumstances, so may your death benefit.
So long as either Insured is alive, you can surrender the Policy for all or part
of its Cash Surrender Value. You may also obtain a Policy loan, using the Policy
as security. We will pay a death benefit when the Last Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum face amount of insurance that we offer is $100,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insureds. We may require each of the
Insureds to provide us with medical records, physician's statement or a complete
paramedical examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. However, you can only put your money in up to 15 of the Investment Funds
and the General Account at any one time. A detailed description of the
Investment Funds, their investment policies, restrictions, risks, and charges is
contained in the prospectuses for each Investment Fund. You should read the
prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Cash Value and from the
Investment Funds. These deductions are made for taxes, mortality and expense
risks, administrative expenses, sales charges, the cost of providing life
insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
tax charge. We also deduct a Premium Tax Charge currently equal to 2.10% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Cash Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insureds.
Monthly Policy Charge. This charge is equal to $25 per month for the first
Policy year, and $6 per Policy month thereafter. This amount is deducted from
the Cash Value of your Policy on the Investment Start Date and each Monthly
Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your Cash Value
on the Investment Start Date and each Monthly Anniversary date. The amount of
the deduction varies with the age, sex (except in unisex policies), risk class
of the Insureds, duration, and the amount of death benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds, Inc.
Advisor: A I M Advisors, Inc
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
- ------------------------------------------------------------------------------------------------------------------------------
Alliance Variable Products Series Fund, Inc.
Advisor: Alliance Capital Management, L.P.
Premier Growth Portfolio(1) 1.00% 0.06% 1.06%
Real Estate Investment Portfolio(2) 0.08% 0.87% 0.95%
- ------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust (3)
Advisor: J.P. Morgan Investment Management, Inc.
Select Equity Portfolio 0.68% 0.18% 0.86%
Small Cap Stock Portfolio 0.85% 0.27% 1.12%
International Equity Portfolio 0.80% 0.28% 1.08%
Quality Bond Portfolio 0.55% 0.10% 0.65%
Large Cap Stock Portfolio 0.65% 0.10% 0.75%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio 0.75% 0.10% 0.85%
Mid-Cap Value Portfolio 1.00% 0.30% 1.30%
Large Cap Research Portfolio 1.00 % 0.30% 1.30%
Developing Growth Portfolio 0.90 % 0.30% 1.20%
Lord Abbett Growth & Income Portfolio(4) 0.65 % 0.07% 0.72%
- ------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Advisor: Conning Asset Management Company
Money Market Fund 0.125% 0.08% 0.205%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Investment Fund Expenses (continued)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Variable Insurance Trust (5)
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund 0.75% 0.15% 0.90%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund 1.00% 0.25% 1.25%
Goldman Sachs Global Income Fund 0.90% 0.15% 1.05%
- ------------------------------------------------------------------------------------------------------------------------------
Kemper Variable Series
Advisor: Scudder Kemper Investments, Inc.
Kemper Small Cap Value Portfolio(6) 0.75% 0.05% 0.80%
Kemper Government Securities Portfolio 0.55% 0.11% 0.66%
Kemper Small Cap Growth Portfolio 0.65% 0.05% 0.70%
- ------------------------------------------------------------------------------------------------------------------------------
Liberty Variable Investment Trust
Advisor: Newport Fund Management, Inc.
Newport Tiger, Variable Series 0.90% 0.40% 1.30%
- ------------------------------------------------------------------------------------------------------------------------------
MFS(R) Variable Insurance TrustSM (7)
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series 0.75% 0.10% 0.85%
MFS Research Series 0.75% 0.11% 0.86%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS High Income Series 0.75% 0.28% 1.03%
MFS Global Governments Series(8) 0.75% 0.26% 1.01%
- ------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA 0.74% 0.04% 0.78%
Oppenheimer Bond Fund/VA 0.72% 0.02% 0.74%
Oppenheimer Capital Appreciation Fund/VA 0.72% 0.03% 0.75%
Oppenheimer Main Street Growth and Income Fund/VA 0.74% 0.05% 0.79%
Oppenheimer Strategic Bond Fund/VA 0.74% 0.06% 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
Putnam Variable Trust
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares 0.46% 0.04% 0.50%
Putnam VT International Growth Fund - Class IA Shares 0.80% 0.27% 1.07%
Putnam VT International New Opportunity Fund - Class IA Shares(9) 1.18% 0.42%
1.60%
Putnam VT New Value Fund - Class IA Shares 0.70% 0.11% 0.81%
Putnam VT Vista Fund - Class IA Shares 0.65% 0.12% 0.77%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Investment Fund Expenses (continued)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
Templeton Variable Products Series Fund, Class 1 Shares
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund 1.25% 0.41% 1.66%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund 0.69% 0.17% 0.86%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund(10) 0.00% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The adviser to the Fund discontinued the expense reimbursement with respect
to the Premier Growth Portfolio effective May 1, 1998.
(2) The expenses shown with respect to the Real Estate Investment Portfolio are
net of voluntary reimbursements. Expenses have been capped at .95% annually
and the adviser to the Fund intends to continue such reimbursements for the
foreseeable future. The estimated expenses for the Real Estate Investment
Portfolio, before reimbursement, are: .90% management fees and 1.41% for
other expenses.
(3) Since May 1, 1996, Cova has been reimbursing the Investment Funds of Cova
Series Trust for all operating expenses (exclusive of the management fees)
in excess of approximately .10%. Effective May 1, 1999, Cova discontinued
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 is reimbursing 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 fund 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.
(4) Estimated. The Portfolio commenced investment operations on January 8,
1999.
(5) The investment advisers to the Goldman Sachs Growth and Income,
International Equity and Global Income Funds have voluntarily agreed to
reduce or limit certain "Other Expenses" of such Funds (excluding
management fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.15%, 0.25% and 0.15% per year of such Funds' average
daily net assets, respectively. The expenses shown include this
reimbursement. If not included, the "Other Expenses" and "Total Annual Fund
Expenses" for the Goldman Sachs Growth and Income, International Equity and
Global Income Funds would be 1.94% and 2.69%, 1.97% and 2.97% and 2.40% and
3.30%, respectively. The reductions or limitations may be discontinued or
modified by the investment advisers in their discretion at any time.
(6) Pursuant to its agreement with Kemper Variable Series, the investment
manager and the accounting agent have agreed, for the one year period
commencing on May 1, 1999, to limit their respective fees and to reimburse
other operating expenses, in a manner communicated to the Board of the
Fund, to the extent necessary to limit total operating expenses of the
Kemper Small Cap Value Portfolio to .84%. The amounts set forth in the
table above reflect actual expenses for the past fiscal year, which were
lower than these expense limits.
(7) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(8) MFS has agreed to bear expenses for the MFS Global Governments Series,
subject to reimbursement by the series, such that the series' "Other
Expenses" do not exceed 0.25% of the average daily net assets of the series
during the current fiscal year. Absent the expense reimbursement, the Total
Annual Fund Expenses for the year ended December 31, 1998, would have been
1.11% for the MFS Global Governments Series. The payments made by MFS on
behalf of the series under this arrangement are subject to reimbursement by
the series to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the series to MFS computed and paid monthly at a
percentage of the series' average daily net assets for its then current
fiscal year, with a limitation that immediately after such payment, the
series' "Other Expenses" will not exceed the percentage set forth above for
the series. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date provided that the arrangement will
continue for the series until at least May 1, 2000, unless terminated with
the consent of the board of trustees which oversees the series.
(9) The Management Fees and Total Annual Fund Expenses reflect an expense
limitation. In the absence of the expense limitation, the Management Fees
and Total Annual Fund Expenses would have been 1.20% and 1.62%,
respectively.
(10) Figures reflect expenses from the Fund's inception on May 1, 1998 and are
annualized. The manager agreed in advance to limit management fees and make
certain payments to reduce Fund expenses as necessary so that Total Annual
Fund Expenses did not exceed 1.00% of the Fund's Class 1 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999. Management Fees, Other Expenses and Total Annual Fund
Expenses in 1998 before any waivers were as follows: 0.60%, 2.27% and 2.87%
for the Mutual Shares Investments Fund.
</FN>
</TABLE>
o Deductions for surrenders, partial withdrawals and transfers.
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the Cash Value
of your Policy to help us recover the costs of selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Last Insured's death;
and
o under some circumstances the Cash Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Cash Value of your Policy on the date of the Last
Insured's death multiplied by the applicable factor. Under this option, the
amount of the death benefit is fixed, except when we use the factor to determine
the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Cash Value of your Policy on the date of
the Last Insured's death, or the Cash Value of your Policy multiplied by the
applicable factor. Under this option, the amount of the death benefit is
variable (but will never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Cash Value on the date of the Last Insured's
death multiplied by an Attained Age factor.
So long as the Policy remains in force, prior to the younger Insured's Attained
Age 100, the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
decrease the Face Amount under certain circumstances.
At the time of application for a Policy, you designate a Beneficiary who is the
person or persons who will receive the death proceeds. You can change your
Beneficiary unless you have designated an irrevocable Beneficiary. The
Beneficiary does not have to be a natural person.
6. TAXES
Your Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 59 1/2 when you take money
out of a MEC, you may also be subject to a 10% federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of either Insured
and we will pay you the Cash Surrender Value of your Policy. At any time during
either of the Insureds' lifetimes and before the Policy has terminated, you may
withdraw a part of your Cash Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Cash Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it (or
whatever period is required in your state) or the 45th day after you sign your
application, whichever period ends later. We will refund all premiums paid. Upon
completion of the underwriting process, we will allocate your initial Net
Premium to the Money Market Fund until the reallocation date, which occurs upon
the expiration of the free look period. After that, we will invest your Policy's
Cash Value and any subsequent premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of one of the
Insureds, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of one of the Insureds.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Cash Value between
Investment Funds periodically to keep the allocation you select. We call
this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Services Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
(877)357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the Owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insureds. It has a Cash
Value, a death benefit, surrender rights, loan privileges and other
characteristics associated with traditional and universal life insurance.
However, since the Policy is a variable life insurance Policy, the value of your
Policy will increase or decrease depending upon the investment experience of the
Investment Funds you choose. The duration or amount of the death benefit may
also vary based on the investment performance of the underlying Investment
Funds. To the extent you select any of the Investment Funds, you bear the
investment risk. If your Cash Value less any loans, loan interest accrued,
unpaid selection and issue charge due for the remainder of the first Policy
year, and if surrender charges and any partial withdrawal fee is insufficient to
pay the monthly deductions, the Policy may terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When both of the
Insureds die, the death proceeds are paid to your Beneficiary which should be
excludable from the gross income of the Beneficiary. The tax-free death proceeds
make this an excellent way to accumulate money you do not think you will use in
your lifetime. It is also a tax-efficient way to provide for those you leave
behind. If you need access to your money, you can borrow from the Policy, make a
total surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about both of the proposed Insureds. In some cases, we will
ask for additional information. We may request that the proposed Insureds
provide us with medical records, a physician's statement or possibly require
other medical tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment, or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insureds within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Cash Value.
If the Last Insured dies during the grace period, any overdue monthly deductions
will be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that both of the Insureds are still
insurable at the risk class that applies for the latest Face Amount portion
then in effect (if only one Insured is alive on the date the Policy lapsed,
you need only submit proof for the living Insured);
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Cash Value of your Policy on the
reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if an Insured who
was living at the time of lapse dies before the reinstatement date. There will
be a full monthly deduction for the Policy month which includes the
reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Cash Value of your
Policy is allocated to the General Account and/or the Investment Funds in
accordance with your selections requested in the application. For any chosen
allocation, the minimum percentage that may be allocated is 5% of the Net
Premium and the percentages must be in whole numbers. This allocation is not
subject to the transfer fee provision. However, we reserve the right to limit
the number of selections that you may invest in at any one time.
Cash Value of Your Policy
The Cash Value equals the sum of the amounts in the General Account, the
Investment Funds you have selected, and the Loan Account.
Method of Determining Cash Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Cash Value of the Investment Funds is determined for each Valuation Period.
When we apply your initial premium to an Investment Fund, the Cash Value equals
the Net Premium allocated to the Investment Fund, minus the monthly deduction(s)
due from the Issue Date through the Investment Start Date. Thereafter, on each
Valuation Date, the Cash Value in an Investment Fund will equal:
(1) The Cash Value in the Investment Fund on the preceding Valuation Date,
multiplied by the Investment Fund's Net Investment Factor (defined below)
for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a pro-rata surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or pro-rata surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
(6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently 41 Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of eleven
open-end, diversified management investment companies: (1) AIM Variable
Insurance Funds, Inc., (2) Alliance Variable Products Series Fund, Inc., (3)
Cova Series Trust, (4) General American Capital Company, (5) Goldman Sachs
Variable Insurance Trust, (6) Kemper Variable Series, (7) Liberty Variable
Investment Trust, (8) MFS Variable Insurance Trust, (9) Oppenheimer Variable
Account Funds, (10) Putnam Variable Trust, and (11) Templeton Variable Product
Series Fund.
You can only invest in up to 15 of the Investment Funds and the General Account
at any one time.
Purchasers should read this prospectus and the prospectuses for the above listed
investment companies carefully before investing. Certain portfolios contained in
the fund prospectuses may not be available with your Policy.
The following is a list of the Investment Funds and investment managers
available under the Policy:
AIM VARIABLE INSURANCE FUNDS, INC.
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Advisor: Alliance Capital Management, L.P.
Premier Growth Portfolio
Real Estate Investment Portfolio
COVA SERIES TRUST
Advisor: J.P. Morgan Investment Management, Inc.
Select Equity Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Large Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
Advisor: Conning Asset Management Company
Money Market Fund
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
KEMPER VARIABLE SERIES
Advisor: Scudder Kemper Investments, Inc.
Kemper Small Cap Value Portfolio
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
LIBERTY VARIABLE INVESTMENT TRUST
Advisor: Newport Fund Management, Inc.
Newport Tiger Fund, Variable Series
(a portfolio investing in equity securities of companies located in certain
countries of Asia).
MFS(R) VARIABLE INSURANCE TRUSTSM
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS High Income Series
MFS Global Governments Series
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
PUTNAM VARIABLE TRUST
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares (a stock portfolio)
TEMPLETON VARIABLE PRODUCTS SERIES FUND,
CLASS 1 SHARES
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund
The investment objectives and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher or
lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results of
similar funds will be comparable even though the funds have the same investment
advisers.
Shares of the Investment Funds may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year, or
(b) the previous Policy year's General Account maximum withdrawal amount, not
to exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
Dollar cost averaging may be selected by completing the proper forms. The
minimum transfer amount is $100. The minimum amount that can be allocated to an
Investment Fund is 5% of the amount transferred. You can elect to participate in
this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Cash Value in the
General Account and in the Investment Funds to the percentages determined in
advance. There are two methods of rebalancing available -- periodic and
variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy Anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Cash Value according to the investment percentages you
elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit the use of approved asset allocation programs, the Policy
was not designed for professional market timing organizations. Repeated patterns
of frequent transfers are disruptive to the operations of the Investment Funds,
and should we become aware of such disruptive practices, we may modify the
transfer privilege either on an individual or class basis.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.10% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
For Policies issued in the state of Oregon, the amounts shown above are
increased by 2%. The guaranteed sales charge varies for Policies issued in
Texas. As of the date of this prospectus, the current sales charge for Texas
Policies is the same as shown above.
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where Policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insureds. For Policies issued in Texas,
the guaranteed selection and issue expense charge is level for the life of the
Policy to ensure compliance with the Texas non-forfeiture laws.
Monthly Policy Charge
We deduct a monthly policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of both Insureds and the
fact that the death benefit is not payable until the death of the Last Insured.
Because the monthly cost of insurance charge depends upon a number of variables,
the charge will vary for each Policy month. We will determine the cost of
insurance charge by multiplying the applicable cost of insurance rate or rates
by the net amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insureds at issue. The monthly cost
of insurance rates generally increase as the Insureds' Attained Ages increase.
The rate class of the Insureds also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Cash Value, an increase in Cash Value will
cause an automatic increase in the death benefit. The rate class for such
increase will be the same as that used for the initial Face Amount.
We currently place Insureds into a preferred rate class, a standard rate class,
or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans; and 1980 CSO Tables NA and SA for unisex policies
issued in compliance with Montana law). All Policies are based on the Attained
Ages of the Insureds. Higher rates apply if either Insured is determined to be
in a substandard risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Cash Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed. We expect to profit from this
charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Cash Value before the withdrawal
and multiplying the result by the surrender charge. Immediately after a
withdrawal, the Policy's remaining surrender charge will equal the amount of the
surrender charge immediately before the withdrawal less the amount deducted in
connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Cash Value. Expenses of the Funds are not fixed or specified
under the terms of the Policy, and actual expenses may vary. These underlying
Investment Fund expenses are taken into consideration in computing each
Investment Fund's net asset value, which is used to calculate the unit values in
the Separate Account. The management fees and other expenses are more fully
described in the prospectus of each individual Investment Fund. The information
relating to the Investment Fund expenses was provided by the Investment Funds
and was not independently verified by us. Except as otherwise specifically
noted, the management fees and other expenses are not currently subject to fee
waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the Cash Value
of your Policy on the date of the Last Insured's death and the death benefit
option (Option A, Option B, or Option C) in effect at that time. The actual
amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Cash Value of your Policy on the date of the Last
Insured's death; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Cash Value Table For Younger Insureds Less than Age 100"
shown below.
Applicable Percentage of Cash Value Table
For Younger Insureds Less Than Age 100
Younger Insured Policy Cash Value
Person's Age Multiple Percentage
---------------- -------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown in this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Cash Value of your Policy on the date of the Last Insured's death
multiplied by the applicable factor from the Table of Attained Age Factors
shown in your Policy.
If your Policy is in force after the younger Insured's Attained Age is 100, then
the Death Benefit will be 101% of the Policy's Cash Value.
Change of Death Benefit
If the Policy was issued with either death benefit Option A or death benefit
Option B, the death benefit option may be changed. A Policy issued under death
benefit Option C may not be changed for the entire lifetime of the Policy.
Similarly, a Policy issued under either death benefit Option A or B may not
change to death benefit Option C for the lifetime of the Policy. A request for
change must be made to us in writing. The Effective Date of such a change will
be the Monthly Anniversary on or following the date we receive the change
request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the Cash Value
on the Effective Date of the change. Satisfactory evidence of insurability must
be submitted to us in connection with a request for a change from death benefit
Option A to death benefit Option B. A change may not be made if it would result
in a Face Amount of less than the minimum Face Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Decrease in Face Amount
Subject to certain limitations set forth below, you may decrease (but not
increase) the Face Amount of a Policy once each Policy year after the first
Policy year. A written request is required for a reduction in the Face Amount. A
reduction in Face Amount may affect the cost of insurance rate and the net
amount at risk, both of which affect your cost of insurance charge. A reduction
in the Face Amount of a Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested decrease must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the Cash
Value may be returned to you (at your election), to the extent necessary to meet
these requirements.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this Policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code for life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance Policy until you take the money out.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Last Insured. However, estate taxes may apply.
Taking Money out of Your Policy
You, as the Owner, will not be taxed on increases in the value of your Policy
until a distribution occurs either as a surrender or as a loan. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC which is included in income may be subject to a 10% penalty. The penalty
will not apply if the income received is: (1) paid on or after the taxpayer
reaches age 59 1/2; (2) paid if the taxpayer becomes totally disabled (as that
term is defined in the Code); or (3) in a series of substantially equal payments
made annually (or more frequently) for the life (or life expectancy) of the
taxpayer.
If your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such requirements.
Under current Federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
Investment Funds. If you are considered the owner of the investments, it will
result in the loss of the favorable tax treatment for the Policy. It is unknown
to what extent Owners are permitted to select Investment Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
Owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, the guidance would generally be
applied prospectively. However, if such guidance is considered not to be a new
position, it may be applied retroactively. This would mean that you, as the
owner of the Policy, could be treated as the owner of the Investment Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Cash Value of the Policy on the date the loan request is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500. The loan may be completely or partially repaid at
any time while either Insured is living. When a Policy loan is made, we will
deduct Cash Value from your Policy equal to the amount of the loan, plus
interest due and place it in the Loan Subaccount as security for the loan. This
Cash Value amount is expected to earn interest at a rate ("the earnings rate")
which is lower than the rate charged on the Policy loan ("the borrowing rate").
The Cash Value that we use as security will accrue interest daily at an annual
earnings rate of 4%.
Unless the Owner requests a different allocation, the Cash Value amount used as
security for the loan will be transferred from the Investment Funds and the
General Account on a pro-rata basis to the Loan Account. This will reduce the
Policy's Cash Value in the General Account and the Investment Fund(s). These
transactions will not be considered transfers for purposes of the limitations on
transfers between Investment Funds or to or from the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Cash Value minus the surrender charge
on any Monthly Anniversary, the Policy will lapse, subject to a grace period.
(See "Purchases -- Lapse and Grace Period".) A lapse of the Policy with a loan
outstanding may have Federal income tax consequences (see "Federal Tax Status").
Interest credited to the Cash Value held in the Loan Subaccount as security for
the loan will be allocated on Policy anniversaries to the General Account and
the Investment Funds. The interest credited will also be transferred: (1) when a
new loan is made; (2) when a loan is partially or fully repaid; and (3) when an
amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences (see "Federal Tax
Status").
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Last Insured and as
long as the Policy is in force. Any Indebtedness outstanding will be deducted
before any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Cash Value used for security was allocated. Unpaid loans and
loan interest will be deducted from any settlement of your Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
a) $500 from an Investment Fund or the General Account; or
b) the Policy's Cash Value in an Investment Fund.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Cash Value net of any applicable surrender charges and fees in that
Investment Fund. The total partial withdrawals and transfers from the General
Account over the Policy year may not exceed a maximum amount equal to the
greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Cash Value in each Investment Fund and the General
Account bears to the total Cash Value of the Policy, less the Cash Value in the
Loan Account, on the date the request for a partial withdrawal is received. If
the limitations on withdrawals from the General Account will not permit this
pro-rata allocation, you will be requested to provide an alternate allocation.
No amount may be withdrawn that would result in there being insufficient Cash
Value to meet any surrender charge and applicable fees that would be payable
immediately following the withdrawal upon the surrender of the remaining Cash
Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the Cash
Value, then a partial withdrawal will decrease the Face Amount by an amount by
which the partial withdrawal plus the applicable surrender charge and fees
exceeds the difference between the death benefit and the Face Amount. If death
benefit Option B is in effect, the Face Amount will not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Cash Value by a
percentage chosen by you. This percentage must be any whole number. A Pro-Rata
Surrender may have Federal income tax consequences. The percentage will be
applied to the Face Amount and the Cash Value on the Monthly Anniversary on or
following our receipt of the request.
You may allocate the amount of decrease in Cash Value plus any applicable
surrender charge and fees among the Investment Funds and the General Account. If
no allocation is specified, then the decrease in Cash Value and any applicable
surrender charge and fees will be allocated among the Investment Funds and the
General Account in the same proportion that the Policy's Cash Value in each
Investment Fund and the General Account bears to the total Cash Value of the
Policy, less the Cash Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Cash Value
reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Last Insured must be living at the
time of a surrender. A surrender may have Federal income tax consequences.
8. OTHER INFORMATION
Cova
Cova Financial Services Life Insurance Company (Cova) was incorporated on August
17, 1981, as Assurance Life Company, a Missouri corporation, and changed its
name to Xerox Financial Services Life Insurance Company in 1985. On June 1,
1995, a wholly-owned subsidiary of General American Life Insurance Company
(General American Life) purchased Cova, which on that date changed its name to
Cova Financial Services Life Insurance Company. On August 26, 1999, it was
announced that The Metropolitan Life Insurance Company would purchase General
American Life. Metropolitan Life is one of the country's oldest and most
financially sound life insurance organizations.
Cova is licensed to do business in the District of Columbia and all states
except for California, Maine, New Hampshire, New York and Vermont.
Distribution
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premiums and 4.0% of excess premiums paid in Policy year 1. In renewal years,
the commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and
2.0% in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, an asset-based compensation equal to .25% of Cash Value for all Policy
years beginning the 13th month. Sometimes, Cova enters into an agreement with
the broker-dealer to pay the broker-dealer persistency bonuses in addition to
the standard commission.
Year 2000
We have developed and initiated plans to assure that our 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
Funds underlying the Separate Account.
The total cost of implementing these plans is not expected to have a material
effect on our financial position or results of operations. We believe that we
have 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
We established a separate account, Cova Variable Life Account One (Separate
Account), to hold the assets that underlie the Policies.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the Policies
and not against any other policies we may issue.
Suspension of Payments or Transfers
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
Investment Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insureds jointly are the Owner of the Policy unless another person or
entity is shown as the Owner in the application. The Owner is entitled to all
rights provided by the Policy. If there is more than one Owner at a given time,
all Owners must exercise the rights of ownership by joint action. If the Owner
dies, and the Owner is not one or both of the Insureds, the Owner's interest in
the Policy becomes the property of his or her estate unless otherwise provided.
Unless otherwise provided, the Policy is jointly owned by all Owners named in
the Policy or by the survivors of those joint Owners. Unless otherwise stated in
the Policy, the final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Last Insured. Unless an irrevocable Beneficiary has been named, you
can change the Beneficiary at any time before the Last Insured dies. If there is
an irrevocable Beneficiary, all Policy changes except premium allocations and
transfers require the consent of the Beneficiary.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement; from the amount of the initial premium payment or
payments; or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
Our directors and executive officers and their principal occupations for the
past 5 years are as follows:
<TABLE>
<CAPTION>
Name of Principal Occupations During
Principal Officers the Past Five Years
- ------------------ -------------------
<S> <C>
John W. Barber*** Director of Cova, First Cova Life Insurance Company (FCLIC) and Cova Financial Life Insurance
Company (CFLIC) - June, 1995 to present; Vice President and Controller of General American -
December, 1984 to present; President and Director of Equity Intermediary Company - October, 1988 to
present.
William P. Boscow* Vice President of Cova and CFLIC - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January, 1999.
Constance A. Doern**** Vice President of Cova and CFLIC - 1997 to present, prior thereto Assistant Vice President from
1990 to 1996; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President
from 1993 to 1996; Vice President of J&H/KVI - 1989 to 1998; Vice President of Cova Life
Administration Services Company (CLASC) - 1998 to present.
Patricia E. Gubbe* Vice President of Cova and CFLIC - 1989 to present; Vice President of FCLIC - 1992 to present;
First Vice President of CLMC - 1996 to present, prior thereto Vice President from 1989 to 1996;
President and Chief Compliance Officer of Cova Life Sales Company (CLSC) from February, 1999 to
present; Vice President and Chief Compliance Officer of CLSC - 1989 to January, 1999.
Philip A. Haley* Executive Vice President of Cova, CFLIC and FCLIC - May 1997 to present; Vice President of Cova and
CFLIC - 1990 to 1997; Vice President of FCLIC - 1992 to present; Vice President of CLSC - 1991 to
present; Senior Vice President of CLMC - 1996 to present, prior thereto Vice President from 1989 to
1996.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova and CFLIC - 1991 to present; Vice President,
Chief Actuary and Director of FCLIC - 1992 to present; Senior Vice President, Chief Actuary and
Director of CLMC - 1996 to present, prior thereto Vice President and Director from 1993 to 1996 and
Vice President from 1991 to 1993.
E. Thomas Hughes, Jr.** Treasurer and Director of Cova and CFLIC - June, 1995 to present; Treasurer of FCLIC - June,
1995 to present; Corporate Actuary and Treasurer of General American - October, 1994 to present.
Formerly, Executive Vice President - Group Pensions General American - March, 1990 to October,
1994. In addition to the Cova companies, Director of the following General American subsidiary
companies: Paragon Life Insurance Company and RGA Reinsurance Company - October, 1994 to present.
Treasurer of the following General American subsidiary companies: Paragon Life Insurance Company,
General Life Insurance Company of America, General Life Insurance Company, General American Holding
Company, Red Oak Realty Company, Gen Mark Incorporated, Walnut Street Securities, Inc., Walnut
Street Advisers Inc., White Oak Royalty Company, Walnut Street Funds, Inc. and RGA Reinsurance
Company - October, 1994 to present.
Douglas E. Jacobs* Vice President of Cova, CFLIC and CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President from 1990 to 1996;
Vice President of CFLIC - 1997 to present, prior thereto Assistant Vice President from 1988 to
1996; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President from 1993
to 1996; Vice President of J&H/KVI - 1985 to 1998; Vice President of CLASC - 1998 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (Advisory) and Cova Investment Allocation Corporation (Allocation) - April, 1997 to
present; Chairman of the Board, President and Chief Executive Officer of General American - May,
1992 to present; Mr. Liddy also holds various positions with the General American subsidiaries as
follows: Chairman of the Board and President of General American Mutual Holding Company, GenAmerica
Corporation and General American Holding Company; Chairman of the Board of Security Equity Life
Insurance Company, Conning Corporation, The Walnut Street Funds, Inc., General American Capital
Company, Reinsurance Group of America, Inc., RGA Life Reinsurance Company of Canada and RGA
Reinsurance Company.
William C. Mair* Vice President and Director of Cova, CFLIC and FCLIC from 1995 to present; Vice President,
Controller and Director of Cova from 1995 to 1998, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and Director of CFLIC from 1995 to 1998, prior
thereto Vice President, Controller, Treasurer and Director; Director of FCLIC from 1993 to present;
Vice President, Controller and Director of FCLIC from 1992 to 1998; Secretary of FCLIC from 1992 to
1995; Vice President, Treasurer, Controller and Director of Advisory - 1993 to present; Vice
President, Treasurer, Controller and Director of Allocation - 1994 to present; Director of CLSC -
1992 to present; Senior Vice President, Treasurer, Controller and Director of CLMC - 1989 to
present; Vice President, Treasurer, Controller, Chief Financial Officer, Chief Accounting Officer
and Trustee of Cova Series Trust - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova, CFLIC and FCLIC - June, 1995 to present; Associate
General Counsel and Vice President of General American - 1973 to present; also, Director, Vice
President, General Counsel and Secretary for several other General American subsidiaries, including
Equity Intermediary Company, Red Oak Realty Company, and White Oak Royalty Company; General
American Holding Company and Paragon Life Insurance Company. General Counsel and Secretary,
Reinsurance Group of America, Incorporated. Director and Secretary, General American Capital
Company. General Counsel and Secretary, Conning Corporation. General Counsel, Conning Asset
Management Company. Director of RGA Reinsurance Company and Walnut Street Securities, Inc.
Secretary to the Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President and Director of Cova and CFLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer and Director of FCLIC - May, 1997 to present; Executive Vice
President of CLMC - May, 1997 to present; Executive Vice President and Director of Advisory -
December, 1996 to present; Executive Vice President and Director of Allocation - December, 1996 to
present.
Myron H. Sandberg* Vice President of Cova and CFLIC - 1985 to present; Vice President of CLMC - 1989 to present.
John W. Schaus* Vice President of Cova and CFLIC - 1988 to present; First Vice President of CLMC from January,
1999 to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFLIC, FCLIC and CLMC since July 1999.
Lorry J. Stensrud* President and Director of Cova, CFLIC, FCLIC and CLMC from June, 1995 to present, prior thereto
Executive Vice President; President and Director of Advisory from 1993 to present; President and
Director of Allocation from 1994 to present. Director of CLSC from 1989 to present; President,
Chief Executive Officer and Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFLIC - January 1999 to present; prior thereto, Vice President of
Cova and CFLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset Management,
General American - June, 1987 to June, 1998; Director of Cova, CFLIC and FCLIC - September 1999 to
present.
Peter L. Witkewiz* Vice President and Controller of Cova, CFLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFLIC and FCLIC - 1993 to June, 1998.
<FN>
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have received instructions.
The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the funds in our own
right, we may elect to do so.
The voting interests of the Owner in the funds will be determined as follows:
Owners may cast one vote for each $100 of Account Value of a Policy which is
allocated to an Investment Fund on the record date. Fractional votes are
counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by us not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each Owner having such a voting interest will receive periodic reports relating
to the Investment Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We may, when required to do so by state insurance authorities, vote shares of
the funds without regard to instructions from Owners if such instructions would
require the shares to be voted to cause an Investment Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We may also disapprove changes
in the investment policy initiated by owners or trustees/directors of the funds,
if such disapproval is reasonable and is based on a good faith determination by
us that the change would violate state or federal law or the change would not be
consistent with the investment objectives of the Investment Funds or which
varies from the general quality and nature of investments and investment
techniques used by other funds with similar investment objectives underlying
other variable contracts offered by us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We cannot contest the validity of the Policy, except in the case of fraud, after
it has been in effect during the lifetime of either Insured for two years. If
the Policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if either Insured commits suicide in the two-year
period, or such period as specified in state law, the benefit payable will be
limited to premiums paid less Indebtedness and less any surrenders. We also have
the right to adjust any benefits under the Policy if the answers in the
application regarding the use of tobacco are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Anniversary Partial Withdrawal Rider -- This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Cash Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of a Cash Value less any loans, loan
interest due, and any surrender charge being insufficient to pay the monthly
deduction.
The secondary guarantee period is the lesser of twenty Policy Years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Cash Value with a specified monthly premium while the Insured is
totally disabled. The monthly premium selected at issue is not guaranteed to
keep the Policy in force. The Insured must have become disabled after age 5 and
before age 65.
Divorce Split Rider -- This rider allows the Policy to be split into two
separate policies in the event of the divorce of a married couple who are the
Insureds under the Policy.
Estate Preservation Term Rider -- This rider provides joint level term
insurance, payable at the death of the Last Insured, for a period of four years
from the date of the rider.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the Policies. Purchasers
bear the complete risk that the Policies may not be treated as "life insurance"
under Federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these Policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment funds underlying variable contracts such as the Policies. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund is represented by any four investments. For
purposes of these regulations, all securities of the same issuer are treated as
a single investment. The Code provides that, for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
We intend that each Investment Fund underlying the Policies will be managed by
the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policyowner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve the right to modify the Policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the Policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the Policy should receive the same Federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the Beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
owner or Beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 and fails to meet the 7-pay test. A Policy fails to meet the 7-pay test
when the cumulative amount paid under the Policy at any time during the first 7
Policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven (7) level annual premiums. A material change would
include any increase in the future benefits or addition of qualified additional
benefits provided under a Policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven Policy years; or (2) the
crediting of interest or other earnings with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC regardless of whether it meets the 7-pay test. However,
an exchange under Section 1035 of the Code of a life insurance Policy entered
into before June 21, 1988 for the Policy will not cause the Policy to be treated
as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then surrenders and/or loan proceeds are
taxable to the extent of income in the Policy. Such distributions are deemed to
be on a last-in, first-out basis, which means the taxable income is distributed
first. Loan proceeds and/or surrender payments, including those resulting from
the lapse of the Policy, may also be subject to an additional 10% federal income
tax penalty applied to the income portion of such distribution. The penalty
shall not apply, however, to any distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer
becoming disabled (within the meaning of Section 72(m)(7) of the Code); or (3)
which is part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
beneficiary.
If a Policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the Policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the Policy within the first fifteen years after the Policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the Policy.
Any loans from a Policy which is not classified as a MEC, will be treated as
Indebtedness of the Owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness exceeds the total premiums paid that
are not treated as previously surrendered by the Policy Owner, the excess
generally will be treated as ordinary income.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC for purposes of determining the taxable portion of any
loans or distributions. Such treatment may result in adverse tax consequences
including more rapid taxation of the loans or distributed amounts from such
combination of policies. You should consult a tax adviser prior to purchasing
more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
Policy.
Qualified Plans. The Policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the Policy owner are subject to Federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. We are
not involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
Experts
The consolidated balance sheets of the Company as of December 31, 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 the Company are provided below.
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Assets and Liabilities
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Trust):
<S> <C> <C> <C>
Lord Abbett Growth and Income Portfolio 65,963 shares at a net asset value of $23.682058 per share $ 1,562,148
Bond Debenture Portfolio 26,357 shares at a net asset value of $12.503713 per share 329,557
Developing Growth Portfolio 17,840 shares at a net asset value of $13.012586 per share 232,142
Large Cap Research Portfolio 22,979 shares at a net asset value of $13.570827 per share 311,844
Mid-Cap Value Portfolio 19,097 shares at a net asset value of $11.802264 per share 225,387
Quality Bond Portfolio 7,725 shares at a net asset value of $10.786856 per share 83,326
Small Cap Stock Portfolio 11,804 shares at a net asset value of $12.704940 per share 149,967
Large Cap Stock Portfolio 37,273 shares at a net asset value of $20.430631 per share 761,505
Select Equity Portfolio 49,054 shares at a net asset value of $17.903279 per share 878,222
International Equity Portfolio 8,130 shares at a net asset value of $13.590555 per share 110,488
AIM Variable Insurance Funds, Inc. (AIM):
AIM V.I. Value Fund 409 shares at a net asset value of $30.04 per share 12,290
General American Capital Company (GACC):
Money Market Fund 28,934 shares at a net asset value of $19.715236 per share 570,433
----------------
Total assets $ 5,227,309
================
</TABLE>
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
<S> <C> <C> <C>
Trust Lord Abbett Growth and Income 127,551 accumulation units at $12.247286 per unit $ 1,562,148
Trust Bond Debenture 31,798 accumulation units at $10.364187 per unit 329,557
Trust Developing Growth 20,348 accumulation units at $11.408624 per unit 232,142
Trust Large Cap Research 25,056 accumulation units at $12.445852 per unit 311,844
Trust Mid-Cap Value 21,102 accumulation units at $10.680636 per unit 225,387
Trust Quality Bond 7,943 accumulation units at $10.491108 per unit 83,326
Trust Small Cap Stock 15,907 accumulation units at $9.427602 per unit 149,967
Trust Large Cap Stock 55,638 accumulation units at $13.686681 per unit 761,505
Trust Select Equity 68,690 accumulation units at $12.785358 per unit 878,222
Trust International Equity 9,898 accumulation units at $11.162725 per unit 110,488
AIM V.I. Value 1,185 accumulation units at $10.372932 per unit 12,290
GACC Money Market 53,207 accumulation units at $10.720997 per unit 570,433
----------------
Net assets $ 5,227,309
================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Operations
Six months ended June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust
------------------------------------------------------------------------------------------
Lord Abbett Large Small
Growth and Bond Developing Cap Mid-Cap Quality Cap
Income (1) Debenture Growth Research Value Bond Stock
------------- ----------- ------------ ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - - - -
------------- ----------- ------------ ----------- ---------- ----------- ---------
Net realized gain (loss) on investments:
Realized gain (loss)
on sale of portfolio shares 542 50 1,275 1,240 1,713 (1,132) 796
Realized gain distributions - - - - - - -
------------- ----------- ------------ ----------- ---------- ----------- ---------
Net realized gain (loss) 542 50 1,275 1,240 1,713 (1,132) 796
------------- ----------- ------------ ----------- ---------- ----------- ---------
Change in unrealized appreciation 115,197 1,389 25,288 22,877 20,448 (1,506) 7,758
------------- ----------- ------------ ----------- ---------- ----------- ---------
Net increase (decrease) in net
assets from operations $ 115,739 1,439 26,563 24,117 22,161 (2,638) 8,554
============= =========== ============ =========== ========== =========== =========
</TABLE>
(1) Sub-account commenced operations on January 8, 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Operations
Six months ended June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust AIM GACC Lord Abbett
----------------------------------- ------------- ---------- -----------
Large Growth
Cap Select International Money and
Stock Equity Equity V.I. Value (2) Market Income (3) Total
--------- ---------- ------------ ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - - - -
--------- ---------- ------------ ------------- ---------- ---------- -----------
Net realized gain (loss)
on investments:
Realized gain (loss) on sale
of portfolio shares 4,894 5,003 1,251 - 15,104 56,187 86,923
Realized gain distributions - - - - - - -
--------- ---------- ------------ ------------- ---------- ---------- -----------
Net realized gain (loss) 4,894 5,003 1,251 - 15,104 56,187 86,923
--------- ---------- ------------ ------------- ---------- ---------- -----------
Change in unrealized appreciation 47,975 67,581 5,014 442 1,051 (25,472) 288,042
--------- ---------- ------------ ------------- ---------- ---------- -----------
Net increase (decrease)
in net assets
from operations $ 52,869 72,584 6,265 442 16,155 30,715 374,965
========= ========== ============ ============= ========== ========== ===========
(2) Sub-account commenced operations on May 3, 1999.
(3) Sub-account ceased operations on January 8, 1999.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Six months ended June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust
------------------------------------------------------------------------------------------
Lord Abbett Large Small
Growth and Bond Developing Cap Mid-Cap Quality Cap
Income (1) Debenture Growth Research Value Bond Stock
------------- ----------- ------------ ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Investment income $ - - - - - - -
Net realized gain (loss) 542 50 1,275 1,240 1,713 (1,132) 796
Change in unrealized appreciation 115,197 1,389 25,288 22,877 20,448 (1,506) 7,758
Net increase (decrease) from ------------- ----------- ------------ ----------- ---------- ----------- ---------
operations 115,739 1,439 26,563 24,117 22,161 (2,638) 8,554
------------- ----------- ------------ ----------- ---------- ----------- ---------
Contract transactions:
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 1,460,484 164,750 73,001 161,512 44,485 (46,507) 21,512
Transfers for contract benefits,
terminations and insurance charges (14,075) (2,822) (2,690) (3,086) (2,653) (1,435) (1,603)
Net increase (decrease) in
net assets from contract ------------- ----------- ------------ ----------- ---------- ----------- ---------
transactions 1,446,409 161,928 70,311 158,426 41,832 (47,942) 19,909
------------- ----------- ------------ ----------- ---------- ----------- ---------
Net increase (decrease) in net
assets 1,562,148 163,367 96,874 182,543 63,993 (50,580) 28,463
Net assets at beginning of period - 166,190 135,268 129,301 161,394 133,906 121,504
------------- ----------- ------------ ----------- ---------- ----------- ---------
Net assets as end of period $ 1,562,148 329,557 232,142 311,844 225,387 83,326 149,967
============= =========== ============ =========== ========== =========== =========
(1) Sub-account commenced operations on January 8, 1999.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Six months ended June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust AIM GACC Lord Abbett
------------------------------------ ------------- ----------- -------------
Large Growth
Cap Select International Money and
Stock Equity Equity V.I. Value (2) Market Income (3) Total
--------- ---------- ------------ ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Investment income $ - - - - - - -
Net realized gain (loss) 4,894 5,003 1,251 - 15,104 56,187 86,923
Change in unrealized appreciation 47,975 67,581 5,014 442 1,051 (25,472) 288,042
Net increase (decrease) from --------- ---------- ------------ ------------- ----------- ------------- ---------
operations 52,869 72,584 6,265 442 16,155 30,715 374,965
--------- ---------- ------------ ------------- ----------- ------------- ---------
Contract transactions:
Payments received from contract
owners - - - - 2,120,870 - 2,120,870
Transfers between sub-accounts, net 456,904 336,385 15,653 11,894 (2,000,991) (693,373) 5,709
Transfers for contract benefits,
terminations and insurance charges (5,561) (8,474) (1,706) (46) (16,803) (253) (61,207)
Net increase (decrease) in net
assets from contract --------- ---------- ------------ ------------- ----------- ------------- ---------
transactions 451,343 327,911 13,947 11,848 103,076 (693,626) 2,065,372
--------- ---------- ------------ ------------- ----------- ------------- ---------
Net increase (decrease) in net
assets 504,212 400,495 20,212 12,290 119,231 (662,911) 2,440,337
Net assets at beginning of period 257,293 477,727 90,276 - 451,202 662,911 2,786,972
--------- ---------- ------------ ------------- ----------- ------------- ---------
Net assets as end of period $ 761,505 878,222 110,488 12,290 570,433 - 5,227,309
========= ========== ============ ============= =========== ============= =========
(2) Sub-account commenced operations on May 3, 1999.
(3) Sub-account ceased operations on January 8, 1999.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Trust
------------------------------------------------------------------------------------------
Large Small Large
Bond Developing Cap Mid-Cap Quality Cap Cap
Debenture Growth Research Value Bond Stock Stock
----------- ---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Investment income $ 191 - 126 61 94 3 23
Net realized gain (loss) 74 (53) (59) (60) 8 334 543
Change in unrealized appreciation 5,181 21,898 11,811 12,587 255 18,574 44,695
Net increase (decrease) from ----------- ---------- ----------- ----------- ----------- ---------- -----------
operations 5,446 21,845 11,878 12,588 357 18,911 45,261
----------- ---------- ----------- ----------- ----------- ---------- -----------
Contract transactions:
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 161,726 115,070 119,413 150,800 133,943 105,943 216,611
Transfers for contract benefits,
terminations and insurance charges (982) (1,647) (1,990) (1,994) (394) (3,350) (4,579)
Net increase (decrease) in net
assets from contract ----------- ---------- ----------- ----------- ----------- ---------- -----------
transactions 160,744 113,423 117,423 148,806 133,549 102,593 212,032
----------- ---------- ----------- ----------- ----------- ---------- -----------
Net increase (decrease) in net
assets 166,190 135,268 129,301 161,394 133,906 121,504 257,293
Net assets at beginning of period - - - - - - -
----------- ---------- ----------- ----------- ----------- ---------- -----------
Net assets as end of period $ 166,190 135,268 129,301 161,394 133,906 121,504 257,293
=========== ========== =========== =========== =========== ========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Statement of Changes in Net Assets
Period ended December 31, 1998
<TABLE>
<CAPTION>
Trust GACC Lord Abbett
----------------------------- ------------- --------------
Growth
Select International Money and
Equity Equity Market Income Total
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Investment income $ 25 652 - 8,782 9,957
Net realized gain (loss) 615 (109) 12,085 28,277 41,655
Change in unrealized appreciation 65,356 1,778 4,240 25,472 211,847
Net increase (decrease) from ------------- ------------- ------------- -------------- -------------
operations 65,996 2,321 16,325 62,531 263,459
------------- ------------- ------------- -------------- -------------
Contract transactions:
Payments received from contract
owners - - 2,605,542 - 2,605,542
Transfers between sub-accounts, net 417,562 91,449 (2,120,328) 607,811 -
Transfers for contract benefits,
terminations and insurance charges (5,831) (3,494) (50,337) (7,431) (82,029)
Net increase (decrease) in net
assets from contract ------------- ------------- ------------- -------------- -------------
transactions 411,731 87,955 434,877 600,380 2,523,513
------------- ------------- ------------- -------------- -------------
Net increase (decrease) in net
assets 477,727 90,276 451,202 662,911 2,786,972
Net assets at beginning of period - - - - -
------------- ------------- ------------- -------------- -------------
Net assets as end of period $ 477,727 90,276 451,202 662,911 2,786,972
============= ============= ============= ============== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
(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 Life Services 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
insurance policies issued by Cova.
The Separate Account is divided into sub-accounts with the assets of each
sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified, open-end,
management investment company registered under the Investment Company Act
of 1940 as amended. The sub-accounts available for investment may vary
between variable life insurance policies offered for sale by Cova.
Cova Series Trust (Trust) 10 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 2 portfolios
General American Capital Company (GACC) 1 portfolio
Templeton Variable Products Series Fund (Templeton) 5 portfolios
On January 8, 1999, the Lord Abbett Growth and Income sub-account ceased
operations and its assets were transferred to the Cova Series Trust Lord
Abbett Growth and Income sub-account which commenced operations on January
8, 1999. The asset transfer was in accordance with a substitution order
issued by the Securities and Exchange Commission.
(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 capital gain distributions are recorded on
the ex-distribution date.
(b) Reinvestment of Distributions
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in additional
shares of the 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 capital gains. During December of each year, the
accumulated net investment income and realized capital gains of the
GACC Money Market Fund are allocated to the Separate Account by
increasing the cost basis and recognizing a gain in the Separate
Account.
(c) Federal Income Taxes
The operations of the Separate Account are included in the federal
income tax return of 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 policies. Based on this, no charge has been made to
the Separate Account for federal income taxes. A charge may be made
in future years for any federal income taxes that would be
attributable to the variable life policies.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
(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. During
the six months ending June 30, 1999, mortality and expense risk and
administrative charges of $26,947 were deducted from the policy
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% (0.15% for
federal tax and 0.25% for premium tax) of the policy account value,
1/12 of which is deducted each month. Premium taxes range from 0% to
4% and the premium tax charge is assessed regardless of the owner's
actual state or local jurisdiction. During the six months ending
June 30, 1999, tax expense charges of $8,316 were deducted from the
policy 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. During the six months ending June 30, 1999, cost of
insurance charges of $13,924 were deducted from the policy 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 7 3.0%
policy year 4 6.0% policy year 8 2.0%
policy year 5 5.0% policy year 9 1.0%
policy year 6 4.0% policy year 10+ 0.0%
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 6 1.00%
policy year 2 2.00% policy year 7 0.75%
policy year 3 1.75% policy year 8 0.50%
policy year 4 1.50% policy year 9 0.25%
policy year 5 1.25% policy year 10+ 0.00%
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
(c) Contract Fees
An annual contract maintenance fee of $30 is imposed on all variable
life contracts with policy 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 policy value is allocated.
Subject to certain restrictions, the contract owner may transfer all
or a part of the accumulated value of the policy among the available
sub-accounts of the Separate Account. If more than 12 transfers have
been made in the policy year, a transfer fee of $25 per transfer or,
if less, 2% of the amount transferred, will be deducted from the
policy account value. Transfers made in a dollar cost averaging
program are not subject to the transfer fee.
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(4) Cost Basis of Investments
The cost basis of each sub-account's investment follows:
<S> <C>
Trust Lord Abbett Growth and Income $ 1,446,951
Trust Bond Debenture 322,987
Trust Developing Growth 184,956
Trust Large Cap Research 277,156
Trust Mid-Cap Value 192,352
Trust Quality Bond 84,577
Trust Small Cap Stock 123,635
Trust Large Cap Stock 668,835
Trust Select Equity 745,285
Trust International Equity 103,696
AIM V.I. Value 11,848
GACC Money Market 565,142
--------------
$ 4,727,420
==============
</TABLE>
<TABLE>
<CAPTION>
(5) Unit Fair Value
A summary of accumulation unit values, net assets and total return for
each sub-account follows:
Accumulation Unit Value Net Assets (in thousands) Total Return
Commenced -------------------------- ---------------------- ----------------------
Operations 6/30/99 12/31/98 6/30/99 12/31/98 1999 1998
------------ ----------- ------------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust Lord Abbett Growth and Income 1/8/99 $12.247286 $1,562 9.61%
Trust Bond Debenture 4/13/98 10.364187 10.262336 330 166 0.99% 0.78%
Trust Developing Growth 4/16/98 11.408624 9.855135 232 135 15.76% -5.41%
Trust Large Cap Research 5/4/98 12.445852 10.972618 312 129 13.43% 4.31%
Trust Mid-Cap Value 3/23/98 10.680636 9.576906 225 161 11.52% -6.17%
Trust Quality Bond 4/13/98 10.491108 10.717509 83 134 -2.11% 6.22%
Trust Small Cap Stock 4/13/98 9.427602 8.891377 150 122 6.03% -14.87%
Trust Large Cap Stock 4/13/98 13.686681 12.135469 762 257 12.78% 13.96%
Trust Select Equity 3/23/98 12.785358 11.480648 878 478 11.36% 9.65%
Trust International Equity 3/23/98 11.162725 10.560451 110 90 5.70% 1.80%
AIM V.I. Value 5/3/99 10.372932 12 3.73%
GACC Money Market 2/26/98 10.720997 10.468518 570 451 2.41% 4.69%
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(6) Realized Gain (Loss) and Change in Unrealized Appreciation
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the six months ending
June 30, 1999 and the year ending December 31, 1998 follows:
Realized Gain (Loss)
---------------------------------------------------------------
Aggregate Aggregate Cost
Year or Proceeds from Sales of Fund Shares Realized
Period of Fund Shares Redeemed Gain (Loss)
------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Trust Lord Abbett Growth and Income 1999 $ 33,219 $ 32,677 $ 542
1998
Trust Bond Debenture 1999 1,657 1,607 50
1998 527 527 -
Trust Developing Growth 1999 5,964 4,689 1,275
1998 1,194 1,250 (56)
Trust Large Cap Research 1999 8,935 7,695 1,240
1998 1,809 1,868 (59)
Trust Mid-Cap Value 1999 15,882 14,169 1,713
1998 1,646 1,706 (60)
Trust Quality Bond 1999 96,129 97,261 (1,132)
1998 890 882 8
Trust Small Cap Stock 1999 5,195 4,399 796
1998 3,110 2,852 258
Trust Large Cap Stock 1999 30,757 25,863 4,894
1998 4,336 3,869 467
Trust Select Equity 1999 34,708 29,705 5,003
1998 2,999 2,887 112
Trust International Equity 1999 18,607 17,356 1,251
1998 3,170 3,287 (117)
AIM V.I. Value 1999 46 46 -
1998
GACC Money Market 1999 1,880,456 1,865,352 15,104
1998 2,041,400 2,029,315 12,085
Lord Abbett Growth and Income 1999 694,610 638,423 56,187
1998 3,786 3,746 40
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(6) Realized Gain (Loss) and Change in Unrealized Appreciation, continued:
Unrealized Appreciation (Depreciation)
---------------------------------------------------------------
Appreciation Appreciation
Year or (Depreciation) (Depreciation)
Period End of Period Beginning of Period Change
------------ ------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Trust Lord Abbett Growth and Income 1999 $ 115,197 $ - $ 115,197
1998
Trust Bond Debenture 1999 6,570 5,181 1,389
1998 5,181 - 5,181
Trust Developing Growth 1999 47,186 21,898 25,288
1998 21,898 - 21,898
Trust Large Cap Research 1999 34,688 11,811 22,877
1998 11,811 - 11,811
Trust Mid-Cap Value 1999 33,035 12,587 20,448
1998 12,587 - 12,587
Trust Quality Bond 1999 (1,251) 255 (1,506)
1998 255 - 255
Trust Small Cap Stock 1999 26,332 18,574 7,758
1998 18,574 - 18,574
Trust Large Cap Stock 1999 92,670 44,695 47,975
1998 44,695 - 44,695
Trust Select Equity 1999 132,937 65,356 67,581
1998 65,356 - 65,356
Trust International Equity 1999 6,792 1,778 5,014
1998 1,778 - 1,778
AIM V.I. Value 1999 442 - 442
1998
GACC Money Market 1999 5,291 4,240 1,051
1998 4,240 - 4,240
Lord Abbett Growth and Income 1999 - 25,472 (25,472)
1998 25,472 - 25,472
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(7) Unit Transactions
The change in the number of units for each sub-account follows:
Trust
------------------------------------------------------------------------------------------
Lord Abbett Large Small
Growth and Bond Developing Cap Mid-Cap Quality Cap
Income (1) Debenture Growth Research Value Bond Stock
------------- ----------- ------------ ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
Unit balance at 12/31/97
Contract units sold - - - - - -
Contract units transferred, net 16,292 13,928 11,988 17,077 12,531 14,067
Contract units redeemed (98) (202) (204) (225) (37) (402)
----------- ------------ --------- ---------- ---------- --------
Unit balance at 12/31/98 16,194 13,726 11,784 16,852 12,494 13,665
Contract units purchased - - - - - - -
Contract units transferred, net 130,578 15,874 6,813 13,512 4,466 (4,416) 2,415
Contract units redeemed (3,027) (270) (191) (240) (216) (135) (173)
------------- ----------- ------------ --------- ---------- ---------- ---------
Unit balance at 6/30/99 127,551 31,798 20,348 25,056 21,102 7,943 15,907
============= =========== ============ ========= ========== ========== =========
(1) Sub-account commenced operations on January 8, 1999.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT ONE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(7) Unit Transactions
The change in the number of units for each sub-account follows:
Trust AIM GACC Lord Abbett
-------------------------------------------- ------------- ------------- ------------
Large Growth
Cap Select International Money and
Stock Equity Equity V.I. Value (2) Market Income (3)
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation units:
Unit balance at 12/31/97
Contract units sold - - - 303,667 -
Contract units transferred, net 21,607 42,165 8,896 (205,485) 62,823
Contract units redeemed (405) (554) (347) (55,081) (745)
------------- ------------- ------------- ------------- -------------
Unit balance at 12/31/98 21,202 41,611 8,549 43,101 62,078
Contract units purchased - - - - 229,496 -
Contract units transferred, net 36,388 29,426 1,453 1,190 (194,272) (62,052)
Contract units redeemed (1,952) (2,347) (104) (5) (25,118) (26)
------------- ------------- ------------- ------------ ------------- -------------
Unit balance at 6/30/99 55,638 68,690 9,898 1,185 53,207 -
============= ============= ============= ============= ============= =============
(2) Sub-account commenced operations on May 3, 1999.
(3) Sub-account ceased operations on January 8, 1999.
</TABLE>
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
(a wholly owned subsidiary of Cova Corporation)
Financial Statements (Unaudited)
June 30, 1999 and 1998
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
Assets (Unaudited) 1998
----------- --------------
<S> <C> <C>
Investments:
Debt securities available for sale at fair value
(cost of $1,510,855 in 1999 and $1,375,198 in 1998) $1,461,821 $1,371,513
Equity securities, at fair value 9,037 9,037
Mortgage loans, net of allowance for potential loan loss 323,531 312,865
Investment Real estate 3,950 -
Policy loans 26,884 26,295
------ ------
Total investments 1,825,223 1,719,710
--------- ---------
Cash and cash equivalents - interest bearing 75,792 94,770
Cash - non-interest bearing 6,832 5,008
Accrued investment income 23,954 21,505
Deferred policy acquisition costs 177,681 131,973
Present value of future profits 43,587 42,230
Goodwill 18,019 18,585
Deferred tax benefits, net 9,660 4,786
Receivable from OakRe 531,541 720,904
Due from affiliates 216,931 246,198
Other assets 1,566 6,674
Separate account assets 2,257,878 1,832,396
--------- ---------
Total assets $5,188,664 $4,844,739
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Balance Sheets, (Continued)
(In thousands)
<TABLE>
<CAPTION>
June 30
1999 December 31,
Liabilities and Shareholder's Equity (Unaudited) 1998
------------ --------------
<S> <C> <C>
Liabilities:
Policyholder deposits $2,535,619 $2,643,124
Future policy benefits 58,430 54,336
Payable on return of collateral on loaned securities 41,797 25,923
Payable on purchase of securities 5,682 1,040
Federal and state income taxes payable 410 446
Accounts payable and other liabilities 19,235 18,714
Future purchase price payable to OakRe 5,523 6,976
Guaranty fund assessments 9,700 9,700
Separate account liabilities 2,257,875 1,832,394
--------- ---------
Total liabilities 4,934,271 4,592,653
--------- ---------
Shareholder's equity:
Common stock 5,799 5,799
Additional paid-in capital 230,491 220,491
Retained earnings 28,846 26,410
Accumulated other comprehensive loss, net of tax (10,743) (614)
-------- -----
Total shareholder's equity 254,393 252,086
------- -------
Total liabilities and shareholder's equity $5,188,664 $4,844,739
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Statements of Income (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
------------------------ --------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $9,755 $8,784 $6,467 $6,179
Net investment income 66,028 61,808 32,125 30,766
Net realized investment gains (losses) (4,794) (1,754) (2,569) 498
Separate account fees 14,326 9,433 7,637 5,149
Other income 4,786 1,691 2,558 868
----- ----- ----- ----
Total revenues 90,101 79,962 46,218 43,460
------ ------ ------ ------
Benefits and expenses:
Interest on policyholder deposits 49,696 45,662 24,505 23,206
Current and future policy benefits 11,918 9,696 8,112 6,237
Operating and other expenses 18,140 13,701 10,012 7,143
Amortization of purchased intangible assets 1,911 2,008 966 998
Amortization of deferred acquisition costs 5,451 3,450 2,890 2,850
----- ----- ----- -----
Total benefits and expenses 87,116 74,517 46,485 40,434
------ ------ ------ ------
Income (loss)before income taxes 2,985 5,445 (267) 3,026
----- ----- ----- -----
Income tax expense(benefit):
Current (206) (1,312) (4,421) 1,767
Deferred 755 3,480 4,075 (575)
--- ----- ----- -----
Total income tax expense (benefit) 549 2,168 (346) 1,192
--- ----- ----- -----
Net income $2,436 $3,277 $79 $1,834
====== ====== === ======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Statements of Shareholder's Equity (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the periods ended
6/30/99 12/31/98
--------- ---------
<S> <C> <C>
Common stock, at beginning and end of period $ 5,799 $ 5,799
------ ------
Additional paid-in capital:
Balance at beginning of period 220,491 191,491
Capital contribution 10,000 29,000
------ ------
Balance at end of period 230,491 220,491
------- -------
Retained earnings:
Balance at beginning of period 26,410 12,516
Net income 2,436 13,894
----- ------
Balance at end of period 28,846 26,410
------ ------
Accumulated other comprehensive loss:
Balance at beginning of period (614) 2,732
Change in unrealized depreciation of debt and equity securities (45,350) (14,571)
Change in deferred acquisition costs attributable to
unrealized appreciation 27,279 6,996
Change in present value of future profits attributable to
unrealized depreciation 2,488 2,428
Change in deferred federal income taxes impact 5,454 1,801
----- -----
Balance at end of period (10,743) (614)
-------- -----
Total shareholder's equity $254,393 $252,086
======== ========
Total comprehensive income (loss):
Net income $2,436 $13,894
Other comprehensive loss (change in
Unrealized losses on debt and equity securities) (10,129) (3,346)
-------- -------
Total comprehensive income(loss) $(7,693) $10,548
======== =======
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
-------- ---------
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $2,436 $3,277
Adjustments to reconcile net income to net cash
provided by operating activities:
6,606
Increase in future policy benefits 4,094
(Decrease) increase in payables and accrued liabilities 521 (3,128)
Increase in accrued investment income (2,449) (711)
Amortization of intangible assets 7,362 5,458
Recapture commission paid to OakRe (1,453) (2,981)
Net realized investment losses 4,794 1,754
Interest accumulated on policyholder deposits 49,696 45,662
Increase in current and deferred federal income taxes (4,910) (2,926)
Commissions and expenses deferred (23,880) (24,496)
Other 6,734 1,440
------- -------
Net cash provided by operating Activities 42,945 29,955
------ ------
Cash flows from investing activities:
Cash used in the purchase of investment
Securities (373,923) (298,878)
Proceeds from investment securities sold
and matured 227,903 265,979
Other (1,107) (724)
------- -----
Net cash used in investing activities (147,127) (33,623)
---------- --------
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Statements of Cash Flows, (Unaudited) (Continued)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from financing activities:
Policyholder deposits $484,855 $506,586
Transfers from OakRe 206,951 415,821
Transfer to separate accounts (288,377) (424,680)
Return of policyholder deposits (378,266) (432,606)
Proceeds from security collateral on
Securities lending 15,874 -
Transfers from(to) RGA 35,991 (40,446)
Capital contribution received 10,000 -
------ ------
Net cash provided by financing activities 87,028 24,675
------ ------
Increase(decrease) in cash and cash
Equivalents (17,154) 21,007
-------- ------
Cash and cash equivalents - beginning of Period 99,778 16,576
------ ------
Cash and cash equivalents - end of period $82,624 $37,583
======= =======
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Interim Financial Statements - (Unaudited)
June 30, 1999 and 1998
(1)
The interim consolidated financial statements for Cova Financial Services Life
Insurance Company (the Company) have been prepared on the basis of generally
accepted accounting principles and, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation or results for such periods. The results of operations and cash
flows for any interim period are not necessarily indicative of results for the
full year. These financial statements should be read in conjunction with the
financial statements as of December 31, 1998 and December 31, 1997, and for each
of the years in the three-year period ended December 31, 1998 and related notes
thereto, presented elsewhere herein. Interim financial data presented herein are
unaudited.
(2) 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 other comprehensive income. The
carrying value and amortized cost of investments at June 30, 1999 were as
follows:
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
--------------------------------------------------------------------------
(in thousands )
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government treasuries $28,220 $88 $(1,906) $26,402 $26,402
Government agency obligations 46,126 464 (135) 46,455 46,455
Corporate securities 1,050,390 3,530 (45,063) 1,008,857 1,008,857
Mortgage-backed securities 210,309 642 (2,022) 208,929 208,929
Asset-backed securities 175,810 575 (5,207) 171,178 171,178
---------- ----- ---------- ---------- ----------
Total debt securities 1,510,855 5,299 (54,333) 1,461,821 1,461,821
Equity securities 9,037 - - 9,037 9,037
Mortgage loans(net) 323,531 9,884 (751) 332,664 323,531
Real estate 3,950 - - 3,950 3,950
Policy loans 26,884 - - 26,884 26,884
---------- ------- -------- ---------- -----------
Total investments $1,874,257 $15,183 ($55,084) $1,834,356 $1,825,223
========== ======= ========= ========== ==========
Company's beneficial interest in
Separate accounts $3 -- -- $3 $3
--- --- --- --- ---
</TABLE>
As of June 30, 1999, the Company had six nonincome producing debt securities
totaling $12,618,058. The Company's valuation allowance for potential losses on
mortgage loans is $775,500 at June 30, 1999.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Interim Financial Statements - (Unaudited)
The amortized cost and fair market value of debt securities at June 30, 1999, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Maturities of
mortgage-backed securities will be substantially shorter than their contractual
maturity because they require monthly principal installments and mortgagees may
prepay principal.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------
Fair
Amortized Market
Cost Value
--------------------------------------
(in thousands )
<S> <C> <C>
Less than one year $78,922 $79,374
Due after one year through five years 489,360 469,383
Due after five years through ten years 439,987 422,300
Due after ten years 292,277 281,835
Mortgage-backed securities 210,309 208,929
------- -------
Total $1,510,855 $1,461,821
========== ==========
</TABLE>
At June 30, 1999, approximately 90.8% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade. Of
the 9.2% non-investment grade debt securities, 6.1% are rated as BB, 1.9% are
rated as B and 1.2% are rated as CCC and treated as impaired.
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Interim Financial Statements - (Unaudited)
The components of net investment income, net realized capital losses and
comprehensive income were as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
----------------------- ------------------------
(in thousands )
<S> <C> <C> <C> <C>
Income on debt securities $50,849 $46,118 $25,274 $22,880
Income on short-term investments 1,013 1,206 548 641
Income on equity securities 281 - 137 -
Income on mortgage loans 13,666 14,500 6,095 7,250
Income on policy loans 1,043 965 530 492
Miscellaneous interest 283 60 114 35
--- -- --- --
Total investment income 67,135 62,849 32,698 31,298
Investment expenses (1,107) (1,041) (573) (532)
------- ------- ----- -----
Net investment income $66,028 $61,808 $32,125 $30,766
======= ======= ======= =======
Net realized capital gains(losses) - debt
securities $(4,794) $(1,754) $(2,569) $498
======== ======== ======== ====
</TABLE>
<TABLE>
<CAPTION>
For the periods ended:
----------------------------------------
6/30/99 6/30/98
----------------------------------------
(in thousands)
<S> <C> <C>
Comprehensive income was as follows:
Debt securities $(45,350) $(546)
Effects on deferred acquisition costs
Amortization 27,279 242
Effects on present value of future
Profits amortization 2,488 90
----- --
Unrealized depreciation before income Taxes (15,583) (214)
Unrealized income tax benefit 5,454 75
----- --
Net change in comprehensive income $(10,129) $(139)
========== =======
</TABLE>
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Corporation)
Notes to Interim Financial Statements - (Unaudited)
(3) Securities Greater than 10% of Shareholder's Equity
As of June 30, 1999 the Company does not have any individual security that
exceeds 10% of shareholder's equity:
(4) Statutory Surplus
As of June 30, 1999, the Company's statutory capital and surplus was
$104,250,501. The Company's statutory net losses for the periods ended June 30,
1999 and 1998 were $9,554,724 and $4,784,981, respectively.
(5) Related-Party Transactions
The Company has entered into management, operations, and servicing agreements
with its affiliated companies. The affiliated companies are Cova Life Management
Company, 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, General
American Life Insurance Company. Cova Life Administrative Service Company
provides various services for the Company including underwriting, claims, and
administrative functions. Expenses and fees paid to affiliated companies as of
June 30, 1999 and 1998 were $10,768,818 and $9,712,533, respectively.
(6) SUBSEQUENT EVENT
On August 26, 1999, the Company's ultimate parent, General American Life
Insurance Company (GALIC), entered into a definitive agreement, whereby MetLife
will acquire GALIC's parent company GenAmerica Corporation for $1.2 billion in
cash. The purchase is subject to the approval of the Missouri Director of
Insurance, and it is expected to be completed in the fourth quarter of 1999.
(7) Others
Certain 1998 amounts have reclassified to conform to the 1999 presentation.
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 --
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. In the first example, we chose a husband and wife age 55. In the
second example, we chose a husband and wife age 65. Our hypothetical Insureds
are non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options; Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $3,500 for the 55-year-old example and $7,000
for the 65-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35% thereafter)
and advisory fee and operating expenses (equal to approximately .92%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.47% for these charges) are approximately -1.47, 4.53% and
10.53%. The Policy will lapse if you do not make additional premiums where 0% is
used in the illustrations.
It is important to be aware that these illustrations assume a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Cash Value, Cash
Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of this prospectus.
These charges are:
(1) A Federal tax charge of 1.3% and a Premium Tax Charge of 2.1% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed Insureds' ages, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,189 1,233 250,000 2,189 1,233 250,000
2 7,534 4,775 3,818 250,000 4,755 3,799 250,000
3 11,585 7,321 6,365 250,000 7,251 6,294 250,000
4 15,840 9,828 8,872 250,000 9,671 8,715 250,000
5 20,307 12,296 11,339 250,000 12,010 11,054 250,000
6 24,997 14,722 13,872 250,000 14,260 13,410 250,000
7 29,922 17,108 16,470 250,000 16,411 15,774 250,000
8 35,093 19,450 19,025 250,000 18,451 18,026 250,000
9 40,523 21,748 21,535 250,000 20,359 20,146 250,000
10 46,224 23,998 23,998 250,000 22,115 22,115 250,000
15 79,301 37,236 37,236 250,000 30,593 30,593 250,000
20 121,517 47,671 47,671 250,000 29,694 29,694 250,000
25 175,397 52,721 52,721 250,000 5,992 5,992 250,000
30 244,163 44,487 44,487 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,344 1,388 250,000 2,344 1,388 250,000
2 7,534 5,243 4,286 250,000 5,222 4,266 250,000
3 11,585 8,271 7,315 250,000 8,198 7,241 250,000
4 15,840 11,436 10,479 250,000 11,268 10,312 250,000
5 20,307 14,740 13,784 250,000 14,432 13,475 250,000
6 24,997 18,190 17,340 250,000 17,683 16,833 250,000
7 29,922 21,791 21,154 250,000 21,017 20,379 250,000
8 35,093 25,547 25,122 250,000 24,421 23,996 250,000
9 40,523 29,463 29,251 250,000 27,881 27,669 250,000
10 46,224 33,544 33,544 250,000 31,378 31,378 250,000
15 79,301 59,928 59,928 250,000 52,038 52,038 250,000
20 121,517 91,269 91,269 250,000 69,823 69,823 250,000
25 175,397 127,678 127,678 250,000 74,148 74,148 250,000
30 244,163 167,928 167,928 250,000 36,853 36,853 250,000
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,499 1,543 250,000 2,499 1,543 250,000
2 7,534 5,730 4,774 250,000 5,709 4,753 250,000
3 11,585 9,300 8,343 250,000 9,223 8,266 250,000
4 15,840 13,243 12,287 250,000 13,066 12,110 250,000
5 20,307 17,600 16,644 250,000 17,267 16,311 250,000
6 24,997 22,411 21,561 250,000 21,855 21,005 250,000
7 29,922 27,723 27,085 250,000 26,862 26,225 250,000
8 35,093 33,587 33,162 250,000 32,319 31,894 250,000
9 40,523 40,059 39,846 250,000 38,257 38,045 250,000
10 46,224 47,201 47,201 250,000 44,709 44,709 250,000
15 79,301 99,679 99,679 250,000 90,367 90,367 250,000
20 121,517 185,653 185,653 250,000 161,387 161,387 250,000
25 175,397 330,228 330,228 346,739 282,949 282,949 297,096
30 244,163 569,033 569,033 597,484 484,617 484,617 508,848
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,189 1,233 252,189 2,189 1,233 252,189
2 7,534 4,774 3,818 254,774 4,754 3,798 254,754
3 11,585 7,320 6,364 257,320 7,248 6,291 257,248
4 15,840 9,826 8,870 259,826 9,664 8,707 259,664
5 20,307 12,292 11,336 262,292 11,995 11,038 261,995
6 24,997 14,717 13,867 264,717 14,232 13,382 264,232
7 29,922 17,100 16,462 267,100 16,363 15,726 266,363
8 35,093 19,439 19,014 269,439 18,374 17,949 268,374
9 40,523 21,731 21,519 271,731 20,241 20,028 270,241
10 46,224 23,975 23,975 273,975 21,940 21,940 271,940
15 79,301 37,102 37,102 287,102 29,684 29,684 279,684
20 121,517 46,960 46,960 296,960 26,648 26,648 276,648
25 175,397 50,000 50,000 300,000 0 0 0
30 244,163 36,589 36,589 286,589 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,990 2,631 1,675 252,631 2,631 1,675 252,631
2 8,180 5,830 4,873 255,830 5,809 4,853 255,809
3 12,578 9,172 8,215 259,172 9,096 8,139 259,096
4 17,197 12,663 11,706 262,663 12,489 11,533 262,489
5 22,047 16,309 15,353 266,309 15,985 15,029 265,985
6 27,140 20,115 19,265 270,115 19,578 18,728 269,578
7 32,487 24,087 23,449 274,087 23,259 22,622 273,259
8 38,101 28,229 27,804 278,229 27,014 26,589 277,014
9 43,996 32,547 32,335 282,547 30,822 30,609 280,822
10 50,186 37,045 37,045 287,045 34,656 34,656 284,656
15 86,098 65,762 65,762 315,762 56,488 56,488 306,488
20 131,933 99,058 99,058 349,058 72,167 72,167 322,167
25 190,431 134,158 134,158 384,158 64,541 64,541 314,541
30 265,091 159,825 159,825 409,825 1,474 1,474 251,474
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,499 1,543 252,499 2,499 1,543 252,499
2 7,534 5,729 4,773 255,729 5,708 4,752 255,708
3 11,585 9,298 8,342 259,298 9,219 8,262 259,219
4 15,840 13,241 12,284 263,241 13,055 12,099 263,055
5 20,307 17,595 16,639 267,595 17,244 16,287 267,244
6 24,997 22,402 21,552 272,402 21,810 20,960 271,810
7 29,922 27,709 27,071 277,709 26,779 26,141 276,779
8 35,093 33,565 33,140 283,565 32,176 31,751 282,176
9 40,523 40,025 39,813 290,025 38,021 37,808 288,021
10 46,224 47,150 47,150 297,150 44,331 44,331 294,331
15 79,301 99,276 99,276 349,276 87,468 87,468 337,468
20 121,517 182,591 182,591 432,591 145,637 145,637 395,637
25 175,397 313,802 313,802 563,802 211,449 211,449 461,449
30 244,163 511,086 511,086 761,086 259,794 259,794 509,794
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,189 1,233 250,000 2,189 1,233 250,000
2 7,534 4,775 3,818 250,000 4,755 3,799 250,000
3 11,585 7,321 6,365 250,000 7,251 6,294 250,000
4 15,840 9,828 8,872 250,000 9,671 8,715 250,000
5 20,307 12,296 11,339 250,000 12,010 11,054 250,000
6 24,997 14,722 13,872 250,000 14,260 13,410 250,000
7 29,922 17,108 16,470 250,000 16,411 15,774 250,000
8 35,093 19,450 19,025 250,000 18,451 18,026 250,000
9 40,523 21,748 21,535 250,000 20,359 20,146 250,000
10 46,224 23,998 23,998 250,000 22,115 22,115 250,000
15 79,301 37,236 37,236 250,000 30,593 30,593 250,000
20 121,517 47,671 47,671 250,000 29,694 29,694 250,000
25 175,397 52,721 52,721 250,000 5,992 5,992 250,000
30 244,163 44,487 44,487 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,344 1,388 250,000 2,344 1,388 250,000
2 7,534 5,243 4,286 250,000 5,222 4,266 250,000
3 11,585 8,271 7,315 250,000 8,198 7,241 250,000
4 15,840 11,436 10,479 250,000 11,268 10,312 250,000
5 20,307 14,740 13,784 250,000 14,432 13,475 250,000
6 24,997 18,190 17,340 250,000 17,683 16,833 250,000
7 29,922 21,791 21,154 250,000 21,017 20,379 250,000
8 35,093 25,547 25,122 250,000 24,421 23,996 250,000
9 40,523 29,463 29,251 250,000 27,881 27,669 250,000
10 46,224 33,544 33,544 250,000 31,378 31,378 250,000
15 79,301 59,928 59,928 250,000 52,038 52,038 250,000
20 121,517 91,269 91,269 250,000 69,823 69,823 250,000
25 175,397 127,678 127,678 250,000 74,148 74,148 250,000
30 244,163 167,928 167,928 250,000 36,853 36,853 250,000
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$3,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,675 2,499 1,543 250,000 2,499 1,543 250,000
2 7,534 5,730 4,774 250,000 5,709 4,753 250,000
3 11,585 9,300 8,343 250,000 9,223 8,266 250,000
4 15,840 13,243 12,287 250,000 13,066 12,110 250,000
5 20,307 17,600 16,644 250,000 17,267 16,311 250,000
6 24,997 22,411 21,561 250,000 21,885 21,005 250,000
7 29,922 27,723 27,085 250,000 26,862 26,225 250,000
8 35,093 33,587 33,162 250,000 32,319 31,894 250,000
9 40,523 40,059 39,846 250,000 38,257 38,045 250,000
10 46,224 47,201 47,201 250,000 44,709 44,709 250,000
15 79,301 99,679 99,679 250,000 90,367 90,367 250,000
20 121,517 185,510 185,510 293,205 161,376 161,376 255,062
25 175,397 325,425 325,425 451,618 270,278 270,278 375,086
30 244,163 546,768 546,768 686,324 424,929 424,929 533,388
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,527 2,277 250,000 4,476 2,226 250,000
2 15,068 9,703 7,453 250,000 9,448 7,198 250,000
3 23,171 14,798 12,548 250,000 14,156 11,906 250,000
4 31,679 19,808 17,558 250,000 18,573 16,323 250,000
5 40,613 24,731 22,481 250,000 22,667 20,417 250,000
6 49,994 29,564 27,564 250,000 26,396 24,396 250,000
7 59,844 34,299 32,799 250,000 29,695 28,195 250,000
8 70,186 38,932 37,932 250,000 32,514 31,514 250,000
9 81,045 43,452 42,952 250,000 34,746 34,246 250,000
10 92,448 47,848 47,848 250,000 36,278 36,278 250,000
15 158,602 73,378 73,378 250,000 35,208 35,208 250,000
20 243,035 87,090 87,090 250,000 0 0 0
25 350,794 78,915 78,915 250,000 0 0 0
30 488,326 21,104 21,104 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,839 2,589 250,000 4,787 2,537 250,000
2 15,068 10,651 8,401 250,000 10,385 8,135 250,000
3 23,171 16,720 14,470 250,000 16,041 13,791 250,000
4 31,679 23,055 20,805 250,000 21,730 19,480 250,000
5 40,613 29,664 27,414 250,000 27,418 25,168 250,000
6 49,994 36,554 34,554 250,000 33,066 31,066 250,000
7 59,844 43,731 42,231 250,000 38,608 37,108 250,000
8 70,186 51,203 50,203 250,000 43,995 42,995 250,000
9 81,045 58,971 58,471 250,000 49,124 48,624 250,000
10 92,448 67,041 67,041 250,000 53,890 53,890 250,000
15 158,602 119,174 119,174 250,000 75,758 75,758 250,000
20 243,035 178,730 178,730 250,000 67,376 67,376 250,000
25 350,794 255,469 255,469 268,242 0 0 0
30 488,326 355,408 355,408 358,962 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,152 2,902 250,000 5,099 2,849 250,000
2 15,068 11,638 9,388 250,000 11,360 9,110 250,000
3 23,171 18,800 16,550 250,000 18,084 15,834 250,000
4 31,679 26,708 24,458 250,000 25,288 23,038 250,000
5 40,613 35,435 33,185 250,000 32,997 30,747 250,000
6 49,994 45,064 43,064 250,000 41,230 39,230 250,000
7 59,844 55,683 54,183 250,000 49,991 48,491 250,000
8 70,186 67,394 66,394 250,000 59,314 58,314 250,000
9 81,045 80,302 79,802 250,000 69,195 68,695 250,000
10 92,448 94,531 94,531 250,000 79,646 79,646 250,000
15 158,602 199,672 199,672 250,000 152,400 152,400 250,000
20 243,035 373,959 373,959 392,657 279,013 279,013 292,964
25 350,794 660,419 660,419 693,440 492,728 492,728 517,364
30 488,326 1,130,562 1,130,562 1,141,868 838,303 838,303 846,686
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,526 2,276 254,526 4,475 2,225 254,475
2 15,068 9,702 7,452 259,702 9,437 7,187 259,437
3 23,171 14,795 12,545 264,795 14,118 11,868 264,118
4 31,679 19,801 17,551 269,801 18,481 16,231 268,481
5 40,613 24,719 22,469 274,719 22,481 20,231 272,481
6 49,994 29,542 27,542 279,542 26,063 24,063 276,063
7 59,844 34,263 32,763 284,263 29,140 27,640 279,140
8 70,186 38,872 37,872 288,872 31,645 30,645 281,645
9 81,045 43,354 42,854 293,354 33,446 32,946 283,446
10 92,448 47,695 47,695 297,695 34,402 34,402 284,402
15 158,602 72,230 72,230 322,230 27,429 27,429 277,429
20 243,035 79,219 79,219 329,219 0 0 0
25 350,794 52,597 52,597 302,597 0 0 0
30 0 0 0 0 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,839 2,589 254,839 4,786 2,536 254,786
2 15,068 10,650 8,400 260,650 10,372 8,122 260,372
3 23,171 16,717 14,467 266,717 15,999 13,749 265,999
4 31,679 23,048 20,798 273,048 21,622 19,372 271,622
5 40,613 29,649 27,399 279,649 27,191 24,941 277,191
6 49,994 36,527 34,527 286,527 32,642 30,642 282,642
7 59,844 43,683 42,183 293,683 37,872 36,372 287,872
8 70,186 51,120 50,120 301,120 42,796 41,796 292,796
9 81,045 58,834 58,334 308,834 47,253 46,753 297,253
10 92,448 66,819 66,819 316,819 51,068 51,068 301,068
15 158,602 117,206 117,206 367,206 60,524 60,524 310,524
20 243,035 162,358 162,358 412,358 17,982 17,982 267,982
25 350,794 181,546 181,546 431,546 0 0 0
30 488,326 140,756 140,756 390,756 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,152 2,902 255,152 5,097 2,847 255,097
2 15,068 11,636 9,386 261,636 11,347 9,097 261,347
3 23,171 18,796 16,546 268,796 18,035 15,785 268,035
4 31,679 26,699 24,449 276,699 25,161 22,911 275,161
5 40,613 35,417 33,167 285,417 32,720 30,470 282,720
6 49,994 45,029 43,029 295,029 40,692 38,692 290,692
7 59,844 55,620 54,120 305,620 49,022 47,552 299,022
8 70,186 67,282 66,282 317,282 57,669 56,669 307,669
9 81,045 80,109 79,609 330,109 66,515 66,015 316,515
10 92,448 94,207 94,207 344,207 75,423 75,423 325,423
15 158,602 196,235 196,235 446,235 123,039 123,039 373,039
20 243,035 344,899 344,899 594,899 139,656 139,656 389,656
25 350,794 549,911 549,911 799,911 58,219 58,219 308,219
30 488,326 816,401 816,401 1,066,401 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,527 2,277 250,000 4,476 2,226 250,000
2 15,068 9,703 7,453 250,000 9,448 7,198 250,000
3 23,171 14,798 12,548 250,000 14,156 11,906 250,000
4 31,679 19,808 17,558 250,000 18,573 16,323 250,000
5 40,613 24,731 22,481 250,000 22,667 20,417 250,000
6 49,994 29,564 27,564 250,000 26,396 24,396 250,000
7 59,844 34,299 32,799 250,000 29,695 28,195 250,000
8 70,186 38,932 37,932 250,000 32,514 31,514 250,000
9 81,045 43,452 42,952 250,000 34,746 34,246 250,000
10 92,448 47,848 47,848 250,000 36,278 36,278 250,000
15 158,602 73,378 73,378 250,000 35,208 35,208 250,000
20 243,035 87,090 87,090 250,000 0 0 0
25 350,794 78,915 78,915 250,000 0 0 0
30 488,326 21,104 21,104 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 4,839 2,589 250,000 4,787 2,537 250,000
2 15,068 10,651 8,401 250,000 10,385 8,135 250,000
3 23,171 16,720 14,470 250,000 16,041 13,791 250,000
4 31,679 23,055 20,805 250,000 21,730 19,480 250,000
5 40,613 29,664 27,414 250,000 27,418 25,168 250,000
6 49,994 36,554 34,554 250,000 33,066 31,066 250,000
7 59,844 43,731 42,231 250,000 38,608 37,108 250,000
8 70,186 51,203 50,203 250,000 43,995 42,995 250,000
9 81,045 58,971 58,471 250,000 49,124 48,624 250,000
10 92,448 67,041 67,041 250,000 53,890 53,890 250,000
15 158,602 119,174 119,174 250,000 75,758 75,758 250,000
20 243,035 178,730 178,730 250,000 67,376 67,376 250,000
25 350,794 251,676 251,676 294,519 0 0 0
30 488,326 355,755 335,755 370,821 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$7,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Cash
Policy at 5% Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,152 2,902 250,000 5,099 2,849 250,000
2 15,068 11,638 9,388 250,000 11,360 9,110 250,000
3 23,171 18,800 16,550 250,000 18,084 15,834 250,000
4 31,679 26,708 24,458 250,000 25,288 23,038 250,000
5 40,613 35,435 33,185 250,000 32,997 30,747 250,000
6 49,994 45,064 43,064 250,000 41,230 39,230 250,000
7 59,844 55,683 54,183 250,000 49,991 48,491 250,000
8 70,186 67,394 66,394 250,000 59,314 58,314 250,000
9 81,045 80,302 79,802 250,000 69,195 68,695 250,000
10 92,448 94,531 94,531 250,000 79,646 79,646 250,000
15 158,602 199,594 199,594 278,626 152,400 152,400 250,000
20 243,035 367,046 367,046 461,626 267,419 267,419 336,328
25 350,794 628,939 628,939 736,003 429,554 429,554 502,677
30 488,326 1,031,753 1,031,753 1,139,509 657,495 657,495 726,163
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Cash Value and Cash Surrender Value for a Policy may be more
or less than those shown depending upon actual investment results. No
representation can be made that this hypothetical rate of return can be achieved
for any one year or sustained over any period of time.
[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
Service Office
P.O. Box 66757
St. Louis, MO 63166-6757
800-227-6505
CL-4275 (11/99) Policy Form Series CLP001 21-CVUL-MOJT 11/99
