<PAGE>
As filed with the Securities and Exchange Commission on July 31, 2000
Registration No. 333-32110
811-09847
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
PRIVILEGE SELECT
FORM N-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
---
Post-Effective Amendment No.
---
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1
PFL LIFE VARIABLE ANNUITY ACCOUNT E
(Exact Name of Registrant)
PFL LIFE INSURANCE COMPANY
(Name of Depositor)
4333 Edgewood Road N.E.
Cedar Rapids, IA 52499-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (319) 297-8468
Frank A. Camp, Esq.
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499-0001
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esq.
Sutherland, Asbill and Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
<PAGE>
Title of Securities Being Registered: Flexible Premium Variable Annuity Policies
------------------------------------
Approximate Date of Proposed Public Offering:
--------------------------------------------
As soon as practicable after the effective date of the Registration statement.
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PRIVILEGE SELECT
Issued Through
PFL LIFE VARIABLE ANNUITY ACCOUNT E
by
PFL LIFE INSURANCE COMPANY--
A TRANSAMERICA COMPANY
Prospectus
August 15, 2000
This flexible premium annuity policy has many investment choices. There is a
fixed account, which offers interest at rates that are guaranteed by PFL Life
Insurance Company (PFL), and thirty-four mutual fund portfolios offered by the
underlying funds listed below. You can choose any combination of these
investment choices. You bear the entire investment risk for all amounts you put
in the mutual fund portfolios.
This prospectus and the mutual fund prospectuses give you important information
about the policies and the mutual funds. Please read them carefully before you
invest and keep them for future reference.
If you would like more information about the Privilege Select variable annuity
policy, you can obtain a free copy of the Statement of Additional Information
(SAI) dated August 15, 2000. Please call us at (800) 525-6205 or write us at:
PFL Life Insurance Company, Financial Markets Division, Variable Annuity
Department, 4333 Edgewood Road N.E., Cedar Rapids, Iowa, 52499-0001. A
registration statement, including the SAI, has been filed with the Securities
and Exchange Commission (SEC) and is incorporated herein by reference.
Information about the separate account can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. You may obtain information about the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site (http://www.sec.gov) that contains the
prospectus, the SAI, material incorporated by reference, and other information.
The table of contents of the SAI is included at the end of this prospectus.
Please note that the policies and the mutual funds:
. are not bank deposits
. are not federally insured
. are not endorsed by any bank or government agency
. are not guaranteed to achieve their goal
. are subject to risks, including loss of premium
The Securities and Exchange Commission has not approved or disapproved these
securities, or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
VARIABLE INSURANCE PRODUCTS FUND (VIP)--SERVICE CLASS 2
Fidelity - VIP Money Market Portfolio
Fidelity - VIP High Income Portfolio
Fidelity - VIP Equity-Income Portfolio
Fidelity - VIP Growth Portfolio
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)--INITIAL CLASS
Fidelity - VIP II Index 500 Portfolio
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)--SERVICE CLASS 2
Fidelity - VIP II Contrafund(R) Portfolio
VARIABLE INSURANCE PRODUCTS FUND III (VIP III)--SERVICE CLASS 2
Fidelity - VIP III Mid Cap Portfolio
JANUS ASPEN SERIES--SERVICE SHARES
Janus Aspen - Aggressive Growth Portfolio
Janus Aspen - Capital Appreciation Portfolio
Janus Aspen - Growth Portfolio
Janus Aspen - International Growth Portfolio
Janus Aspen - Worldwide Growth Portfolio
MFS VARIABLE INSURANCE TRUST
MFS Bond Series
MFS Capital Opportunities Series
MFS Emerging Growth Series
MFS Growth Series
MFS New Discovery Series
MFS Research Series
MFS Utilities Series
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Global Securities Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Multiple Strategies Fund/VA
Oppenheimer Strategic Bond Fund/VA
STI CLASSIC VARIABLE TRUST
STI Capital Appreciation Fund
STI Growth & Income Fund
STI International Equity Fund
STI Investment Grade Bond Fund
STI Mid-Cap Equity Fund
STI Quality Growth Stock Fund
STI Small Cap Value Equity Fund
STI Value Income Stock Fund
WRL SERIES FUND, INC.
WRL Goldman Sachs Small Cap
WRL VKAM Emerging Growth
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
GLOSSARY OF TERMS.......................................................... 3
SUMMARY.................................................................... 4
ANNUITY POLICY FEE TABLE................................................... 8
EXAMPLES................................................................... 10
1. THE ANNUITY POLICY...................................................... 13
2. PURCHASE................................................................ 13
Policy Issue Requirements................................................ 13
Premium Payments......................................................... 13
Initial Premium Requirements............................................. 13
Additional Premium Payments.............................................. 13
Maximum Total Premium Payments........................................... 14
Allocation of Premium Payments........................................... 14
Policy Value............................................................. 14
3. INVESTMENT CHOICES...................................................... 14
The Separate Account..................................................... 14
The Fixed Account........................................................ 15
Transfers................................................................ 16
4. PERFORMANCE............................................................. 16
5. EXPENSES................................................................ 17
Surrender Charges........................................................ 17
Excess Interest Adjustment............................................... 18
Mortality and Expense Risk Fee........................................... 18
Administrative Charges................................................... 18
Premium Taxes............................................................ 18
Federal, State and Local Taxes........................................... 18
Transfer Fee............................................................. 18
Family Income Protector.................................................. 19
Portfolio Management Fees................................................ 19
6. ACCESS TO YOUR MONEY.................................................... 19
Surrenders............................................................... 19
Delay of Payment and Transfers........................................... 19
Excess Interest Adjustment............................................... 20
7. ANNUITY PAYMENTS (THE INCOME PHASE)..................................... 20
Annuity Payment Options.................................................. 20
8. DEATH BENEFIT........................................................... 22
When We Pay A Death Benefit.............................................. 22
When We Do Not Pay A Death Benefit....................................... 22
</TABLE>
<TABLE>
<S> <C>
Amount of Death Benefit................................................... 23
Guaranteed Minimum Death Benefit.......................................... 23
Adjusted Partial Withdrawal............................................... 23
9. TAXES.................................................................... 24
Annuity Policies in General............................................... 24
Qualified and Nonqualified Policies....................................... 24
Withdrawals - Qualified Policies.......................................... 24
Withdrawals - 403(b) Policies............................................. 25
Diversification and Distribution Requirements............................. 25
Withdrawals - Nonqualified Policies....................................... 25
Taxation of Death Benefit Proceeds........................................ 25
Annuity Payments.......................................................... 25
Transfers, Assignments or Exchanges of Policies........................... 26
Possible Tax Law Changes.................................................. 26
10. ADDITIONAL FEATURES..................................................... 26
Systematic Payout Option.................................................. 26
Family Income Protector................................................... 26
Nursing Care and Terminal Condition Withdrawal Option..................... 28
Unemployment Waiver....................................................... 29
Telephone Transactions.................................................... 29
Dollar Cost Averaging Program............................................. 29
Asset Rebalancing......................................................... 30
11. OTHER INFORMATION....................................................... 30
Ownership................................................................. 30
Assignment................................................................ 30
PFL Life Insurance Company................................................ 30
The Separate Account...................................................... 30
Mixed and Shared Funding.................................................. 31
Reinstatements............................................................ 31
Voting Rights............................................................. 31
Distributor of the Policies............................................... 31
Non-Participating Policy.................................................. 31
Variations in Policy Provisions........................................... 31
IMSA...................................................................... 32
Legal Proceedings......................................................... 32
Financial Statements...................................................... 32
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION................ 32
APPENDIX A
Historical Performance Data................................................. 33
</TABLE>
2
<PAGE>
GLOSSARY OF TERMS
Accumulation Unit--An accounting unit of measure used in calculating the policy
value in the separate account before the annuity commencement date.
Annuitant--The person during whose life any annuity payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which annuity payments are to
commence. The annuity commencement date may not be later than the last day of
the policy month starting after the annuitant attains age 85, except as
expressly allowed by PFL. In no event will this date be later than the last day
of the policy month following the month in which the annuitant attains age 95.
The annuity commencement date may be required to be earlier for qualified
policies.
Annuity Payment Option--A method of receiving a stream of annuity payments
selected by the owner.
Cash Value--The policy value increased or decreased by an excess interest
adjustment, less the service charge, and less any applicable premium taxes,
surrender charge and family income protector rider fee.
Cumulative Free Percentage--The percentage (as applied to the policy value)
which is available free of any surrender charge.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial or full surrenders from the fixed account guaranteed
period options, or to amounts applied to annuity payment options. The
adjustment reflects changes in the interest rates that PFL declared since the
date any payment was received by or an amount was transferred to the guaranteed
period option. The excess interest adjustment can either decrease or increase
the amount the owner receives upon full surrender or commencement of annuity
payments, depending upon whether there has been an increase or decrease in
interest rates, respectively.
Fixed Account--One or more investment choices under the policy that are part of
PFL's general assets and are not in the separate account.
Guaranteed Period Options--The various guaranteed interest rate periods of the
fixed account which may be offered by PFL and into which premium payments may
be paid or amounts transferred.
Owner--The person who may exercise all rights and privileges under the policy.
The owner during the lifetime of the annuitant and prior to the annuity
commencement date is the person designated as the owner or a successor owner in
the information that we require to issue a policy.
Policy Value--On or before the annuity commencement date, the policy value is
equal to the owner's:
. premium payments; minus
. partial withdrawals (including the net effect of any applicable excess
interest adjustments and/or surrender charges on such withdrawals); plus
. interest credited in the fixed account; plus or minus
. accumulated gains or losses in the separate account; minus
. service charges, premium taxes, rider fees, and transfer fees, if any.
Separate Account--PFL Life Variable Annuity Account E, a separate account
established and registered as a unit investment trust under the Investment
Company Act of 1940, (the "1940 Act"), as amended, to which premium payments
under the policies may be allocated.
Subaccount--A subdivision within the separate account, the assets of which are
invested in a specified portfolio of the underlying funds.
(Note: The SAI contains a more extensive Glossary.)
3
<PAGE>
SUMMARY
The sections in this summary correspond to sections in this prospectus, which
discuss the topics in more detail.
1. THE ANNUITY POLICY
The flexible premium variable annuity policy offered by PFL Life Insurance
Company (PFL, we, us or our) provides a way to invest on a tax-deferred basis
in the following investment choices: subaccounts of the separate account and a
fixed account of PFL. The policy is intended to accumulate money for retirement
or other long-term investment purposes.
This policy offers thirty-four subaccounts that are listed in Section 3. Each
subaccount invests exclusively in shares of one of the portfolios of the
underlying funds. The policy value may depend on the investment experience of
the selected subaccounts. Therefore, you bear the entire investment risk with
respect to all policy value in any subaccount. You could lose the amount that
you invest.
The fixed account offers an interest rate that PFL guarantees. We guarantee to
return your investment with interest credited for all amounts allocated to the
fixed account.
You can transfer money between any of the investment choices within certain
limits. We reserve the right to impose a $10 fee for each transfer in excess of
12 transfers per policy year.
The policy, like all deferred annuity policies, has two phases: the
"accumulation phase" and the "income phase." During the accumulation phase,
earnings accumulate on a tax-deferred basis and are taxed as ordinary income
when you take them out of the policy. The income phase occurs when you begin
receiving regular payments from your policy. The money you can accumulate
during the accumulation phase will largely determine the income payments you
receive during the income phase.
2. PURCHASE
You can buy this policy with $2,000 or more under most circumstances. You can
add as little as $50 at any time during the accumulation phase.
3. INVESTMENT CHOICES
You can allocate your premium payments to one or more of the following
investment choices described in the underlying fund prospectuses:
Fidelity--VIP Money Market Portfolio--Service Class 2
Fidelity--VIP High Income Portfolio--Service Class 2
Fidelity--VIP Equity-Income Portfolio--Service Class 2
Fidelity--VIP Growth Portfolio--Service Class 2
Fidelity--VIP II Index 500 Portfolio--Initial Class
Fidelity--VIP II Contrafund(R) Portfolio--Service Class 2
Fidelity--VIP III Mid Cap Portfolio--Service Class 2
Janus Aspen--Aggressive Growth Portfolio--Service Shares
Janus Aspen--Capital Appreciation Portfolio--Service Shares
Janus Aspen--Growth Portfolio--Service Shares
Janus Aspen--International Growth Portfolio--Service Shares
Janus Aspen--Worldwide Growth Portfolio--Service Shares
MFS Bond Series
MFS Capital Opportunities Series
MFS Emerging Growth Series
MFS Growth Series
MFS New Discovery Series
MFS Research Series
MFS Utilities Series
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Global Securities Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Multiple Strategies Fund/VA
Oppenheimer Strategic Bond Fund/VA
STI Capital Appreciation Fund
STI Growth & Income Fund
4
<PAGE>
STI International Equity Fund
STI Investment Grade Bond Fund
STI Mid-Cap Equity Fund
STI Quality Growth Stock Fund
STI Small Cap Value Equity Fund
STI Value Income Stock Fund
WRL Goldman Sachs Small Cap
WRL VKAM Emerging Growth
Depending upon their investment performance, you can make or lose money in any
of these subaccounts.
You can also allocate your premium payments to the fixed account.
4. PERFORMANCE
The value of the policy will vary up or down depending upon the investment
performance of the subaccounts you choose. We provide performance information
in Appendix A and in the SAI. This data is not intended to indicate future
performance.
5. EXPENSES
No deductions are made from premium payments at the time you buy the policy so
that the full amount of each premium payment is invested in one or more of your
investment choices.
We may deduct a surrender charge of up to 6.0% of premium payments withdrawn
within five years after the premium is paid. However, after the tenth policy
year, no surrender charges apply, regardless of when you made your last premium
payment. To calculate surrender charges, we consider the premium you paid to
come out before any earnings.
Full surrenders and partial withdrawals from a guaranteed period option of the
fixed account may also be subject to an excess interest adjustment, which may
increase or decrease the amount you receive. This adjustment may also apply to
amounts applied to an annuity payment option from a guaranteed period option of
the fixed account.
We deduct daily mortality and expense risk fees and administrative charges of
either 1.25% or 1.40% per year from the assets in each subaccount, depending on
the guaranteed minimum death benefit you choose.
During the accumulation phase, we deduct an annual service charge of no more
than $30 from the policy value on each policy anniversary and at the time of
surrender. The charge is waived if either the policy value or the sum of all
premium payments, minus all partial withdrawals, is at least $50,000.
We will deduct state premium taxes, which currently range from 0% to 3.50%,
upon total surrender, payment of a death benefit, or when annuity payments
begin.
If you elect the "family income protector" rider, there is an annual fee during
the accumulation phase of 0.30% of the minimum annuitization value. If you
receive annuity payments under the rider, then during the income phase there is
a guaranteed payment fee at an annual rate of 1.25% of the daily net asset
value in the separate account. The value of the net assets of the subaccounts
will reflect the management fee and other expenses incurred by the underlying
portfolios.
6.ACCESS TO YOUR MONEY
You can take money out anytime during the accumulation phase (except under
certain qualified policies). You may take out up to 10% of the policy value
free of surrender charges each policy year. The percentage that may be taken
free of surrender charges is referred to as the cumulative free percentage. Any
cumulative free percentage that is not taken in one year is carried forward and
is available to be taken in the following policy year free of surrender
charges. Amounts withdrawn in excess of the cumulative free percentage may be
subject to a surrender charge and excess interest adjustment. You may also have
to pay income tax and a tax penalty on any money you take out.
5
<PAGE>
7. ANNUITY PAYMENTS (THE INCOME PHASE)
The policy allows you to receive income under one of five annuity payment
options. You may choose from fixed payment options, variable payment options,
or a combination of both. If you select a variable payment option, the dollar
amount of your payments may go up or down.
8.DEATH BENEFIT
If you are both the owner and the annuitant and you die before the income phase
begins, then your beneficiary will receive a death benefit.
Naming different persons as owner and annuitant can affect whether the death
benefit is payable and to whom amounts will be paid. Use care when naming
owners, annuitants and beneficiaries, and consult your agent if you have
questions.
You may choose one of the following guaranteed minimum death benefits:
. 5% Growth through age 80
. Annual Step-Up through age 80
. Return of Premium
Charges are higher for the 5% Growth through age 80 and Annual Step-Up through
age 80 death benefits.
If the owner is not the annuitant, no death benefit is paid if the owner dies.
9.TAXES
Your earnings, if any, are not taxed until you take them out. If you take money
out during the accumulation phase, earnings come out first for federal tax
purposes, and are taxed as ordinary income. If you are younger than 59 1/2 when
you take money out, you may be charged a 10% federal penalty tax on the
earnings. Payments during the income phase may be considered partly a return of
your original investment so that part of each payment would not be taxable as
income.
10. ADDITIONAL FEATURES
This policy has additional features that might interest you. These include the
following:
. You can arrange to have money automatically sent to you monthly, quarterly,
semi-annually, or annually while your policy is in the accumulation phase.
This feature is referred to as the "systematic payout option." Amounts you
receive may be included in your gross income, and in certain circumstances,
may be subject to penalty taxes.
. You can elect an optional rider that guarantees you a minimum annuitization
value. This feature is called the "family income protector." There is an
extra charge for this rider and the rider may vary by state.
. Under certain medically related circumstances, we will allow you to
surrender or partially withdraw your policy value without a surrender charge
and excess interest adjustment. This feature is called the "nursing care and
terminal condition withdrawal option."
. Under certain unemployment circumstances, you may withdraw all or a portion
of the policy value free of surrender charges and excess interest
adjustments. This feature is called the "unemployment waiver."
. You may make transfers and/or change the allocation of additional premium
payments by telephone.
. You can arrange to have a certain amount of money automatically transferred
from the fixed account, either monthly or quarterly, to your choice of
subaccounts. This feature is called "dollar cost averaging."
. We will, upon your request, automatically transfer amounts among the
subaccounts on a regular basis to maintain a desired allocation of the
policy value among the various subaccounts. This feature is called "asset
rebalancing."
These features are not available in all states and may not be suitable for your
particular situation.
11. OTHER INFORMATION
Right to Cancel Period. You may return your policy for a refund. The amount of
time you have to return the policy will depend on the state where the policy
was issued. It is generally
6
<PAGE>
only 20 days. The amount of the refund will generally be the policy value. PFL
will pay the refund within 7 days after it receives written notice of
cancellation and the returned policy. The policy will then be deemed void. In
some states you may have more or less than 20 days to return a policy, or
receive a refund of more (or less) than the policy value.
No Probate. Usually, when the annuitant dies, the person you choose as your
beneficiary will receive the death benefit under this policy without going
through probate. State laws vary on how the amount that may be paid is treated
for estate tax purposes.
Who should purchase the policy? This policy is designed for people seeking
long-term tax-deferred accumulation of assets, generally for retirement or
other long-term purposes; and for persons who have maximized their use of other
retirement savings methods, such as 401(k) plans. The tax-deferred feature is
most attractive to people in high federal and state tax brackets. The tax
deferral features of variable annuities are unnecessary when purchased to fund
a qualified plan. You should not buy this policy if you are looking for a
short-term investment or if you cannot take the risk of losing the money that
you put in.
There are various fees and charges associated with variable annuities. You
should consider whether the features and benefits of this policy, such as the
opportunity for lifetime income payments, a guaranteed death benefit, the
guaranteed level of certain charges, and the family income protector, make this
policy appropriate for your needs.
Financial Statements. Financial statements for PFL are in the SAI.
12. INQUIRIES
If you need more information, please contact us at:
Administrative and Service Office
Financial Markets Division
Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road N.E.
P.O. Box 3183
Cedar Rapids, IA 52406-3183
You may check your policy at www.pfllife.com/fmd. Follow the logon procedures.
You will need your pre-assigned Personal Identification Number ("PIN") to
access information about your policy.
7
<PAGE>
ANNUITY POLICY FEE TABLE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Policy Owner Transaction
Expenses
----------------------------------------
<S> <C> <C>
Sales Load On Purchase
Payments.................... 0
Maximum Surrender Charge
(as a % of Premium Payments
Surrendered)(/1/)(/2/)...... 6%
Service Charge(/2/)......$30.Per Policy
Transfer Fee(/2/)......Currently.No.Fee.
</TABLE>
<TABLE>
<CAPTION>
Separate Account Annual Expenses
(as a percentage of average account
value)
<S> <C>
Mortality and Expense Risk
Fees(/3/).................... 1.25%
Administrative Charge......... 0.15%
----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES.............. 1.40%
</TABLE>
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Portfolio Annual Expenses(/4/)
(as a percentage of average net assets and after expense reimbursements)
--------------------------------------------------------------------------------
Total
Rule Portfolio
Management Other 12b-1 Annual
Fees Expenses Fees Expenses
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fidelity--VIP Money Market
Portfolio--Service Class 2(/5/)..... 0.18% 0.12% 0.25% 0.55%
Fidelity--VIP High Income Portfolio--
Service Class 2(/5/)................ 0.58% 0.12% 0.25% 0.95%
Fidelity--VIP Equity-Income
Portfolio--Service Class 2(/5/)..... 0.48% 0.10% 0.25% 0.83%
Fidelity--VIP Growth Portfolio--
Service Class 2(/5/)................ 0.58% 0.10% 0.25% 0.93%
Fidelity--VIP II Index 500
Portfolio--Initial Class(/6/)....... 0.24% 0.04% -- 0.28%
Fidelity--VIP II Contrafund(R)
Portfolio--Service Class 2(/5/)..... 0.58% 0.12% 0.25% 0.95%
Fidelity--VIP III Mid Cap Portfolio--
Service Class 2(/5/)................ 0.57% 0.43% 0.25% 1.25%
Janus Aspen--Aggressive Growth
Portfolio--
Service Shares(/7/)................. 0.65% 0.02% 0.25% 0.92%
Janus Aspen--Capital Appreciation
Portfolio--
Service Shares(/7/)................. 0.65% 0.04% 0.25% 0.94%
Janus Aspen--Growth Portfolio--
Service Shares(/7/)................. 0.65% 0.02% 0.25% 0.92%
Janus Aspen--International Growth
Portfolio--
Service Shares(/7/)................. 0.65% 0.11% 0.25% 1.01%
Janus Aspen--Worldwide Growth
Portfolio--
Service Shares(/7/)................. 0.65% 0.05% 0.25% 0.95%
MFS Bond Series(/8/)................. 0.60% 0.17% -- 0.77%
MFS Capital Opportunities
Series(/8/)......................... 0.75% 0.17% -- 0.92%
MFS Emerging Growth Series(/8/)...... 0.75% 0.09% -- 0.84%
MFS Growth Series(/8/)............... 0.75% 0.17% -- 0.92%
MFS New Discovery Series(/8/)........ 0.90% 0.19% -- 1.09%
MFS Research Series(/8/)............. 0.75% 0.11% -- 0.86%
MFS Utilities Series(/8/)............ 0.75% 0.16% -- 0.91%
Oppenheimer Capital Appreciation
Fund/VA............................. 0.68% 0.02% -- 0.70%
Oppenheimer Global Securities
Fund/VA............................. 0.67% 0.02% -- 0.69%
Oppenheimer Main Street Growth &
Income Fund/VA...................... 0.73% 0.05% -- 0.78%
Oppenheimer Multiple Strategies
Fund/VA............................. 0.72% 0.01% -- 0.73%
Oppenheimer Strategic Bond Fund/VA... 0.74% 0.04% -- 0.78%
STI Capital Appreciation Fund(/9/)... 0.94% 0.21% -- 1.15%
STI Growth & Income Fund............. 0.90% 0.30% -- 1.20%
STI International Equity Fund(/10/).. 0.86% 0.74% -- 1.60%
STI Investment Grade Bond Fund(/11/). 0.30% 0.45% -- 0.75%
STI Mid-Cap Equity Fund(/12/)........ 0.80% 0.35% -- 1.15%
STI Quality Growth Stock Fund........ 1.00% 0.30% -- 1.30%
STI Small Cap Value Equity
Fund(/13/).......................... 0.52% 0.68% -- 1.20%
STI Value Income Stock Fund(/14/).... 0.79% 0.16% -- 0.95%
WRL Goldman Sachs Small Cap(/15/).... 0.90% 0.10% -- 1.00%
WRL VKAM Emerging Growth............. 0.80% 0.07% -- 0.87%
</TABLE>
8
<PAGE>
(/1/)The surrender charge is decreased based on the number of years since the
premium payment was made, from 6% in the year in which the premium payment
was made to 0% in the sixth year after the premium payment was made.
However, after the tenth policy year, no surrender charges apply,
regardless of when you made your last premium payment. If applicable, a
surrender charge will only be applied to withdrawals that exceed the
amount available under certain listed exceptions.
(/2/)The surrender charge and transfer fee, if any are imposed, apply to each
policy, regardless of how policy value is allocated among the separate
account and the fixed account. The service charge is the lesser of $30 or
2% of the policy value. It applies to both the fixed account and the
separate account, and is assessed on a pro rata basis relative to each
account's policy value as a percentage of the policy's total policy value.
There is no fee for the first 12 transfers per year. For additional
transfers, PFL may charge a fee of $10 per transfer, but currently does
not charge for any transfers. Separate account annual expenses do not
apply to the fixed account.
(/3/)Mortality and expense risk fees shown (1.25%) are for the "5% Growth
through age 80 Death Benefit" and the "Annual Step-up through age 80 Death
Benefit." This reflects a fee that is 0.15% higher than the 1.10%
corresponding fee for the "Return of Premium Death Benefit."
(/4/)The fee table information relating to the underlying funds was provided to
PFL by the underlying funds, their investment advisers or managers, and
PFL has not independently verified such information. Actual future
expenses of the portfolios may be greater or less than those shown in the
Table.
(/5/)Service Class 2 expenses are based on estimated expenses for the first
year. VIP expenses are without any reimbursement.
(/6/)Fidelity Management & Research Company agreed to reimburse a portion of
Index 500 Portfolios expenses during the period. The expenses presented in
the table are shown with this reimbursement. Without this reimbursement,
the Portfolios management fee, other expenses and total expenses would
have been: 0.24%, 0.10%, and 0.34%, respectively.
(/7/)Expenses are based on the estimated expenses that the new Service Shares
Class of each portfolio expects to incur in its initial fiscal year.
(/8/)Each series has an expenses 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. Other expenses do
not take into account these expense reductions, and are therefore higher
than the actual expenses of the series. The ratios for Other Expenses and
Total Underlying Fund Annual Expenses (reduced by custodial offset
arrangements), respectively, would have been as follows: 0.16%, 0.75%--MFS
Bond Series; 0.16%, 0.90%--MFS Capital Opportunities Series; 0.08%,
0.83%--MFS Emerging Growth Series; 0.16%, 0.90%--MFS Growth Series; 0.17%,
1.05%--MFS New Discovery Series; 0.10%, 0.85%-- MFS Research Series; and
0.15%, 0.90%-- MFS Utilities Series.
(/9/)For STI Capital Appreciation Fund, the management fees before waivers were
1.15%. Therefore, Total Portfolio Annual Expenses for the period ended
December 31, 1999 were 1.36%.
(/10/)For STI International Equity Fund, the management fees before waivers
were 1.25%. Therefore, Total Portfolio Annual Expenses for the period
ended December 31, 1999 were 1.99%.
(/11/)For STI Investment Grade Bond Fund, the management fees before waivers
were 0.74%. Therefore, Total Portfolio Annual Expenses for the period
ended December 31, 1999 were 1.19%.
(/12/)For STI Mid-Cap Equity Fund, the management fees before waivers were
1.15%. Therefore, Total Portfolio Annual Expenses for the period ended
December 31, 1999 were 1.50%.
(/13/)For STI Small Cap Value Equity Fund, the management fees before waivers
were 1.15%. Therefore, Total Portfolio Annual Expenses for the period
ended December 31, 1999 were 1.83%.
(/14/)For STI Value Income Stock Fund, the management fees before waivers were
0.80%. Therefore, Total Portfolio Annual Expenses for the period ended
December 31, 1999 were 0.96%.
(/15/)Because WRL Goldman Sachs Small Cap commenced operations on May 3, 1999,
the percentages set forth as "Other Expenses" and "Total Portfolio Annual
Expenses" are annualized.
9
<PAGE>
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a
hypothetical 5% annual return on assets, assuming the entire policy value is in
the applicable subaccount, and assuming the family income protector rider has
not been selected:
The expenses reflect different mortality and expense risk fees depending on
which death benefit you select:
A = Return of Premium Death Benefit (1.10% charge)
B = 5% Growth through age 80 Death Benefit or the Annual Step-Up through age 80
Death Benefit (1.25% charge)
<TABLE>
<CAPTION>
If the policy is
annuitized at the
If the policy is end of the applicable
surrendered at the time period or if the
end of the applicable policy is not surrendered
time period. or annuitized.
----------------------------------------------
1 Year 3 Years 1 Year 3 Years
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fidelity--VIP Money
Market Portfolio A $ 73 $ 100 $ 19 $ 60
Service Class 2 ....... B $ 75 $ 105 $ 21 $ 64
----------------------------------------------------------------------------------
Fidelity--VIP High
Income Portfolio A $ 77 $ 112 $ 23 $ 72
Service Class 2........ B $ 79 $ 117 $ 25 $ 76
----------------------------------------------------------------------------------
Fidelity--VIP Equity-
Income Portfolio A $ 76 $ 109 $ 22 $ 68
Service Class 2........ B $ 77 $ 113 $ 24 $ 73
----------------------------------------------------------------------------------
Fidelity--VIP Growth
Portfolio A $ 77 $ 112 $ 23 $ 71
Service Class 2........ B $ 78 $ 116 $ 25 $ 76
----------------------------------------------------------------------------------
Fidelity--VIP II Index
500 Portfolio A $ 70 $ 92 $ 17 $ 51
Initial Class.......... B $ 72 $ 96 $ 18 $ 56
----------------------------------------------------------------------------------
Fidelity--VIP II
Contrafund(R) Portfolio A $ 77 $ 112 $ 23 $ 72
Service Class 2........ B $ 79 $ 117 $ 25 $ 76
----------------------------------------------------------------------------------
Fidelity--VIP III Mid
Cap Portfolio A $ 80 $ 112 $ 26 $ 81
Service Class 2........ B $ 82 $ 126 $ 28 $ 85
----------------------------------------------------------------------------------
Janus Aspen--Aggressive
Growth Portfolio A $ 77 $ 111 $ 23 $ 71
Service Shares......... B $ 78 $ 116 $ 25 $ 75
----------------------------------------------------------------------------------
Janus Aspen--Capital
Appreciation Portfolio A $ 77 $ 112 $ 23 $ 72
Service Shares......... B $ 79 $ 117 $ 25 $ 76
----------------------------------------------------------------------------------
Janus Aspen--Growth
Portfolio A $ 77 $ 111 $ 23 $ 71
Service Shares......... B $ 78 $ 116 $ 25 $ 75
----------------------------------------------------------------------------------
Janus Aspen--
International Growth
Portfolio A $ 78 $ 114 $ 24 $ 74
Service Shares......... B $ 79 $ 119 $ 25 $ 78
----------------------------------------------------------------------------------
Janus Aspen--Worldwide
Growth Portfolio A $ 77 $ 112 $ 23 $ 72
Service Shares......... B $ 79 $ 117 $ 25 $ 76
----------------------------------------------------------------------------------
MFS Bond Series......... A $ 75 $ 107 $ 22 $ 68
B $ 77 $ 111 $ 23 $ 71
----------------------------------------------------------------------------------
MFS Capital
Opportunities Series... A $ 77 $ 111 $ 23 $ 71
B $ 78 $ 116 $ 25 $ 75
----------------------------------------------------------------------------------
MFS Growth Series....... A $ 77 $ 111 $ 23 $ 71
B $ 78 $ 116 $ 25 $ 75
----------------------------------------------------------------------------------
MFS Emerging Growth
Series................. A $ 76 $ 109 $ 22 $ 69
B $ 78 $ 114 $ 24 $ 73
----------------------------------------------------------------------------------
MFS New Discovery
Series................. A $ 79 $ 117 $ 25 $ 76
B $ 80 $ 121 $ 26 $ 81
----------------------------------------------------------------------------------
MFS Research Series..... A $ 76 $ 110 $ 22 $ 69
B $ 78 $ 114 $ 24 $ 74
</TABLE>
10
<PAGE>
EXAMPLES continued.
<TABLE>
<CAPTION>
If the policy is
annuitized at the
If the policy is end of the applicable
surrendered at the time period or if the
end of the applicable policy is not surrendered
time period. or annuitized.
----------------------------------------------
1 Year 3 Years 1 Year 3 Years
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MFS Utilities Series.... A $ 77 $ 111 $ 23 $ 71
B $ 78 $ 116 $ 24 $ 75
----------------------------------------------------------------------------------
Oppenheimer Capital
Appreciation Fund/VA... A $ 75 $ 105 $ 21 $ 64
B $ 76 $ 109 $ 22 $ 69
----------------------------------------------------------------------------------
Oppenheimer Global
Securities Fund/VA..... A $ 75 $ 104 $ 21 $ 64
B $ 76 $ 109 $ 22 $ 69
----------------------------------------------------------------------------------
Oppenheimer Main Street
Growth & Income A $ 75 $ 107 $ 22 $ 67
Fund/VA................ B $ 77 $ 112 $ 23 $ 71
----------------------------------------------------------------------------------
Oppenheimer Multiple
Strategies Fund/VA..... A $ 75 $ 106 $ 21 $ 65
B $ 76 $ 110 $ 23 $ 70
----------------------------------------------------------------------------------
Oppenheimer Strategic
Bond Fund/VA........... A $ 75 $ 107 $ 22 $ 67
B $ 77 $ 112 $ 23 $ 71
----------------------------------------------------------------------------------
STI Capital Appreciation
Fund................... A $ 79 $ 119 $ 25 $ 78
B $ 81 $ 123 $ 27 $ 82
----------------------------------------------------------------------------------
STI Growth & Income
Fund................... A $ 80 $ 120 $ 26 $ 79
B $ 81 $ 125 $ 27 $ 84
----------------------------------------------------------------------------------
STI International Equity
Fund................... A $ 84 $ 132 $ 30 $ 91
B $ 85 $ 137 $ 31 $ 96
----------------------------------------------------------------------------------
STI Investment Grade
Bond Fund.............. A $ 75 $ 106 $ 21 $ 66
B $ 77 $ 111 $ 23 $ 70
----------------------------------------------------------------------------------
STI Mid-Cap Equity Fund. A $ 79 $ 119 $ 25 $ 78
B $ 81 $ 123 $ 27 $ 82
----------------------------------------------------------------------------------
STI Quality Growth Stock
Fund................... A $ 81 $ 123 $ 27 $ 82
B $ 82 $ 128 $ 28 $ 87
----------------------------------------------------------------------------------
STI Small Cap Value
Equity Fund............ A $ 80 $ 120 $ 26 $ 79
B $ 81 $ 125 $ 27 $ 84
----------------------------------------------------------------------------------
STI Value Income Stock
Fund................... A $ 77 $ 112 $ 23 $ 72
B $ 79 $ 117 $ 25 $ 76
----------------------------------------------------------------------------------
WRL Goldman Sachs Small
Cap.................... A $ 78 $ 114 $ 24 $ 73
B $ 79 $ 119 $ 25 $ 78
----------------------------------------------------------------------------------
WRL VKAM Emerging
Growth................. A $ 76 $ 110 $ 23 $ 69
B $ 78 $ 115 $ 24 $ 74
</TABLE>
11
<PAGE>
The above table will assist you in understanding the costs and expenses that
you will bear, directly or indirectly. These include the 1999 expenses of the
underlying fund portfolios. In addition to the expenses listed above, premium
taxes may be applicable.
The examples should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown. The
assumed 5% annual return is hypothetical and should not be considered a
representation of past or future annual returns, which may be greater or less
than the assumed rate.
In these examples, the $30 service charge is reflected as a charge of 0.1000%
based on an anticipated average policy value of $30,000.00.
These examples do not reflect the annual fee of 0.30% of the minimum
annuitization value for the family income protector rider. The above expense
figures would be approximately $3 per year higher if you elected that rider.
Financial Information. The subaccounts had not commenced operations as of
December 31, 1999, therefore there is no condensed financial information to
report as of the date of this prospectus.
12
<PAGE>
1.THE ANNUITY POLICY
This prospectus describes the Privilege Select variable annuity policy offered
by PFL Life Insurance Company.
An annuity is a policy between you, the owner, and an insurance company (in
this case PFL), where the insurance company promises to pay you an income in
the form of annuity payments. These payments begin on a designated date,
referred to as the annuity commencement date. Until the annuity commencement
date, your annuity is in the accumulation phase and the earnings (if any) are
tax deferred. Tax deferral means you generally are not taxed on your annuity
until you take money out of your annuity. After the annuity commencement date,
your annuity switches to the income phase.
The policy is a flexible premium variable annuity. You can use the policy to
accumulate funds for retirement or other long-term financial planning purposes.
This policy is a "flexible premium" policy because after you purchase it, you
can generally make additional investments of any amount of $50 or more, until
the annuity commencement date. But you are not required to make any additional
investments.
The policy is a "variable" annuity because the value of your investments can go
up or down based on the performance of your investment choices. If you invest
in the variable annuity portion of the policy, the amount of money you are able
to accumulate in your policy during the accumulation phase depends upon the
performance of your investment choices. The amount of annuity payments you
receive during the income phase from the variable annuity portion of your
policy also depends upon the investment performance of your investment choices
for the income phase. However, if you annuitize under the family income
protector rider, then PFL will guarantee a minimum amount of your annuity
payments.
The policy also contains a fixed account. The fixed account offers interest at
rates that we guarantee will not decrease during the selected guaranteed
period. There may be different interest rates for each different guaranteed
period that you select.
2.PURCHASE
Policy Issue Requirements
PFL will not issue a policy unless:
. PFL receives all information needed to issue the policy;
. PFL receives a minimum initial premium payment; and
. The annuitant and any joint owner are age 84 or younger.
We reserve the right to reject any application or premium payment.
Premium Payments
You should make checks for premium payments payable only to PFL Life Insurance
Company and send them to the administrative and service office. Your check must
be honored in order for PFL to pay any associated payments and benefits due
under the policy.
Initial Premium Requirements
The initial premium payment for most policies must be at least $2,000. There is
no minimum initial premium payment for policies issued under section 403(b) of
the Internal Revenue Code; however, your premium must be received within 90
days of the policy date or your policy will be canceled. We will credit your
initial premium payment to your policy within two business days after the day
we receive it and your complete policy information. If we are unable to credit
your initial premium payment, we will contact you within five business days and
explain why. We will also return your initial premium payment at that time
unless you let us keep it and credit it as soon as possible.
The date on which we credit your initial premium payment to your policy is the
policy date. The policy date is used to determine policy years, policy months
and policy anniversaries.
Additional Premium Payments
You are not required to make any additional premium payments. However, you can
make additional premium payments as often as you
13
<PAGE>
like during the lifetime of the annuitant and during the accumulation phase.
Additional premium payments must be at least $50. We will credit additional
premium payments to your policy as of the business day we receive your premium
and required information. Additional premium payments must be received before
the New York Stock Exchange closes to get same-day pricing of the premium
payment.
Maximum Total Premium Payments
We allow premium payments up to a total of $1,000,000 without prior approval.
Allocation of Premium Payments
When you purchase a policy, we will allocate your premium payment to the
investment choices you select. Your allocation must be in whole percentages and
must total 100%. We will allocate additional premium payments the same way,
unless you request a different allocation.
If you allocate your premium payment to the dollar cost averaging fixed
account, you must give us directions regarding the subaccount(s) to which
transfers are to be made or we cannot accept your premium payment.
You may change allocations for future additional premium payments by sending us
written instructions or by telephone, subject to the limitations described
below under "Telephone Transactions." The allocation change will apply to
premium payments received after the date we receive the change request.
Policy Value
You should expect your policy value to change from valuation period to
valuation period. A valuation period begins at the close of trading on the New
York Stock Exchange on each business day and ends at the close of trading on
the next succeeding business day. A business day is each day that the New York
Stock Exchange is open. The New York Stock Exchange generally closes at 4:00
p.m. eastern time. Holidays are generally not business days.
3.INVESTMENT CHOICES
The Separate Account
The Privilege Select variable annuity separate account currently consists of
thirty-four subaccounts.
The Underlying Funds Portfolios. The subaccounts invest in shares of the
various underlying fund portfolios. The companies that provide investment
advice and administrative services for the underlying fund portfolios offered
through this policy are listed below. The following investment choices are
currently offered through this policy:
VARIABLE INSURANCE PRODUCTS FUND (VIP)--SERVICE CLASS 2
Managed by Fidelity Management & Research Company
Fidelity--VIP Money Market Portfolio
Fidelity--VIP High Income Portfolio
Fidelity--VIP Equity-Income Portfolio
Fidelity--VIP Growth Portfolio
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)--INITIAL CLASS
Managed by Fidelity Management & Research Company
Fidelity--VIP II Index 500 Portfolio
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)--SERVICE CLASS 2
Managed by Fidelity Management & Research Company
Fidelity--VIP II Contrafund(R) Portfolio
VARIABLE INSURANCE PRODUCTS FUND III (VIP III)--SERVICE CLASS 2
Managed by Fidelity Management & Research Company
Fidelity--VIP III Mid Cap Portfolio
JANUS ASPEN SERIES--SERVICE SHARES
Managed by Janus Capital Corporation
Janus Aspen--Aggressive Growth Portfolio
Janus Aspen--Capital Appreciation Portfolio
Janus Aspen--Growth Portfolio
Janus Aspen--International Growth Portfolio
Janus Aspen--Worldwide Growth Portfolio
14
<PAGE>
MFS VARIABLE INSURANCE TRUST
Managed by Massachusetts Financial Services Company
MFS Bond Series
MFS Capital Opportunities Series
MFS Emerging Growth Series
MFS Growth Series
MFS New Discovery Series
MFS Research Series
MFS Utilities Series
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Managed by OppenheimerFunds, Inc.
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Global Securities Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Multiple Strategies Fund/VA
Oppenheimer Strategic Bond Fund/VA
STI CLASSIC VARIABLE TRUST
Managed by STI Capital Management, N.A.
STI Capital Appreciation Fund
STI Growth & Income Fund
STI International Equity Fund
STI Investment Grade Bond Fund
STI Mid-Cap Equity Fund
STI Quality Growth Stock Fund
STI Small Cap Value Equity Fund
STI Value Income Stock Fund
WRL SERIES FUND, INC.
Subadvised By Goldman Sachs Asset Management
WRL Goldman Sachs Small Cap
Subadvised By Van Kampen Asset Management Inc.
WRL VKAM Emerging Growth
The general public may not purchase these underlying fund portfolios. The
investment objectives and policies may be similar to other portfolios and
mutual funds managed by the same investment adviser or manager that are sold
directly to the public. You should not expect the investment results of the
underlying fund portfolios to be the same as those of other portfolios or
mutual funds.
More detailed information, including an explanation of the portfolios'
investment objectives, may be found in the current prospectuses for the
underlying funds portfolios, which are attached to this prospectus. You should
read the prospectuses for the underlying fund portfolios carefully before you
invest.
We may receive expense reimbursements or other revenues from the underlying
funds or their managers. The amount of these reimbursements or revenues, if
any, may be based on the amount of assets that PFL or the separate account
invests in the underlying fund portfolios.
We do not guarantee that any of the subaccounts will always be available for
premium payments, allocations, or transfers. See the SAI for more information
concerning the possible addition, deletion or substitution of investments.
The Fixed Account
Premium payments allocated and amounts transferred to the fixed account become
part of PFL's general account. Interests in the general account have not been
registered under the Securities Act of 1933 (the "1933 Act"), nor is the
general account registered as an investment company under the 1940 Act.
Accordingly, neither the general account nor any interests therein are
generally subject to the provisions of the 1933 or 1940 Acts. PFL has been
advised that the staff of the SEC has not reviewed the disclosures in this
prospectus which relate to the fixed account.
We guarantee that the interest credited to the fixed account will not be less
than 3% per year. At the end of a guaranteed period option you selected, the
value in that guaranteed period option will automatically be transferred into a
new guaranteed period option of the same length (or the next shorter period if
the same period is no longer offered) at the current interest rate for that
period. You can transfer to another investment choice by giving us notice
within 30 days before the end of the expiring guaranteed period.
15
<PAGE>
Surrenders or partial withdrawals from a guaranteed period option of the fixed
account are subject to an excess interest adjustment. This adjustment may
increase or decrease the amount of interest credited to your policy. The excess
interest adjustment will not decrease the interest credited to your policy
below 3% per year, however. You bear the risk that we will not credit interest
greater than 3% per year. We determine credited rates, which are guaranteed for
at least one year, in our sole discretion.
If you select the fixed account, your money will be placed with the other
general assets of PFL. The amount of money you are able to accumulate in the
fixed account during the accumulation phase depends upon the total interest
credited. The amount of annuity payments you receive during the income phase
from the fixed portion of your policy will remain level for the entire income
phase.
Transfers
During the accumulation phase, you may make transfers to or from any subaccount
or the fixed account as often as you wish within certain limitations.
Transfers from a guaranteed period option of the fixed account are limited to
the following:
. If at the end of a guaranteed period, you must notify us within 30 days
prior to the end of the guaranteed period that you wish to transfer the
amount in the guaranteed period option to another investment choice. No
excess interest adjustment will apply.
. Transfers of amounts equal to interest credited on a monthly, quarterly,
semi-annual or annual basis. This may affect your overall interest-crediting
rate, because transfers are deemed to come from the oldest premium payment
first.
Otherwise, you cannot transfer out of the fixed account.
There are no transfers permitted out of the dollar cost averaging fixed account
option except through the dollar cost averaging program.
Each transfer must be at least $500, or the entire subaccount value. Transfers
of guaranteed period option amounts equal to interest credited must be at least
$50. If less than $500 remains, then we reserve the right to include that
amount in the transfer. Transfers must be received while the New York Stock
Exchange is open to get same-day pricing of the transaction.
During the income phase of your policy, you may transfer values out of any
subaccount up to four times per policy year. However, you cannot transfer
values out of the fixed account in this phase. The minimum amount that can be
transferred during this phase is the lesser of $10 of monthly income, or the
entire monthly income of the annuity units in the subaccount from which the
transfer is being made.
Transfers may be made by telephone, subject to the limitations described below
under "Telephone Transactions."
Currently, there is no charge for transfers or limit on the number of transfers
during the accumulation phase. However, in the future, the number of transfers
permitted may be limited and a $10 charge per transfer may apply. We reserve
the right to prohibit transfers to the fixed account if we are crediting an
effective annual interest rate of 3.0% (the guaranteed minimum).
The policy you are purchasing was not designed for professional market timing
organizations or other persons that use programmed, large, or frequent
transfers. The use of such transfers may be disruptive to an underlying fund
portfolio. We reserve the right to reject any premium payment or transfer
request from any person, if, in our judgment, an underlying fund portfolio
would be unable to invest effectively in accordance with its investment
objectives and policies or would otherwise be potentially adversely affected or
if an underlying portfolio would reject our purchase order.
4.PERFORMANCE
PFL periodically advertises performance of the various investment portfolios.
We may disclose
16
<PAGE>
at least four different kinds of performance. First, we may calculate
performance by determining the percentage change in the value of an
accumulation unit by dividing the increase (decrease) for that unit by the
value of the accumulation unit at the beginning of the period. This performance
number reflects the deduction of the mortality and expense risk fees and
administrative charges. It does not reflect the deduction of any applicable
premium taxes or surrender charges. The deduction of any applicable premium
taxes or surrender charges would reduce the percentage increase or make greater
any percentage decrease.
Second, any advertisement will also include total return figures, which reflect
the deduction of the mortality and expense risk fees, administrative charges
and surrender charges.
Third, for periods starting prior to the date the policies were first offered,
the performance will be based on the historical performance of the
corresponding investment portfolios for the periods commencing from the date on
which the particular investment portfolio was made available through the
separate account.
Fourth, in addition, for certain investment portfolios, performance may be
shown for the period commencing from the inception date of the investment
portfolio. These figures should not be interpreted to reflect actual historical
performance of the separate account.
We also may, from time to time, include in our advertising and sales materials,
tax deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
Appendix A contains performance information that you may find useful. It is
divided into various parts, depending upon the type of performance information
shown. Future performance will vary and future results will not be the same as
the results shown.
5.EXPENSES
There are charges and expenses associated with your policy that reduce the
return on your investment in the policy.
Surrender Charges
During the accumulation phase, you can withdraw part or all of the cash value.
Cash value is the policy value increased or decreased by any excess interest
adjustment, less the annual service charge, and less any applicable surrender
charge, premium taxes and family income protector rider fees. We may deduct a
surrender charge to compensate us for expenses relating to policy sales,
including commissions to registered representatives and other promotional
expenses.
You can withdraw up to 10% of your policy value each year free of surrender
charges. This free amount is cumulative and is referred to as the cumulative
free percentage and is determined at the time of the withdrawal. If you
withdraw money in excess of the cumulative free percentage, you might have to
pay a surrender charge, which is a contingent deferred sales charge, on the
excess amount. The following schedule shows the surrender charges that apply
during the five years following each premium payment:
<TABLE>
<CAPTION>
Surrender Charge
umberNof Years Since (as a percentage of
remiumPPayment Date premium withdrawn)
------------------------------------------
<S> <C>
0-1 6%
------------------------------------------
1-2 6%
------------------------------------------
2-3 6%
------------------------------------------
3-4 4%
------------------------------------------
4-5 2%
------------------------------------------
5 or
more 0%
</TABLE>
For example, assume your policy value is $100,000 at the beginning of policy
year 2 and you withdraw $30,000. Since that amount is more than your cumulative
free percentage of 20% that is available at that time, you would pay a
surrender charge of $600 on the remaining $10,000 (6% of $30,000-$20,000).
You receive the full amount of a requested partial withdrawal because we deduct
any surrender charge and any applicable excess interest adjustment from your
remaining policy value. You receive your cash value upon full surrender.
17
<PAGE>
For surrender charge purposes, the oldest premium is considered to be withdrawn
first. After the tenth policy year, no surrender charges apply, regardless of
when you made your last premium payment.
Keep in mind that withdrawals may be taxable, and if made before age 59 1/2,
may be subject to a 10% federal penalty tax. For tax purposes, withdrawals are
considered to come from earnings first.
Surrender charges are waived if you withdraw money under the nursing care and
terminal condition withdrawal option or the unemployment waiver.
Excess Interest Adjustment
Withdrawals of cash value from the fixed account may be subject to an excess
interest adjustment. This adjustment could retroactively reduce the interest
credited in the fixed account to the guaranteed minimum of 3% per year. See the
"Excess Interest Adjustment" Section of this prospectus.
Mortality and Expense Risk Fee
We charge a fee as compensation for bearing certain mortality and expense risks
under the policy. Examples include a guarantee of annuity rates, the death
benefits, certain expenses of the policy, and assuming the risk that the
current charges will be insufficient in the future to cover costs of
administering the policy. For the Return of Premium Death Benefit the mortality
and expense risk fee is at an annual rate of 1.10% of assets. During the
accumulation phase, for the 5% Growth through age 80 Death Benefit and the
Annual Step-Up through age 80 Death Benefit, the mortality and expense risk fee
is at an annual rate of 1.25% of assets. During the income phase, the mortality
and expense risk fee for these benefits is at an annual rate of 1.10% of
assets. This annual fee is assessed daily based on the et asset value of each
subaccount.
If this charge does not cover our actual costs, we absorb the loss. Conversely,
if the charge more than covers actual costs, the excess is added to our
surplus. We expect to profit from this charge. We may use our profit or surplus
for any proper purpose, including distribution expenses.
Administrative Charges
We deduct an annual administrative charge to cover the costs of administering
the policies. This charge is equal to an annual rate of 0.15% of the daily net
asset value of the separate account.
In addition, an annual service charge of $30 (but not more than 2% of the
policy value) is charged on each policy anniversary and at surrender. The
service charge is waived if your policy value or the sum of your premiums, less
all partial withdrawals, is at least $50,000.
Premium Taxes
Some states assess premium taxes on the premium payments you make. We currently
do not deduct for these taxes at the time you make a premium payment. However,
we will deduct the total amount of premium taxes, if any, from the policy value
when:
. you elect to begin receiving annuity payments;
. you surrender the policy; or
. you die and a death benefit is paid (you must also be the annuitant for the
death benefit to be paid).
Generally, premium taxes range from 0% to 3.50%, depending on the state.
Federal, State and Local Taxes
We may in the future deduct charges from the policy for any taxes we incur
because of the policy. However, no deductions are being made at the present
time.
Transfer Fee
Currently there is no charge for transfers. However, if you make more than 12
transfers per year before the annuity commencement date, we reserve the right
to charge $10 for each additional transfer. Premium payments, asset rebalancing
and dollar cost averaging transfers are not considered transfers. All transfer
requests made at the same time are treated as a single request.
18
<PAGE>
Family Income Protector
If you elect the family income protector, there is an annual rider fee during
the accumulation phase of 0.30% of the minimum annuitization value, and a
guaranteed payment fee during the income phase of 1.25% of the daily net asset
value if you annuitize under the rider. The annual rider fee is also deducted
if you surrender the policy. We may raise these fees in the future.
Portfolio Management Fees
The value of the assets in each subaccount will reflect the fees and expenses
paid by the underlying fund. A list of these expenses is found in the "Fee
Table" section of this prospectus. See the prospectuses for the underlying
funds for more information.
6.ACCESS TO YOUR MONEY
During the accumulation phase, you can have access to the money in your policy
in several ways:
. by making a withdrawal (either a complete or partial withdrawal);
. by taking systematic payouts; or
. by taking annuity payments.
Surrenders
If you want to make a complete withdrawal, you will receive:
. the value of your policy; plus or minus
. any excess interest adjustment; minus
. any applicable surrender charges, premium taxes, service charges, and family
income protector rider fees.
If you want to take a partial withdrawal, in most cases it must be for at least
$500. Unless you tell us otherwise, we will take the withdrawal from each of
the investment choices in proportion to the policy value.
You may take out up to 10% of the policy value free of surrender charges each
year. The free amount is cumulative so any free amount not taken one year is
available to be taken the following year free of surrender charges.
Remember that any withdrawal you take will reduce the policy value, and might
reduce the amount of the death benefit. See Section 8, Death Benefit, for more
details.
Withdrawals from the fixed account may also be subject to an excess interest
adjustment. Income taxes, federal tax penalties and certain restrictions may
apply to any withdrawals you make.
Withdrawals from qualified policies may be restricted or prohibited.
During the income phase, you will receive annuity payments under the annuity
payment option you select; however, you generally may not take any other
withdrawals, either complete or partial.
Delay of Payment and Transfers
Payment of any amount due from the separate account for a surrender, a death
benefit, or the death of the owner of a nonqualified policy, will generally
occur within seven business days from the date PFL receives all required
information. PFL may be permitted to defer such payment from the separate
account if:
. the New York Stock Exchange is closed other than for usual weekends or
holidays or trading on the Exchange is otherwise restricted; or
. an emergency exists as defined by the SEC or the SEC requires that trading
be restricted; or
. the SEC permits a delay for the protection of owners.
In addition, transfers of amounts from the subaccounts may be deferred under
these circumstances.
Pursuant to the requirements of certain state laws, we reserve the right to
defer payment of the cash value from the fixed account for up to six months. We
may also defer payment of any amount until your premium check has cleared your
bank.
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Excess Interest Adjustment
Money that you withdraw from a guaranteed period option of the fixed account
before the end of its guaranteed period (the number of years you specified the
money would remain in a guaranteed period option of the fixed account) may be
subject to an excess interest adjustment. At the time you request a withdrawal,
if interest rates set by PFL have risen since the date of the initial
guarantee, the excess interest adjustment will result in a lower cash value on
surrender. However, if interest rates have fallen since the date of the initial
guarantee, the excess interest adjustment will result in a higher cash value on
surrender.
Any amount withdrawn in excess of the cumulative free percentage available is
generally subject to an excess interest adjustment.
There will be no excess interest adjustment on any of the following:
. lump sum withdrawals of the cumulative free percentage available;
. nursing care and terminal condition withdrawals;
. unemployment withdrawals;
. periodic withdrawals of cumulative interest credited;
. withdrawals to satisfy any minimum distribution requirements; and
. systematic payout option payments, which do not exceed the cumulative
interest credited.
Please note that in these circumstances you will not receive a higher cash
value if interest rates have fallen nor will you receive a lower cash value if
interest rates have risen.
7.ANNUITY PAYMENTS
(THE INCOME PHASE)
You choose the annuity commencement date. You can change this date by giving us
30 days written notice before the current annuity commencement date. The new
annuity commencement date must be at least 30 days after we receive notice of
the change. The latest annuity commencement date generally cannot be after the
policy month following the month in which the annuitant attains age 85. We may
allow a later annuity commencement date, but in no event will that date be
later than the last day of the policy month following the month in which the
annuitant attains age 95.
Election of Annuity Payment Option. Before the annuity commencement date, if
the annuitant is alive, you may choose an annuity payment option or change your
election. If the annuitant dies before the annuity commencement date, the
beneficiary may elect to receive the death benefit in a lump sum or under one
of the annuity payment options. Unless you specify otherwise, the annuitant
will receive the annuity payments. After the annuitant's death, the beneficiary
will receive any remaining guaranteed payments.
Annuity Payment Options
The policy provides five annuity payment options that are described below. You
may chose any combination of annuity payment options. We will use your
"adjusted policy value" to provide these annuity payments. The adjusted policy
value is the policy value increased or decreased by any applicable excess
interest adjustment. If the adjusted policy value on the annuity commencement
date is less than $2,000, PFL reserves the right to pay it in one lump sum in
lieu of applying it under an annuity payment option. You can receive payments
monthly, quarterly, semi-annually, or annually. (We reserve the right to change
the frequency if payments would be less than $50.)
Unless you choose to receive variable payments under annuity payment options 3
or 5, the amount of each payment will be set on the annuity commencement date
and will not change. You may, however, choose to receive variable payments
under payment options 3 and 5. The dollar amount of the first variable payment
will be determined in accordance with the annuity payment rates set forth in
the applicable table contained in the policy. The dollar amount of additional
variable payments will vary based on the investment performance of the
subaccount(s) that you select.
The dollar amount of each variable payment after the first may increase,
decrease or remain
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constant. If the actual investment performance exactly matched the assumed
investment return of 5% at all times, the amount of each variable annuity
payment would remain equal. If actual investment performance exceeds the
assumed investment return, the amount of the variable annuity payments would
increase. Conversely, if actual investment performance is lower than the
assumed investment return, the amount of the variable annuity payments would
decrease.
A charge for premium taxes and an excess interest adjustment may be made when
annuity payments begin.
The annuity payment options are explained below. Options 1, 2, and 4 are fixed
only. Options 3 and 5 can be fixed or variable.
Payment Option 1--Interest Payments. We will pay the interest on the amount we
use to provide annuity payments in equal payments, or this amount may be left
to accumulate for a period of time you and PFL agree to. You and PFL will agree
on withdrawal rights when you elect this option.
Payment Option 2--Income for a Specified Period. We will make level payments
only for the fixed period you choose. No funds will remain at the end.
Payment Option 3--Life Income. You may choose between:
Fixed Payments
. No Period Certain--We will make level payments only during the annuitant's
lifetime.
. 10 Years Certain--We will make level payments for the longer of the
annuitant's lifetime or ten years.
. Guaranteed Return of Policy Proceeds--We will make level payments for the
longer of the annuitant's lifetime or until the total dollar amount of
payments we made to you equals the amount applied to this option.
Variable Payments
. No Period Certain--Payments will be made only during the lifetime of the
annuitant.
. 10 Years Certain--Payments will be made for the longer of the annuitant's
lifetime or ten years.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the amount applied to this option, with interest, is
exhausted. This will be a series of level payments followed by a smaller final
payment.
Payment Option 5--Joint and Survivor Annuity. You may choose between:
Fixed Payments
. Payments are made during the joint lifetime of the annuitant and a joint
annuitant of your selection. Payments will be made as long as either
person is living.
Variable Payments
. Payments are made during the joint lifetime of the annuitant and a joint
annuitant of your selection. Payments will be made as long as either
person is living.
Other annuity payment options may be arranged by agreement with PFL. Certain
annuity payment options may not be available in all states.
NOTE CAREFULLY:
IF:
. you choose Life Income with No Period Certain or a Joint and Survivor
Annuity; and
. the annuitant(s) dies before the due date of the second (third, fourth,
etc.) annuity payment;
THEN:
. we may make only one (two, three, etc.) annuity payments.
IF:
. you choose Income for a Specified Period, Life Income with 10 Years Certain,
Life Income with Guaranteed Return of Policy Proceeds, or Income of a
Specified Amount; and
. the person receiving payments dies prior to the end of the guaranteed
period;
THEN:
. the remaining guaranteed payments will be continued to that person's
beneficiary, or their present value may be paid in a single sum.
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We will not pay interest on amounts represented by uncashed annuity payment
checks if the postal or other delivery service is unable to deliver checks to
the payee's address of record. The person receiving payments is responsible to
keep PFL informed of their current address.
8.DEATH BENEFIT
We will pay a death benefit to your beneficiary, under certain circumstances,
if the annuitant dies during the accumulation phase and the annuitant was also
an owner. (If the annuitant was not an owner, a death benefit may or may not be
paid. See below.) The beneficiary may choose an annuity payment option, or may
choose to receive a lump sum.
When We Pay A Death Benefit
Before the Annuity Commencement Date
We will pay a death benefit to your beneficiary IF:
. you are both the annuitant and the owner of the policy; and
. you die before the annuity commencement date.
If the only beneficiary is your surviving spouse, then he or she may elect to
continue the policy as the new annuitant and owner, instead of receiving the
death benefit. All future surrender charges will be waived.
We will also pay a death benefit to your beneficiary IF:
. you are not the annuitant; and
. the annuitant dies before the annuity commencement date; and
. you specifically requested that the death benefit be paid upon the
annuitant's death.
Distribution requirements apply to the policy value upon the death of any
owner. These requirements are detailed in the SAI.
After the Annuity Commencement Date
The death benefit payable, if any, on or after the annuity commencement date
depends on the annuity payment option selected.
IF:
. you are not the annuitant; and
. you die on or after the annuity commencement date; and
. the entire interest in the policy has not been paid to you;
THEN:
. the remaining portion of such interest in the policy will be distributed at
least as rapidly as under the method of distribution being used as of the
date of your death.
When We Do Not Pay A Death Benefit
No death benefit is paid in the following cases:
IF:
. you are not the annuitant; and
. the annuitant dies prior to the annuity commencement date; and
. you did not specifically request that the death benefit be paid upon the
annuitant's death;
THEN:
. you will become the new annuitant and the policy will continue.
IF:
. you are not the annuitant; and
. you die prior to the annuity commencement date;
THEN:
. the new owner must surrender the policy within five years of your death for
the policy value increased or decreased by an excess interest adjustment.
Note carefully. If the owner does not name a contingent owner, the owner's
estate will become the new owner. If no probate estate is opened (because, for
example, the owner has precluded the opening of a probate estate by means of a
trust or other instrument), and PFL has not received written notice of the
trust as a successor owner signed prior to the owner's death, then that trust
may not exercise ownership rights to the policy. It may be necessary to open a
probate estate in order to exercise ownership rights to the policy if no
contingent owner is named in a written notice PFL receives.
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Amount of Death Benefit
Death benefit provisions may differ from state to state. The death benefit may
be paid as a lump sum or as annuity payments. The amount of the death benefit
depends on the guaranteed minimum death benefit option you chose when you
bought the policy. The death benefit will be the greatest of:
. policy value on the date we receive the required information; or
. cash value on the date we receive the required information (this could be
more than the policy value if there is a positive excess interest adjustment
that exceeds the surrender charge); or
. guaranteed minimum death benefit, if any (discussed below), plus premium
payments, less partial withdrawals from the date of death to the date the
death benefit is paid.
Guaranteed Minimum Death Benefit
On the policy application, you generally may choose one of the three guaranteed
minimum death benefit options listed below.
After the policy is issued, you cannot make an election and the death benefit
cannot be changed.
A.Return of Premium Death Benefit
The Return of Premium Death Benefit is the total premium payments, less any
adjusted partial withdrawals (discussed below) as of the date of death.
The Return of Premium Death Benefit will be in effect if you do not choose
one of the other options on the policy application. After the policy is
issued, you cannot make an election and the death benefit cannot be
changed.
B.5% Growth through age 80 Death Benefit
The 5% Growth through age 80 Death Benefit is the total premium payments,
less any adjusted partial withdrawals, plus interest at an effective annual
rate of 5% from the premium payment date or withdrawal date to the date of
death (but not later than your 81st birthday). There is an extra charge for
this death benefit.
The 5% Growth through age 80 Death Benefit is not available if the owner or
annuitant is 81 or older on the policy date.
C. Annual Step-Up through age 80 Death Benefit
On each policy anniversary before your 81st birthday, a new "stepped-up"
death benefit is determined and becomes the guaranteed minimum death
benefit for that policy year. The death benefit is equal to:
. the largest policy value on the policy date or on any policy anniversary
before you reach age 81; plus
. any premium payments you have made since then; minus
. any adjusted partial withdrawals we have paid to you since then.
There is an extra charge for this death benefit.
The Annual Step-Up through age 80 Death Benefit is not available if the
owner or annuitant is 81 or older on the policy date.
IF, under all three death benefit options:
. the surviving spouse elects to continue the policy instead of receiving the
death benefit; and
. the guaranteed minimum death benefit is greater than the policy value;
THEN:
. we will increase the policy value to be equal to the guaranteed minimum
death benefit. This increase is made only at the time the surviving spouse
elects to continue the policy.
Adjusted Partial Withdrawal
When you request a partial withdrawal, your guaranteed minimum death benefit
will be reduced by an amount called the adjusted partial withdrawal. Under
certain circumstances, the adjusted partial withdrawal may be more than the
amount of your withdrawal request. It is also possible that if a death benefit
is paid after you have made a partial withdrawal, then the total amount paid
could be less than the total premium payments. We have included a detailed
explanation of this adjustment in the SAI.
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9.TAXES
NOTE: PFL has prepared the following information on federal income taxes as a
general discussion of the subject. It is not intended as tax advice to any
individual. You should consult your own tax adviser about your own
circumstances. PFL has included an additional discussion regarding taxes in the
SAI.
Annuity Policies in General
Deferred annuity policies are a way of setting aside money for future needs
like retirement. Congress recognized how important saving for retirement is and
provided special rules in the Internal Revenue Code for annuities. Simply
stated, these rules provide that generally you will not be taxed on the
earnings, if any, on the money held in your annuity policy until you take the
money out. This is referred to as tax deferral. There are different rules as to
how you will be taxed depending on how you take the money out and the type of
policy--qualified or nonqualified (discussed below).
You will not be taxed on increases in the value of your policy until a
distribution occurs--either as a withdrawal or as annuity payments.
When a non-natural person (e.g., corporation or certain other entities other
than tax-qualified trusts) owns a nonqualified policy, the policy will
generally not be treated as an annuity for tax purposes.
Qualified and Nonqualified Policies
If you purchase the policy under an individual retirement annuity, a pension
plan, or specially sponsored program, your policy is referred to as a qualified
policy.
Qualified policies are issued in connection with the following plans:
. Individual Retirement Annuity (IRA): A traditional IRA allows individuals to
make contributions, which may be deductible, to the policy. A Roth IRA also
allows individuals to make contributions to the policy, but it does not
allow a deduction for contributions, and distributions may be tax-free if
the owner meets certain rules.
. Tax-Sheltered Annuity (403(b) Plan): A 403(b) Plan may be made available to
employees of certain public school systems and tax-exempt organizations and
permits contributions to the policy on a pre-tax basis.
. Corporate Pension and Profit-Sharing and H.R. 10 Plans: Employers and self-
employed individuals can establish pension or profit-sharing plans for their
employees or themselves and make contributions to the policy on a pre-tax
basis.
. Deferred Compensation Plan (457 Plan): Certain governmental and tax-exempt
organizations can establish a plan to defer compensation on behalf of their
employees through contributions to the policy.
If you purchase the policy as an individual and not under an individual
retirement annuity, 403(b) plan, 457 plan, or pension or profit sharing plan,
your policy is referred to as a nonqualified policy.
Withdrawals--Qualified Policies
The information herein describing the taxation of nonqualified policies does
not apply to qualified policies.
There are special rules that govern with respect to qualified policies.
Generally, these rules restrict:
. the amount that can be contributed to the policy during any year; and
. the time when amounts can be paid from the policies.
In addition, a penalty tax may be assessed on amounts withdrawn from the policy
prior to the date you reach age 59 1/2, unless you meet one of the exceptions
to this rule. You may also be required to begin taking minimum distributions
from the policy by a certain date. The terms of the plan may limit the rights
otherwise available to you under the policies. We have provided more
information in the SAI.
You should consult your legal counsel or tax adviser if you are considering
purchasing a policy for use with any retirement plan.
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Withdrawals--403(b) Policies
The Internal Revenue Code limits the withdrawal from certain 403(b) policies.
Withdrawals can generally only be made when an owner:
. reaches age 59 1/2;
. leaves his/her job;
. dies;
. becomes disabled (as that term is defined in the Internal Revenue Code); or
. in the case of hardship. However, in the case of hardship, the owner can
only withdraw the premium payments and not any earnings.
Diversification and Distribution Requirements
The Internal Revenue Code provides that the underlying investments for a
variable annuity must satisfy certain diversification requirements in order to
be treated as an annuity policy. The policy must also meet certain distribution
requirements at the death of an owner in order to be treated as an annuity
policy. These diversification and distribution requirements are discussed in
the SAI. PFL may modify the policy to attempt to maintain favorable tax
treatment.
Withdrawals--Nonqualified Policies
If you make a withdrawal from your policy before the annuity commencement date,
the Internal Revenue Code treats that withdrawal as first coming from earnings
and then from your premium payments. When you make a withdrawal you are taxed
on the amount of the withdrawal that is earnings. (The excess interest
adjustment resulting from the withdrawal may affect the amount on which you are
taxed. The tax treatment of excess interest adjustments is uncertain. You
should consult a tax adviser if a withdrawal results in an excess interest
adjustment.) Different rules apply for annuity payments. See "Annuity Payments"
below.
The Internal Revenue Code also provides that withdrawn earnings may be subject
to a penalty. The amount of the penalty is equal to 10% of the amount that is
includable in income. Some withdrawals will be exempt from the penalty. They
include any amounts:
. paid on or after the taxpayer reaches age 59 1/2;
. paid after an owner dies;
. paid if the taxpayer becomes totally disabled (as that term is defined in
the Internal Revenue Code);
. paid in a series of substantially equal payments made annually (or more
frequently) under a lifetime annuity;
. paid under an immediate annuity; or
. which come from premium payments made prior to August 14, 1982.
All deferred non-qualified policies that are issued by PFL (or its affiliates)
to the same owner during any calendar year are treated as one annuity for
purposes of determining the amount includable in the owner's income when a
taxable distribution occurs.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the policy because of the death of an owner or
the annuitant. Generally, such amounts are includable in the income of the
recipient IF:
. distributed in a lump sum, these amounts are taxed in the same manner as a
full surrender; or
. distributed under an annuity payment option, these amounts are taxed in the
same manner as annuity payments.
For these purposes, the "investment in the contract" is not affected by the
owner's or annuitant's death. That is, the "investment in the policy" remains
generally the total premium payments (less amounts received which were not
includable in gross income). The same tax treatment applies to any amounts
distributed after an owner's death.
Annuity Payments
Although the tax consequences may vary depending on the annuity payment option
you select, in general, for nonqualified and certain qualified policies, only a
portion of the annuity payments you receive will be includable in your gross
income.
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In general, the excludable portion of each annuity payment you receive will be
determined as follows:
. Fixed payments--by dividing the "investment in the policy" on the annuity
commencement date by the total expected value of the annuity payments for
the term of the payments. This is the percentage of each annuity payment
that is excludable.
. Variable payments--by dividing the "investment in the policy" on the annuity
commencement date by the total number of expected periodic payments. This is
the amount of each annuity payment that is excludable.
The remainder of each annuity payment is includable in gross income. Once the
"investment in the policy" has been fully recovered, the full amount of any
additional annuity payments is includable in gross income.
If you select more than one annuity payment option, special rules govern the
allocation of the policy's entire "investment in the policy" to each such
option, for purposes of determining the excludable amount of each payment
received under that option. We advise you to consult a competent tax adviser as
to the potential tax effects of allocating amounts to any particular annuity
payment option.
If, after the annuity commencement date, annuity payments stop because an
annuitant died, the excess (if any) of the "investment in the policy" as of the
annuity commencement date, over the aggregate amount of annuity payments
received that was excluded from gross income, is generally allowable as a
deduction for your last taxable year.
Transfers, Assignments or Exchanges of Policies
A transfer of ownership or assignment of a policy, the designation of an
annuitant or payee or other beneficiary who is not also the owner, the
selection of certain annuity commencement dates, or a change of annuitant, may
result in certain income or gift tax consequences to the owner that are beyond
the scope of this discussion. An owner contemplating any such transfer,
assignment, selection, or change should contact a competent tax adviser with
respect to the potential tax effects of such a transaction.
Possible Tax Law Changes
Although the likelihood of legislative changes is uncertain, there is always
the possibility that the tax treatment of the policy could change by
legislation or otherwise. You should consult a tax adviser with respect to
legal developments and their effect on the policy.
10. ADDITIONAL FEATURES
Systematic Payout Option
You can select at any time (during the accumulation phase) to receive regular
payments from your policy by using the systematic payout option. Under this
option, you can receive up to 10% (annually) of your policy value free of
surrender charges. Payments can be made monthly, quarterly, semi-annually, or
annually. Each payment must be at least $50, and cannot exceed the cumulative
free percentage divided by the number of payments per year. Monthly and
quarterly payments must be made by electronic funds transfer directly to your
checking or savings account. There is no charge for this benefit.
Family Income Protector
The family income protector may vary by state and may not be available in all
states.
The optional "family income protector" rider assures you of a minimum level of
income in the future by guaranteeing a minimum annuitization value (discussed
below) after 10 years. You may elect to purchase this benefit, which guarantees
the total amount you will have to apply to a family income protector payment
option and which guarantees a minimum level of those payments once you begin to
receive them. By electing this benefit, you can participate in the gains of the
underlying variable investment options you select while knowing that you are
guaranteed a minimum level of income in the future, regardless of the
performance of the underlying variable investment options.
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You can annuitize under the family income protector (subject to the conditions
described below) at the greater of the adjusted policy value or the minimum
annuitization value.
Minimum Annuitization Value. The minimum annuitization value is:
. the policy value on the date the rider is issued; plus
. any additional premium payments; minus
. an adjustment for any withdrawals made after the date the rider is issued;
. accumulated at the annual growth rate written on page one of the rider;
minus
. any premium taxes.
The annual growth rate is currently 6% per year. PFL may, at its discretion,
change the rate in the future, but the rate will never be less than 3% per
year. Once the rider is added to your policy, the annual growth rate will not
vary during the life of that rider. Withdrawals may reduce the minimum
annuitization value on a basis greater than dollar-for-dollar. See the SAI for
more information.
The minimum annuitization value may only be used to annuitize using the family
income protector payment options and may not be used with any of the annuity
payment options listed in Section 7 of this prospectus. The family income
protector payment options are:
. Life Income--An election may be made for "No Period Certain" or "10 Years
Certain". In the event of the death of the annuitant prior to the end of the
chosen period certain, the remaining period certain payments will be
continued to the beneficiary.
. Joint and Full Survivor--An election may be made for "No Period Certain" or
"10 Years Certain". Payments will be made as long as either the annuitant or
joint annuitant is living. In the event of the death of both the annuitant
and joint annuitant prior to the end of the chosen period certain, the
remaining period certain payments will be continued to the beneficiary.
The minimum annuitization value is used to calculate the family income
protector payment and does not establish or guarantee a policy value or
guarantee performance of any investment option.
In addition to the annual growth rate, other benefits and fees under the rider
(the rider fee, the fee waiver threshold, guaranteed payment fee, and the
waiting period before the family income protector can be exercised) are also
guaranteed not to change after the rider is added. However, all of these
benefit specifications may change if you elect to upgrade the minimum
annuitization value.
Minimum Annuitization Value Upgrade. You can upgrade your minimum annuitization
value to the policy value within 30 days after any policy anniversary before
your 85th birthday (earlier if required by state law). For your convenience, we
will put the last date to upgrade on page one of the rider.
If you upgrade:
. the current rider will terminate and a new one will be issued with its own
specified guaranteed benefits and fees;
. the new rider's specified benefits and fees may not be as advantageous as
before; and
. you will have a new ten year waiting period before you can exercise the
family income protector.
It generally will not be to your advantage to upgrade unless your policy value
exceeds your minimum annuitization value on the applicable policy anniversary.
Conditions of Exercise of the Family Income Protector. You can only annuitize
using the family income protector within the 30 days after the tenth or later
policy anniversary after the family income protector is elected or, in the case
of an upgrade of the minimum annuitization value, the tenth or later policy
anniversary following the upgrade. PFL may, at its discretion, change the
waiting period before the family income protector can be exercised in the
future. You cannot, however, annuitize using the family income protector after
the policy anniversary after your 94th birthday (earlier if required by state
law). For your convenience, we will put the first and last date to annuitize
using the family income protector on page one of the rider.
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Note Carefully--If you annuitize at any time other than indicated above, you
cannot use the family income protector.
Guaranteed Minimum Stabilized Payments. Annuity payments under the family
income protector are guaranteed to never be less than the initial payment. See
the SAI for information concerning the calculation of the initial payment. The
payments will also be "stabilized" or held constant during each policy year.
During the first policy year after annuitizing using the family income
protector, each stabilized payment will equal the initial payment. On each
policy anniversary thereafter, the stabilized payment will increase or decrease
depending on the performance of the investment options you selected (but will
never be less than the initial payment), and then be held constant at that
amount for that policy year. The stabilized payment on each policy anniversary
will equal the greater of the initial payment or the payment supportable by the
annuity units in the selected investment options. See the SAI for additional
information concerning stabilized payments.
Family Income Protector Rider Fee. A rider fee, currently 0.30% of the minimum
annuitization value on the policy anniversary, is charged annually prior to
annuitization. We will also charge this fee if you make a complete withdrawal.
The rider fee is deducted from each variable investment option in proportion to
the amount of policy value in each subaccount.
The rider fee on any given policy anniversary will be waived if the policy
value exceeds the fee waiver threshold. The fee waiver threshold currently is
two times the minimum annuitization value. PFL may, at its discretion, change
the fee waiver threshold in the future, but it will never be greater than two
and one-half times the minimum annuitization value.
Guaranteed Payment Fee. A guaranteed payment fee, currently equal to an
effective annual rate of 1.25% of the daily net asset value in the separate
account, is reflected in the amount of the variable payments you receive if you
annuitize under the family income protector rider. The guaranteed payment fee
is included on page one of the rider.
Termination. The family income protector is irrevocable. You have the option
not to use the benefit but you will not receive a refund of any fees you have
paid. The family income protector will terminate upon the earliest of the
following:
. annuitization (you will still get guaranteed minimum stabilized payments if
you annuitize using the minimum annuitization value under the family income
protector),
. upgrade of the minimum annuitization value (although a new rider will be
issued),
. termination of your policy, or
. 30 days after the policy anniversary after your 94th birthday (earlier if
required by state law).
The family income protector does not establish or guarantee policy value or
guarantee performance of any investment option. Because this benefit is based
on conservative actuarial factors, the level of lifetime income that it
guarantees may be less than the level that would be provided by application of
the policy value at otherwise applicable adjusted annuity factors. Therefore,
the family income protector should be regarded as a safety net. The costs of
annuitizing under the family income protector include the guaranteed payment
fee, and also the lower payout levels inherent in the annuity tables used for
those minimum payouts.
Nursing Care and Terminal Condition Withdrawal Option
No surrender charges or excess interest adjustment will apply if you or your
spouse has been:
. confined in a hospital or nursing facility for 30 days in a row; or
. diagnosed with a terminal condition (usually a life expectancy of 12 months
or less).
This benefit is also available to the annuitant or annuitant's spouse if the
owner is not a natural person.
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<PAGE>
You may select this benefit at any time (during the accumulation phase) and
there is no charge for this benefit. This benefit may not be available in all
states. See the policy or endorsement for details and conditions.
Unemployment Waiver
No surrender charges or excess interest adjustment will apply to withdrawals if
you or your spouse is unemployed. In order to qualify, you (or your spouse,
whichever is applicable) must have been:
. employed full time for at least two years prior to becoming unemployed; and
. employed full time on the policy date; and
. unemployed for at least 60 days in a row at the time of withdrawal; and
. must have a minimum cash value at the time of withdrawal of $5,000.
You must provide written proof from your State's Department of Labor, which
verifies that you qualify for and are receiving unemployment benefits at the
time of withdrawal.
You can select this benefit at any time (during the accumulation phase) and
there is no charge for this benefit.
This benefit is also available to the annuitant or annuitant's spouse if the
owner is not a natural person. This benefit may not be available in all states.
See the policy for details.
Telephone Transactions
You may make transfers and change the allocation of additional premium payments
by telephone IF:
. you select the "Telephone Transfer/ Reallocation Authorization" box in the
policy application or enrollment information; or
. you later make this request in writing.
You will be required to provide certain information for identification purposes
when requesting a transaction by telephone and we may record your telephone
call. We may also require written confirmation of your request. We will not be
liable for following telephone requests that we believe are genuine.
Telephone requests must be received while the New York Stock Exchange is open
to get same-day pricing of the transaction. We may discontinue this option at
any time.
Dollar Cost Averaging Program
During the accumulation phase, you may instruct us to automatically transfer
money from the dollar cost averaging fixed account option into one or more
variable subaccounts. There is no charge for this program.
Complete and clear instructions must be received before a dollar cost averaging
program will begin. The instructions must include:
. the subaccounts into which money from the dollar cost averaging fixed
account (or other subaccount(s) used for dollar cost averaging) is to be
transferred; and
. either the dollar amount to transfer monthly or quarterly (each transfer
must be at least $500) or the number of transfers (minimum of 6 monthly or 4
quarterly and maximum of 24 monthly or 8 quarterly).
Transfers must begin within 30 days. We will make the transfers on the 28th day
of the applicable month. You may change your allocations at anytime.
Only one dollar cost averaging program can run at one time. This means that any
addition to a dollar cost averaging program must change either the length of
the program or the dollar amount of the transfers. New instructions must be
received each time there is an addition to a dollar cost averaging program.
Any amount in the dollar cost averaging fixed account (or other subaccount(s)
used for dollar cost averaging) for which we have not received complete and
clear instructions will remain in the dollar cost averaging fixed account (or
other such subaccount) until we receive the instructions. If we have not
received complete and clear instructions within 30 days, the interest credited
in the dollar cost averaging fixed account may be adjusted downward, but not
below the guaranteed effective annual interest rate of 3%.
29
<PAGE>
Dollar cost averaging buys more accumulation units when prices are low and
fewer accumulation units when prices are high. It does not guarantee profits or
assure that you will not experience a loss. You should consider your ability to
continue the dollar cost averaging program during all economic conditions.
We may credit different interest rates for dollar cost averaging programs of
varying time periods. If you discontinue the dollar cost averaging program
before its completion, then the interest credited on amounts in the dollar cost
averaging fixed account may be adjusted downward, but not below the minimum
guaranteed effective annual interest rate of 3%.
Asset Rebalancing
During the accumulation phase you can instruct us to automatically rebalance
the amounts in your subaccounts to maintain your desired asset allocation. This
feature is called asset rebalancing and can be started and stopped at any time
free of charge. However, we will not rebalance if you are in the dollar cost
averaging program or if any other transfer is requested. If a transfer is
requested, we will honor the requested transfer and discontinue asset
rebalancing. Asset rebalancing ignores amounts in the fixed account. You can
choose to rebalance monthly, quarterly, semi-annually, or annually.
11.OTHER INFORMATION
Ownership
You, as owner of the policy, exercise all rights under the policy. You can
change the owner at any time by notifying us in writing. An ownership change
may be a taxable event.
Assignment
You can also assign the policy any time during your lifetime. PFL will not be
bound by the assignment until we receive written notice of the assignment. We
will not be liable for any payment or other action we take in accordance with
the policy before we receive notice of the assignment. There may be limitations
on your ability to assign a qualified policy. An assignment may have tax
consequences.
PFL Life Insurance Company
PFL Life Insurance Company was incorporated under the laws of the State of Iowa
on April 19, 1961 as NN Investors Life Insurance Company, Inc. It is engaged in
the sale of life and health insurance and annuity policies. PFL is a
Transamerica Company and a wholly-owned indirect subsidiary of AEGON USA, Inc.
which conducts most of its operations through subsidiary companies engaged in
the insurance business or in providing non-insurance financial services. All of
the stock of AEGON USA, Inc. is indirectly owned by AEGON N.V. of The
Netherlands, the securities of which are publicly traded. AEGON N.V., a holding
company, conducts its business through subsidiary companies engaged primarily
in the insurance business. PFL is licensed in the District of Columbia, Guam,
and in all states except New York.
All obligations arising under the policies, including the promise to make
annuity payments, are general corporate obligations of PFL.
The Separate Account
PFL established a separate account, called the PFL Life Variable Annuity
Account E, under the laws of the State of Iowa on February 20, 1997. The
separate account receives and currently invests the premium payments that are
allocated to the separate account for investment in shares of the underlying
fund portfolios.
The separate account is registered with the SEC as a unit investment trust
under the 1940 Act. However, the SEC does not supervise the management, the
investment practices, or the policies of the separate account or PFL. Income,
gains, and losses, whether or not realized, from assets allocated to the
separate account are, in accordance with the policies, credited or charged
against the separate account without regard to PFL's other income, gains or
losses.
The assets of the separate account are held in PFL's name on behalf of the
separate account and belong to PFL. However, those assets that underlie the
policies are not chargeable with liabilities arising out of any other business
PFL
30
<PAGE>
may conduct. The separate account includes other subaccounts that are not
available under these policies.
Mixed and Shared Funding
Before making a decision concerning the allocation of premium payments to a
particular subaccount, please read the prospectuses for the underlying funds.
The underlying funds are not limited to selling their shares to this separate
account and can accept investments from any separate account or qualified
retirement plan. Since the underlying fund portfolios are available to
registered separate accounts offering variable annuity products of PFL, as well
as variable annuity and variable life products of other insurance companies,
and qualified retirement plans, there is a possibility that a material conflict
may arise between the interests of this separate account and one or more of the
other accounts of another participating insurance company. In the event of a
material conflict, the affected insurance companies, including PFL, agree to
take any necessary steps to resolve the matter. This includes removing their
separate accounts from the underlying funds. See the prospectuses for the
underlying fund for more details.
Reinstatements
You may surrender your policy and transfer your money directly to another life
insurance company (sometimes referred to as a 1035 Exchange or a trustee-to-
trustee transfer). You may also request us to reinstate your policy after such
a transfer by returning the same total dollar amount of funds to the applicable
investment choices. The dollar amount will be used to purchase new accumulation
units at the then current price. Because of changes in market value, your new
accumulation units may be worth more or less than the units you previously
owned. We recommend that you consult a tax professional to explain the possible
tax consequences of exchanges and/or reinstatements.
Voting Rights
PFL will vote all shares of the underlying funds in accordance with
instructions we receive from you and other owners that have voting interests in
the portfolios. We will send you and other owners written requests for
instructions on how to vote those shares. When we receive those instructions,
we will vote all of the shares in proportion to those instructions. If,
however, we determine that we are permitted to vote the shares in our own
right, we may do so.
Each person having a voting interest will receive proxy material, reports, and
other materials relating to the appropriate portfolio.
Distributor of the Policies
AFSG Securities Corporation is the principal underwriter of the policies. Like
PFL, it is a Transamerica Company and an indirect wholly-owned subsidiary of
AEGON USA, Inc. It is located at 4333 Edgewood Road N.E., Cedar Rapids, IA
52499-0001. AFSG Securities Corporation is registered as a broker/dealer under
the Securities Exchange Act of 1934. It is a member of the National Association
of Securities Dealers, Inc.
Commissions of up to 6% of premium payments will be paid to broker/dealers who
sell the policies under agreements with AFSG Securities Corporation. These
commissions are not deducted from premium payments. In addition, certain
production, persistency and managerial bonuses may be paid. PFL may also pay
compensation to banks and other financial institutions for their services in
connection with the sale and servicing of the policies.
Non-participating Policy
The policy does not participate or share in the profits or surplus earnings of
PFL. No dividends are payable on the policy.
Variations in Policy Provisions
Certain provisions of the policies may vary from the descriptions in this
prospectus in order to comply with different state laws. See your policy for
variations since any such state variations will be included in your policy or
in riders or endorsements attached to your policy.
31
<PAGE>
IMSA
PFL is a charter member of the Insurance Marketplace Standards Association
(IMSA). IMSA is an independent, voluntary organization of life insurance
companies. It promotes high ethical standards in the sales, and advertising and
servicing of individual life insurance and annuity products. Companies must
undergo a rigorous self and independent assessment of their practices to become
a member of IMSA. The IMSA logo in our sales literature shows our ongoing
commitment to these standards.
Legal Proceedings
There are no legal proceedings to which the separate account is a party or to
which the assets of the account are subject. PFL, like other life insurance
companies, is involved in lawsuits. In some class action and other lawsuits
involving other insurers, substantial damages have been sought and/or material
settlement payments have been made. Although the outcome of any litigation
cannot be predicted with certainty, PFL believes that at the present time there
are no pending or threatened lawsuits that are reasonably likely to have a
material adverse impact on the separate account or PFL.
Financial Statements
The financial statements for PFL are included in the SAI. There are no
financial statements for the separate account because as of December 31, 1999,
it had not commenced operations.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Glossary of Terms
The Policy--General Provisions
Certain Federal Income Tax Consequences
Investment Experience
Family Income Protector--Additional Information
Historical Performance Data
Published Ratings
State Regulation of PFL
Administration
Records and Reports
Distribution of the Policies
Voting Rights
Other Products
Custody of Assets
Legal Matters
Independent Auditors
Other Information
Financial Statements
32
<PAGE>
APPENDIX A
HISTORICAL PERFORMANCE DATA
Standardized Performance Data
PFL may advertise historical yields and total returns for the subaccounts of
the separate account. These figures are based on historical earnings and are
calculated according to guidelines from the SEC. They do not indicate future
performance.
Fidelity--VIP Money Market Subaccount. The yield of the Fidelity--VIP Money
Market Subaccount for a policy refers to the annualized income generated by an
investment under a policy in the subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment under a
policy in the subaccount is assumed to be reinvested. The effective yield will
be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Other Subaccounts. The yield of a subaccount of the separate account (other
than the Fidelity -VIP Money Market Subaccount) for a policy refers to the
annualized income generated by an investment under a policy in the subaccount
over a specified 30-day period. The yield is calculated by assuming that the
income generated by the investment during that 30-day period is generated each
30-day period over a 12-month period and is shown as a percentage of the
investment.
The total return of a subaccount of the separate account refers to return
quotations assuming an investment under a policy has been held in the
subaccount for various periods of time including a period measured from the
date the subaccount commenced operations. When a subaccount has been in
operation for 1, 5, and 10 years, respectively, the total return for these
periods will be provided. The total return quotations for a subaccount will
represent the average annual compounded rates of return that equate an initial
investment of $1,000 in the subaccount to the redemption value of that
investment as of the last day of each of the periods for which total return
quotations are provided.
The yield and total return calculations for a subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular policy and
they do not reflect the rider charge for the optional family income protector.
The yield calculations also do not reflect the effect of any surrender charge
that may be applicable to a particular policy. To the extent that any or all of
a premium tax and/or surrender charge is applicable to a particular policy, the
yield and/or total return of that policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the SAI, a copy of which may
be obtained from the administrative and service office upon request.
Non-Standardized Performance Data
In addition to the standardized data discussed above, similar performance data
for other periods may also be shown.
PFL may also advertise or disclose average annual total return or other
performance data in non-standardized formats for a subaccount of the separate
account. The non-standardized performance data may assume that no surrender
charge is applicable, and may also make other assumptions such as the amount
invested in a subaccount, differences in time periods to be shown, or the
effect of partial withdrawals or annuity payments.
33
<PAGE>
All non-standardized performance data will be advertised only if the
standardized performance data is also disclosed. For additional information
regarding the calculation of other performance data, please refer to the SAI.
Adjusted Historical Performance Data. The following performance data is
historic performance data for the underlying portfolios since their inception
reduced by some or all of the fees and charges under the policy. Such adjusted
historic performance includes data that precedes the inception dates of the
subaccounts. This data is designed to show the performance that would have
resulted if the policy had been in existence during that time, based on the
performance of the applicable portfolio and the assumption that the applicable
subaccount was in existence for the same period as the portfolio with a level
of charges equal to those currently assessed under the policies. This data is
not intended to indicate future performance.
For instance, as shown in Table 1 and Table 2 below, PFL may disclose average
annual total returns for the portfolios reduced by all fees and charges under
the policy, as if the policy had been in existence since the inception of the
portfolio. Such fees and charges include the mortality and expense risk fee,
administrative charge and surrender charges. Table 1 assumes a complete
surrender of the policy at the end of the period, and therefore the surrender
charge is deducted. Table 2 assumes that the policy is not surrendered, and
therefore the surrender charge is not deducted. Also, Table 1 and Table 2 do
not reflect the rider charge for the optional family income protector.
34
<PAGE>
The following information is also based on the method of calculation described
in the SAI. The adjusted historical average annual total returns for periods
ended December 31, 1999, were as follows:
TABLE 1-A
Adjusted Historical Average Annual Total Returns(/1/)
(Assuming A Surrender Charge and No Family Income Protector)
5% Growth through age 80 Death Benefit or Annual Step-Up through age 80 Death
Benefit
(Total Separate Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Corresponding
10 Year Portfolio
Portfolio 1 Year 5 Year or Inception Inception Date
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fidelity--VIP High Income
Portfolio--Service Class
2(/2/)...................... 1.86% 9.31% 10.87%+ September 19, 1985
Fidelity--VIP Equity-Income
Portfolio--Service Class
2(/2/)...................... 0.04% 16.94% 12.89%+ October 9, 1986
Fidelity--VIP Growth
Portfolio--Service Class
2(/2/)...................... 31.05% 27.93% 18.27%+ October 9, 1986
Fidelity--VIP II Index 500
Portfolio--Initial Class.... 14.29% 26.41% 19.41% August 27, 1992
Fidelity--VIP II
Contrafund(R) Portfolio--
Service Class 2(/2/)........ 17.92% N/A 25.95% January 3, 1995
Fidelity--VIP III Mid Cap
Portfolio--Service Class
2(/2/)...................... 42.70% N/A 46.83% December 28, 1998
Janus Aspen--Aggressive
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 31, 1999
Janus Aspen--Capital
Appreciation Portfolio--
Service Shares.............. N/A N/A N/A December 31, 1999
Janus Aspen--Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
Janus Aspen--International
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 3, 1999
Janus Aspen--Worldwide Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
MFS Bond Series.............. (7.77%) N/A 3.18% October 24, 1995
MFS Capital Opportunities
Series...................... 41.18% N/A 30.42% August 14, 1996
MFS Emerging Growth Series... 70.45% N/A 34.56% July 24, 1995
MFS Growth Series............ N/A N/A 33.60% May 3, 1999
MFS New Discovery Series..... 67.15% N/A 37.11% May 1, 1998
MFS Research Series.......... 17.82% N/A 21.16% July 26, 1995
MFS Utilities Series......... 24.58% N/A 24.72% January 3, 1995
Oppenheimer Capital
Appreciation Fund/VA........ 35.42% 28.87% 16.83%+ April 3, 1985
Oppenheimer Global Securities
Fund/VA..................... 52.24% 20.00% 15.18% November 12, 1990
Oppenheimer Main Street
Growth & Income Fund/VA..... 15.48% N/A 24.05% July 5, 1995
Oppenheimer Multiple
Strategies Fund/VA.......... 5.58% 12.82% 9.30%+ February 9, 1987
Oppenheimer Strategic Bond
Fund/VA..................... (3.38%) 6.76% 4.71% May 3, 1993
STI Capital Appreciation
Fund........................ 2.51% N/A 22.78% October 2, 1995
STI Growth & Income Fund..... N/A N/A (5.41%) December 30, 1999
STI International Equity
Fund........................ 2.59% N/A 10.08% November 7, 1996
STI Investment Grade Bond
Fund........................ (7.88%) N/A 3.59% October 2, 1995
STI Mid-Cap Equity Fund...... 7.78% N/A 13.03% October 2, 1995
STI Quality Growth Stock
Fund........................ N/A N/A (5.40%) December 30, 1999
STI Small Cap Value Equity
Fund........................ (10.98%) N/A (12.39%) October 22, 1997
STI Value Income Stock Fund.. (9.20%) N/A 11.95% October 2, 1995
WRL Goldman Sachs Small Cap.. N/A N/A 11.13% May 3, 1999
WRL VKAM Emerging Growth..... 98.87% 41.02% 30.83% March 1, 1993
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Ten Year Date
35
<PAGE>
TABLE 1-B
Adjusted Historical Average Annual Total Returns(/1/)
(Assuming A Surrender Charge and No Family Income Protector)
Return of Premium Death Benefit
(Total Separate Account Annual Expenses: 1.25%)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Corresponding
10 Year Portfolio
Portfolio 1 Year 5 Year or Inception Inception Date
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fidelity--VIP High Income
Portfolio--Service Class
2(/2/)...................... 2.02% 9.48% 11.03%+ September 19, 1985
Fidelity--VIP Equity-Income
Portfolio--Service Class
2(/2/)...................... 0.20% 17.11% 13.06%+ October 9, 1986
Fidelity--VIP Growth
Portfolio--Service Class
2(/2/)...................... 31.25% 28.12% 18.45%+ October 9, 1986
Fidelity--VIP II Index 500
Portfolio--Initial Class.... 14.46% 26.60% 19.59% August 27, 1992
Fidelity--VIP II
Contrafund(R) Portfolio--
Service Class 2(/2/)........ 18.10% N/A 26.13% January 3, 1995
Fidelity--VIP III Mid Cap
Portfolio--Service Class
2(/2/)...................... 42.92% N/A 47.05% December 28, 1998
Janus Aspen--Aggressive
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 31, 1999
Janus Aspen--Capital
Appreciation Portfolio--
Service Shares.............. N/A N/A N/A December 31, 1999
Janus Aspen--Growth
Portfolio-- Service Shares.. N/A N/A N/A December 31, 1999
Janus Aspen--International
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 3, 1999
Janus Aspen--Worldwide Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
MFS Bond Series.............. (7.62%) N/A 3.34% October 24, 1995
MFS Capital Opportunities
Series...................... 41.40% N/A 30.62% August 14, 1996
MFS Emerging Growth Series... 70.71% N/A 34.76% July 24, 1995
MFS Growth Series............ N/A N/A 33.73% May 3, 1999
MFS New Discovery Series..... 67.40% N/A 37.31% May 1, 1998
MFS Research Series.......... 18.00% N/A 21.34% July 26, 1995
MFS Utilities Series......... 24.77% N/A 24.91% January 3, 1995
Oppenheimer Capital
Appreciation Fund/VA........ 35.62% 29.06% 17.00%+ April 3, 1985
Oppenheimer Global Securities
Fund/VA..................... 52.46% 20.18% 15.35% November 12, 1990
Oppenheimer Main Street
Growth & Income Fund/VA..... 15.66% N/A 24.24% July 5, 1995
Oppenheimer Multiple
Strategies Fund/VA.......... 5.75% 12.99% 9.47%+ February 9, 1987
Oppenheimer Strategic Bond
Fund/VA..................... (3.23%) 6.92% 4.87% May 3, 1993
STI Capital Appreciation
Fund........................ 2.67% N/A 22.97% October 2, 1995
STI Growth & Income Fund..... N/A N/A (5.40%) December 30, 1999
STI International Equity
Fund........................ 2.76% N/A 10.25% November 7, 1996
STI Investment Grade Bond
Fund........................ (7.73%) N/A 3.75% October 2, 1995
STI Mid-Cap Equity Fund...... 7.95% N/A 13.20% October 2, 1995
STI Quality Growth Stock
Fund........................ N/A N/A (5.40%) December 30, 1999
STI Small Cap Value Equity
Fund........................ (10.84%) N/A (12.24%) October 22, 1997
STI Value Income Stock Fund.. (9.06%) N/A 12.12% October 2, 1995
WRL Goldman Sachs Small Cap.. N/A N/A 11.25% May 3, 1999
WRL VKAM Emerging Growth..... 99.17% 41.23% 31.02% March 1, 1993
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Ten Year Date
(/1/The)calculation of total return performance for periods prior to inception
of the subaccounts reflects deductions for the mortality and expense risk
fee and administrative charge on a monthly basis, rather than a daily
basis. The monthly deduction is made at the beginning of each month and
generally approximates the performance that would have resulted if the
subaccounts had actually been in existence since the inception of the
portfolio.
(/2/Returns)prior to January 12, 2000 for the portfolios are based on
historical returns for Initial Class Shares.
36
<PAGE>
TABLE 2-A
Adjusted Historical Average Annual Total Returns(/1/)
(Assuming No Surrender Charge or Family Income Protector)
5% Growth through age 80 Death Benefit or Annual Step-Up through age 80 Death
Benefit
(Total Separate Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Corresponding
10 Year Portfolio
Portfolio 1 Year 5 Year or Inception Inception Date
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fidelity--VIP High Income
Portfolio--Service Class
2/(2)/...................... 6.58% 9.31% 10.87%+ September 19, 1985
Fidelity--VIP Equity-Income
Portfolio--Service Class
2/(2)/...................... 4.78% 16.94% 12.89%+ October 9, 1986
Fidelity--VIP Growth
Portfolio--Service Class
2/(2)/...................... 35.42% 27.93% 18.27%+ October 9, 1986
Fidelity--VIP II Index 500
Portfolio--Initial Class.... 18.86% 26.41% 19.41% August 27, 1992
Fidelity--VIP II
Contrafund(R) Portfolio--
Service Class 2/(2)/........ 22.45% N/A 25.95% January 3, 1995
Fidelity--VIP III Mid Cap
Portfolio--Service Class
2/(2)/...................... 46.94% N/A 50.96% December 28, 1998
Janus Aspen--Aggressive
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 31, 1999
Janus Aspen--Capital
Appreciation Portfolio--
Service Shares.............. N/A N/A N/A December 31, 1999
Janus Aspen--Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
Janus Aspen--International
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 3, 1999
Janus Aspen--Worldwide Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
MFS Bond Series.............. (2.93%) N/A 3.36% October 24, 1995
MFS Capital Opportunities
Series...................... 45.44% N/A 30.43% August 14, 1996
MFS Emerging Growth Series... 74.36% N/A 34.56% July 24, 1995
MFS Growth Series............ N/A N/A 38.76% May 3, 1999
MFS New Discovery Series..... 71.10% N/A 39.00% May 1, 1998
MFS Research Series.......... 22.35% N/A 21.16% July 26, 1995
MFS Utilities Series......... 29.03% N/A 24.72% January 3, 1995
Oppenheimer Capital
Appreciation Fund/VA........ 39.74% 28.87% 16.83%+ April 3, 1985
Oppenheimer Global Securities
Fund/VA..................... 56.36% 20.00% 15.18% November 12, 1990
Oppenheimer Main Street
Growth & Income Fund/VA..... 20.04% N/A 24.05% July 5, 1995
Oppenheimer Multiple
Strategies Fund/VA.......... 10.26% 12.82% 9.30%+ February 9, 1987
Oppenheimer Strategic Bond
Fund/VA..................... 1.40% 6.76% 4.71% May 3, 1993
STI Capital Appreciation
Fund........................ 7.22% N/A 22.78% October 2, 1995
STI Growth & Income Fund..... N/A N/A (0.01%) December 30, 1999
STI International Equity
Fund........................ 7.31% N/A 10.55% November 7, 1996
STI Investment Grade Bond
Fund........................ (3.04%) N/A 3.76% October 2, 1995
STI Mid-Cap Equity Fund...... 12.43% N/A 13.08% October 2, 1995
STI Quality Growth Stock
Fund........................ N/A N/A 0.00% December 30, 1999
STI Small Cap Value Equity
Fund........................ (6.11%) N/A (9.98%) October 22, 1997
STI Value Income Stock Fund.. (4.35%) N/A 12.01% October 2, 1995
WRL Goldman Sachs Small Cap.. N/A N/A 16.43% May 3, 1999
WRL VKAM Emerging Growth..... 102.44% 41.02% 30.83% March 1, 1993
</TABLE>
--------------------------------------------------------------------------------
+Ten Year Date
37
<PAGE>
TABLE 2-B
Adjusted Historical Average Annual Total Returns(/1/)
(Assuming No Surrender Charge or Family Income Protector)
Return of Premium Death Benefit
(Total Separate Account Annual Expenses: 1.25%)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Corresponding
10 Year Portfolio
Portfolio 1 Year 5 Year or Inception Inception Date
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fidelity--VIP High Income
Portfolio--Service Class
2/(2)/...................... 6.74% 9.48% 11.03%+ September 19, 1985
Fidelity--VIP Equity-Income
Portfolio--Service Class
2/(2)/...................... 4.94% 17.11% 13.06%+ October 9, 1986
Fidelity--VIP Growth
Portfolio--Service Class
2/(2)/...................... 35.62% 28.12% 18.45%+ October 9, 1986
Fidelity--VIP II Index 500
Portfolio--Initial Class.... 19.03% 26.60% 19.59% August 27, 1992
Fidelity--VIP II
Contrafund(R) Portfolio--
Service Class 2/(2)/........ 22.63% N/A 26.13% January 3, 1995
Fidelity--VIP III Mid Cap
Portfolio--Service Class
2/(2)/...................... 47.15% N/A 51.18% December 28, 1998
Janus Aspen--Aggressive
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 31, 1999
Janus Aspen--Capital
Appreciation Portfolio--
Service Shares.............. N/A N/A N/A December 31, 1999
Janus Aspen--Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
Janus Aspen--International
Growth Portfolio--Service
Shares...................... N/A N/A N/A December 3, 1999
Janus Aspen--Worldwide Growth
Portfolio--Service Shares... N/A N/A N/A December 31, 1999
MFS Bond Series.............. (2.79%) N/A 3.52% October 24, 1995
MFS Capital Opportunities
Series...................... 45.65% N/A 30.62% August 14, 1996
MFS Emerging Growth Series... 74.61% N/A 34.76% July 24, 1995
MFS Growth Series............ N/A N/A 38.90% May 3, 1999
MFS New Discovery Series..... 71.35% N/A 39.20% May 1, 1998
MFS Research Series.......... 22.53% N/A 21.34% July 26, 1995
MFS Utilities Series......... 29.22% N/A 24.91% January 3, 1995
Oppenheimer Capital
Appreciation Fund/VA........ 39.94% 29.06% 17.00%+ April 3, 1985
Oppenheimer Global Securities
Fund/VA..................... 56.59% 20.18% 15.35% November 12, 1990
Oppenheimer Main Street
Growth & Income Fund/VA..... 20.22% N/A 24.24% July 5, 1995
Oppenheimer Multiple
Strategies Fund/VA.......... 10.42% 12.99% 9.47%+ February 9, 1987
Oppenheimer Strategic Bond
Fund/VA..................... 1.55% 6.92% 4.87% May 3, 1993
STI Capital Appreciation
Fund........................ 7.38% N/A 22.97% October 2, 1995
STI Growth & Income Fund..... N/A N/A 0.00% December 30, 1999
STI International Equity
Fund........................ 7.47% N/A 10.71% November 7, 1996
STI Investment Grade Bond
Fund........................ (2.90%) N/A 3.92% October 2, 1995
STI Mid-Cap Equity Fund...... 12.59% N/A 13.24% October 2, 1995
STI Quality Growth Stock
Fund........................ N/A N/A 0.00% December 30, 1999
STI Small Cap Value Equity
Fund........................ (5.97%) N/A (9.85%) October 22, 1997
STI Value Income Stock Fund.. (4.21%) N/A 12.18% October 2, 1995
WRL Goldman Sachs Small Cap.. N/A N/A 16.55% May 3, 1999
WRL VKAM Emerging Growth..... 102.73% 41.23% 31.02% March 1, 1993
</TABLE>
-------------------------------------------------------------------------------
+Ten Year Date
/(1)/ The calculation of total return performance for periods prior to inception
of the subaccounts reflects deductions for the mortality and expense risk
fee and administrative charge on a monthly basis, rather than a daily
basis. The monthly deduction is made at the beginning of each month and
generally approximates the performance that would have resulted if the
subaccounts had actually been in existence since the inception of the
portfolio.
/(2)/ Returns prior to January 12, 2000 for the portfolios are based on
historical returns for Initial Class Shares.
38
<PAGE>
PRIVILEGE SELECT VARIABLE ANNUITY
Issued by
PFL LIFE INSURANCE COMPANY
Supplement Dated August 15, 2000
to the
Prospectus dated August 15, 2000
For New Jersey policies, the optional family income protector is as described
in this supplement and not as described in the prospectus.
Family Income Protector
The optional "family income protector" rider can be used to provide you a
certain level of income in the future by guaranteeing a minimum annuitization
value (discussed below). You may elect to purchase this benefit, which
provides a minimum amount you will have to apply to a family income protector
payment option and which guarantees a minimum level of those payments once you
begin to receive them. By electing this benefit, you can participate in the
gains of the underlying variable investment options you select while knowing
that you are guaranteed a minimum level of income in the future, regardless of
the performance of the underlying variable investment options.
You can annuitize under the family income protector (subject to the conditions
described below) at the greater of the policy value or the minimum
annuitization value (subject to any applicable adjustment).
Minimum Annuitization Value. If the family income protector is added when you
purchase the policy or in the first policy year, the minimum annuitization
value on the rider date (i.e., the date the rider is added to the policy) is
the total premium payments. If the family income protector is added after the
first policy year, the minimum annuitization value on the rider date is the
policy value.
After the rider date, the minimum annuitization value is:
. the minimum annuitization value on the rider date; plus
. any additional premium payments; minus
. an adjustment for any withdrawals made after the rider date;
. the result of which is accumulated at the annual growth rate; minus
. any premium taxes.
Please note that if you annuitize using the family income protector on any
date other than a rider anniversary, there may be a downward adjustment to
your minimum annuitization value. See "Minimum Annuitization Value Adjustment"
below.
The annual growth rate is 6% per year. Withdrawals may reduce the minimum
annuitization value on a basis greater than dollar-for-dollar. See the SAI for
more information. In addition to the immediate reduction in the minimum
annuitization value due to the withdrawal, the same withdrawal, if taken in
the rider year that you annuitize using the family income protector, may also
result in a negative minimum annuitization value adjustment. See "Minimum
Annuitization Value Adjustment" below.
The minimum annuitization value may only be used to annuitize using the family
income protector payment options and may not be used with any of the other
annuity payment options listed in the prospectus. The family income protector
payment options are:
. Life Income--An election may be made for "No Period Certain" or "10 Years
Certain". In the event of the death of the annuitant prior to the end of
the chosen period certain, the remaining period certain payments will be
continued to the beneficiary.
. Joint and Full Survivor--An election may be made for "No Period Certain" or
"10 Years Certain". Payments will be made as long as either the annuitant
or joint annuitant is living. In the event of the death of both the
annuitant and joint annuitant prior to the end of the chosen period
certain, the remaining period certain payments will be continued to the
beneficiary.
Please note that if you annuitize using the family income protector before the
10th rider anniversary, the payments will be calculated with an annuity factor
age adjustment. See "Annuity Factor Age Adjustment" below.
Minimum Annuitization Value Adjustment. If you annuitize under the family
income protector on
1
<PAGE>
any date other than a rider anniversary, the minimum annuitization value will
be adjusted downward if your policy value has decreased since the last rider
anniversary (or the rider date for annuitizations within the first rider year).
The adjusted minimum annuitization value will equal:
. the policy value on the date you annuitize; plus
. the minimum annuitization value on the most recent rider anniversary (or the
rider date for annuitizations within the first rider year); minus
.the policy value on the most recent rider anniversary (or the rider date for
annuitizations within the first rider year).
The minimum annuitization value will not be adjusted if:
. you annuitize on a rider anniversary; or
. your policy value has increased since the last rider anniversary (or the
rider date for annuitizations within the first rider year).
Annuity Factor Age Adjustment. If you annuitize using the family income
protector before the 10th rider anniversary, the first payment will be
calculated with an annuity factor age adjustment which subtracts up to 10 years
from your age resulting in all payments being lower than if an annuity factor
age adjustment was not used. See the SAI for information concerning the
calculation of the initial payment. The age adjustment is as follows:
<TABLE>
<CAPTION>
Number
of
Years
Since Age Adjustment:
the Number of Years
Rider Subtracted from
Date Your Age
-----------------------
<S> <C>
0-1 10
-----------------------
1-2 9
-----------------------
2-3 8
-----------------------
3-4 7
-----------------------
4-5 6
-----------------------
5-6 5
-----------------------
6-7 4
-----------------------
7-8 3
-----------------------
8-9 2
-----------------------
9-10 1
-----------------------
>10 0
</TABLE>
Please note that the minimum annuitization value is used solely to calculate
the family income protector annuity payments. The family income protector does
not establish or guarantee policy value or guarantee performance of any
investment option. Because this benefit is based on conservative actuarial
factors, the level of lifetime income that it guarantees may be less than the
level that would be provided by application of the policy value at otherwise
applicable adjusted annuity factors. Therefore, the family income protector
should be regarded as a safety net. The costs of annuitizing under the family
income protector include the guaranteed payment fee, and also the lower payout
levels inherent in the annuity tables used for those minimum payouts (which may
also include an annuity factor age adjustment). These costs should be balanced
against the benefits of a minimum payout level.
In addition to the annual growth rate, other benefits and fees under the rider
(the rider fee, the fee waiver threshold, guaranteed payment fee, and the
annuity factor age adjustment) are also guaranteed not to change after the
rider is added. However, all of these benefit specifications may change if you
elect to upgrade the minimum annuitization value.
Minimum Annuitization Value Upgrade. You can upgrade your minimum annuitization
value to the policy value at any time before your 95th birthday.
If you upgrade:
. the current rider will terminate and a new one will be issued with its own
specified guaranteed benefits and fees; and
. the new rider's specified benefits and fees may not be as advantageous as
before.
It generally will not be to your advantage to upgrade unless your policy value
exceeds your minimum annuitization value at that time.
Conditions of Exercise of the Family Income Protector. You can annuitize using
the family income protector at any time before your 95th birthday. For your
convenience, we will put the last date to annuitize using the family income
protector on page one of the rider.
2
<PAGE>
Note Carefully:
. If you annuitize at any time other than a rider anniversary, there may be a
negative adjustment to your minimum annuitization value. See "Minimum
Annuitization Value Adjustment."
. If you annuitize before the 10th rider anniversary there will be an annuity
factor age adjustment. See "Annuity Factor Age Adjustment."
. If you take a withdrawal during the rider year that you annuitize, your
minimum annuitization value will be reduced to reflect the withdrawal and
will likely be subject to a negative minimum annuitization value adjustment.
Guaranteed Minimum Stabilized Payments. Annuity payments under the family
income protector are guaranteed to never be less than the initial payment. See
the SAI for information concerning the calculation of the initial payment. The
payments will also be "stabilized" or held constant during each rider year.
During the first rider year after annuitizing using the family income
protector, each stabilized payment will equal the initial payment. On each
rider anniversary thereafter, the stabilized payment will increase or decrease
depending on the performance of the investment options you selected (but will
never be less than the initial payment), and then be held constant at that
amount for that rider year. The stabilized payment on each rider anniversary
will equal the greater of the initial payment or the payment supportable by the
annuity units in the selected investment options. See the SAI for additional
information concerning stabilized payments.
Family Income Protector Rider Fee. A rider fee, currently 0.35% of the minimum
annuitization value on the rider anniversary, is charged annually prior to
annuitization. We will also charge this fee upon termination. The rider fee is
deducted from each variable investment option in proportion to the amount of
policy value in each subaccount.
The rider fee on any given rider anniversary will be waived if the policy value
exceeds the fee waiver threshold. The fee waiver threshold currently is two
times the minimum annuitization value. PFL may, at its discretion, change the
fee waiver threshold in the future, but it will never be greater than two and
one-half times the minimum annuitization value.
Guaranteed Payment Fee. A guaranteed payment fee, currently equal to an
effective annual rate of 1.25% of the daily net asset value in the separate
account, is reflected in the amount of the variable payments you receive if you
annuitize under the family income protector rider.
Termination. The family income protector will terminate upon the earliest of
the following:
.the date we receive written notice from you requesting termination of the
family income protector;
. annuitization (you will still get guaranteed minimum stabilized payments if
you annuitize using the minimum annuitization value under the family income
protector);
. upgrade of the minimum annuitization value (although a new rider will be
issued);
. termination of your policy; or
. 30 days after the last date to elect the benefit as shown on page 1 of the
rider.
3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PRIVILEGE SELECT
Issued through
PFL LIFE VARIABLE ANNUITY ACCOUNT E
Offered by
PFL LIFE INSURANCE COMPANY--
A TRANSAMERICA COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This Statement of Additional Information expands upon subjects discussed in the
current prospectus for the Privilege Select variable annuity offered by PFL
Life Insurance Company. You may obtain a copy of the prospectus dated August
15, 2000, by calling 1-800-525-6205, or by writing to the Administrative and
Service Office, Financial Markets Division-Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. The prospectus sets forth
information that a prospective investor should know before investing in a
policy. Terms used in the current prospectus for the policy are incorporated in
this Statement of Additional Information.
This Statement of Additional Information (SAI) is not a prospectus and should
be read only in conjunction with the prospectuses for the policy and the
underlying fund portfolios.
Dated: August 15, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GLOSSARY OF TERMS.......................................................... 3
THE POLICY--GENERAL PROVISIONS............................................. 6
Owner.................................................................... 6
Entire Policy............................................................ 6
Misstatement of Age or Sex............................................... 7
Addition, Deletion, or Substitution of Investments....................... 7
Excess Interest Adjustment............................................... 7
Reallocation of Policy Values After the Annuity Commencement Date........ 12
Annuity Payment Options.................................................. 13
Death Benefit............................................................ 14
Death of Owner........................................................... 16
Assignment............................................................... 16
Evidence of Survival..................................................... 16
Non Participating........................................................ 16
Amendments............................................................... 17
Employee and Agent Purchases............................................. 17
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 17
Tax Status of the Policy................................................. 17
Taxation of PFL.......................................................... 21
INVESTMENT EXPERIENCE...................................................... 21
Accumulation Units....................................................... 21
Annuity Unit Value and Annuity Payment Rates............................. 23
FAMILY INCOME PROTECTOR--ADDITIONAL INFORMATION............................ 25
HISTORICAL PERFORMANCE DATA................................................ 28
Money Market Yields...................................................... 28
Other Subaccount Yields.................................................. 29
Total Returns............................................................ 29
Other Performance Data................................................... 30
Adjusted Historical Performance Data..................................... 30
PUBLISHED RATINGS.......................................................... 30
STATE REGULATION OF PFL.................................................... 31
ADMINISTRATION............................................................. 31
RECORDS AND REPORTS........................................................ 31
DISTRIBUTION OF THE POLICIES............................................... 31
VOTING RIGHTS.............................................................. 32
OTHER PRODUCTS............................................................. 32
CUSTODY OF ASSETS.......................................................... 32
LEGAL MATTERS.............................................................. 33
INDEPENDENT AUDITORS....................................................... 33
OTHER INFORMATION.......................................................... 33
FINANCIAL STATEMENTS....................................................... 33
</TABLE>
2
<PAGE>
GLOSSARY OF TERMS
Accumulation Unit--An accounting unit of measure used in calculating the policy
value in the separate account before the annuity commencement date.
Adjusted Policy Value--An amount equal to the policy value increased or
decreased by any excess interest adjustments applied on the annuity
commencement date.
Administrative and Service Office--Financial Markets Division Variable Annuity
Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Annuitant--The person during whose life any annuity payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which annuity payments are to
commence. The annuity commencement date may not be later than the last day of
the policy month starting after the annuitant attains age 85, except as
expressly allowed by PFL, but in no event later than the last day of the policy
month following the month in which the annuitant attains age 95. The annuity
commencement date may be required to be earlier for qualified policies.
Annuity Payment Option--A method of receiving a stream of annuity payments
selected by the owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent variable annuity payment.
Application--A written application, order form, or any other information
received electronically or otherwise upon which the policy is issued and/or is
reflected on the data or specifications page.
Beneficiary--The person who has the right to the death benefit set forth in the
policy.
Business Day--A day when the New York Stock Exchange is open for business.
Cash Value--The policy value increased or decreased by an excess interest
adjustment, less the service charge, and less any applicable premium taxes,
surrender charge, and family income protector rider fee.
Code--The Internal Revenue Code of 1986, as amended.
Cumulative Free Percentage--The percentage (as applied to the policy value)
which is available free of any surrender charge.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial or full surrenders from the fixed account guaranteed
period options, or to amounts applied to annuity payment options. The
adjustment reflects changes in the interest rates declared by PFL since the
date any payment was received by or an amount was transferred to the guaranteed
period option. The excess interest adjustment can either decrease or increase
the amount to be received by the owner upon full surrender or commencement of
annuity payments, depending upon whether there has been an increase or decrease
in interest rates, respectively.
Excess Partial Withdrawal--The portion of a partial withdrawal (surrender) that
exceeds the cumulative free percentage.
Fixed Account--One or more investment choices under the policy that are part of
the general assets of PFL and are not in the separate accounts.
3
<PAGE>
Guaranteed Period Options--The various guaranteed interest rate periods of the
fixed account which may be offered by PFL and into which premium payments may
be paid or amounts transferred.
Nonqualified Policy--A policy other than a qualified policy.
Owner--The person who may exercise all rights and privileges under the policy.
The owner during the lifetime of the annuitant and prior to the annuity
commencement date is the person designated as the owner or a successor owner in
the information that we require to issue a policy.
Policy Value--On or before the annuity commencement date, the policy value is
equal to the owner's:
. premium payments; minus
. partial withdrawals (including any applicable excess interest
adjustments and/or surrender charges on such withdrawals); plus
. interest credited in the fixed account; plus or minus
. accumulated gains or losses in the separate account; minus
. service charges, premium taxes, rider fees, and transfer fees, if any.
Policy Year--A policy year begins on the policy date in which the policy
becomes effective and on each anniversary thereof.
Premium Payment--An amount paid to PFL by the owner or on the owner's behalf as
consideration for the benefits provided by the policy.
Qualified Policy--A policy issued in connection with retirement plans that
qualify for special federal income tax treatment under the Code.
Separate Account--PFL Life Variable Annuity Account E, a separate account
established and registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the "1940 Act"), to which premium payments
under the policies may be allocated.
Service Charge--There is an annual service charge on each policy anniversary
(and a charge at the time of surrender during any policy year) for policy
maintenance and related administrative expenses. This annual charge is $30, but
in no event will this charge be more than 2% of the policy value.
Subaccount--A subdivision within the separate account, the assets of which are
invested in a specified portfolio of the underlying funds.
Successor Owner--A person appointed by the owner to succeed to ownership of the
policy in the event of the death of the owner who is not the annuitant before
the annuity commencement date.
Surrender Charge--The applicable contingent deferred sales charge, assessed on
certain full surrenders or partial withdrawals of premium payments to cover
expenses relating to the sale of the policies.
Underlying Funds--The designated portfolios of: (1) Variable Insurance Products
Fund (Service Class 2), Variable Insurance Products Fund II (Initial and
Service Class 2), and Variable Insurance Products Fund III (Service Class 2),
managed by Fidelity Management & Research Company; (2) Janus Aspen Series,
managed by Janus Capital Corporation; (3) MFS Variable Insurance Trust, managed
by Massachusetts Financial Services Company; (4) Oppenheimer Variable Account
Funds, managed by OppenheimerFunds, Inc.; (5) STI Class Variable Trust, managed
by STI Capital Management, N.A.; and (6) WRL Series Fund, Inc. - WRL Goldman
Sachs Small Cap, subadvised by Goldman Sachs Asset Management and WRL VKAM
Emerging Growth, subadvised by Van Kampen Asset Management Inc.
4
<PAGE>
Valuation Period--The period of time from one determination of accumulation
unit and annuity unit values to the next subsequent determination of values.
Such determinations shall be made on each business day. Variable Annuity
Payment(s)--Payment(s) made pursuant to an annuity payment option which
fluctuate as to dollar amount or payment term in relation to the investment
performance of the specified subaccounts within the separate account.
Written Notice--Written notice, signed by the owner, that gives PFL the
information it requires and is received at the administrative and service
office. For some transactions, PFL may accept an electronic notice such as
telephone instructions. Such electronic notice must meet the requirements PFL
establishes for such notices.
5
<PAGE>
In order to supplement the description in the prospectus, the following
provides additional information about PFL and the policy, which may be of
interest to a prospective purchaser.
THE POLICY--GENERAL PROVISIONS
Owner
The policy shall belong to the owner upon issuance of the policy after
completion of an application and delivery of the initial premium payment. While
the annuitant is living, the owner may: (1) assign the policy; (2) surrender
the policy; (3) amend or modify the policy with PFL's consent; (4) receive
annuity payments or name a payee to receive the payments; and (5) exercise,
receive and enjoy every other right and benefit contained in the policy. The
exercise of these rights may be subject to the consent of any assignee or
irrevocable beneficiary; and of the owner's spouse in a community or marital
property state.
Unless PFL has been notified of a community or marital property interest in the
policy, it will rely on its good faith belief that no such interest exists and
will assume no responsibility for inquiry.
A successor owner can be named in the application or in a written notice. The
successor owner will become the new owner upon your death, if you predecease
the annuitant. If no successor owner survives you and you predecease the
annuitant, your estate will become the owner.
Note Carefully. If the owner does not name a successor owner, the owner's
estate will become the new owner. If no probate estate is opened because the
owner has precluded the opening of a probate estate by means of a trust or
other instrument, unless PFL has received written notice of the trust as a
successor owner signed prior to the owner's death, that trust may not exercise
ownership rights to the policy. It may be necessary to open a probate estate in
order to exercise ownership rights to the policy if no successor owner is named
in a written notice received by PFL.
The owner may change the ownership of the policy in a written notice. When this
change takes effect, all rights of ownership in the policy will pass to the new
owner. A change of ownership may have tax consequences.
When there is a change of owner or successor owner, the change will not be
effective until it is recorded in our records. Once recorded, it will take
effect as of the date the owner signs the written notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the owner or naming a new successor owner cancels any prior choice of
successor owner, but does not change the designation of the beneficiary or the
annuitant.
If ownership is transferred (except to the owner's spouse) because the owner
dies before the annuitant, the adjusted policy value generally must be
distributed to the successor owner within five years of the owner's death, or
if the first payment begins within one year of the owner's death, payments must
be made for a period certain which does not exceed that successor owner's life
expectancy.
Entire Policy
The policy, any endorsements thereon, the application, and information provided
in lieu thereof constitute the entire contract between PFL and the owner. All
statements in the application are representations and not warranties. No
statement will cause the policy to be void or to be used in defense of a claim
unless contained in the application or information provided in lieu thereof.
6
<PAGE>
Misstatement of Age or Sex
If the age or sex of the annuitant has been misstated, PFL will change the
annuity benefit payable to that which the premium payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by PFL
shall be paid in full with the next payment due such person or the beneficiary.
The dollar amount of any overpayment made by PFL due to any misstatement shall
be deducted from payments subsequently accruing to such person or beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
annuitant may be established at any time by the submission of proof
satisfactory to PFL.
Addition, Deletion, or Substitution of Investments
PFL cannot and does not guarantee that any of the subaccounts or portfolios
will always be available for premium payments, allocations, or transfers. PFL
retains the right, subject to any applicable law, to make certain changes in
the separate account and its investments. PFL reserves the right to eliminate
the shares of any portfolio held by a subaccount and/or to substitute shares of
another portfolio of the underlying funds, or of another registered open-end
management investment company for the shares of any portfolio, if the shares of
the portfolio are no longer available for investment or if, in PFL's judgment,
investment in any portfolio would be inappropriate in view of the purposes of
the separate account. To the extent required by the 1940 Act, substitutions of
shares attributable to an owner's interest in a subaccount will not be made
without prior notice to the owner and the prior approval of the Securities and
Exchange Commission (SEC). Nothing contained herein shall prevent the separate
account from purchasing other securities for other series or classes of
variable annuity policies, or from effecting an exchange between series or
classes of variable annuity policies on the basis of your requests.
New subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new subaccounts may
be made available to existing owners on a basis to be determined by PFL. Each
additional subaccount will purchase shares in a mutual fund portfolio or other
investment vehicle. PFL may also eliminate one or more subaccounts if, in its
sole discretion, marketing, tax, investment or other conditions warrant such
change. In the event any subaccount is eliminated, PFL will notify owners and
request a reallocation of the amounts invested in the eliminated subaccount. If
no such reallocation is provided by the owner, PFL will reinvest the amounts
invested in the eliminated subaccount in the subaccount that invests in the
Fidelity--VIP Money Market portfolio (or in a similar portfolio of money market
instruments) or in another subaccount, if appropriate.
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the policies,
the separate account may be (i) operated as a management company under the 1940
Act or any other form permitted by law, (ii) deregistered under the 1940 Act in
the event such registration is no longer required or (iii) combined with one or
more other separate accounts. To the extent permitted by applicable law, PFL
also may (1) transfer the assets of the separate account associated with the
policies to another account or accounts, (2) restrict or eliminate any voting
rights of owners or other persons who have voting rights as to the separate
account, (3) create new separate accounts, (4) add new subaccounts to or remove
existing subaccounts from the separate account, or combine subaccounts, or (5)
add new underlying funds, or substitute a new fund for an existing fund.
Excess Interest Adjustment
Money that you withdraw from or apply to an annuity payment option from a
guaranteed period option of the fixed account before the end of its guaranteed
period (the number of years you specified
7
<PAGE>
the money would remain in the guaranteed period option) may be subject to an
excess interest adjustment. At the time you request a withdrawal, if interest
rates PFL set have risen since the date of the initial guarantee, the excess
interest adjustment will result in a lower cash value. However, if interest
rates have fallen since the date of the initial guarantee, the excess interest
adjustment will result in a higher cash value.
Excess interest adjustments will not reduce the adjusted policy value for a
guaranteed period option below the amount paid into it, less any prior partial
withdrawals and transfers from that guaranteed period option, plus interest at
the policy's minimum guaranteed effective annual interest rate of 3%. This is
referred to as the excess interest adjustment floor.
The formula which will be used to determine the excess interest adjustment is:
S*(G - C)* (M/12)
S = Gross amount being withdrawn that is subject to the excess interest
adjustment
G = Guaranteed Interest Rate applicable to S.
C = Current Guaranteed Interest Rate then being offered on new premium payments
for the next longer guaranteed period than "M". If this policy form or such
a guaranteed period is no longer offered, "C" will be the U.S. Treasury
rate for the next longer maturity (in whole years) than "M" on the 25th day
of the previous calendar month, plus up to 2%.
M = Number of months remaining in the current guaranteed period, rounded up to
the next higher whole number of months.
* = multiplication
/\ = exponentiation
8
<PAGE>
Example 1 (Full Surrender, rates increase by 3%):
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Single premium: $50,000
-------------------------------------------------------------------------------
Guarantee period: 5 Years
-------------------------------------------------------------------------------
Guarantee rate: 5.50% per annum
-------------------------------------------------------------------------------
Full surrender: middle of contract year 3
-------------------------------------------------------------------------------
Policy value at middle of = 50,000* (1.055) /\ 2.5 = 57,161.18
contract year 3
-------------------------------------------------------------------------------
Surrender charge free amount = 57,161.18* .30 = 17,148.35
at middle of policy year 3
-------------------------------------------------------------------------------
Excess interest adjustment = 57,161.18 - 50,000 = 7,161.18
free amount at middle of
policy year 3
-------------------------------------------------------------------------------
Amount subject to excess = 57,161.18 - 7,161.18 = 50,000.00
interest adjustment
-------------------------------------------------------------------------------
Excess interest adjustment = 50,000* (1.03) /\ 2.5 = 53,834.80
floor
-------------------------------------------------------------------------------
Excess interest adjustment
G = .055
C = .085
M = 30
-------------------------------------------------------------------------------
Excess interest adjustment = S* (G - C)* (M/12)
= 50,000.00* (.055 - .085)* (30/12)
= -3,750.00, but excess interest adjustment
cannot cause the adjusted policy value to fall
below the excess interest adjustment floor, so
the adjustment is limited to 53,834.80 -
57,161.18 = -3,326.38
-------------------------------------------------------------------------------
Adjusted policy value = policy value + excess interest adjustment
= 57,161.18 - 3,326.38 = 53,834.80
-------------------------------------------------------------------------------
Surrender charge = (50,000 - 17,148.35)* .06 = 1,971.10
-------------------------------------------------------------------------------
Cash value at middle of = policy value + excess interest adjustment -
policy year 3 surrender charge
= 57,161.18 - 3,326.38 - 1,971.10
= 51,863.70
</TABLE>
9
<PAGE>
Example 2 (Full Surrender, rates decrease by 1%):
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Single premium: $50,000
-------------------------------------------------------------------------------
Guarantee period: 5 Years
-------------------------------------------------------------------------------
Guarantee rate: 5.50% per annum
-------------------------------------------------------------------------------
Full surrender: middle of contract year 3
-------------------------------------------------------------------------------
Policy value at middle of = 50,000* (1.055) /\ 2.5 = 57,161.18
policy year 3
-------------------------------------------------------------------------------
Surrender charge free amount = 57,161.18* .30 = 17,148.35
at middle of policy year 3
-------------------------------------------------------------------------------
Excess interest adjustment = 57,161.18 - 50,000 = 7,161.18
free amount at middle of
policy year 3
-------------------------------------------------------------------------------
Amount subject to excess = 57,161.18 - 7,161.18 = 50,000.00
interest adjustment
-------------------------------------------------------------------------------
Excess interest adjustment = 50,000* (1.03) /\ 2.5 = 53,834.80
floor
-------------------------------------------------------------------------------
Excess interest adjustment
G = .055
C = .045
M = 30
-------------------------------------------------------------------------------
Excess interest adjustment = S* (G - C)* (M/12)
= 50,000* (.055 - .045)* (30/12)
= 1,250.00
-------------------------------------------------------------------------------
Adjusted policy value = policy value + excess interest adjustment
= 57,161.18 + 1,250.00 = 58,411.18
-------------------------------------------------------------------------------
Surrender charge = (50,000 - 17,148.35)* .06 = 1,971.10
-------------------------------------------------------------------------------
Cash value at middle of policy = policy value + excess interest adjustment -
year 3 surrender charge
= 57,161.18 + 1,250 - 1,971.10
= 56,440.08
</TABLE>
On a partial withdrawal, PFL will pay the owner the full amount of withdrawal
requested (as long as the policy value is sufficient). Surrender charge--Free
withdrawals will reduce the policy value by the amount withdrawn. Amounts
withdrawn in excess of the surrender charge--Free amount will reduce the policy
value by an amount equal to:
X - Y + Z
X = excess partial withdrawal = requested withdrawal less cumulative free
percentage
Y = excess interest adjustment = (A)*(G -C)*(M/12) where G, C, and M are
defined above, with "A" substituted for "S" in the definition of G and M.
A = amount of partial withdrawal which is subject to excess interest
adjustment = requested withdrawal - excess interest adjustment - cumulative
free percentage, where excess interest adjustment - cumulative free
percentage = cumulative interest credited at time of, but prior to,
withdrawal.
Z = surrender charge on X minus Y.
10
<PAGE>
Example 3 (Partial Withdrawal, rates increase by 1%):
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Single premium: $50,000
-------------------------------------------------------------------------------
Guarantee period: 5 Years
-------------------------------------------------------------------------------
Guarantee rate: 5.50% per annum
-------------------------------------------------------------------------------
Partial surrender: $30,000; middle of contract year 3
-------------------------------------------------------------------------------
Policy value at middle of policy = 50,000* (1.055) /\ 2.5 = 57,161.18
year 3
-------------------------------------------------------------------------------
Surrender charge free amount at = 57,161.18* .30 = 17,148.35
middle of policy year 3
-------------------------------------------------------------------------------
Excess interest adjustment free = 57,161.18 - 50,000 = 7,161.18
amount at middle of policy year
3
-------------------------------------------------------------------------------
Excess interest adjustment /
surrender charge
X = 30,000 -17,148.35 =
12,851.65
A = 30,000 -7,161.18 = 22,838.82
G = .055
C = .065
M = 30
Y = 22,838.82* (.055 -.065)*
(30/12) = -570.97
Z = .06* [12,851.65 -(-570.97)]
= 805.36
-------------------------------------------------------------------------------
Reduction to policy value due to = 17,148.35
surrender charge--
-------------------------------------------------------------------------------
Reduction to policy value due to = X - Y + Z
excess withdrawal = 12,851.65 -(-570.97) + 805.36
= 14,227.98
-------------------------------------------------------------------------------
Policy value after withdrawal at = 57,161.18 - [17,148.35 + 14,227.98]
middle of policy year 3
= 57,161.18 - [17,148.35 + 12,851.65 -
(-570.97) + 805.36]
= 57,161.18 - [30,000 - (-570.97) + 805.36]
= 57,161.18 - 31,376.33 = 25,784.85
</TABLE>
11
<PAGE>
Example 4 (Partial Withdrawal, rates decrease by 1%):
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Single premium: $50,000
-------------------------------------------------------------------------------
Guarantee period: 5 Years
-------------------------------------------------------------------------------
Guarantee rate: 5.50% per annum
-------------------------------------------------------------------------------
Partial surrender: $30,000; middle of contract year 3
-------------------------------------------------------------------------------
Policy value at middle of policy = 50,000 (1.055) /\ 2.5 = 57,161.18
year 3
-------------------------------------------------------------------------------
Surrender charge free amount at = 57,161.18* .30 = 17,148.35
middle of policy year 3
-------------------------------------------------------------------------------
Excess interest adjustment free = 57,161.18 - 50,000 = 7,161.18
amount at middle of policy year
3
-------------------------------------------------------------------------------
Excess interest adjustment /
surrender charge
X = 30,000 - 17,148.35 =
12,851.65
A = 30,000 - 7,161.18 = 22,838.82
G = .055
C = .045
M = 30
Y = 22,838.82* (.055 - .045)*
(30/12) = 570.97
Z = .06* [12,851.65 - (570.97)] =
736.84
-------------------------------------------------------------------------------
Reduction to policy value due to = 17,148.35
surrender charge--Free
Withdrawal
-------------------------------------------------------------------------------
Reduction to policy value due to = X - Y + Z
excess withdrawal
= 12,851.65 - 570.97 + 736.84
= 13,017.52
-------------------------------------------------------------------------------
Policy value after withdrawal at = 57,161.18 - [17,148.35 + 13,017.52]
middle of policy year 3
= 57,161.18 - [17,148.35 + 12,851.65 -
570.97 + 736.84]
= 57,161.18 - [30,000 /\ (570.97) + 736.84]
= 57,161.18 - 30,165.87 = 26,995.31
</TABLE>
Reallocation of Policy Values After the Annuity Commencement Date
After the annuity commencement date, the owner may reallocate the value of a
designated number of annuity units of a subaccount of the separate account then
credited to a policy into an equal value of annuity units of one or more other
subaccounts of the separate account, or the fixed account. An annuity unit is
an accounting unit used in the calculation of the amount of the second and each
subsequent variable annuity payment. The reallocation shall be based on the
relative value of the annuity units of the account(s) or subaccount(s) at the
end of the business day on the next payment date. The minimum amount which may
be reallocated is the lesser of (1) $10 of monthly income or (2) the entire
monthly income of the annuity units in the account or subaccount from which the
transfer is being made. If the monthly income of the annuity units remaining in
an account or subaccount after a reallocation is less than $10, PFL reserves
the right to include the value of those annuity units as part of the transfer.
The request must be in writing to PFL's administrative and service office.
There is no charge assessed in connection with such reallocation. A
reallocation of policy value may be made up to four times in any given policy
year.
12
<PAGE>
After the annuity commencement date, no transfers may be made from the fixed
account to the separate account.
Annuity Payment Options
During the lifetime of the annuitant and prior to the annuity commencement
date, the owner may choose an annuity payment option or change the election,
but written notice of any election or change of election must be received by
PFL at its administrative and service office at least thirty (30) days prior to
the annuity commencement date. If no election is made prior to the annuity
commencement date, annuity payments will be made under (i) Payment Option 3,
life income with fixed (level) payments for 10 years certain, using the
existing adjusted policy value of the fixed account, or (ii) under Payment
Option 3, life income with variable payments for 10 years certain using the
existing policy value of the separate account, or (iii) in a combination of (i)
and (ii).
The person who elects an annuity payment option can also name one or more
successor payees to receive any unpaid amount PFL has at the death of a payee.
Naming these payees cancels any prior choice of a successor payee.
A payee who did not elect the annuity payment option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL agrees.
Variable Payment Options. The dollar amount of the first variable annuity
payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table with projection using
Scale G factors, assuming a maturity date in the year 2000. ("The 1983 Table a"
mortality rates are adjusted based on improvements in mortality since 1983 to
more appropriately reflect increased longevity. This is accomplished using a
set of improvement factors referred to as projection scale G.) The dollar
amount of additional variable annuity payments will vary based on the
investment performance of the subaccount(s) of the separate account selected by
the annuitant or beneficiary.
Determination of the First Variable Payment. The amount of the first variable
payment depends upon the sex (if consideration of sex is allowed under state
law) and adjusted age of the annuitant. The adjusted age is the annuitant's
actual age nearest birthday, on the annuity commencement date, adjusted as
follows
<TABLE>
<CAPTION>
Annuity
Commencement
Date Adjusted Age
------------ ------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
Determination of Additional Variable Payments. All variable annuity payments
other than the first are calculated using annuity units which are credited to
the policy. The number of annuity units to be credited in respect of a
particular subaccount is determined by dividing that portion of the first
variable annuity payment attributable to that subaccount by the annuity unit
value of that subaccount
13
<PAGE>
on the annuity commencement date. The number of annuity units of each
particular subaccount credited to the policy then remains fixed, assuming no
transfers to or from that subaccount occur. The dollar value of variable
annuity units in the chosen subaccount will increase or decrease reflecting the
investment experience of the chosen subaccount. The dollar amount of each
variable annuity payment after the first may increase, decrease or remain
constant. This amount is equal to the sum of the amounts determined by
multiplying the number of annuity units of each particular subaccount credited
to the policy by the annuity unit value for the particular subaccount as of the
first business day of each month.
Death Benefit
Adjusted Partial Withdrawal. The amount of your Guaranteed Minimum Death
Benefit is reduced due to a partial withdrawal called the adjusted partial
withdrawal. The reduction amount depends on the relationship between your
guaranteed minimum death benefit and policy value. The adjusted partial
withdrawal is the sum of (1) and (2), where:
(1) The surrender charge-free withdrawal amount taken; and
(2) The amount that an excess partial withdrawal (the portion of a
withdrawal that can be subject to a surrender charge) reduces the policy
value times [(a) divided by (b)] where:
(a) is the amount of the death benefit prior to the excess partial
withdrawal; and
(b) is the policy value prior to the excess partial withdrawal.
The following examples describe the effect of a withdrawal on the guaranteed
minimum death benefit and policy value.
EXAMPLE 1
--------------------------------------------------------------------------------
(Assumed Facts for Example)
<TABLE>
------------------------------------------------------------------------------
<C> <S>
$75,000 current guaranteed minimum death benefit before withdrawal
------------------------------------------------------------------------------
$50,000 current policy value before withdrawal
------------------------------------------------------------------------------
$75,000 current death benefit (larger of policy value and guaranteed minimum
death benefit)
------------------------------------------------------------------------------
6% current surrender charge percentage
------------------------------------------------------------------------------
$15,000 requested withdrawal
------------------------------------------------------------------------------
$10,000 surrender charge-free amount (assumes 20% cumulative free percentage
is available)
------------------------------------------------------------------------------
$5,000 excess partial withdrawal (amount subject to surrender charge)
------------------------------------------------------------------------------
$100 excess interest adjustment--(assumes interest rates have decreased
since initial guarantee)
------------------------------------------------------------------------------
$294 surrender charge on (excess partial withdrawal less excess interest
adjustment) = 0.06*(5000 - 100)
------------------------------------------------------------------------------
$5,194 reduction in policy value due to excess partial withdrawal = 5000 -
100+294
------------------------------------------------------------------------------
$17,791 adjusted partial withdrawal = $10,000 + [$5,194 * (75,000/50,000)]
------------------------------------------------------------------------------
$57,209 new guaranteed minimum death benefit (after withdrawal) = 75,000 -
17,791
------------------------------------------------------------------------------
$34,806 new policy value (after withdrawal) = 50,000 - 10,000 - 5,194
</TABLE>
<TABLE>
<CAPTION>
Summary:
<S> <C>
Reduction in guaranteed minimum death benefit = $17,791
Reduction in policy value = $15,194
</TABLE>
14
<PAGE>
Note, guaranteed minimum death benefit is reduced more than the policy value
since the guaranteed minimum death benefit was greater than the policy value
just prior to the withdrawal.
EXAMPLE 2
--------------------------------------------------------------------------------
(Assumed Facts for Example)
<TABLE>
------------------------------------------------------------------------------
<C> <S>
$50,000 current guaranteed minimum death benefit before withdrawal
------------------------------------------------------------------------------
$75,000 current policy value before withdrawal
------------------------------------------------------------------------------
$75,000 current death benefit (larger of policy value and guaranteed minimum
death benefit)
------------------------------------------------------------------------------
6% current surrender charge percentage
------------------------------------------------------------------------------
$15,000 requested withdrawal
------------------------------------------------------------------------------
$11,250 surrender charge-free amount (assumes 15% cumulative free percentage
is available)
------------------------------------------------------------------------------
$3,750 excess partial withdrawal (amount subject to surrender charge)
------------------------------------------------------------------------------
$-100 excess interest adjustment - (assumes interest rates have increased
since initial guarantee)
------------------------------------------------------------------------------
$231 surrender charge on (excess partial withdrawal less excess interest
adjustment) = 0.06*[(3750 - (-100))]
------------------------------------------------------------------------------
$4,081 reduction in policy value due to excess partial withdrawal = 3750 -
(-100) + 231 = 3750 + 100 + 231
------------------------------------------------------------------------------
$15,331 adjusted partial withdrawal = $11,250 + [$4,081 * (75,000/75,000)]
------------------------------------------------------------------------------
$34,669 new guaranteed minimum death benefit (after withdrawal) = 50,000 -
15,331
------------------------------------------------------------------------------
$59,669 new policy value (after withdrawal) = 75,000in - 11,250 - 4,081
</TABLE>
<TABLE>
<CAPTION>
Summary:
<S> <C>
Reduction in guaranteed minimum death benefit = $15,331
Reduction in policy value = $15,331
</TABLE>
Note, guaranteed minimum death benefit and policy value are reduced by the same
amount since the policy value was equal to the guaranteed minimum death benefit
just prior to the withdrawal.
Due proof of death of the annuitant is proof that the annuitant who is the
owner died prior to the commencement of annuity payments. A certified copy of a
death certificate, a certified copy of a decree of a court of competent
jurisdiction as to the finding of death, a written statement by the attending
physician, or any other proof satisfactory to PFL, will constitute due proof of
death. Upon receipt of this proof and an election of a method of settlement and
return of the policy, the death benefit generally will be paid within seven
days, or as soon thereafter as PFL has sufficient information about the
beneficiary to make the payment. The beneficiary may receive the amount payable
in a lump sum cash benefit, or, subject to any limitation under any state or
federal law, rule, or regulation, under one of the annuity payment options
described above, unless a settlement agreement is effective at the death of the
owner preventing such election.
Distribution Requirements. If the annuitant was the owner, and the beneficiary
was not the annuitant's spouse, the death benefit must (1) be distributed
within five years of the date of the deceased owner's death, or (2) payments
under an annuity payment option must begin no later than one year after the
deceased owner's death and must be made for the beneficiary's lifetime or for a
period certain (so long as any period certain does not exceed the beneficiary's
life expectancy). Death proceeds which are not paid to or for the benefit of a
natural person must be distributed within five
15
<PAGE>
years of the date of the deceased owner's death. If the sole beneficiary is the
deceased owner's surviving spouse, such spouse may elect to continue the policy
as the new annuitant and owner instead of receiving the death benefit. (See
"Certain Federal Income Tax Consequences.")
If the annuitant is not the owner, and the owner dies prior to the annuity
commencement date, a successor owner may surrender the policy at any time for
the amount of the adjusted policy value. If the successor owner is not the
deceased owner's spouse, however, the adjusted policy value must be
distributed: (1) within five years after the date of the deceased owner's
death, or (2) payments under an annuity payment option must begin no later than
one year after the deceased owner's death and must be made for the successor
owner's lifetime or for a period certain (so long as any period certain does
not exceed the successor owner's life expectancy).
Beneficiary. The beneficiary designation in the application will remain in
effect until changed. The owner may change the designated beneficiary by
sending written notice to PFL. The beneficiary's consent to such change is not
required unless the beneficiary was irrevocably designated or law requires
consent. (If an irrevocable beneficiary dies, the owner may then designate a
new beneficiary.) The change will take effect as of the date the owner signs
the written notice, whether or not the owner is living when the Notice is
received by PFL. PFL will not be liable for any payment made before the written
notice is received. If more than one beneficiary is designated, and the owner
fails to specify their interests, they will share equally.
Death of Owner
Federal tax law requires that if any owner (including any joint owner or any
successor owner who has become a current owner) dies before the annuity
commencement date, then the entire value of the policy must generally be
distributed within five years of the date of death of such owner. Certain rules
apply where (1) the spouse of the deceased owner is the sole beneficiary; (2)
the owner is not a natural person and the primary annuitant dies or is changed;
or (3) any owner dies after the annuity commencement date. See "Certain Federal
Income Tax Consequences" below for more information about these rules. Other
rules may apply to qualified policies.
Assignment
During the lifetime of the annuitant the owner may assign any rights or
benefits provided by the policy if your policy is a nonqualified policy. An
assignment will not be binding on PFL until a copy has been filed at its
administrative and service office. The rights and benefits of the owner and
beneficiary are subject to the rights of the assignee. PFL assumes no
responsibility for the validity or effect of any assignment. Any claim made
under an assignment shall be subject to proof of interest and the extent of the
assignment. An assignment may have tax consequences.
Unless you so direct by filing written notice with PFL, no beneficiary may
assign any payments under the policy before they are due. To the extent
permitted by law, no payments will be subject to the claims of any
beneficiary's creditors.
Ownership under qualified policies is restricted to comply with the Code.
Evidence of Survival
PFL reserves the right to require satisfactory evidence that a person is alive
if a payment is based on that person being alive. No payment will be made until
PFL receives such evidence.
Non-Participating
The policy will not share in PFL's surplus earnings; no dividends will be paid.
16
<PAGE>
Amendments
No change in the policy is valid unless made in writing by PFL and approved by
one of PFL's officers. No registered representative has authority to change or
waive any provision of the policy.
PFL reserves the right to amend the policy to meet the requirements of the
Code, regulations or published rulings. You can refuse such a change by giving
written notice, but a refusal may result in adverse tax consequences.
Employee and Agent Purchases
The policy may be acquired by an employee or registered representative of any
broker/dealer authorized to sell the policy or their spouse or minor children,
or by an officer, director, trustee or bona-fide full-time employee of PFL or
its affiliated companies or their spouse or minor children. In such a case, PFL
may credit an amount equal to a percentage of each premium payment to the
policy due to lower acquisition costs PFL experiences on those purchases. The
credit will be reported to the Internal Revenue Service as taxable income to
the employee or registered representative. PFL may offer certain employer
sponsored savings plans, in its discretion reduced fees and charges including,
but not limited to, the service charge, the surrender charges, the mortality
and expense risk fee and the administrative charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which PFL is not presently aware
which could result in reduced sales or distribution expenses. Credits to the
policy or reductions in these fees and charges will not be unfairly
discriminatory against any owner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a policy, based on the Internal
Revenue Code of 1986, as amended, proposed and final Treasury Regulations
thereunder, judicial authority, and current administrative rulings and
practice. This summary discusses only certain federal income tax consequences
to "United States Persons," and does not discuss state, local, or foreign tax
consequences. United States Persons means citizens or residents of the United
States, domestic corporations, domestic partnerships and trusts or estates that
are subject to United States federal income tax regardless of the source of
their income.
Tax Status of the Policy
The following discussion is based on the assumption that the policy qualifies
as an annuity contract for federal income tax purposes.
Diversification Requirements. Section 817(h) of the Code provides that in order
for a variable contract which is based on a segregated asset account to qualify
as an annuity contract under the Code, the investments made by such account
must be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) (Treas. Reg. ((S)) 1.817-5)
apply a diversification requirement to each of the subaccounts of the separate
account. The separate account, through the underlying funds and their
portfolios, intends to comply with the diversification requirements of the
Treasury. PFL has entered into agreements regarding participation in the
Privilege Select that require the underlying funds and their portfolios to be
operated in compliance with the Treasury regulations.
Owner Control. In certain circumstances, owners of variable annuity contracts
may be considered the owners, for federal income tax purposes, of the assets of
the separate account used to support
17
<PAGE>
their contracts. In those circumstances, income and gains from the separate
account assets would be includable in the variable annuity contractowner's
gross income. Several years ago, the Internal Revenue Service stated in
published rulings that a variable contractowner will be considered the owner of
separate account assets if the contractowner possesses incidents of ownership
in those assets, such as the ability to exercise investment control over the
assets. More recently, the Treasury Department announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor, rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets."
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the owner of a policy has the choice of one or more subaccounts in
which to allocate premiums and policy values, and may be able to transfer among
these accounts more frequently than in such rulings. These differences could
result in policyowners being treated as the owners of the assets of the
separate account. In addition, PFL does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. PFL therefore reserves the right to modify the
policies as necessary to attempt to prevent the policyowners from being
considered the owners of a pro rata share of the assets of the separate
account.
Distribution Requirements. The Code also requires that nonqualified policies
contain specific provisions for distribution of policy proceeds upon the death
of any owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such policies provide that if any owner
dies on or after the annuity commencement date and before the entire interest
in the policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such owner's death. If any
owner dies before the annuity commencement date, the entire interest in the
policy must generally be distributed within five years after such owner's date
of death or be applied to provide an immediate annuity under which payments
will begin within one year of such owner's death and will be made for the life
of the beneficiary or for a period not extending beyond the life expectancy of
the beneficiary. However, if such owner's death occurs prior to the annuity
commencement date, and such owner's surviving spouse is named the beneficiary,
then the policy may be continued with the surviving spouse as the new owner. If
any owner is not a natural person, then for purposes of these distribution
requirements, the primary annuitant shall be treated as the owner and any death
or change of such primary annuitant shall be treated as the death of an owner.
The policy contains provisions intended to comply with these requirements of
the Code. No regulations interpreting these requirements of the Code have yet
been issued and thus no assurance can be given that the provisions contained in
the policies satisfy all such Code requirements. The provisions contained in
the policies will be reviewed and modified if necessary to maintain their
compliance with the Code requirements when clarified by regulation or
otherwise.
Withholding. The portion of any distribution under a policy that is includable
in gross income will be subject to federal income tax withholding unless the
recipient of such distribution elects not to have federal income tax withheld.
Election forms will be provided at the time distributions are requested or
made. The withholding rate varies according to the type of distribution and the
owner's tax status. For qualified policies, "eligible rollover distributions"
from Section 401(a) plans, Section 403(a) annuities, and Section 403(b) tax-
sheltered annuities are subject to a mandatory federal income tax withholding
of 20%. An eligible rollover distribution is the taxable portion of any
distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified
18
<PAGE>
annuity form. The 20% withholding does not apply, however, if the owner chooses
a "direct rollover" from the plan to another tax-qualified plan or IRA.
Different withholding requirements may apply in the case of non-United States
persons.
Qualified Policies. The qualified policy is designed for use with several types
of tax-qualified retirement plans. The tax rules applicable to participants and
beneficiaries in tax-qualified retirement plans vary according to the type of
plan and the terms and conditions of the plan. Special favorable tax treatment
may be available for certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions);
distributions that do not conform to specified commencement and minimum
distribution rules; and in other specified circumstances. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into the policies or PFL's policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
policies comply with applicable law.
For qualified plans under Section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the owner (or
plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined in the Code), or if the policy is a traditional individual retirement
annuity, then distributions generally must begin no later than April 1 of the
calendar year in which the owner (or plan participant) reaches age 70 1/2. Each
owner is responsible for requesting distributions under the policy that satisfy
applicable tax rules.
PFL makes no attempt to provide more than general information about use of the
policy with the various types of retirement plans. Purchasers of policies for
use with any retirement plan should consult their legal counsel and tax adviser
regarding the suitability of the policy.
Individual Retirement Annuities. In order to qualify as a traditional
individual retirement annuity under Section 408(b) of the Code, a policy must
contain certain provisions: (i) the owner must be the annuitant; (ii) the
policy generally is not transferable by the owner, e.g., the owner may not
designate a new owner, designate a successor owner or assign the policy as
collateral security; (iii) the total premium payments for any calendar year on
behalf of any individual may not exceed $2,000, except in the case of a
rollover amount or contribution under Sections 402(c), 403(a)(4), 403(b)(8) or
408(d)(3) of the Code; (iv) annuity payments or partial withdrawals must begin
no later than April 1 of the calendar year following the calendar year in which
the annuitant attains age 70 1/2; (v) an annuity payment option with a Period
Certain that will guarantee annuity payments beyond the life expectancy of the
annuitant and the beneficiary may not be selected; (vi) certain payments of
death benefits must be made in the event the annuitant dies prior to the
distribution of the policy value; and (vii) the entire interest of the owner is
non-forfeitable. Policies intended to qualify as traditional individual
retirement annuities under Section 408(b) of the Code contain such provisions.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. Distributions prior to age 59 1/2 (unless certain
exceptions apply) are subject to a 10% penalty tax.
No part of the funds for an individual retirement account (including a Roth
IRA) or annuity may be invested in a life insurance contract, but the
regulations thereunder allow such funds to be invested in an annuity policy
that provides a death benefit that equals the greater of the premiums paid or
the cash value for the contract. The policy provides an enhanced death benefit
that could exceed the amount of such a permissible death benefit, but it is
unclear to what extent such an enhanced death benefit could disqualify the
policy as an IRA. The Internal Revenue Service has not reviewed the policy for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether an enhanced death benefit provision, such as the
provision in the policy, comports with IRA qualification requirements.
19
<PAGE>
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply to the rollover or
conversion and to distributions attributable thereto. You should consult a tax
adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years. The
Roth IRA is available to individuals with earned income and whose modified
adjusted gross income is under $110,000 for single filers, $160,000 for married
filing jointly, and $10,000 for married filing separately. The amount per
individual that may be contributed to all IRAs (Roth and traditional) is
$2,000. Secondly, the distributions are taxed differently. The Roth IRA offers
tax-free distributions when made 5 tax years after the first contribution to
any Roth IRA of the individual and made after attaining age 59 1/2, to pay for
qualified first time homebuyer expenses (lifetime maximum of $10,000) or due to
death or disability. All other distributions are subject to income tax when
made from earnings and may be subject to a premature withdrawal penalty tax
unless an exception applies. Unlike the traditional IRA, there are no minimum
required distributions during the owner's lifetime; however, required
distributions at death are generally the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by public
school systems and certain tax exempt organizations to purchase policies for
their employees are excludable from the gross income of the employee, subject
to certain limitations. However, such payments may be subject to FICA (Social
Security) taxes. The policy includes a death benefit that in some cases may
exceed the greater of the premium payments or the policy value. The death
benefit could be characterized as an incidental benefit, the amount of which is
limited in any tax-sheltered annuity under Section 403(b). Because the death
benefit may exceed this limitation, employers using the policy in connection
with such plans should consult their tax adviser. Additionally, in accordance
with the requirements of the Code, Section 403(b) annuities generally may not
permit distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Sections 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the policies to accumulate retirement savings. Adverse
tax consequences to the plan, the participant or both may result if the policy
is assigned or transferred to any individual as a means to provide benefit
payments. The policy includes a death benefit that in some cases may exceed the
greater of the premium payments or the policy value. The death benefit could be
characterized as an incidental benefit, the amount of which is limited in an
pension or profit sharing plan. Because the death benefit may exceed this
limitation, employers using the policy in connection with such plans should
consult their tax adviser.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is not used in the Code), provides
for certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. The policies can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. For non-governmental 457 plans, all such
investments, however, are owned by, and are subject to, the claims of the
general creditors of the sponsoring employer. Depending on the terms of the
particular plan, a non-governmental employer may be entitled to draw
20
<PAGE>
on deferred amounts for purposes unrelated to its Section 457 plan obligations.
In general, all amounts received under a Section 457 plan are taxable and are
subject to federal income tax withholding as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity contract
held by a taxpayer other than a natural person generally will not be treated as
an annuity contract under the Code; accordingly, an owner who is not a natural
person will recognize as ordinary income for a taxable year the excess of (i)
the sum of the cash value as of the close of the taxable year and all previous
distributions under the policy over (ii) the sum of the premium payments paid
for the taxable year and any prior taxable year and the amounts includable in
gross income for any prior taxable year with respect to the policy. For these
purposes, the policy value at year-end may have to be increased by any positive
excess interest adjustment which could result from a full surrender at such
time. There is, however, no definitive guidance on the proper tax treatment of
excess interest adjustments and the owner should contact a competent tax
adviser with respect to the potential tax consequences of an excess interest
adjustment. Notwithstanding the preceding sentences in that paragraph, Section
72(u) of the Code does not apply to (i) a policy where the nominal owner is not
a natural person but the beneficial owner of which is a natural person, (ii) a
policy acquired by the estate of a decedent by reason of such decedent's death,
(iii) a qualified policy (other than one qualifying under Section 457) or (iv)
a single-payment where the annuity the commencement date is no later than one
year from the date of the single premium payment; such policies are taxed as
described in the prospectus.
Taxation of PFL
PFL at present is taxed as a life insurance company under part I of subchapter
L of the Code. The separate account is treated as part of PFL and, accordingly,
will not be taxed separately as a "regulated investment company" under
subchapter M of the Code. PFL does not expect to incur any federal income tax
liability with respect to investment income and net capital gains arising from
the activities of the separate account retained as part of the reserves under
the policy. Based on this expectation, it is anticipated that no charges will
be made against the separate account for federal income taxes. If, in future
years, any federal income taxes are incurred by PFL with respect to the
separate account, PFL may make a charge to the separate account.
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of accumulation units
and annuity units, and to determine annuity payment rates.
Accumulation Units
Allocations of a premium payment directed to a subaccount are credited in the
form of accumulation units. Each subaccount has a distinct accumulation unit
value. The number of units credited is determined by dividing the premium
payment or amount transferred to the subaccount by the accumulation unit value
of the subaccount as of the end of the valuation period during which the
allocation is made. For each subaccount, the accumulation unit value for a
given business day is based on the net asset value of a share of the
corresponding portfolio of the underlying funds less any applicable charges or
fees. The investment performance of the portfolio, expenses, and deductions of
certain charges affect the value of an accumulation unit.
Upon allocation to the selected subaccount of the separate account, premium
payments are converted into accumulation units of the subaccount. The number of
accumulation units to be credited is determined by dividing the dollar amount
allocated to each subaccount by the value of an accumulation unit for that
subaccount as next determined after the premium payment is received at
21
<PAGE>
the administrative and service office or, in the case of the initial premium
payment, when the application is completed, whichever is later. The value of an
accumulation unit was arbitrarily determined at the inception of each
subaccount. Thereafter, the value of an accumulation unit is determined as of
the close of trading on each day the New York Stock Exchange is open for
business.
An index (the "net investment factor") which measures the investment
performance of a subaccount during a valuation period, is used to determine the
value of an accumulation unit for the next subsequent valuation period. The net
investment factor may be greater or less than or equal to one; therefore, the
value of an accumulation unit may increase, decrease or remain the same from
one valuation period to the next. The owner bears this investment risk. The net
investment performance of a subaccount and deduction of certain charges affect
the accumulation unit value.
The net investment factor for any subaccount for any valuation period is
determined by dividing (a) by (b) and subtracting (c) from the result, where:
(a) is the net result of:
. the net asset value per share of the shares held in the
subaccount determined at the end of the current valuation period;
plus
. the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the subaccount if the ex-
dividend date occurs during the current valuation period; plus or
minus
. a per share credit or charge for any taxes determined by PFL to
have resulted from the investment operations of the subaccount;
(b) the net asset value per share of the shares held in the subaccount
determined as of the end of the immediately preceding valuation period;
and
(c) is the charge for mortality and expense risk during the valuation
period (equal on an annual basis to 1.10% for the Return of Premium
Death Benefit and 1.25% for both the 5% Growth through age 80 Death
Benefit or the Annual Step-Up through age 80 Death Benefit) of the daily
net asset value of the subaccount, plus the .15% administrative charge
for all three Death Benefit Options.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining the Net Investment Factor
(Assume Either the 5% Growth through age 80 Death Benefit or
the Annual Step-Up through age 80 Death Benefit is in effect.)
Investment Experience Factor = (A + B - C) - E
-----------
D
<TABLE>
<S> <C>
Where: A = The net asset value of an underlying fund share as of the end of the
current valuation period.
Assume.............................................. A = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding valuation period.
Assume.............................................. B = 0
C = The per share charge or credit for any taxes reserved for at the end
of the current valuation period.
Assume.............................................. C = 0
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
D = The net asset value of an underlying fund share at the end of the
immediately preceding valuation period.
Assume...................................................... D = $11.40
E = The daily deduction for mortality and expense risk fee and
administrative charges, which totals 1.40% on an annual basis.
On a daily basis............................................ = .0000380909
Then, the net investment factor = (11.57 + 0 - 0) - .0000380909 = Z = 1.0148741898
---------------
11.40
</TABLE>
Formula and Illustration for Determining Accumulation Unit Value
Accumulation unit value = A * B
<TABLE>
<S> <C>
Where: A = The accumulation unit value for the immediately preceding
valuation period.
Assume............................................................... = $X
B = The net investment factor for the current valuation period.
Assume............................................................... = Y
</TABLE>
Then, the accumulation unit value = $X * Y = $Z
Annuity Unit Value and Annuity Payment Rates
The amount of variable annuity payments will vary with annuity unit values.
Annuity unit values rise if the net investment performance of the subaccount
exceeds the assumed interest rate of 5% annually. Conversely, annuity unit
values fall if the net investment performance of the subaccount is less than
the assumed rate. The value of a variable annuity unit in each subaccount was
established at $1.00 on the date operations began for that subaccount. The
value of a variable annuity unit on any subsequent business day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable annuity unit value for that subaccount on the
immediately preceding business day;
(b) is the net investment factor for that subaccount for the valuation
period; and
(c) is the investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the product
of discount factors of .99986634 per day to recognize the 5% effective annual
Assumed Investment Return. The valuation period is the period from the close of
the immediately preceding business day to the close of the current business
day.
The net investment factor for the policy used to calculate the value of a
variable annuity unit in each subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
. the net asset value of a fund share held in that subaccount
determined at the end of the current valuation period; plus
. the per share amount of any divident or capital gain distributions
made by the fund for shares held in that subaccount if the ex-
dividend date occurs during the valuation period; plus or minus
23
<PAGE>
. a per share charge or credit for any taxes reserved for, which PFL
determines to have resulted from the investment operations of the
subaccount.
(ii) is the net asset value of a fund share held in that subaccount
determined as of the end of the immediately preceding valuation period.
(iii) is a factor representing the mortality and expense risk fee and
administrative charge. This factor is equal, on an annual basis, to 1.25%
(for Death Benefit Option A) or 1.40% (for Death Benefit Options B and C)
of the daily net asset value of a fund share held in that subaccount.
The dollar amount of subsequent variable annuity payments will depend upon
changes in applicable annuity unit values.
The annuity payment rates vary according to the annuity option elected and the
sex and adjusted age of the annuitant at the annuity commencement date. The
policy also contains a table for determining the adjusted age of the annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity unit value = A * B * C
<TABLE>
<S> <C>
Where: A = Annuity unit value for the immediately preceding valuation period.
Assume............................................................... = $X
B = Investment experience factor for the valuation period for which the
annuity unit value is being calculated.
Assume................................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into the
annuity tables used.
Assume................................................................ = Z
</TABLE>
Then, the annuity unit value is:
$X * Y * Z = $Q
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First monthly variable annuity payment = A * B
------
$1,000
<TABLE>
<S> <C>
Where: A = The policy value as of the annuity commencement date.
Assume............................................................... = $X
B = The annuity purchase rate per $1,000 based upon the option selected,
the sex and adjusted age of the annuitant according to the tables
contained in the policy.
Assume............................................................... = $Y
</TABLE>
Then, the first monthly variable annuity payment = $X * $Y = $Z
-------
1,000
24
<PAGE>
Formula and Illustration for Determining the Number of Annuity Units
Represented by Each Monthly Variable Annuity Payment
Number of annuity units = A
-
B
<TABLE>
<S> <C>
Where: A = The dollar amount of the first monthly variable annuity payment.
Assume............................................................... = $X
B = The annuity unit value for the valuation date on which the first
monthly payment is due.
Assume............................................................... = $Y
</TABLE>
Then, the number of annuity units = $X = Z
--
$Y
FAMILY INCOME PROTECTOR--ADDITIONAL INFORMATION
The amounts shown below are hypothetical guaranteed minimum monthly payment
amounts under the "family income protector" for a $100,000 premium when annuity
payments do not begin until the rider anniversary indicated in the left-hand
column. These figures assume the following:
. there were no subsequent premium payments or withdrawals;
. there were no premium taxes;
. the $100,000 premium is subject to the family income protector;
. the annuitant is (or both annuitants are) 60 years old when the rider is
issued;
. the annual growth rate is 6.0% (once established, an annual growth rate
will not change during the life of the family income protector rider);
and
. there was no upgrade of the minimum annuitization value.
Six different annuity payment options are illustrated: a male annuitant, a
female annuitant and a joint and survivor annuity, each on a Life Only and a
Life with 10 Year Certain basis. The figures below, which are the amount of the
first monthly payment, are based on an assumed investment return of 3%.
Subsequent payments will never be less than the amount of the first payment
(although subsequent payments are calculated using a 5% assumed investment
return).
Illustrations of guaranteed minimum payments based on other assumptions will be
provided upon request.
Life Only = Life Annuity with No Life 10 = Life Annuity with 10 Years
Period Certain Certain
<TABLE>
<CAPTION>
Male Female Joint & Survivor
----------------------------------------------------
Rider
Anniversary
at Exercise
Date Life Only Life 10 Life Only Life 10 Life Only Life 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
10 (age 70) $1,135 $1,067 $ 976 $ 949 $ 854 $ 852
---------------------------------------------------------------------
15 1,833 1,634 1,563 1,469 1,332 1,318
---------------------------------------------------------------------
20 (age 80) 3,050 2,479 2,598 2,287 2,146 2,078
</TABLE>
This hypothetical illustration should not be deemed representative of past or
future performance of any underlying variable investment option.
25
<PAGE>
Withdrawals will affect the minimum annuitization value as follows: Each policy
year, withdrawals up to the limit of the total free amount (the minimum
annuitization value on the last policy anniversary multiplied by the annual
growth rate) reduce the minimum annuitization value on a dollar-for-dollar
basis. Withdrawals over this free amount will reduce the minimum annuitization
value on a pro rata basis by an amount equal to the minimum annuitization value
immediately prior to the excess withdrawal multiplied by the percentage
reduction in the policy value resulting from the excess withdrawal. The free
amount will always be a relatively small fraction of the minimum annuitization
value.
Examples of the effect of withdrawals on the minimum annuitization value are as
follows:
EXAMPLE 1
--------------------------------------------------------------------------------
Assumptions
<TABLE>
<S> <C>
. minimum annuitization value on last $10,000
policy anniversary:
. minimum annuitization value at time $10,500
of distribution:
. policy value at time of distribution: $15,000
. distribution amount: $500
. prior distribution in current policy None
year:
------------------------------------------------------------------------------
Calculations
. maximum annual free amount: $10,000 X 6% = $600
. policy value after distribution: $15,000 - $500 = $14,500
. minimum annual value after $10,500 - $500 = $10,000
distribution:
EXAMPLE 2
------------------------------------------------------------------------------
Assumptions
. minimum annuitization value on last $10,000
policy anniversary:
. minimum annuitization value at time $10,500
of distribution:
. policy value at time of distribution: $15,000
. distribution amount: $1,500
. prior distribution in current policy $1,000
year:
------------------------------------------------------------------------------
Calculations
. maximum annual free amount: $0.0
(prior distributions have exceeded the
current year free amount of $600
[$10,000 x 6% = $600])
. policy value after distribution: $15,000 - $1,500 = $13,500
(since the policy value is reduced 10%
($1,500/$15,000), the minimum
annuitization value is also reduced
10%)
. minimum annual value after $10,500 - (10% X $10,500) = $9,450
distribution:
</TABLE>
26
<PAGE>
EXAMPLE 3
--------------------------------------------------------------------------------
Assumptions
<TABLE>
<S> <C>
. minimum annuitization value on last $10,000
policy anniversary:
. minimum annuitization value at time $10,500
of distribution:
. policy value at time of distribution: $7,500
. distribution amount: $1,500
. prior distribution in current policy $1,000
year:
------------------------------------------------------------------------------
Calculations
. maximum annual free amount: $0.0
(prior distributions have exceeded the
current year free amount of $600
[$10,000 x 6% = $600])
. policy value after distribution: $7,500 - $1,500 = $6,000
(since the policy value is reduced 20%
($1,500/$7,500), the minimum
annuitization value is also reduced
20%)
. minimum annual value after $10,500 - (20% X $10,500) = $8,400
distribution:
</TABLE>
The amount of the first payment provided by the family income protector will be
determined by multiplying each $1,000 of minimum annuitization value by the
applicable annuity factor shown on Schedule I of the family income protector
rider. The applicable annuity factor depends upon the annuitant's (and joint
annuitant's, if any) sex (or without regard to gender if required by law), age,
and the family income protector payment option selected and is based on a
guaranteed interest rate of 3% and the "1983 Table a" mortality table with
projection using Scale G factors, assuming a maturity date in the year 2000.
Subsequent payments will be calculated as described in the family income
protector rider using a 5% assumed investment return. Subsequent payments may
fluctuate annually in accordance with the investment performance of the annuity
subaccounts. However, subsequent payments are guaranteed to never be less than
the initial payment.
The stabilized payment on each subsequent policy anniversary after
annuitization using the family income protector will equal the greater of the
initial payment or the payment supportable by the annuity units in the selected
subaccounts. The supportable payment is equal to the number of variable annuity
units in the selected subaccounts multiplied by the variable annuity unit
values in those subaccounts on the date the payment is made. The variable
annuity unit values used to calculate the supportable payment will assume a 5%
assumed investment return. If the supportable payment at any payment date
during a policy year is greater than the stabilized payment for that policy
year, the excess will be used to purchase additional annuity units. Conversely,
if the supportable payment at any payment date during a policy year is less
than the stabilized payment for that policy year, there will be a reduction in
the number of annuity units credited to the policy to fund the deficiency. In
the case of a reduction, you will not participate as fully in the future
investment performance of the subaccounts you selected since fewer annuity
units are credited to your policy. Purchases and reductions will be allocated
to each subaccount on a proportionate basis.
PFL bears the risk that it will need to make payments if all annuity units have
been used in an attempt to maintain the stabilized payment at the initial
payment level. In such an event, PFL will make all future payments equal to the
initial payment. Once all the annuity units have been used, the amount of your
payment will not increase or decrease and will not depend upon the performance
of any subaccounts. To compensate PFL for this risk, a guaranteed payment fee
will be deducted.
27
<PAGE>
HISTORICAL PERFORMANCE DATA
Money Market Yields
PFL may from time to time disclose the current annualized yield of the
Fidelity--VIP Money Market Subaccount for a 7-day period in a manner which does
not take into consideration any realized or unrealized gains or losses on
shares of the portfolio securities. This current annualized yield is computed
by determining the net change (exclusive of realized gains and losses on the
sale of securities and unrealized appreciation and depreciation and income
other than investment income) at the end of the 7-day period in the value of a
hypothetical account having a balance of 1 unit at the beginning of the 7-day
period, dividing such net change in account value by the value of the account
at the beginning of the period to determine the base period return, and
annualizing this quotient on a 365-day basis. The net change in account value
reflects (i) net income from the portfolio attributable to the hypothetical
account; and (ii) charges and deductions imposed under a policy that are
attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for (i) the administrative
charges; and (ii) the mortality and expense risk fee. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS * ES)/UV) * (365/7)
Where:
NCS = The net change in the value of the portfolio (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation and income other than investment income) for the 7-day
period attributable to a hypothetical account having a balance of 1
subaccount unit.
ES = Per unit expenses of the subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a policy, the yield for the
Fidelity--VIP Money Market Subaccount will be lower than the yield for the
Fidelity--VIP Money Market Portfolio. The yield calculations do not reflect the
effect of any premium taxes or surrender charges that may be applicable to a
particular policy. Surrender charges range from 6% to 0% of the amount of
premium payments withdrawn based on the number of years since the premium
payment was made. However, surrender charges will not be assessed after the
tenth policy year.
PFL may also disclose the effective yield of the Fidelity--VIP Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according
to the following formula:
Effective Yield = (1 + ((NCS - ES)/UV))/365///7/ - 1
Where:
NCS = The net change in the value of the account (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation and income other than investment income) for the 7-day
period attributable to a hypothetical account having a balance of 1
subaccount unit.
ES = Per unit expenses of the subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
The yield on amounts held in the Fidelity--VIP Money Market Subaccount normally
will fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or
28
<PAGE>
representation of future yields or rates of return. The Fidelity--VIP Money
Market Subaccount actual yield is affected by changes in interest rates on
money market securities, average portfolio maturity of the Fidelity--VIP Money
Market Portfolio, the types and quality of portfolio securities held by the
Fidelity--VIP Money Market Portfolio and its operating expenses. There was no
yield or effective yield for the Fidelity--VIP Money Market Subaccount for the
seven days ended December 31, 1999, because the Fidelity--VIP Money Market
subaccount had not yet commenced operations.
Other Subaccount Yields
PFL may from time to time advertise or disclose the current annualized yield of
one or more of the subaccounts of the separate account (except the Fidelity--
VIP Money Market Subaccount) for 30-day periods. The annualized yield of a
subaccount refers to income generated by the subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the subaccount less subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, compounding that yield for
a 6-month period, and (iii) multiplying that result by 2. Expenses attributable
to the subaccount include (i) the administrative charge and (ii) the mortality
and expense risk fee. The 30-day yield is calculated according to the following
formula:
Yield = 2 * ((((NI - ES)/(U * UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the subaccount for the 30-day period
attributable to the subaccount's unit.
ES = Expenses of the subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the separate account, the
yield for a subaccount of the separate account will be lower than the yield for
its corresponding portfolio. The yield calculations do not reflect the effect
of any premium taxes or surrender charges that may be applicable to a
particular policy. Surrender charges range from 6% to 0% of the amount of
premium payments withdrawn based on the number of years since the premium
payment was made. However, surrender charges will not be assessed after the
tenth policy year.
The yield on amounts held in the subaccounts of the separate account normally
will fluctuate over time. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The types and quality of its investments and its operating expenses
affect a subaccount's actual yield.
Total Returns
PFL may from time to time also advertise or disclose total returns for one or
more of the subaccounts of the separate account for various periods of time.
One of the periods of time will include the period measured from the date the
subaccount commenced operations. When a subaccount has been in operation for 1,
5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also be
disclosed. Total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption
value of that investment as of the last day of each of the periods. The ending
date for each
29
<PAGE>
period for which total return quotations are provided will be for the most
recent month end practicable, considering the type and media of the
communication and will be stated in the communication.
Total returns will be calculated using subaccount unit values which PFL
calculates on each business day based on the performance of the subaccount's
underlying portfolio, and the deductions for the mortality and expense risk fee
and the administrative charges. Total return calculations will reflect the
effect of surrender charges that may be applicable to a particular period. The
total return will then be calculated according to the following formula:
P (1 + T)N = ERV
Where:
T = The average annual total return net of subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of the
period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
Other Performance Data
PFL may from time to time also disclose average annual total returns in a non-
standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that the
surrender charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in conjunction
with the standard format described above. The cumulative returns will be
calculated using the following formula assuming that the surrender charge
percentage will be 0%.
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical initial payment of $1,000.
All non-standardized performance data will only be advertised if the
standardized performance data for the same period, as well as for the required
period, is also disclosed.
Adjusted Historical Performance Data
From time to time, sales literature or advertisements may quote average annual
total returns for periods prior to the date the separate account commenced
operations. Such performance information for the subaccounts will be calculated
based on the performance of the various portfolios and the assumption that the
subaccounts were in existence for the same periods as those indicated for the
portfolios, with the level of policy charges that were in effect at the
inception of the subaccounts.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to owners, the ratings and other information assigned to it by one or
more independent rating organizations such as
30
<PAGE>
A.M. Best Company, Standard & Poor's Insurance Ratings Services, Moody's
Investors Service and Duff & Phelps Credit Rating Co. The purpose of the
ratings is to reflect the financial strength and/or claims-paying ability of
PFL and they should not be considered as bearing on the investment performance
of assets held in the separate account or of the safety or riskiness of an
investment in the separate account. Each year the A.M. Best Company reviews the
financial status of thousands of insurers, culminating in the assignment of
Best's ratings. These ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. In addition, the
claims-paying ability of PFL as measured by Standard & Poor's Insurance Ratings
Services, Moody's Investors Service or Duff & Phelps Credit Rating Co. may be
referred to in advertisements or sales literature or in reports to owners.
These ratings are opinions of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Claims-paying ability ratings do not refer to an insurer's ability
to meet non-policy obligations such as debt or commercial paper obligations.
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the policies. These services include
issuance of the policies, maintenance of records concerning the policies, and
certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the separate account will be maintained by
PFL. As presently required by the Investment Company Act of 1940 and
regulations promulgated thereunder, PFL will mail to all owners at their last
known address of record, at least annually, reports containing such information
as may be required under that Act or by any other applicable law or regulation.
Owners will also receive confirmation of each financial transaction and any
other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the policies
is continuous and PFL does not anticipate discontinuing the offering of the
policies, however, PFL reserves the right to do so.
AFSG Securities Corporation, an affiliate of PFL, is the principal underwriter
of the policies and may enter into agreements with broker-dealers for the
distribution of the policies. Distribution of the policies had not begun as of
the date of this SAI.
31
<PAGE>
VOTING RIGHTS
To the extent required by law, PFL will vote the underlying funds' shares held
by the separate account at regular and special shareholder meetings of the
underlying funds in accordance with instructions received from persons having
voting interests in the portfolios, although the underlying funds do not hold
regular annual shareholder meetings. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the underlying fund shares in its own right, it may elect to do so.
Before the annuity commencement date, you hold the voting interest in the
selected portfolios. The number of votes that you have the right to instruct
will be calculated separately for each subaccount. The number of votes that you
have the right to instruct for a particular subaccount will be determined by
dividing your policy value in the subaccount by the net asset value per share
of the corresponding portfolio in which the subaccount invests. Fractional
shares will be counted.
After the annuity commencement date, the person receiving annuity payments has
the voting interest, and the number of votes decreases as annuity payments are
made and as the reserves for the policy decrease. The person's number of votes
will be determined by dividing the reserve for the policy allocated to the
applicable subaccount by the net asset value per share of the corresponding
portfolio. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the
right to instruct will be determined as of the date established by the
underlying fund for determining shareholders eligible to vote at the meeting of
the underlying fund. PFL will solicit voting instructions by sending you, or
other persons entitled to vote, written requests for instructions prior to that
meeting in accordance with procedures established by the underlying fund.
Portfolio shares as to which no timely instructions are received and shares
held by PFL in which you, or other persons entitled to vote, have no beneficial
interest will be voted in proportion to the voting instructions that are
received with respect to all policies participating in the same subaccount.
Each person having a voting interest in a subaccount will receive proxy
material, reports, and other materials relating to the appropriate portfolio.
OTHER PRODUCTS
PFL makes other variable annuity policies available that may also be funded
through the separate account. These variable annuity policies may have
different features, such as different investment choices or charges.
CUSTODY OF ASSETS
PFL holds assets of each of the subaccounts of the separate account. The assets
of each of the subaccounts of the separate account are segregated and held
separate and apart from the assets of the other subaccounts and from PFL's
general account assets. PFL maintains records of all purchases and redemptions
of shares of the underlying funds held by each of the subaccounts. Additional
protection for the assets of the separate account is afforded by PFL's fidelity
bond, presently in the amount of $5,000,000, covering the acts of officers and
employees of PFL.
32
<PAGE>
LEGAL MATTERS
Sutherland Asbill & Brennan LLP, of Washington D.C. has provided legal advice
to PFL relating to certain matters under the federal securities laws applicable
to the issue and sale of the policies.
INDEPENDENT AUDITORS
The statutory-basis financial statements and schedules of PFL as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in this SAI have been audited by Ernst & Young LLP,
Independent Auditors, Suite 3400, 801 Grand Avenue, Des Moines, Iowa 50309.
There are no financial statements of the separate account because it had not
commenced operations as of December 31, 1999.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
policies discussed in this SAI. Not all of the information set forth in the
Registration Statement, amendments and exhibits thereto has been included in
the prospectus or this SAI. Statements contained in the prospectus and this SAI
concerning the content of the policies and other legal instruments are intended
to be summaries. For a complete statement of the terms of these documents,
reference should be made to the instruments filed with the Securities and
Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of owners in the separate account will be affected
solely by the investment results of the selected subaccount(s). The financial
statements of PFL, which are included in this SAI, should be considered only as
bearing on the ability of PFL to meet its obligations under the policies. They
should not be considered as bearing on the investment performance of the assets
held in the separate account.
33
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company, an indirect wholly-owned subsidiary of AEGON N.V., as of
December 31, 1999 and 1998, and the related statutory-basis statements of
operations, changes in capital and surplus, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
accompanying statutory-basis financial statement schedules required by Article
7 of Regulation S-X. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from accounting principles generally accepted in
the United States. The variances between such practices and accounting
principles generally accepted in the United States also are described in Note
1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effect of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of PFL Life Insurance Company at December 31, 1999 and
1998, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1999.
1
<PAGE>
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic statutory-basis financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 18, 2000
2
<PAGE>
PFL Life Insurance Company
Balance Sheets--Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
1999 1998
----------- ----------
<S> <C> <C>
Admitted Assets
Cash and invested assets:
Cash and short-term investments........................ $ 53,695 $ 83,289
Bonds.................................................. 4,892,156 4,822,442
Stocks:
Preferred............................................ 17,074 14,754
Common (cost: 1999--$61,813; 1998--$34,731).......... 71,658 49,448
Affiliated entities (cost: 1999--$10,318; 1998--
$8,060)............................................. 6,764 5,613
Mortgage loans on real estate.......................... 1,339,202 1,012,433
Real estate, at cost less accumulated depreciation
($10,891 in 1999; $9,500 in 1998):
Home office properties............................... 7,829 8,056
Properties acquired in satisfaction of debt.......... 16,336 11,778
Investment properties................................ 33,707 44,325
Policy loans........................................... 59,871 60,058
Other invested assets.................................. 123,722 76,482
----------- ----------
Total cash and invested assets..................... 6,622,014 6,188,678
Premiums deferred and uncollected....................... 14,656 15,318
Accrued investment income............................... 65,364 65,308
Receivable from affiliate............................... -- 643
Federal income taxes recoverable........................ 1,335 639
Transfers from separate accounts due or accrued......... 92,309 70,866
Other assets............................................ 30,119 29,511
Separate account assets................................. 4,905,374 3,348,611
----------- ----------
Total admitted assets................................... $11,731,171 $9,719,574
=========== ==========
</TABLE>
3
<PAGE>
PFL Life Insurance Company
Balance Sheets--Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
1999 1998
----------- ----------
<S> <C> <C>
Liabilities and Capital and Surplus
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 1,552,781 $1,357,175
Annuity.............................................. 4,036,751 3,925,293
Accident and health.................................. 254,571 205,736
Policy and contract claim reserves:
Life................................................. 8,681 9,101
Accident and health.................................. 37,466 48,906
Other policyholders' funds............................. 172,774 162,266
Remittances and items not allocated.................... 33,020 19,690
Asset valuation reserve................................ 103,193 91,588
Interest maintenance reserve........................... 36,120 50,575
Short-term notes payable to affiliates................. 144,500 9,421
Other liabilities...................................... 70,717 76,766
Payable for securities................................. 15,136 57,645
Payable to affiliates.................................. 11,517 --
Separate account liabilities........................... 4,899,289 3,342,884
----------- ----------
Total liabilities....................................... 11,376,516 9,357,046
Commitments and contingencies (Note 10)
Capital and surplus:
Common stock, $10 par value, 500,000 shares autho-
rized, 266,000 issued and outstanding................. 2,660 2,660
Paid-in surplus........................................ 154,282 154,282
Unassigned surplus..................................... 197,713 205,586
----------- ----------
Total capital and surplus............................... 354,655 362,528
----------- ----------
Total liabilities and capital and surplus............... $11,731,171 $9,719,574
=========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
PFL Life Insurance Company
Statements of Operations--Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life.................................... $ 227,510 $ 516,111 $ 202,435
Annuity................................. 1,413,049 667,920 657,695
Accident and health..................... 160,570 178,593 207,982
Net investment income..................... 437,549 446,984 446,424
Amortization of interest maintenance re-
serve.................................... 7,588 8,656 3,645
Commissions and expense allowances on
reinsurance ceded........................ 24,741 32,781 49,859
Separate account fee income............... 49,826 37,137 --
---------- ---------- ----------
2,320,833 1,888,182 1,568,040
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits... 115,621 135,184 146,583
Surrender benefits...................... 1,046,611 732,796 658,071
Other benefits.......................... 169,479 152,209 126,495
Increase (decrease) in aggregate
reserves for policies and contracts:
Life.................................... 195,606 473,158 149,575
Annuity................................. 111,427 (278,665) (203,139)
Accident and health..................... 48,835 36,407 30,059
Other................................... 10,480 17,550 16,998
---------- ---------- ----------
1,698,059 1,268,639 924,642
Insurance expenses:
Commissions............................... 167,146 136,569 157,300
General insurance expenses................ 54,191 48,018 57,571
Taxes, licenses and fees.................. 12,382 19,166 8,715
Net transfers to separate accounts........ 309,307 302,839 297,480
Other expenses............................ 229 1,016 119
---------- ---------- ----------
543,255 507,608 521,185
---------- ---------- ----------
2,241,314 1,776,247 1,445,827
---------- ---------- ----------
Gain from operations before federal income
tax expense and net realized capital gains
on investments............................. 79,519 111,935 122,213
Federal income tax expense.................. 25,316 49,835 43,381
---------- ---------- ----------
Gain from operations before net realized
capital gains on investments............... 54,203 62,100 78,832
Net realized capital gains on investments
(net of related federal income taxes and
amounts transferred to interest maintenance
reserve)................................... 6,365 3,398 7,159
---------- ---------- ----------
Net income.................................. $ 60,568 $ 65,498 $ 85,991
========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus--Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
Total
Capital
Common Paid-in Unassigned and
Stock Surplus Surplus Surplus
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $2,660 $154,129 $261,558 $418,347
Capital contribution.................... -- 153 -- 153
Net income.............................. -- -- 85,991 85,991
Change in net unrealized capital gains.. -- -- 3,592 3,592
Change in non-admitted assets........... -- -- (481) (481)
Change in asset valuation reserve....... -- -- (14,974) (14,974)
Dividend to stockholder................. -- -- (62,000) (62,000)
Surplus effect of sale of a division.... -- -- (161) (161)
Surplus effect of ceding commissions
associated with the sale of a
division............................... -- -- 5 5
Amendment of reinsurance agreement...... -- -- 389 389
Surplus effect of reinsurance
agreement.............................. -- -- 402 402
Change in liability for reinsurance in
unauthorized companies................. -- -- (1,901) (1,901)
------ -------- -------- --------
Balance at December 31, 1997 2,660 154,282 272,420 429,362
Net income.............................. -- -- 65,498 65,498
Change in net unrealized capital gains.. -- -- 4,504 4,504
Change in non-admitted assets........... -- -- (260) (260)
Change in asset valuation reserve....... -- -- (21,763) (21,763)
Dividend to stockholder................. -- -- (120,000) (120,000)
Increase in liability for reinsurance in
unauthorized companies................. -- -- 2,036 2,036
Tax benefit on stock options exercised.. -- -- 2,476 2,476
Change in surplus in separate accounts.. -- -- 675 675
------ -------- -------- --------
Balance at December 31, 1998 2,660 154,282 205,586 362,528
Net income.............................. -- -- 60,568 60,568
Change in net unrealized capital gains.. -- -- (20,217) (20,217)
Change in non-admitted assets........... -- -- (980) (980)
Change in asset valuation reserve....... -- -- (11,605) (11,605)
Dividend to stockholder................. -- -- (40,000) (40,000)
Tax benefit on stock options exercised.. -- -- 1,305 1,305
Change in surplus in separate accounts.. -- -- 245 245
Settlement of prior period tax returns
and other tax-related adjustments...... -- -- 2,811 2,811
------ -------- -------- --------
Balance at December 31, 1999.............. $2,660 $154,282 $197,713 $354,655
====== ======== ======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows--Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net
of reinsurance......................... $ 1,830,365 $ 1,396,428 $ 1,119,936
Net investment income................... 441,737 469,246 452,091
Life and accident and health claims..... (124,178) (138,249) (154,383)
Surrender benefits and other fund
withdrawals............................ (1,046,611) (732,796) (658,071)
Other benefits to policyholders......... (169,476) (152,167) (126,462)
Commissions, other expenses and other
taxes.................................. (238,192) (197,135) (225,042)
Net transfers to separate accounts...... (280,923) (276,375) (319,146)
Federal income taxes.................... (24,709) (72,176) (47,909)
Cash paid in conjunction with an
amendment of a reinsurance agreement... -- -- (4,826)
Cash received in connection with a
reinsurance agreement.................. -- -- 1,477
Other, net.............................. (23,047) (93,095) 89,693
----------- ----------- -----------
Net cash provided by operating
activities............................. 364,966 203,681 127,358
Investing activities
Proceeds from investments sold, matured
or repaid:
Bonds and preferred stocks............ 3,283,038 3,347,174 3,284,095
Common stocks......................... 60,293 34,564 34,004
Mortgage loans on real estate......... 158,739 192,210 138,162
Real estate........................... 13,367 5,624 6,897
Policy loans.......................... 186 -- --
Cash received from ceding commissions
associated with the sale of a
division............................. -- -- 8
Other................................. 6,133 7,210 57,683
----------- ----------- -----------
3,521,756 3,586,782 3,520,849
Cost of investments acquired:
Bonds and preferred stocks............ (3,398,158) (3,251,822) (3,411,442)
Common stocks......................... (76,200) (36,379) (37,339)
Mortgage loans on real estate......... (480,750) (257,039) (159,577)
Real estate........................... (7,568) (11,458) (2,013)
Policy loans.......................... -- (2,922) (2,922)
Cash paid in association with the sale
of a division........................ -- -- (591)
Other................................. (48,719) (44,514) (15,674)
----------- ----------- -----------
(4,011,395) (3,604,134) (3,629,558)
----------- ----------- -----------
Net cash used in investing activities... (489,639) (17,352) (108,709)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows--Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Financing activities
Issuance (repayment) of short-term intercompany
notes payable................................... $135,079 $ (6,979) $16,400
Capital contribution............................. -- -- 153
Dividends to stockholder......................... (40,000) (120,000) (62,000)
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... 95,079 (126,979) (45,447)
-------- -------- -------
Increase (decrease) in cash and short-term
investments..................................... (29,594) 59,350 (26,798)
Cash and short-term investments at beginning of
year............................................ 83,289 23,939 50,737
-------- -------- -------
Cash and short-term investments at end of year... $ 53,695 $ 83,289 $23,939
======== ======== =======
</TABLE>
See accompanying notes.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis
(Dollars in thousands)
December 31, 1999
1. Organization and Summary of Significant Accounting Policies
Organization
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is an indirect wholly-owned subsidiary of AEGON N.V., a
holding company organized under the laws of The Netherlands.
Nature of Business
The Company sells individual non-participating whole life, endowment and term
contracts, as well as a broad line of single fixed and flexible premium annuity
products. In addition, the Company offers group life, universal life, and
individual and specialty health coverages. The Company is licensed in 49 states
and the District of Columbia and Guam. Sales of the Company's products are
primarily through the Company's agents and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa ("Insurance Department"), which
practices differ in some respects from generally accepted accounting
principles. The more significant of these differences are as follows: (a) bonds
are generally reported at amortized cost rather than segregating the portfolio
into held-to-maturity (reported at amortized cost), available-for-sale
(reported at fair value), and trading (reported at fair value) classifications;
(b) acquisition costs of acquiring new business are charged to current
operations as incurred rather than deferred and amortized over the life of the
policies; (c) policy reserves on traditional life products
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
are based on statutory mortality rates and interest which may differ from
reserves based on reasonable assumptions of expected mortality, interest, and
withdrawals which include a provision for possible unfavorable deviation from
such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized
gains or losses attributed to changes in the level of interest rates in the
market are deferred and amortized over the remaining life of the bond or
mortgage loan, rather than recognized as gains or losses in the statement of
operations when the sale is completed; (h) potential declines in the estimated
realizable value of investments are provided for through the establishment of a
formula-determined statutory investment reserve (reported as a liability),
changes to which are charged directly to surplus, rather than through
recognition in the statement of operations for declines in value, when such
declines are judged to be other than temporary; (i) certain assets designated
as "non-admitted assets" have been charged to surplus rather than being
reported as assets; (j) revenues for universal life and investment products
consist of premiums received rather than policy charges for the cost of
insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as amounts
are paid; (l) stock options settled in cash are recorded as expense of the
Company's indirect parent rather than charged to current operations; (m)
adjustments to federal income taxes of prior years are charged or credited
directly to unassigned surplus, rather than reported as a component of expense
in the statement of operations; (n) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations; and (o) a liability is established for
"unauthorized reinsurers" and changes in this liability are charged or credited
directly to unassigned surplus. The effects of these variances have not been
determined by the Company but are presumed to be material.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
codified statutory accounting principles ("Codification") effective January 1,
2001. Codification will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices that
the Company uses to prepare its statutory-basis financial statements.
Codification will require adoption by the various states before it becomes the
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for the
Company, the State of Iowa must adopt Codification as the prescribed basis of
accounting on which domestic insurers must report their statutory-basis results
to the Insurance Department. At this time, it is anticipated that the State of
Iowa will adopt Codification. However, based on current guidance, management
believes that the impact of Codification will not be material to the Company's
statutory-basis financial statements.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
Cash and Short-Term Investments
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased
to be short-term investments.
Investments
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the investment. The Company reviews its
prepayment assumptions on mortgage and other asset-backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in
preferred stocks not in good standing are reported at the lower of cost or
market. Common stocks of unaffiliated and affiliated companies, which includes
shares of mutual funds and real estate investment trusts, are carried at market
value. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
Net realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve ("AVR") is established by the Company to provide for
potential losses in the event of default by issuers of certain invested assets.
These amounts are determined using a formula prescribed by the NAIC and are
reported as a liability. The formula for the AVR provides for a corresponding
adjustment for realized gains and losses. Under a formula prescribed by the
NAIC, the Company defers, in the Interest Maintenance Reserve ("IMR"), the
portion of realized gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining period
to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. During 1999, 1998 and 1997, the Company
excluded investment income due and accrued of $530, $102 and $177,
respectively, with respect to such practices.
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
The Company uses interest rate swaps and caps as part of its overall interest
rate risk management strategy for certain life insurance and annuity products.
The Company entered into several interest rate swap contracts to modify the
interest rate characteristics of the underlying liabilities. The net interest
effect of such swap transactions is reported as an adjustment of interest
income from the hedged items as incurred.
The Company has entered into an interest rate cap agreement to hedge the
exposure of changing interest rates. The cash flows from the interest rate cap
will help offset losses that might occur from changes in interest rates. The
cost of such agreement is included in interest expense ratably during the life
of the agreement. Income received as a result of the cap agreement will be
recognized in investment income as earned. Unamortized cost of the agreement is
included in other invested assets.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using
interest rates ranging from 2.00 to 6.00 percent and are computed principally
on the Net Level Premium Valuation and the Commissioners' Reserve Valuation
Methods. Reserves for universal life policies are based on account balances
adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Accounts
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at
market. Income and gains and losses with respect to the assets in the separate
accounts accrue to the benefit of the contract owners and, accordingly, the
operations of the separate accounts are not included in the accompanying
financial statements. The separate accounts do not have any minimum guarantees
and the investment risks associated with market value changes are borne
entirely by the contract owners. The Company received variable contract
premiums of $486,282, $345,319 and $281,095 in 1999, 1998 and 1997,
respectively. All variable account contracts are subject to discretionary
withdrawal by the contract owner at the market value of the underlying assets
less the current surrender charge.
Stock Option Plan
AEGON N.V. sponsors a stock option plan for eligible employees of the Company.
Under this plan, certain employees have indicated a preference to immediately
sell shares received as a result of their exercise of the stock options; in
these situations, AEGON N.V. has settled such options in cash rather than
issuing stock to these employees. These cash settlements are paid by the
Company, and AEGON N.V. subsequently reimburses the Company for such payments.
Under statutory accounting principles, the Company does not record any expense
related to this plan, as the expense is recognized by AEGON N.V. However, the
Company is allowed to record a deduction in the consolidated tax return filed
by the Company and certain affiliates. The tax benefit of this deduction has
been credited directly to surplus.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standard ("SFAS") No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments, requires additional disclosure about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. SFAS No. 107 and No. 119 exclude certain financial instruments
and all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or,
in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments. The fair values for equity
securities, including affiliated mutual funds and real estate investment
trusts, are based on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying
amount.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
2. Fair Values of Financial Instruments (continued)
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price. Estimated
fair value of interest rate swaps are based upon the pricing differential
for similar swap agreements.
Short-term notes payable to affiliates: The fair values for short-term
notes payable to affiliates are assumed to equal their carrying amount.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying amounts
of the Company's financial instruments subject to the provisions of SFAS No.
107 and No. 119:
<TABLE>
<CAPTION>
December 31
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Admitted assets
Cash and short-term investments... $ 53,695 $ 53,695 $ 83,289 $ 83,289
Bonds............................. 4,892,156 4,757,325 4,822,442 4,900,516
Preferred stocks.................. 17,074 15,437 14,754 14,738
Common stocks..................... 71,658 71,658 49,448 49,448
Affiliated common stock........... 6,764 6,764 5,613 5,613
Mortgage loans on real estate..... 1,339,202 1,299,160 1,012,433 1,089,315
Policy loans...................... 59,871 59,871 60,058 60,058
Interest rate cap................. 4,959 1,784 4,445 725
Interest rate swaps............... 8,134 10,609 1,916 6,667
Separate account assets........... 4,905,374 4,905,374 3,348,611 3,348,611
Liabilities
Investment contract liabilities... 4,207,369 4,059,842 4,084,683 4,017,509
Separate account liabilities...... 4,377,676 4,212,615 3,271,005 3,213,251
Short-term notes payable to
affiliates....................... 144,500 144,500 9,421 9,421
</TABLE>
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
3. Investments
The carrying amounts and estimated fair values of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999
Bonds:
United States Government and
agencies........................ $ 141,390 $ 142 $ 4,520 $ 137,012
State, municipal and other
government...................... 137,745 5,168 1,627 141,286
Public utilities................. 219,791 1,148 6,777 214,162
Industrial and miscellaneous..... 2,078,145 20,042 84,919 2,013,268
Mortgage and other asset-backed
securities...................... 2,315,085 24,214 87,702 2,251,597
---------- -------- -------- ----------
4,892,156 50,714 185,545 4,757,325
Preferred stocks................... 17,074 2 1,639 15,437
---------- -------- -------- ----------
$4,909,230 $ 50,716 $187,184 $4,772,762
========== ======== ======== ==========
December 31, 1998
Bonds:
United States Government and
agencies........................ $ 150,085 $ 2,841 $ 321 $ 152,605
State, municipal and other
government...................... 62,948 918 1,651 62,215
Public utilities................. 139,732 5,053 2,555 142,230
Industrial and miscellaneous..... 2,068,086 78,141 34,493 2,111,734
Mortgage and other asset-backed
securities...................... 2,401,591 45,185 15,044 2,431,732
---------- -------- -------- ----------
4,822,442 132,138 54,064 4,900,516
Preferred stocks................... 14,754 75 91 14,738
---------- -------- -------- ----------
$4,837,196 $132,213 $ 54,155 $4,915,254
========== ======== ======== ==========
</TABLE>
The carrying amounts and estimated fair values of bonds at December 31, 1999,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 194,654 $ 192,453
Due after one year through five years................. 1,151,170 1,121,353
Due after five years through ten years................ 908,926 873,402
Due after ten years................................... 322,321 318,520
---------- ----------
2,577,071 2,505,728
Mortgage and other asset-backed securities............ 2,315,085 2,251,597
---------- ----------
$4,892,156 $4,757,325
========== ==========
</TABLE>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
3. Investments (continued)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and preferred stock............... $347,639 $374,478 $373,496
Dividends on equity investments..................... 734 1,357 1,460
Interest on mortgage loans.......................... 92,325 77,960 80,266
Rental income on real estate........................ 7,322 6,553 7,501
Interest on policy loans............................ 4,141 4,080 3,400
Other investment income............................. 7,978 2,576 613
-------- -------- --------
Gross investment income............................. 460,139 467,004 466,736
Less investment expenses............................ 22,590 20,020 20,312
-------- -------- --------
Net investment income............................... $437,549 $446,984 $446,424
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds.................................... $3,283,038 $3,347,174 $3,284,095
========== ========== ==========
Gross realized gains........................ $ 21,171 $ 48,760 $ 30,094
Gross realized losses....................... (32,259) (8,072) (17,265)
---------- ---------- ----------
Net realized gains (losses)................. $ (11,088) $ 40,688 $ 12,829
========== ========== ==========
</TABLE>
At December 31, 1999, investments with an aggregate carrying value of
$6,346,831 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
3. Investments (continued)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
Realized
----------------------------
Year ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Debt securities......... $(11,088) $ 40,688 $ 12,829
Equity securities....... 11,433 (879) 6,972
Mortgage loans on real
estate................. 4,661 12,637 2,252
Real estate............. 900 3,176 4,252
Short-term investments.. (1,407) 1,533 (19)
Other invested assets... 534 (2,523) 1,632
-------- -------- --------
5,033 54,632 27,918
Tax effect.............. (5,535) (22,290) (10,572)
Transfer from (to)
interest maintenance
reserve................ 6,867 (28,944) (10,187)
-------- -------- --------
Net realized gains...... $ 6,365 $ 3,398 $ 7,159
======== ======== ========
<CAPTION>
Change in Unrealized
----------------------------
Year ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Bonds................... $(12,711) $ (836) $ 2,498
Preferred stocks........ (2,753) -- --
Common stocks........... (3,980) 3,751 1,097
Mortgage loans.......... (147) (150) --
Other invested assets... (626) 1,739 (3)
-------- -------- --------
Change in unrealized.... $(20,217) $ 4,504 $ 3,592
======== ======== ========
Gross unrealized gains and gross unrealized losses on equity securities are as
follows:
<CAPTION>
December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Unrealized gains........ $ 11,369 $ 15,980 $ 10,356
Unrealized losses....... (5,078) (3,710) (3,836)
-------- -------- --------
Net unrealized gains.... $ 6,291 $ 12,270 $ 6,520
======== ======== ========
</TABLE>
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
3. Investments (continued)
During 1999, the Company issued mortgage loans with interest rates ranging from
6.42% to 8.67%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 84%. Mortgage loans with a
carrying value of $248 were non-income producing for the previous twelve
months. Accrued interest of $95 related to these mortgage loans was excluded
from investment income. The Company requires all mortgaged properties to carry
fire insurance equal to the value of the underlying property.
At December 31, 1999 and 1998, the Company held a mortgage loan loss reserve in
the asset valuation reserve of $15,173 and $16,104, respectively. The mortgage
loan portfolio is diversified by geographic region and specific collateral
property type as follows:
Geographic Distribution Property Type Distribution
<TABLE>
<CAPTION>
December 31 December 31
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
South Atlantic.......... 27% 32% Office.................. 39% 30%
Pacific................. 18 15 Retail.................. 28 35
E. North Central........ 17 16 Industrial.............. 18 21
Middle Atlantic......... 15 10 Apartment............... 11 12
Mountain................ 9 10 Other................... 4 2
W. South Central........ 6 6
W. North Central........ 4 5
E. South Central........ 3 3
New England............. 1 3
</TABLE>
At December 31, 1999, the Company had no investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve,
collectively.
19
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
3. Investments (continued)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels
and to manage duration mismatch of assets and liabilities. These instruments
include interest rate swaps and caps. All involve elements of credit and market
risks in excess of the amounts recognized in the accompanying financial
statements at a given point in time. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of financial
instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance
by a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1999 and 1998, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
Notional Amount
1999 1998
-------- --------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed--pay floating............................... $115,000 $100,000
Receive floating--pay fixed............................... 64,017 --
Receive floating (uncapped)--pay floating (capped)........ 41,617 53,011
Receive floating (LIBOR--pay floating (S&P)............... 60,000 60,000
Interest rate cap agreements................................ 500,000 500,000
</TABLE>
4. Reinsurance
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
4. Reinsurance (continued)
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,942,716 $1,533,822 $1,312,446
Reinsurance assumed...................... 2,723 2,366 2,038
Reinsurance ceded........................ (144,310) (173,564) (246,372)
---------- ---------- ----------
Net premiums earned...................... $1,801,129 $1,362,624 $1,068,112
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $139,138, $173,297
and $183,638 during 1999, 1998 and 1997, respectively. At December 31, 1999 and
1998, estimated amounts recoverable from reinsurers that have been deducted
from policy and contract claim reserves totaled $35,511 and $47,956,
respectively. The aggregate reserves for policies and contracts were reduced
for reserve credits for reinsurance ceded at December 31, 1999 and 1998 of
$1,870,190 and $2,163,905, respectively.
At December 31, 1999, amounts recoverable from unauthorized reinsurers of
$39,996 (1998--$55,379) and reserve credits for reinsurance ceded of $48,297
(1998--$49,835) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $85,431 at December 31, 1999, that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. Income Taxes
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
5. Income Taxes (continued)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal income
tax expense and net realized capital gains (losses) on investments for the
following reasons:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)..... $27,832 $39,177 $42,775
IMR amortization................................. (2,656) (3,030) (1,276)
Tax reserve adjustment........................... 1,390 607 2,004
Excess tax depreciation.......................... (219) (223) (392)
Deferred acquisition costs-- tax basis........... 5,979 11,827 4,308
Prior year under (over) accrual ................. (3,492) 1,750 (1,016)
Dividend received deduction...................... (1,666) (1,053) (941)
Charitable contributions......................... -- -- (848)
Other items--net................................. (1,852) 780 (1,233)
------- ------- -------
Federal income tax expense....................... $25,316 $49,835 $43,381
======= ======= =======
</TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to realized gains (losses) due to the
differences in book and tax asset bases at the time certain investments are
sold.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1999). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $7,135.
In 1999, the Company reached a final settlement with the Internal Revenue
Service for 1990 and 1991, resulting in a tax refund of $904 and interest
received of $548. These amounts were credited directly to unassigned surplus.
The Company also corrected an error in 1999 which related to the 1997 tax-
sharing agreement between the Company and various affiliates. This resulted in
a credit to unassigned surplus of $1,359.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1992.
An examination is underway for years 1993 through 1997.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
6. Policy and Contract Attributes
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on a
variety of the Company's annuity and deposit fund products. There may be
certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
December 31
1999 1998
------------------- ------------------
Percent Percent
of of
Amount Total Amount Total
----------- ------- ---------- -------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment................ $ 114,544 1% $ 82,048 1%
Subject to discretionary withdrawal at
book value less surrender charge....... 828,490 8 515,778 5
Subject to discretionary withdrawal at
market value........................... 4,313,445 41 3,211,896 34
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments)........................... 5,021,762 48 5,519,265 58
Not subject to discretionary withdrawal
provision.............................. 248,444 2 228,030 2
----------- --- ---------- ---
10,526,685 100% 9,557,017 100%
Less reinsurance ceded.................. 1,863,810 2,124,769
----------- ----------
Total policy reserves on annuities and
deposit fund liabilities............... $ 8,662,875 $7,432,248
=========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts
is presented below:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:..
Transfers to separate accounts................. $486,282 $345,319 $281,095
Transfers from separate accounts............... (175,822) (42,671) (9,819)
-------- -------- --------
Net transfers to separate accounts............... 310,460 302,648 271,276
Reconciling adjustments--change in miscellaneous
income.......................................... (1,153) 191 26,204
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement................................ $309,307 $302,839 $297,480
======== ======== ========
</TABLE>
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
6. Policy and Contract Attributes (continued)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1999 and 1998, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
Gross Loading Net
------- ------- -------
<S> <C> <C> <C>
December 31, 1999
Life and annuity:
Ordinary direct first year business................ $ 2,823 $2,085 $ 738
Ordinary direct renewal business................... 20,950 6,289 14,661
Group life direct business......................... 638 243 395
Reinsurance ceded.................................. (1,269) (16) (1,253)
------- ------ -------
23,142 8,601 14,541
Accident and health:
Direct............................................. 138 -- 138
Reinsurance ceded.................................. (23) -- (23)
------- ------ -------
Total accident and health............................ 115 -- 115
------- ------ -------
$23,257 $8,601 $14,656
======= ====== =======
December 31, 1998
Life and annuity:
Ordinary direct first year business................ $ 3,346 $2,500 $ 846
Ordinary direct renewal business................... 21,435 6,365 15,070
Group life direct business......................... 1,171 536 635
Reinsurance ceded.................................. (1,367) (44) (1,323)
------- ------ -------
24,585 9,357 15,228
Accident and health:
Direct............................................. 108 -- 108
Reinsurance ceded.................................. (18) -- (18)
------- ------ -------
Total accident and health............................ 90 -- 90
------- ------ -------
$24,675 $9,357 $15,318
======= ====== =======
</TABLE>
At December 31, 1999 and 1998, the Company had insurance in force aggregating
$41,720 and $44,233, respectively, in which the gross premiums are less than
the net premiums required by the standard valuation standards established by
the Insurance Division, Department of Commerce, of the State of Iowa. The
Company established policy reserves of $871 and $998 to cover these
deficiencies at December 31, 1999 and 1998, respectively.
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
7. Dividend Restrictions
The Company is subject to limitations, imposed by the State of Iowa, on the
payment of dividends to its parent company. Generally, dividends during any
twelve-month period may not be paid, without prior regulatory approval, in
excess of the greater of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations before net
realized capital gains (losses) on investments for the preceding year. Subject
to the availability of unassigned surplus at the time of such dividend, the
maximum payment which may be made in 2000, without the prior approval of
insurance regulatory authorities, is $54,203.
The Company paid dividends to its parent of $40,000, $120,000 and $62,000 in
1999, 1998 and 1997, respectively.
8. Retirement and Compensation Plans
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
SFAS No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $408, $380 and $422 for the
years ended December 31, 1999, 1998 and 1997, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement and
Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to
contribute up to fifteen percent of their salary to the plan. The Company will
match an amount up to three percent of the participant's salary. Participants
may direct all of their contributions and plan balances to be invested in a
variety of investment options. The plan is subject to the reporting and
disclosure requirements of the Employee Retirement and Income Security Act of
1974. Expense related to this plan was $267, $233 and $226 for the years ended
December 31, 1999, 1998 and 1997, respectively.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
8. Retirement and Compensation Plans (continued)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory, and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
or funded as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits
to employees meeting certain eligibility requirements. Portions of the medical
and dental plans are contributory. The expenses of the postretirement plans are
charged to affiliates in accordance with an intercompany cost sharing
arrangement. The Company expensed $28, $62 and $62 for the years ended December
31, 1999, 1998 and 1997, respectively.
9. Related Party Transactions
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1999,
1998 and 1997, the Company paid $19,983, $18,706 and $18,705, respectively, for
these services, which approximates their costs to the affiliates.
Payables to affiliates bear interest at the thirty-day commercial paper rate of
5.7% at December 31, 1999. During 1999, 1998 and 1997, the Company paid net
interest of $1,994, $1,491 and $1,188, respectively, to affiliates.
During 1997, the Company received a capital contribution of $153 in cash from
its parent.
At December 31, 1999 and 1998, the Company has short-term notes payable to an
affiliate of $144,500 and $9,421, respectively. Interest on these notes accrues
at rates ranging from 4.85% to 5.90% at December 31, 1999 and 5.13% to 5.52% at
December 31, 1998.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements--Statutory Basis--(continued)
(Dollars in thousands)
9. Related Party Transactions (continued)
During 1998, the Company issued life insurance policies to certain affiliated
companies, covering the lives of certain employees of those affiliates.
Premiums of $174,000 related to these policies were recognized during the year,
and aggregate reserves for policies and contracts are $190,299 and $181,720 at
December 31, 1999 and 1998, respectively.
10. Commitments and Contingencies
The Company has issued Trust (synthetic) GIC contracts to plan sponsors
totaling $374,124 at December 31, 1999, pursuant to terms under which the plan
sponsor retains ownership of the assets related to these contracts. The Company
guarantees benefit responsiveness in the event that plan benefit requests and
other contractual commitments exceed plan cash flows. The plan sponsor agrees
to reimburse the Company for such benefit payments with interest, either at a
fixed or floating rate, from future plan and asset cash flows. In return for
this guarantee, the Company receives a premium which varies based on such
elements as benefit responsive exposure and contract size. The Company
underwrites the plans for the possibility of having to make benefit payments
and also must agree to the investment guidelines to ensure appropriate credit
quality and cash flow matching. The assets relating to such contracts are not
recognized in the Company's statutory-basis financial statements.
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on
the most recent information available from the National Organization of Life
and Health Insurance Guaranty Associations. The Company has established a
reserve of $19,662 and $17,901 and an offsetting premium tax benefit of $7,429
and $7,631 at December 31, 1999 and 1998, respectively, for its estimated share
of future guaranty fund assessments related to several major insurer
insolvencies. The guaranty fund expense (benefit) was $1,994, $1,985 and $(975)
for the years ended December 31, 1999, 1998 and 1997, respectively.
27
<PAGE>
PFL Life Insurance Company
Summary of Investments--Other than
Investments in Related Parties
(Dollars in thousands)
December 31, 1999
SCHEDULE I
<TABLE>
<CAPTION>
Amount at Which
Market Shown in the
Type of Investment Cost(1) Value Balance Sheet
------------------ ---------- --------- ---------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities............... $ 195,119 $ 189,752 $ 195,119
States, municipalities and political
subdivisions........................... 545,562 535,945 545,562
Foreign governments..................... 134,584 138,767 134,584
Public utilities........................ 219,791 214,162 219,791
All other corporate bonds............... 3,797,100 3,678,699 3,797,100
Redeemable preferred stock................ 17,074 15,437 17,074
---------- --------- ----------
Total fixed maturities.................... 4,909,230 4,772,762 4,909,230
Equity securities
Common stocks:
Banks, trust and insurance.............. 2,676 2,809 2,809
Industrial, miscellaneous and all
other.................................. 59,137 68,849 68,849
---------- --------- ----------
Total equity securities................... 61,813 71,658 71,658
Mortgage loans on real estate............. 1,339,202 1,339,202
Real estate............................... 41,536 41,536
Real estate acquired in satisfaction of
debt..................................... 16,336 16,336
Policy loans.............................. 59,871 59,871
Other long-term investments............... 123,722 123,722
Cash and short-term investments........... 53,695 53,695
---------- ----------
Total investments......................... $6,605,405 $6,615,250
========== ==========
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
28
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
Future
Policy Policy
Benefits and
and Unearned Contract
Expenses Premiums Liabilities
---------- -------- -----------
<S> <C> <C> <C>
Year ended December 31, 1999
Individual life................................. $1,550,188 $ -- $ 8,607
Individual health............................... 133,214 10,311 10,452
Group life and health........................... 105,035 8,604 27,088
Annuity......................................... 4,036,751 -- --
---------- ------- -------
$5,825,188 $18,915 $46,147
========== ======= =======
Year ended December 31, 1998
Individual life................................. $1,355,283 $ -- $ 8,976
Individual health............................... 94,294 9,631 12,123
Group life and health........................... 93,405 10,298 36,908
Annuity......................................... 3,925,293 -- --
---------- ------- -------
$5,468,275 $19,929 $58,007
========== ======= =======
Year ended December 31, 1997
Individual life................................. $ 882,003 $ -- $ 8,550
Individual health............................... 62,033 9,207 12,821
Group life and health........................... 88,211 11,892 44,977
Annuity......................................... 4,204,125 -- --
---------- ------- -------
$5,236,372 $21,099 $66,348
========== ======= =======
</TABLE>
29
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
Benefits,
Claims
Net Losses and Other
Premium Investment Settlement Operating Premiums
Revenue Income* Expenses Expenses* Written
---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999
Individual life........... $ 226,456 $104,029 $ 274,730 $141,030 $ --
Individual health......... 77,985 10,036 58,649 35,329 77,716
Group life and health..... 83,639 10,422 61,143 38,075 81,918
Annuity................... 1,413,049 313,062 1,303,537 278,995 --
---------- -------- ---------- --------
$1,801,129 $437,549 $1,698,059 $493,429
========== ======== ========== ========
Year ended December 31,
1998
Individual life........... $ 514,194 $ 85,258 $ 545,720 $ 87,455 $ --
Individual health......... 68,963 8,004 48,144 30,442 68,745
Group life and health..... 111,547 11,426 82,690 54,352 108,769
Annuity................... 667,920 342,296 592,085 298,222 --
---------- -------- ---------- --------
$1,362,624 $446,984 $1,268,639 $470,471
========== ======== ========== ========
Year ended December 31,
1997
Individual life........... $ 200,175 $ 75,914 $ 211,921 $ 36,185 $ --
Individual health......... 63,548 5,934 37,706 29,216 63,383
Group life and health..... 146,694 11,888 103,581 91,568 143,580
Annuity................... 657,695 352,688 571,434 364,216 --
---------- -------- ---------- --------
$1,068,112 $446,424 $ 924,642 $521,185
========== ======== ========== ========
</TABLE>
-------------------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
30
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999
Life insurance in
force.................. $6,538,901 $(500,192) $415,910 $6,454,619 6.4%
========== ========= ======== ========== ===
Premiums:
Individual life....... $ 227,363 $ 3,967 $ 2,723 $ 226,119 1.2%
Individual health..... 83,489 5,504 -- 77,985 --
Group life and
health............... 205,752 122,113 -- 83,639 --
Annuity............... 1,426,112 12,726 -- 1,413,386 --
---------- --------- -------- ---------- ---
$1,942,716 $ 144,310 $ 2,723 $1,801,129 0.2%
========== ========= ======== ========== ===
Year ended December 31,
1998
Life insurance in
force.................. $6,384,095 $ 438,590 $ 39,116 $5,984,621 .6%
========== ========= ======== ========== ===
Premiums:
Individual life....... $ 515,164 $ 3,692 $ 2,366 $ 513,838 .5%
Individual health..... 76,438 7,475 -- 68,963 --
Group life and
health............... 255,848 144,301 -- 111,547 --
Annuity............... 686,372 18,096 -- 668,276 --
---------- --------- -------- ---------- ---
$1,533,822 $ 173,564 $ 2,366 $1,362,624 .2%
========== ========= ======== ========== ===
Year ended December 31,
1997
Life insurance in
force.................. $5,025,027 $ 420,519 $ 35,486 $4,639,994 .8%
========== ========= ======== ========== ===
Premiums:
Individual life....... $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health..... 73,593 10,045 -- 63,548 --
Group life and
health............... 339,269 192,575 -- 146,694 --
Annuity............... 697,893 40,198 -- 657,695 --
---------- --------- -------- ---------- ---
$1,312,446 $ 246,372 $ 2,038 $1,068,112 .2%
========== ========= ======== ========== ===
</TABLE>
31
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits:
(1) (a) Resolution of the Board of Directors of PFL Life
Insurance Company authorizing establishment of the
Mutual Fund Account. Note 8.
(2) Not Applicable.
(3) (a) Principal Underwriting Agreement by and between PFL
Life Insurance Company, on its own behalf and on the
behalf of the Mutual Fund Account, and AFSG
Securities Corporation. Note 8.
(b) Form of Broker/Dealer Supervision and Sales
Agreement by and between AFSG Securities Corporation
and the Broker/Dealer. Note 8.
(4) (a) Form of Policy. Note 9.
(4) (b) Form of Policy Endorsement. (allocation of Premium
Payment) Note 6.
(4) (c) Form of Policy Endorsement (GMIB) Note 10.
(4) (d) Form of Policy Endorsement (403(b)) Note 10.
(5) (a) Form of Application. Note 12.
(6) (a) Articles of Incorporation of PFL Life Insurance
Company. Note 1.
(b) ByLaws of PFL Life Insurance Company. Note 1.
(7) Not Applicable.
(8) (a)(1) Participation Agreement among Variable Insurance
Products Fund, Fidelity Distributors Corporation and
PFL Life Insurance Company. Note 2.
(a)(2) Amended Schedule A to Participation Agreement among
Variable Insurance Products Fund, Fidelity
Distributors Corporation and PFL Life Insurance
Company. Note 8.
(b)(1) Participation Agreement among Variable Insurance
Products Fund II, Fidelity Distributors Corporation
and PFL Life Insurance Company. Note 2.
(b)(2) Amended Schedule A to Participation Agreement among
Variable Insurance Products Fund II, Fidelity
Distributors Corporation and PFL Life Insurance
Company. Note 8.
(c)(1) Participation Agreement among Variable Insurance
Products Fund III, Fidelity Distributors Corporation
and PFL Life Insurance Company. Note 3.
(c)(2) Amended Schedule A to Participation Agreement among
Variable Insurance Products Fund III, Fidelity
Distributors Corporation and PFL Life Insurance
Company. Note 8.
<PAGE>
(d)(1) Participation among MFS Variable Insurance Trust,
PFL Life Insurance Company and Massachusetts
Financial Services Company. Note 4.
(d)(2) Partial Termination of Participation Agreement among
MFS Variable Insurance Trust, PFL Life Insurance
Company and Massachusetts Financial Services
Company. Note 5.
(d)(3) Amendment to Participation Agreement among MFS
Variable Insurance Trust, PFL Life Insurance Company
and Massachusetts Financial Services Company. Note
12.
(e)(1) Participation Agreement among Oppenheimer Variable
Account Funds, Oppenheimer Funds, Inc., and PFL Life
Insurance Company. Note 4.
(e)(2) Amendment to Participation Agreement among
Oppenheimer Variable Account Funds, Oppenheimer
Funds, Inc., and PFL Life Insurance Company. Note
12.
(f) Participation Agreement among Suntrust and PFL Life
Insurance Company. Note 12.
(g)(1) Participation Agreement among WRL Series Fund, Inc.,
PFL Life Insurance Company, AUSA Life Insurance
Company, Inc. and Peoples Benefit Life Insurance
Company. Note 7.
(g)(2) Amendment to Participation Agreement among WRL
Series Fund, Inc. PFL Life Insurance Company, AUSA
Life Insurance Company, Inc., and Peoples Benefit
Life Insurance Company. Note 12.
(h) Participation Agreement by and between Janus Aspen
Series and PFL Life Insurance Company. Note 11.
(h)(1) Amendment to Schedule A of the Participation
Agreement by and between Janus Aspen Series and PFL
Life Insurance Company. Note 12.
(9) Opinion and Consent of Counsel. Note 12.
(10) (a) Consent of Independent Auditors. Note 12.
(b) Opinion and Consent of Actuary. Note 12.
(11) Not applicable.
(12) Not applicable.
(13) Performance Data Calculations. Note 13.
(14) Powers of Attorney. (P.S. Baird, C.D. Vermie, W.L.
Busler, L.N. Norman, D.C. Kolsrud, R.J. Kontz, B.K.
Clancy) Note 8. (Bart Herbert, Jr.) Note 12.
Note 1. Incorporated by reference to the Initial Filing to Form N-4
Registration Statement (File No. 333-26209) on April 30, 1997.
Note 2. Incorporated by reference to Post-Effective Amendment No. 8 to
Form N-4 Registration Statement (File No. 33-37498) on April 28,
1999.
Note 3. Incorporated by reference to Post-Effective Amendment No. 7 to
Form N-4 Registration Statement (File No. 33-37498) on April 29,
1997.
<PAGE>
Note 4. Incorporated by reference to Post-Effective Amendment No. 2 to
Form N-4 Registration Statement (File No. 333-7509) on December
23, 1997.
Note 5. Incorporated by reference to Post-Effective Amendment No. 8 to
Form N-4 Registration Statement (File No. 333-7509) on April 29,
1999.
Note 6. Incorporated by reference to Post-Effective Amendment No. 5 to
Form N-4 Registration Statement (File No. 333-7509) on July 16,
1998.
Note 7. Incorporated by reference to Post-Effective Amendment No. 1 to
Form N-4 Registration Statement (File No. 333-26209) on April
29, 1998.
Note 8. Filed with the Initial Filing of Form N-4 Registration Statement
(File No. 333-32110) on March 10, 2000.
Note 9. Incorporated by reference to Pre-Effective Amendment No. 1 to
Form N-4 Registration Statement (File No. 333-7509) on December
6, 1996.
Note 10. Incorporated by reference to Post-Effective Amendment No. 6 to
Form N-4 Registration Statement (File No. 333-7509) on January
22, 1999.
Note 11. Incorporated by reference to Post-Effective Amendment No. 3 to
Form N-4 Registration Statement (File No. 333-26209) on April
28, 2000.
Note 12. File herewith
Note 13. To be filed by amendment.
Item 25. Directors and Officers of the Depositor (PFL Life Insurance Company)
Name and Business Address Principal Positions and Offices with Depositor
------------------------- ----------------------------------------------
Bart Herbert, Jr. Director, Chairman of the Board and Executive
4333 Edgewood Road, N.E. Vice President
Cedar Rapids, Iowa 52499-0001
Patrick S. Baird Director, Senior Vice President and Chief
4333 Edgewood Road, N.E. Operating Officer
Cedar Rapids, Iowa 52499-0001
Craig D. Vermie Director, Vice President, Secretary and
4333 Edgewood Road, N.E. General Counsel
Cedar Rapids, Iowa 52499-0001
Douglas C. Kolsrud Director, Senior Vice President, Chief
4333 Edgewood Road, N.E. Investment Officer and Corporate Actuary
Cedar Rapids, Iowa 52499-0001
Larry N. Norman Director and President
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Robert J. Kontz Vice President and Corporate Controller
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Brenda K. Clancy Vice President, Treasurer and Chief Financial
4333 Edgewood Road, N.E. Officer
Cedar Rapids, Iowa 52499-0001
<PAGE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name Incorporation Securities Owned Business
---- ------------- ---------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands 51.16% of Vereniging Holding company
AEGON Netherlands
Membership Association
Groninger Financieringen B.V. Netherlands 100% of AEGON N.V. Holding company
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Voting Trust Trustees: Delaware Voting Trust
K.J. Storm
Donald J. Shepard H.B.
Van Wijk Dennis Hersch
AEGON U.S. Holding Corporation Delaware 100% of Voting Trust Holding company
Short Hills Management Company New Jersey 100% of AEGON U.S. Holding company
Holding Corporation
CORPA Reinsurance Company New York 100% of AEGON U.S. Holding company
Holding Corporation
AEGON Management Company Indiana 100% of AEGON U.S. Holding company
Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding company
Holding Corporation
Transamerica Holding Company Delaware 100% AEGON USA, Inc. Holding company
AEGON Funding Corp. Delaware 100% Transamerica Issue debt securities-net
Holding Company proceeds used to make
loans to affiliates
First AUSA Life Insurance Maryland 100% AEGON USA, Inc. Insurance holding company
AUSA Life Insurance New York 82.33% First AUSA Life Insurance
Company, Inc. Insurance Company
17.67% Veterans Life
Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Ins. Co. Insurance
Company of America
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Life Investors Alliance, LLC Delaware 100% LIICA Purchase, own, and hold the
equity interest of other entities
Great American Insurance Iowa 100% LIICA Marketing
Agency, Inc.
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Ins. Co. Insurance
AEGON Financial Services Minnesota 100% PFL Life Insurance Co. Marketing
Group, Inc.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
of Kentucky Services Group, Inc. settlements
AEGON Assignment Corporation Illinois 100% AEGON Financial Administrator of structured
Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Ins. Co. Insurance
Co. of Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Inc. Florida 100% Western Reserve Life Provides administration for
Assurance Co. of Ohio affiliated mutual fund
WRL Investment Florida 100% Western Reserve Life Registered investment advisor
Management, Inc. Assurance Co. of Ohio
ISI Insurance Agency, Inc. California 100% Western Reserve Life Insurance agency
And Subsidiaries Assurance Co. of Ohio
ISI Insurance Agency Alabama 100% ISI Insurance Agency, Inc. Insurance Agency
of Alabama, Inc.
ISI Insurance Agency Ohio 100% ISI Insurance Agency, Inc. Insurance agency
of Ohio, Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Agency Inc. Insurance Agency
of Massachusetts, Inc.
ISI Insurance Agency Texas 100% ISI Insurance Agency, Inc. Insurance agency
of Texas, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
ISI Insurance Agency Hawaii 100% ISI Insurance Insurance agency
of Hawaii, Inc. Agency, Inc.
ISI Insurance Agency New Mexico 100% ISI Insurance Insurance agency
New Mexico, Inc. Agency, Inc.
AEGON Equity Group, Inc. Florida 100% Western Reserve Life Insurance Agency
Assurance Co. of Ohio
Monumental General Casualty Co. Maryland 100% First AUSA Life Ins. Co. Insurance
United Financial Services, Inc. Maryland 100% First AUSA Life Ins. Co. General agency
Bankers Financial Life Ins. Co. Arizona 100% First AUSA Life Ins. Co. Insurance
The Whitestone Corporation Maryland 100% First AUSA Life Ins. Co. Insurance agency
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Monumental General Life Puerto Rico 51% First AUSA Life Insurance
Insurance Company of Insurance Company
Puerto Rico 49% Baldrich & Associates
of Puerto Rico
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Insurance Maryland 100% AUSA Holding Co. Holding company
Group, Inc.
Trip Mate Insurance Agency, Inc. Kansas 100% Monumental General Sale/admin. of travel
Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management srvcs.
Administrators, Inc. Insurance Group, Inc. to unaffiliated third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial consulting
Consultant Services, Inc. Administrators, Inc. services
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale of
Marketing, Inc. Insurance Group, Inc. mass marketed insurance
coverages
AUSA Financial Markets, Inc. Iowa 100% AUSA Holding Co. Marketing
Transamerica Capital, Inc. California 100% AUSA Holding Co. Broker/Dealer
Endeavor Management Company California 100% AUSA Holding Co. Investment Management
Universal Benefits Corporation Iowa 100% AUSA Holding Co. Third party administrator
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Trust Co. Iowa 100% AUSA Holding Co. Trust company
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling
for employees and agents of
affiliated companies
ADB Corporation Delaware 100% Money Services, Inc. Special purpose limited
Liability company
ORBA Insurance Services, Inc. California 10.56% Money Services, Inc. Insurance agency
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Inc. Insurance agency
Zahorik Texas, Inc. Texas 100% Zahorik Company, Inc. Insurance agency
Long, Miller & Associates, L.L.C. California 33-1/3% AUSA Holding Co. Insurance agency
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment advisor
Services, Inc.
InterSecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
Associated Mariner Financial Michigan 100% InterSecurities, Inc. Holding co./management
Group, Inc. services
Associated Mariner Ins. Agency Massachusetts 100% Associated Mariner Insurance agency
of Massachusetts, Inc. Agency, Inc.
Associated Mariner Agency Ohio 100% Associated Mariner Insurance agency
Ohio, Inc. Agency, Inc.
Associated Mariner Agency Texas 100% Associated Mariner Insurance agency
Texas, Inc. Agency, Inc.
Idex Investor Services, Inc. Florida 100% AUSA Holding Co. Shareholder services
Idex Management, Inc. Delaware 100% AUSA Holding Co. Investment advisor
IDEX Mutual Funds Massachusetts Various Mutual fund
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment advisor
Advisors, Inc.
Diversified Investors Securities Delaware 100% Diversified Investment Broker-Dealer
Corp. Advisors, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
George Beram & Company, Inc. Massachusetts 100% Diversified Investment Employee benefit and
Advisors, Inc. actuarial consulting
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer (De-registered)
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Inc. Insurance agency
Canadian Dealer Network Inc.
Weiner Agency, Inc. Maryland 100% Creditor Resources, Inc. Insurance agency
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment services
AEGON USA Real Estate Delaware 100% AEGON USA Realty Real estate and mortgage
Services, Inc. Advisors, Inc. holding company
QSC Holding, Inc. Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and sales
LRA, Inc. Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Associates, Inc. Delaware 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Realty Associates, Inc. Texas 100% Landauer Associates, Inc. Real estate counseling
Realty Information Systems, Inc. Iowa 100% AEGON USA Realty Information Systems for
Advisors, Inc. real estate investment
management
USP Real Estate Investment Trust Iowa 12.89% First AUSA Life Ins. Co. Real estate investment trust
13.11% PFL Life Ins. Co.
4.86% Bankers United Life
Assurance Co.
RCC Properties Limited Iowa AEGON USA Realty Advisors, Limited Partnership
Partnership Inc. is General Partner and 5%
owner.
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
AFSG Securities Corporation Pennsylvania 100% CGC Broker-Dealer
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life
Insurance Company
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Durco Agency, Inc. Virginia 100% Benefit Plans, Inc. General agent
Capital 200 Block Corporation Delaware 100% CGC Real estate holdings
Capital Real Estate Delaware 100% CGC Furniture and equipment
Development Corporation lessor
Commonwealth General. Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
Diversified Financial Products Inc. Delaware 100% CGC Provider of investment,
marketing and admin. services
to ins. cos.
Monumental Agency Group, Inc. Kentucky 100% CGC Provider of srvcs. to ins. cos.
PB Investment Advisors, Inc. Delaware 100% CGC Registered investment advisor
(de-registered)
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Commonwealth General LLC Turks & 100% CGC Special-purpose subsidiary
Caicos Islands
Ampac Insurance Agency, Inc. Pennsylvania 100% CGC Provider of management
(EIN 23-1720755) support services
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Financial Planning Services, Inc. Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Frazer Association Illinois 100% Ampac Insurance TPA license-holder
Consultants, Inc. Agency, Inc.
National Home Life Corporation Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Valley Forge Associates, Inc. Pennsylvania 100% Ampac Insurance Furniture & equipment lessor
Agency, Inc.
Veterans Benefits Plans, Inc. Pennsylvania 100% Ampac Insurance Administrator of group
Agency, Inc. insurance programs
Veterans Insurance Services, Inc. Delaware 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Academy Insurance Group, Inc. Delaware 100% CGC Holding company
Academy Life Insurance Co. Missouri 100% Academy Insurance Insurance company
Group, Inc.
Pension Life Insurance New Jersey 100% Academy Life Insurance company
Company of America Insurance Company
FED Financial, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Development Corp. Inc. Kansas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Insurance Agency, Inc. California 100% Academy Insurance General agent
Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
(EIN 23-2364438) Group, Inc.
Force Financial Group, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Force Financial Services, Inc. Massachusetts 100% Force Fin. Group, Inc. Special-purpose subsidiary
Military Associates, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. services
Services, Inc. Group, Inc.
Unicom Administrative Germany 100%Unicom Administrative Provider of admin. services
Services, GmbH Services, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Capital General Development Delaware 100% CGC Holding company
Corporation
Monumental Life Maryland 73.23% Capital General Insurance company
Insurance Company Development Company
26.77% First AUSA Life
Insurance Company
AEGON Special Markets Maryland 100% Monumental Life Marketing company
Group, Inc. Insurance Company
Peoples Benefit Life Missouri 3.7% CGC Insurance company
Insurance Company 20.0% Capital Liberty, L.P.
76.3% Monumental Life
Insurance Company
Veterans Life Insurance Co. Illinois 100% Peoples Benefit Insurance company
Life Insurance Company
Peoples Benefit Services, Inc. Pennsylvania 100% Veterans Life Ins. Co. Special-purpose subsidiary
Coverna Direct Insurance Maryland 100% Peoples Benefit Insurance agency
Insurance Services, Inc. Life Insurance Company
Ammest Realty Corporation Texas 100% Monumental Life Special purpose subsidiary
Insurance Company
JMH Operating Company, Inc. Mississippi 100% Monumental Life Real estate holdings
Insurance Company
Capital Liberty, L.P. Delaware 99.0% Monumental Life Holding Company
Insurance Company
1.0% CGC
Transamerica Corporation Delaware 100% AEGON NV Major interest in insurance
and finance
Transamerica Pacific Insurance Hawaii 100% Transamerica Corp. Life insurance
Company, Ltd.
TREIC Enterprises, Inc. Delaware 100% Transamerica Corp. Investments
ARC Reinsurance Corporation Hawaii 100% Transamerica Corp. Property & Casualty Ins.
Transamerica Management, Inc. Delaware 100% ARC Reinsurance Corp. Asset management
Inter-America Corporation California 100% Transamerica Corp. Insurance
Broker
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Pyramid Insurance Company, Ltd. Hawaii 100% Transamerica Corp. Property & Casualty Ins.
Pacific Cable Ltd. Bmda. 100% Pyramid Ins. Co., Ltd. Sold 25% of TC Cable, Inc.
stock in 1998
Transamerica Business Tech Corp. Delaware 100% Transamerica Corp. Telecommunications and
data processing
Transamerica CBO I, Inc. Delaware 100% Transamerica Corp. Owns and manages a pool of
high-yield bonds
Transamerica Corporation (Oregon) Oregon 100% Transamerica Corp. Name holding only-Inactive
Transamerica Finance Corp. Delaware 100% Transamerica Corp. Commercial & Consumer
Lending & equip. leasing
TA Leasing Holding Co., Inc. Delaware 100% Transamerica Fin. Corp. Holding company
Trans Ocean Ltd. Delaware 100% TA Leasing Hldg Co. Inc. Holding company
Trans Ocean Container Corp. Delaware 100% Trans Ocean Ltd. Intermodal Leasing
("TOCC")
SpaceWise Inc. Delaware 100% TOCC Intermodal leasing
Trans Ocean Container
Finance Corp. Delaware 100% TOCC Intermodal leasing
Trans Ocean Leasing
Deutschland GmbH Germany 100% TOCC Intermodal leasing
Trans Ocean Leasing PTY Ltd. Austria 100% TOCC Intermodal leasing
Trans Ocean Management S.A. Switzerland 100% TOCC Intermodal leasing
Trans Ocean Regional
Corporate Holdings California 100% TOCC Holding company
Trans Ocean Tank Services Corp. Delaware 100% TOCC Intermodal leasing
Transamerica Leasing Inc. Delaware 100% TA Leasing Holding Co. Leases & Services intermodal
equipment
Transamerica Leasing Holdings Delaware 100% Transamerica Leasing Inc. Holding Company
Inc. ("TLHI")
Greybox Logistics Services Inc. Delaware 100% TLHI Intermodal Leasing
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Greybox L.L.C. Delaware 100% TLHI Intermodal freight container
interchange facilitation
service
Transamerica Trailer France 100% Greybox L.L.C. Leasing
Leasing S.N.C.
Greybox Services Limited U.K. 100% TLHI Intermodal Leasing
Intermodal Equipment, Inc. Delaware 100% TLHI Intermodal leasing
Transamerica Leasing N.V. Belg. 100% Intermodal Equipment Inc. Leasing
Transamerica Leasing SRL Italy 100% Intermodal Equipment Inc. Leasing
Transamerica Distribution Delaware 100% TLHI Provided door-to-door
Services, Inc. services for the domestic
transportation of temperature-
sensitive products
Transamerica Leasing Belg. 100% TLHI Leasing
Coordination Center
Transamerica Leasing do Braz. 100% TLHI Container Leasing
Brasil Ltda.
Transamerica Leasing GmbH Germany 100% TLHI Leasing
Transamerica Leasing Limited U.K. 100% TLHI Leasing
ICS Terminals (UK) Limited U.K. 100% Transamerica. Leasing
Leasing Limited
Transamerica Leasing Pty. Ltd. Australia 100% TLHI Leasing
Transamerica Leasing (Canada) Inc. Canada 100% TLHI Leasing
Transamerica Leasing (HK) Ltd. H.K. 100% TLHI Leasing
Transamerica Leasing S. Africa 100% TLHI Intermodal leasing
(Proprietary) Limited
Transamerica Tank Container Australia 100% TLHI The Australian (domestic)
Leasing Pty. Limited leasing of tank containers
Transamerica Trailer Holdings I Inc. Delaware 100% TLHI Holding company
Transamerica Trailer Holdings II, Inc. Delaware 100% TLHI Holding company
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Transamerica Trailer Holdings III, Inc. Delaware 100% TLHI Holding company
Transamerica Trailer Leasing AB Swed. 100% TLHI Leasing
Transamerica Trailer Leasing AG Switzerland 100% TLHI Leasing
Transamerica Trailer Leasing A/S Denmark 100% TLHI Leasing
Transamerica Trailer Leasing GmbH Germany 100% TLHI Leasing
Transamerica Trailer Leasing Belgium 100% TLHI Leasing
(Belgium) N.V.
Transamerica Trailer Leasing Netherlands 100% TLHI Leasing
(Netherlands) B.V.
Transamerica Trailer Spain S.A. Spain 100% TLHI Leasing
Transamerica Transport Inc. New Jersey 100% TLHI Dormant
Transamerica Commercial Delaware 100% Transamerica Fin. Corp. Holding company for
Finance Corporation, I ("TCFCI") Commercial/consumer
finance subsidiaries
Transamerica Equipment Financial Delaware 100% TCFCI
Services Corporation
BWAC Credit Corporation Delaware 100% TCFCI
BWAC International Corporation Delaware 100% TCFCI
BWAC Twelve, Inc. Delaware 100% TCFCI Holding company for
premium finance subsidiaries
TIFCO Lending Corporation Illinois 100% BWAC Twelve, Inc. General financing & other
services in the US &
elsewhere
Transamerica Insurance Finance Maryland 100% BWAC Twelve, Inc. Provides insurance premium
Corporation ("TIFC") financing in the US with the
exception of CA and HI
Transamerica Insurance Finance Maryland 100% TIFC Provides Insurance premium
Company (Europe) financing in California
Transamerica Insurance Finance California 100% TIFC Disability ins. & holding co.
Corporation, California for various insurance
subsidiaries of Transamerica
Corporation
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Transamerica Insurance Finance ON 100% TIFC Provides ins. premium
Corporation, Canada financing in Canada
Transamerica Business Credit Delaware 100% TCFCI Provides asset based lending
Corporation ("TBCC") leasing & equip. financing
Transamerica Mezzanine Delaware 100% TBCC Holds investments in several
Financing, Inc. joint ventures/partnerships
Transamerica Business Advisory Grp. Delaware 100% TBCC
Bay Capital Corporation Delaware 100% TBCC Special purpose company for
the purchase of real estate tax
liens
Coast Funding Corporation Delaware 100% TBCC Special purpose company for
the purchase of real estate tax
liens
Transamerica Small Business Delaware 100% TBCC
Capital, Inc. ("TSBC")
Emergent Business Capital Delaware 100% TSBC
Holdings, Inc.
Gulf Capital Corporation Delaware 100% TBCC Special purpose company for
the purchase of real estate tax
liens
Direct Capital Equity Investment, Inc. Delaware 100% TBCC Small business loans
TA Air East, Corp Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air I, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air II, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air III, Corp. Delaware 100% TBCC special purpose corp. which
hold an ownership interest
or leases aircraft
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
TA Air IV, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air V, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air VI, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air VII, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest or
leases aircraft
TA Air VIII, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest or
leases aircraft
TA Air IX, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air X, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air XI, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air XII, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air XIII, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air XIV, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
TA Air XV, Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest
or leases aircraft
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
TA Marine I Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest or
leases barges or ships
TA Marine II Corp. Delaware 100% TBCC Special purpose corp. which
hold an ownership interest or
leases barges or ships
TBC I, Inc. Delaware 100% TBCC Special purpose corp.
TBC II, Inc. Delaware 100% TBCC Special purpose corp.
TBC III, Inc. Delaware 100% TBCC Special purpose corp.
TBC IV, Inc. Delaware 100% TBCC Special purpose corp.
TBC V, Inc. Delaware 100% TBCC Special purpose corp.
TBC VI, Inc. Delaware 100% TBCC Special purpose corp.
TBC Tax I, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
TBC Tax II, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
TBC Tax III, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
TBC Tax IV, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
TBC Tax V, Inc. Delaware 100% TBCC Special purpose co. for the
purchase or real estate tax lien
TBC Tax VI, Inc. Delaware 100% TBCC Special purpose co. for the
purchase or real estate tax lien
TBC Tax VII, Inc. Delaware 100% TBCC Special purpose co. for the
purchase or real estate tax lien
TBC Tax VIII, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
TBC Tax IX, Inc. Delaware 100% TBCC Special purpose co. for the
purchase of real estate tax lien
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
The Plain Company Delaware 100% TBCC Special purpose corp. which
hold an ownership interest or
leases aircraft.
Transamerica Distribution Delaware 100% TCFCI Holding corp. for inventory,
Finance Corporation ("TDFC") comm. Leasing, retail finance
comm. Recovery service and
accounts
Transamerica Accounts Holding Corp. Delaware 100% TDFC
Transamerica Commercial Delaware 100% TDFC Wholesale floor plan for
Finance Corporation ("TCFC") appliances, electronics,
computers, office equip. and
marine equipment.
Transamerica Acquisition Canada 100% TCFC Holding company
Corporation, Canada
Transamerica Distribution Finance Delaware 100% TCFC
Corporation - Overseas, Inc.
("TDFCO")
TDF Mauritius Limited Mauritius 100% TDFCO Mauritius holding company
of our Indian Joint Venture
Inventory Funding Trust Delaware 100% TCFC
Inventory Funding Company, LLC Delaware 100% Inventory Funding Trust
TCF Asset Management Corporation Colorado 100% TCFC A depository for foreclosed
real and personal property
Transamerica Joint Ventures, Inc. Delaware 100% TCFC To enter into general partner-
ships for the ownership of
comm. & finance business
Transamerica Inventory Delaware 100% TDFC Holding co. for inventory
Finance Corporation ("TIFC") finance subsidiaries
Transamerica GmbH, Inc. Delaware 100% TIFC Commercial lending in
Germany
Transamerica Fincieringsmaatschappij
B.V. Netherlands 100% Trans. GmbH, Inc. Commercial lending in
Europe
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
BWAC Seventeen, Inc. Delaware 100% TIFC Holding co. for principal
Canadian operation, Trans-
America Comm. Finance
Corp, Canada
Transamerica Commercial ON 100% BWAC Seventeen, Inc. Shell corp.- Dormant
Finance Canada, Limited
Transamerica Commercial Canada 100% BWAC Seventeen, Inc. Commercial finance
Finance Corporation, Canada
BWAC Twenty-One, Inc. Delaware 100% TIFC Holding co. for United
Kingdom operation, Trans-
America Comm. Finance
Limited
Transamerica Commercial U.K. 100% BWAC Twenty-One Inc. Commercial lending in the
Finance Limited ("TCFL") United Kingdom.
Whirlpool Financial Corporation 100% TCFL Inactive commercial finance
Polska Spzoo Company in Poland
Transamerica Commercial U.K. 100% BWAC Twenty-One Inc. Holding Company
Holdings Limited
Transamerica Commercial Finance U.K. 100% Trans. Commercial
Limited Holdings Limited
Transamerica Commercial Finance France 100% BWAC Twenty-One Inc. Carries out factoring trans-
France S.A. actions in France & abroad
Transamerica GmbH Inc. Delaware 100% BWAC Twenty-One Inc. Holding co. for Transamerica
Financieringsmaatschappij
B.V.
Transamerica Retail Financial Delaware 100% TIFC Provides retail financing
Services Corporation ("TRFSC")
Transamerica Bank, NA Delaware 100% TRFSC Bank (Credit Cards)
Transamerica Consumer Finance Delaware 100% TRFSC Consumer finance holding
Holding Company ("TCFHC") company
Transamerica Mortgage Company Delaware 100% TCFHC Consumer mortgages
Transamerica Consumer Mortgage Delaware 100% TCFHC Securitization company
Receivables Company
Metropolitan Mortgage Company Florida 100% TCFHC Consumer mortgages
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Easy Yes Mortgage, Inc. Florida 100% Metropolitan Mtg. Co. No active business/Name
holding only
Easy Yes Mortgage, Inc. Georgia 100% Metropolitan Mtg. Co. No active business/Name
holding only
First Florida Appraisal Services, Inc. Georgia 100% Metropolitan Mtg. Co. Appraisal and inspection
services
First Georgia Appraisal Services, Inc. Georgia 100% First FL App. Srvc, Inc. Appraisal services
Freedom Tax Services, Inc. Florida 100% Metropolitan Mtg. Co. Property tax information
services
J.J. & W. Advertising, Inc. Florida 100% Metropolitan Mtg. Co. Advertising and marketing
services
J.J. & W. Realty Corporation Florida 100% Metropolitan Mtg. Co. To hold problem REO
properties
Liberty Mortgage Company of Florida 100% Metropolitan Mtg. Co. No active business/Name
Ft. Myers, Inc. holding only
Metropolis Mortgage Company Florida 100% Metropolitan Mtg. Co. No active business/Name
holding only
Perfect Mortgage Company Florida 100% Metropolitan Mtg. Co. No active business/Name
holding only
Transamerica Vendor Financial Srvc. Delaware 100% TDFC Provides commercial lease
Transamerica Distribution Finance 100% TCFCI
Corporation de Mexico ("TDFCM")
TDF de Mexico Mexico 100% TDFCM
Transamerica Corporate Services 100% TDFCM
De Mexico
Transamerica Home Loan California 100% TFC Consumer mortgages
Transamerica Lending Company Delaware 100% TFC Consumer lending
Transamerica Financial Products, Inc. California 100% Transamerica Corp. Service investments
Transamerica Insurance Corporation California 100% Transamerica Corp. Provides insurance premium
of California ("TICC") financing in California
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Arbor Life Insurance Company Arizona 100% TICC Life insurance, disability
insurance
Plaza Insurance Sales Inc. California 100% TICC Casualty insurance placement
Transamerica Advisors, Inc. California 100% TICC Retail sale of investment
advisory services
Transamerica Annuity Services Corp. New Mexico 100% TICC Performs services required for
structured settlements
Transamerica Financial Resources, Inc. Delaware 100% TICC Retail sale of securities
products
Financial Resources Insurance Texas 100% Transamerica Fin. Res. Retail sale of securities
Agency of Texas products
TBK Insurance Agency of Ohio, Inc. Ohio 100% Transamerica Fin. Res. Variable insurance contract
sales in state of Ohio
Transamerica Financial Resources Alabama 100% Transamerica Fin. Res. Insurance agent & broker
Agency of Alabama, Inc.
Transamerica Financial Resources Ins. Massachusetts 100% Transamerica Fin. Res. Insurance agent & broker
Agency of Massachusetts, Inc.
Transamerica International Insurance Delaware 100% TICC Holding & administering
Services, Inc. ("TIIS") foreign operations
Home Loans and Finance Ltd. U.K. 100% TIIS Inactive
Transamerica Occidental Life California 100% TICC Licensed in all forms of life
Insurance Company ("TOLIC") insurance, accident and
sickness insurance
NEF Investment Company California 100% TOLIC Real estate development
Transamerica Life Insurance and N. Carolina 100%TOLIC Writes life and pension ins.
Annuity Company ("TLIAC") originally incorporated in CA
April 14, 1966
Transamerica Assurance Company Missouri 100% TLIAC Life and disability insurance
Gemini Investments, Inc. Delaware 100% TLIAC Investment subsidiary
Transamerica Life Insurance Company Canada 100% TOLIC Sells individual life insurance
of Canada & investment products in all
provinces and territories of
Canada
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Transamerica Life Insurance Company New York 100% TOLIC Licensed in NY to market life
of New York insurance, annuities and
health insurance
Transamerica South Park Delaware 100% TOLIC Provide market analysis of
Resources, Inc. certain undeveloped land
holdings held by TOLIC
Transamerica Variable Insurance Maryland 100% TOLIC Mutual Fund
Fund, Inc.
USA Administration Services, Inc. Kansas 100% TOLIC Third party administrator
Transamerica Products. Inc. California 100% TICC Parent co. of various
subsidiary corp. which are
formed to be co-general
partners of proprietary limited
Transamerica Securities Sales Corp. Maryland 100% Transamerica Prod. Inc. Retail sale of the variable life
ins. and variable annuity
products of the Transamerica
life companies
Transamerica Service Company Delaware 100% Transamerica Prod. Inc. Passive loss tax service for
Lloyd's U.S. names
Transamerica Intellitech, Inc. Delaware 100% TICC Real estate information and
technology services
Transamerica International Delaware 100% TICC Investments
Holdings, Inc.
Transamerica Investment Services, Inc. Delaware 100% TICC Investment adviser
Transamerica Income Shares, Inc. Maryland 100% Trans. Invest. Srvc. Inc. Transamerica investment
services
Transamerica LP Holdings Corp. Delaware 100% TICC Limited partnership
Investment (initial limited
partner of Transamerica
Delaware, L.P.)
Transamerica Real Estate Tax Service N/A 100% TICC Real estate tax reporting and
(A Division of Transamerica Corp) processing services
Transamerica Realty Services, Inc. Delaware 100% TICC Responsible for real estate
investments for Transamerica
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Bankers Mortgage Company of CA California 100% Transamerica Realty Srv. Holds bank account and owns
certain residual investments in
certain French real estate
projects which are managed
special purpose company for
the purchase of real estate tax
liens.
Pyramid Investment Corporation Delaware 100% Transamerica Realty Srv. Owns office buildings in San
Francisco and other properties
The Gilwell Company California 100% Transamerica Realty Srv. Ground lessee of 517
Washington Street,
San Francisco
Transamerica Affordable Housing, Inc. California 100% Transamerica Realty Srv. Owns general partnership
interests in low-income
housing tax credit
partnerships
Transamerica Minerals Company California 100% Transamerica Realty Srv. Owner and lessor of oil and
gas properties
Transamerica Oakmont Corporation California 100% Transamerica Realty Srv. General partner in
Transamerica/Oakmont
Retirement Associates
Transamerica Senior Properties, Inc. Delaware 100% TICC Owns congregate care and
assisted living retirement
Properties
Transamerica Senior Living, Inc. Delaware 100% Trans. Sr. Prop. Inc. Manages congregate care and
assisted living retirement
properties.
</TABLE>
Item 27. Number of Contract Owners
As of December 31, 1999, there were no Contract owners.
Item 28. Indemnification
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
-------
indemnification in certain situations, mandatory indemnification in other
situations, and prohibits indemnification in certain situations. The Code also
specifies producers for determining when indemnification payments can be made.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Depositor pursuant to the foregoing provisions, or otherwise, the Depositor has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Depositor of expenses incurred
or paid by a director, officer or controlling person in connection with the
securities being registered), the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29. Principal Underwriters
AFSG Securities Corporation
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
The directors and officers of AFSG Securities Corporation are as follows:
Larry N. Norman Thomas R. Moriarty
Director and President Vice President
Frank A. Camp Robert W. Warner
Secretary Assistant Compliance Officer
Lisa Wachendorf Linda Gilmer
Director, Vice President and Controller and Treasurer
Chief Compliance Officer
Priscilla Hechler
Anne M. Spaes Assistant Vice President and Assistant Secretary
Director and Vice President
Emily Bates Thomas Pierpan
Assistant Treasurer Assistant Vice President and Assistant Secretary
Clifton Flenniken Darin D. Smith
Assistant Treasurer Assistant Vice President and Assistant Secretary
The principal business address of each person listed is AFSG Securities
Corporation, 4333 Edgewood Road, N.E., Cedar Rapids, IA 52499-0001.
Commissions and Other Compensation Received by Principal Underwriter.
--------------------------------------------------------------------
AFSG Securities Corporation, the broker/dealer, received $0 from the Registrant
for the year ending December 31, 1999, for its services in distributing the
Policies. No other commission or compensation was received by the principal
underwriter, directly or indirectly, from the Registrant during the fiscal year.
AFSG Securities Corporation serves as the principal underwriter for the PFL
Endeavor VA Separate Account, the PFL Retirement Builder Variable Annuity
Account, the PFL Life Variable Annuity Account A, the PFL Life Variable Annuity
Account C, the PFL Life Variable Annuity Account D, PFL Life Variable Annuity
Account E, the PFL Wright Variable Annuity Account, the AUSA Endeavor Variable
Annuity Account, PFL Endeavor Variable Life Account and the Legacy Builder
Variable Account. These accounts are separate accounts of PFL Life Insurance
Company or AUSA Life Insurance Company, Inc. AFSG Securities Corporation also
serves as principal underwriter for Separate Account I, Separate Account II, and
Separate Account V of Peoples Benefit Life Insurance Company, and for Separate
Account C of AUSA Life Insurance Company, Inc.
<PAGE>
Item 30. Location of Accounts and Records
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are maintained by
PFL Life Insurance Company at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499-0001.
Item 31. Management Services.
All management Contracts are discussed in Part A or Part B.
Item 32. Undertakings
(a) Registrant undertakes that it will file a post-effective amendment to this
registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as Premiums under the Contract may be
accepted.
(b) Registrant undertakes that it will include either (i) a postcard or similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or
(ii) a space in the Policy application that an applicant can check to
request a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statements required to be made available under this Form
promptly upon written or oral request to PFL at the address or phone number
listed in the Prospectus.
(d) PFL Life Insurance Company hereby represents that the fees and charges
deducted under the contracts, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the
risks assumed by PFL Life Insurance Company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b) of
Rule 485 and has caused this Registration Statement to be signed on its behalf,
in the City of Cedar Rapids and State of Iowa, on this 27th day of July, 2000.
PFL LIFE VARIABLE
ANNUITY ACCOUNT E
PFL LIFE INSURANCE COMPANY
Depositor
/s/ Larry N. Norman
-------------------
Larry N. Norman
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Patrick S. Baird Director July 27, 2000
------------------------
Patrick S. Baird
/s/ Craig D. Vermie Director July 27, 2000
------------------------
Craig D. Vermie
/s/ Larry N. Norman Director July 27, 2000
------------------------ (Principal Executive Officer)
Larry N. Norman
/s/ Bart Herbert, Jr. Director July 27, 2000
------------------------
Bart Herbert, Jr.
/s/ Douglas C. Kolsrud Director July 27, 2000
------------------------
Douglas C. Kolsrud
/s/ Robert J. Kontz Vice President and July 27, 2000
------------------------ Corporate Controller
Robert J. Kontz
/s/ Brenda K. Clancy Treasurer July 27, 2000
------------------------
Brenda K. Clancy
</TABLE>
<PAGE>
Registration No.
333-32110
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
PRIVILEGE SELECT
----------------
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page No.*
----------- ---------------------- ----------
(5)(a) Form of Application
(8)(d)(3) Amendment to Participation Agreement among MFS Variable
Insurance Trust, PFL Life Insurance company and
Massachusetts Financial Services Company.
(8)(e)(2) Amendment to Participation Agreement among Oppenheimer
Variable Account Funds, OppenheimerFunds, Inc. and PFL
Life Insurance Company.
(8)(f) Participation Agreement among Suntrust and PFL Life
Insurance Company.
(8)(g)(2) Amendment to Participation Agreement among WRL Series
Fund, Inc., PFL Life Insurance Company, AUSA Life
Insurance Company, Inc., and Peoples Benefit Life
Insurance Company.
(8)(h)(1) Amendment to Schedule A of the Participation Agreement
by and between Janus Aspen Series and PFL Life Insurance
Company.
(9) Opinion and Consent of Counsel.
(10)(a) Consent of Independent Auditors.
(10)(b) Opinion and Consent of Actuary
(14) Power of Attorney
---------------------------------
* Page numbers included only in manually executed original.
