AAL
VARIABLE
UNIVERSAL
LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Offered by:
AID ASSOCIATION FOR LUTHERANS
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
(414) 734-5721
[AAL Logo]
AID ASSOCIATION FOR LUTHERANS
AAL's Variable Universal Life Provides You With These Benefits
Death Benefit Protection
Flexible Premium Payment Options
A Variety of Investment Options for Your Cash Value
Death Benefit Guarantee Upon Payment of Death Benefit Guarantee Premium
AAL Variable Life Account I
AAL Variable Product Series Fund, Inc.
The AAL Variable Product Money Market Portfolio
The AAL Variable Product Bond Portfolio
The AAL Variable Product Balanced Portfolio
The AAL Variable Product Large Company Stock Portfolio
The AAL Variable Product Small Company Stock Portfolio
AAL VARIABLE UNIVERSAL LIFE
AAL VARIABLE UNIVERSAL LIFE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
Offered by:
AID ASSOCIATION FOR LUTHERANS
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
(414) 734-5721
PROSPECTUS Dated January 20, 1998
Aid Association for Lutherans ("AAL") is offering the flexible premium variable
life insurance Certificate (the "Certificate") described in this Prospectus to
persons who are eligible for membership in AAL. Membership is open to Lutherans
and their families. AAL offers life, disability income insurance and annuities
to its members and to employees of AAL, its subsidiaries and affiliated
companies who reside in Wisconsin, and mutual funds are offered through a
subsidiary, AAL Capital Management Corporation. All members are part of one of
over 9,600 local AAL branches throughout the United States. The Certificate
provides life insurance benefits. You may choose from two death benefit options.
Under the Level Death Benefit Option the death benefit is usually the Specified
Amount. Under the Variable Death Benefit the death benefit is usually equal to
the Specified Amount plus the Certificate's Cash Value, which can vary. You can
also choose the timing and amounts of your premium payments and allocate your
Cash Value among the underlying Subaccounts. You may use your Cash Value to keep
your Certificate in force, or borrow a portion of it. You can also surrender
your Certificate and receive the Cash Value less any surrender charges and
loans.
Your Certificate's Cash Value will vary with the investment experience of the
underlying funding options you choose. Although Certificate values will vary,
the Certificate can be guaranteed to stay in force through the Guaranteed Death
Benefit Provision.
It may not be to your advantage to replace existing life insurance or supplement
existing variable life insurance with this Certificate.
Please read this prospectus carefully and retain it for future reference.
You should rely only on the information contained in this document. AAL has not
authorized anyone to provide you with information that is different.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS
FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION HEREWITH.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE CERTIFICATE IS TO PROVIDE LIFE
INSURANCE PROTECTION FOR THE BENEFICIARY NAMED THEREIN.
NO CLAIM IS MADE THAT THIS VARIABLE LIFE INSURANCE CERTIFICATE IS IN ANY WAY
SIMILAR TO OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
TABLE OF CONTENTS
DEFINITIONS.....
CERTIFICATE SUMMARY
INTRODUCTION
WHAT IS AAL?
WHAT IS THE PURPOSE OF THE CERTIFICATE?
WHAT LIFE INSURANCE PROTECTION IS PROVIDED?
WHAT PREMIUMS MAY I PAY?
WHAT INVESTMENT OPTIONS DO I HAVE?
WHAT IS THE CASH VALUE OF THE CERTIFICATE?
WHAT CHARGES DO I PAY?
HOW CAN I TAKE CASH OUT OF MY CERTIFICATE?
HOW CAN MY CERTIFICATE TERMINATE?
BENEFITS
DEATH BENEFIT
INCREASING YOUR SPECIFIED AMOUNT
DECREASING YOUR SPECIFIED AMOUNT
CHANGING YOUR DEATH BENEFIT OPTION
DEATH BENEFIT GUARANTEE
MATURITY BENEFIT
ADDITIONAL BENEFITS
PREMIUMS
DEATH BENEFIT GUARANTEE PREMIUM
FLEXIBILITY
LIMITS
NET PREMIUM & PREMIUM ALLOCATION
INVESTMENT OPTIONS
FIXED ACCOUNT
VARIABLE ACCOUNT
INVESTMENT OBJECTIVES OF THE FUND PORTFOLIOS
TRANSFERS
REVIEW OF INVESTMENT STRATEGY
VOTING PRIVILEGES
CASH VALUE
FIXED ACCOUNT CASH VALUE
VARIABLE ACCOUNT CASH VALUE
WHAT AFFECTS CASH VALUE
SURRENDER VALUE
CHARGES
PERCENT OF PREMIUM CHARGE
CASH VALUE CHARGES
SURRENDER CHARGE
TRANSFER CHARGE
ACCESS TO CASH VALUE
PARTIAL WITHDRAWALS
LOANS
SURRENDER
CERTIFICATE TERMINATION
EARLY TERMINATION AND REINSTATEMENT
DEATH, MATURITY, AND SURRENDER
PAYOUT OPTIONS
SELECTION
OPTION 1: INTEREST
OPTION 2: A SELECTED AMOUNT OF INCOME
OPTION 3: A SET PERIOD
OPTION 4: LIFE PAYMENT
OPTION 5: JOINT & SURVIVOR
HOW TO MAKE PAYMENTS AND RECEIVE SERVICE
APPLYING FOR A CERTIFICATE
TIMELY PROCESSING
WRITTEN REQUESTS
TELEPHONE TRANSACTIONS
DEATH CLAIMS
GENERAL INFORMATION
FREE LOOK
ENTIRE CONTRACT
STATEMENTS IN THE APPLICATION
CHANGE OF CERTIFICATE
INCONTESTABILITY
MISSTATEMENT OF AGE OR SEX
MAINTENANCE OF SOLVENCY
BASIS OF COMPUTATIONS
REPORTS TO OWNERS
MEMBERSHIP
OWNERSHIP
BENEFICIARY
COLLATERAL ASSIGNMENT
RIGHTS RESERVED BY AAL
DIRECTORS AND OFFICERS
FEDERAL TAX MATTERS
VARIABLE ACCOUNT TAX STATUS
LIFE INSURANCE QUALIFICATION
PRE-DEATH DISTRIBUTIONS
DIVERSIFICATION REQUIREMENTS
OTHER CONSIDERATIONS
LITIGATION
DISTRIBUTION
ILLUSTRATIONS
LEGAL AND ACTUARIAL MATTERS
EXPERTS
DEFINITIONS
AAL: Aid Association for Lutherans, a fraternal benefit society organized under
the laws of the State of Wisconsin, owned and operated for its members. It is
the issuer of the Certificates.
AALCMC: AAL Capital Management Corporation, an indirect subsidiary of Aid
Association for Lutherans and a registered broker-dealer. It serves as principal
underwriter of the Certificates.
AAL Representative: An AAL District Representative who is appropriately licensed
by state insurance department officials to sell the Certificates, and is also a
licensed Registered Representative of AALCMC.
Accumulation Unit: A unit of measure used to calculate the Cash Value in each
Subaccount of the Variable Account. A further description is contained in the
Section "Cash Value", specifically the subsection "Variable Account", of this
Prospectus.
Accumulation Unit Value: On any Valuation Date, the value of the Accumulation
Unit of each Subaccount of the Variable Account. A further description is
contained in the Section "Cash Value", specifically the subsection "Variable
Account", of this Prospectus.
Age: The Issue Age of the insured plus the number of Certificate Years elapsed.
Beneficiary: The person(s) named by the Certificate Owner to receive the death
proceeds under the Certificate. A beneficiary need not be a natural person.
Cash Value: The total value of the Certificate. Cash Value equals the sum of the
Subaccount cash values plus Fixed Account cash value.
Certificate: The flexible premium variable life insurance Certificate offered by
AAL and described in this prospectus.
Certificate Anniversary: The same date in each succeeding year as the
Certificate Issue Date.
Certificate Year: The 12-month period following the Issue Date or a Certificate
Anniversary. The Certificate Year is always based upon the time elapsed since
the Issue Date.
Death Benefit: The amount paid upon the death of the Insured.
Death Benefit Option: Either of the two methods used to determine the Death
Benefit.
Death Benefit Guarantee: A Certificate provision that guarantees insurance
coverage if you meet certain conditions.
Death Benefit Guarantee Premium: The minimum monthly premium required to keep
your particular Certificate's Death Benefit Guarantee in effect. Different
combinations of age, sex, risk class, specified amount and additional benefits
will result in different Death Benefit Guarantee Premiums. Your Death Benefit
Guarantee Premium is listed on page 3A of your Certificate and it is further
described in the Section "PREMIUMS" of this Prospectus.
Fixed Account: A Cash Value accumulation option that credits an interest rate.
The Fixed Account is part of AAL's general account, which includes all of AAL's
assets other than those in any AAL separate account.
Fund: AAL Variable Product Series Fund, Inc., which is described in the Fund
Prospectus accompanying this Prospectus.
Home Office: AAL's office at 4321 Ballard Road, Appleton, Wisconsin 54919-0001,
or such other place as AAL shall specify in a notice to the Certificate Owner.
Insured: The person on whose life the Certificate is issued.
Internal Revenue Code: The Internal Revenue Code of 1986, as amended.
Issue Age: The age of the insured as of his or her last birthday on or before
the issue date.
Issue Date: The date insurance coverage begins under this Certificate.
Monthly Deduction Date: The date each month on which monthly charges are taken
from Cash Value. It occurs each month on the nearest Valuation Date, on or
preceding the day of the month which corresponds to the day of the month on
which the Certificate was issued. A further description is contained in the
"Charges" Section of this Prospectus.
Net Asset Value: The unit of valuation for a Fund portfolio as computed and
described in such Fund's prospectus.
Specified Amount: Initially, the amount of life insurance for which the
Certificate was issued. The Specified Amount of your Certificate may change, as
described in your Certificate. This is further described in the "Benefits"
Section of this Prospectus.
Subaccount: A subdivision of the Variable Account. Each Subaccount invests
exclusively in the shares of a corresponding portfolio of the Fund. This is
further described in the "Investment Options" Section, specifically in the
Variable Account" subsection.
Surrender Value: Cash Value less any applicable surrender charges and
outstanding loan balances.
Valuation Date: Any day upon which both the New York Stock Exchange is open for
regular trading and AAL is open for business. The Exchange is regularly closed
on Saturdays and Sundays and on New Year's Day, the third Monday in February,
Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving
and Christmas. If one of these holidays falls on a Saturday or Sunday, the
Exchange will be closed on the preceding Friday or the following Monday. AAL
will also be closed on the Friday after Thanksgiving and the day before
Christmas. When the markets are trading on days when the portfolios are not
priced, a subaccount's value may change on a day when Certificate Owners may not
be able to access their Certificate's Cash Value.
Valuation Period: The period of time from the end of one Valuation Date to the
end of the next Valuation Date.
Variable Account: The AAL Variable Life Account I. It is a separate account of
AAL.
Written Request: A written request or notice signed by the Certificate Owner,
received in good order by AAL at its Home Office.
You, Your: The Owner of the Certificate.
CERTIFICATE SUMMARY
INTRODUCTION
As you read this prospectus, keep in mind that you are considering the purchase
of a life insurance contract. Because a substantial part of your premium pays
for life insurance, you should not buy this Certificate unless a primary reason
for your purchase is to provide life insurance protection. Since it is cash
value life insurance with investment aspects, the Certificate can also serve a
second purpose. In addition to providing life insurance coverage, cash may also
be available for use during your lifetime. Because it is variable universal life
insurance, it has significant investment aspects that require you to make
investment decisions and take investment risk. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund. This section provides only an overview of the more significant
provisions of the Certificate. It omits details that are provided in the rest of
this Prospectus. The Table of Contents will help you locate more details or
other specific topics.
WHAT IS AAL?
AAL (Aid Association for Lutherans) was organized on November 24, 1902. It is a
fraternal benefit society under Internal Revenue Code section 501(c)(8) and
incorporated under the laws of the state of Wisconsin. As of December 31, 1997,
AAL had approximately 1.7 million members and is the world's largest fraternal
benefit society in terms of assets (over $17.9 billion) and life insurance in
force ($82 billion), ranking it in the top two percent of all life insurers in
the United States in terms of ordinary life insurance in force.
WHAT IS THE PURPOSE OF THE CERTIFICATE?
This Certificate provides life insurance protection on the Insured as long as
the Certificate is in effect. It also may provide cash available for use during
your lifetime.
Like traditional life insurance, the Certificate has a death benefit,
accumulates a cash value and offers loan and surrender privileges. Unlike
traditional life insurance, the Certificate offers flexible premiums and a
choice of investment alternatives, including the opportunity to participate in
the risks and returns of equities.
Your choice of premiums, investment options, and your use of withdrawal and loan
privileges will be key factors in the Certificate's performance. The choices you
make directly impact how long the Certificate remains in effect and the amount
of cash available for use.
WHAT LIFE INSURANCE PROTECTION IS PROVIDED?
You choose one of two Death Benefit Options. Under the Level Death Benefit
option the death benefit is usually the Specified Amount. Under the Variable
Death Benefit option the death benefit is usually equal to the Specified Amount
plus the Certificate's Cash Value which can vary according to gains or losses as
a result of the investment options selected.
If your Cash Value builds to a large total compared to your Specified Amount,
your death benefit will be increased as necessary to comply with federal tax
law. This is required to maintain your Certificate's tax status as life
insurance.
Your Certificate is guaranteed to stay in effect as long as the Death Benefit
Guarantee is in effect. This guarantee is available until age 65 or your 10th
Certificate anniversary, if later, provided you pay certain minimum premium
amounts.
You may change Death Benefit Options, and increase or decrease your Death
Benefit by changing your Specified Amount, as provided for in your Certificate.
Additional benefits are also available. They include Accidental Death Benefit,
Disability Waiver, Guaranteed Purchase Option, and Applicant Waiver. See your
Certificate for details.
WHAT PREMIUMS MAY I PAY?
You choose when and how much premium to pay, within certain restrictions. To
keep your Certificate in effect during the first four (4) years, you should pay
at least the Death Benefit Guarantee Premium. Your Certificate will likely lapse
if you fail to pay at least these premiums.
If you want to make regular payments, AAL will send you billing statements of an
amount you select. You can choose monthly, quarterly, semi-annual or annual
payments.
To keep your Death Benefit Guarantee, your total premiums paid less partial
withdrawals must equal or exceed the total Death Benefit Guarantee Premiums plus
any outstanding loan balance. AAL recommends you pay at least the Death Benefit
Guarantee Premiums to adequately fund your Certificate. Paying these premiums
guarantees that your Certificate will not lapse until age 65, or for 10 years
from issuance if longer.
The amount of premiums paid may effect the tax status of your Certificate. The
Internal Revenue Code's definition of life insurance limits the amount of
premium you may pay.
WHAT INVESTMENT OPTIONS DO I HAVE?
You choose where to allocate your premiums among the Variable Accounts (called
"Subaccounts") and the Fixed Account.
Premiums you allocate to the Fixed Account are credited to your Fixed Account's
Cash Value. Cash Value in the Fixed Account accumulates at a fixed rate of
interest as declared by AAL. This rate is guaranteed never to be lower than 4%.
The Fixed Account is a part of AAL's general account. The general account
includes all of AAL's assets other than those in our separate accounts
(including the Variable Account).
Each Subaccount invests in a portfolio of a mutual fund. The current portfolios
are Money Market, Bond, Large Company Stock, Small Company Stock, and Balanced.
Each portfolio has a different investment strategy. Premiums allocated to a
Subaccount will increase that Subaccount's Cash Value. Each Subaccount's cash
value will accumulate based on the investment experience of that Subaccount's
portfolio.
You may transfer the Cash Value among the Subaccounts and Fixed Account, as
specified in the Certificate. This allows you to adjust your investment strategy
at any time.
WHAT IS THE CASH VALUE OF THE CERTIFICATE?
The total Cash Value at any time is equal to the sum of the Cash Values in the
Subaccounts and the Fixed Account.
Premiums increase Cash Value. Charges and cash you withdraw from the Certificate
decrease Cash Value. The investment experience of the Subaccount(s) you select
also affects your Certificate's Cash Value as does the interest credited to the
Fixed Account. Investment gains, if any, increase Cash Value, while any
investment losses decrease Cash Value.
Your decisions on the premiums to pay, the accounts to invest in, and the
amounts you withdraw from the Certificate have a great impact on your
Certificate's Cash Value.
Important Note: The primary purpose for paying enough premium to build your Cash
Value is to cover increasing Cost of Insurance rates as you (the Insured) get
older. Unless you build your Cash Value over time, you will need to cover
increasing costs with higher premiums. Your Cash Value also depends upon the
investment experience of the Subaccount(s) in which your Cash Value is invested
and, if this experience is low or negative, you may also need to pay higher
premiums.
WHAT CHARGES DO I PAY?
Charges are necessary to pay for the insurance coverage provided, cover the
expenses of issuing and administering the Certificate, and to fund AAL's
fraternal activities. Charges are:
Cost of Insurance Charge - A monthly charge for life insurance coverage. This
charge varies by risk class, sex, amount at risk, and age.
Mortality and Expense Risk Charge - Monthly charges are deducted from the
Subaccounts of the Variable Account to pay for the mortality and expense risks
borne by AAL. Currently, during the first 15 years the monthly charge is .0625%
(approximately .75% annually) of the total Subaccount cash value. This charge
drops to .02083% (approximately .25% annually) of the total Subaccount Cash
Value in Certificate Year 16.
Administrative Charge - A monthly charge of $4 is deducted to cover
administrative costs.
Change Fee - A $25 charge will be assessed if you choose to make changes to your
Certificate. Such Certificate changes include a reduction of insurance charges
that are in excess of standard due to insurance underwriting requirements, a
change from smoker to non-smoker risk class, a change in death benefit options,
and changes to the additional benefits under the Certificate.
Issue Expense Charge - A monthly charge to cover issue costs is deducted for the
first 36 months. This charge will vary by age, risk class, sex and Specified
Amount.
Percent of Premium Charge - A charge of 3 % of each premium is taken to cover
sales and other expenses and provide support for AAL's fraternal activities.
Additional Benefits Charge - A charge will be taken each month for any
additional benefits you have.
Partial Withdrawal Charge - A $25 charge per withdrawal is made after the first
withdrawal during any Certificate Year. This charge is assessed by the
redemption of Accumulation Units and/or reduction in the Fixed Account balance.
Surrender Charge - If you choose to surrender your Certificate or reduce your
Specified Amount, AAL will reduce your Cash Value by the Surrender Charge. The
charge decreases over the first 10 Certificate years to zero in the 11th
Certificate Year. A new Surrender Charge schedule begins for the increase in
Specified Amount each time you increase your Specified Amount. Your initial
Surrender Charge is based on an amount per thousand of Specified Amount for
which the Certificate is issued. The amount per thousand varies by sex, risk
class and Issue Age. Your actual Surrender Charges are listed on page 3A1 of
your Certificate. If you increase your Specified Amount, a new Surrender Charge
is applicable. If you decrease the Specified Amount while the Surrender Charge
applies, a portion of the Surrender Charge will be assessed. For further details
regarding Surrender Charges, see page _____.
Portfolio Expenses The expenses for each of the Portfolios are limited to the
respective maximum advisory fees, currently .35% of the average annual daily net
assets. Without this limitation through reimbursement by the adviser, which can
be changed or stopped with 30 days notice, the expenses for the year ended 1996
would have been: Money Market Portfolio - 0.65%, Bond Portfolio - 0.68%,
Balanced Portfolio - 0.60%, Large Company Stock Portfolio - 0.63%, and Small
Company Stock Portfolio - 0.75%.
Transfer Charge - AAL will charge $25 for each transfer between Subaccounts
and/or the Fixed Account in excess of 12 in each Certificate Year.
HOW CAN I TAKE CASH OUT OF MY CERTIFICATE?
You can choose to take cash out of the Certificate through a loan, partial
withdrawal, or full surrender.
You may take one partial withdrawal per Certificate year at no charge. You will
be charged $25 for each additional withdrawal. A partial withdrawal will reduce
your Cash Value and may reduce your Specified Amount. It will also reduce the
amount of premiums considered "paid" to meet the Death Benefit Guarantee premium
requirement.
You make take up to 92% of your Cash Value out as a loan. You will be charged 8%
per annum on the loan balance until you reach your 15th Certificate anniversary.
Thereafter the rate will drop to 7 1/4% per annum.
Cash Value securing a loan may earn a lower interest rate than other Cash Value
in the Fixed Account. AAL will determine the rates earned.
If you surrender your Certificate, you will receive the Cash Value less any
surrender charge and outstanding loans.
Both partial withdrawals and loans will reduce the Cash Value available to pay
your insurance costs. You should carefully consider the impact on the insurance
your Certificate will be able to provide, now and in the future, before
exercising these privileges.
These privileges can be a major advantage of this Certificate. When you pay
enough premiums, the power of tax-deferred earnings, with favorable investment
experience, can build significant Cash Value. Under these circumstances, some
Cash Value will be available for your use, in addition to paying your insurance
costs.
HOW CAN MY CERTIFICATE TERMINATE?
Without the Death Benefit Guarantee, this Certificate will terminate (lapse)
when there is not enough Cash Value to pay the monthly charges. If this happens,
you have a short period to pay enough premiums to keep the Certificate in
effect. Your Certificate will not terminate while the Death Benefit Guarantee is
in effect.
Your Certificate will terminate when the Insured dies and the death benefit is
paid.
Your Certificate will terminate if you surrender your Certificate for its
surrender value (Cash Value less loans and surrender charges).
Your Certificate will terminate if you reach age 100. At that time the Cash
Value less any loans, will be paid to you.
There may be tax consequences when money is received from a Certificate. Please
consult with your tax advisor.
BENEFITS
DEATH BENEFIT
The death benefit is the amount payable upon the death of the Insured. At the
time of purchase, you must choose between two available Death Benefit Options.
The amount payable under either option will be determined as of the date of the
Insured's death. Loans plus unpaid interest always reduce the death benefit
paid.
Suicide Exclusion
If the Insured commits suicide within one year of the issue date AAL will not
pay a death benefit but will return all premiums paid. The one year period in
the Suicide Exclusion provision will apply at issue and to each increase in the
Specified Amount beginning on the effective date of each increase. The only
amount payable attributable to the increase will be a refund of the monthly
deductions for the increase.
Level Death Benefit - Option 1
The death benefit under this option is the greater of the Specified Amount, or
the death benefit factor multiplied by Cash Value. The death benefit factor is
2.5 through age 40 and decreases yearly to 1 at age 95. The death benefit factor
helps to qualify your Certificate as life insurance under federal tax law. A
table of death benefit factors is contained in your Certificate.
Option 1 generally provides a level Death Benefit. Choose Death Benefit Option 1
if: 1) you do not expect your insurance needs to generally increase; and 2) you
wish to minimize your insurance costs. All other things being equal, Option 1
will provide greater growth in Cash Value than Option 2.
Variable Death Benefit - Option 2
The death benefit will be the greater of the Specified Amount plus Cash Value or
the death benefit factor (described above) multiplied by Cash Value.
Option 2 provides a death benefit that varies over time. It increases and
decreases along with your Cash Value. Choose Death Benefit Option 2 if: 1) you
expect your insurance needs to increase; or 2) you wish to have an increasing
death benefit. Option 2 will provide a greater death benefit than Option 1.
INCREASING YOUR SPECIFIED AMOUNT
You have the right to increase the Specified Amount at any time on or before the
certificate anniversary following the insured's 80th birthday if the insured is
insurable for the increase under AAL's underwriting guidelines and policies.
An increase must be at least $10,000. Proof of insurability may be required and,
if you are not the Insured, proof of insurable interest may also be required.
When an increase is approved, it becomes effective as of the date shown on the
new page 3A that is sent to you.
The cost of insurance rates charged for each increase will vary based on factors
such as sex, risk class, age and the time elapsed since issue.
Each increase will be subject to AAL's expense charges in effect at the time of
increase. The expense charges for each increase will be based on the insured's
age on the last certificate anniversary and sex at the time of increase and will
apply for the number of months shown on the new page 3A.1. A new set of
surrender charges will apply to each increase in the Specified Amount. These
charges will all be shown on the new page 3A.1.
DECREASING YOUR SPECIFIED AMOUNT
You have the right to decrease the Specified Amount after it has been in effect
for one year. The Specified Amount remaining in effect cannot be less than
$10,000.
The decrease will be effective as of the date the request is received at the
Home Office. The decrease will be subtracted first from any previous increases
in the Specified Amount, starting with the most recent, then from the original
specified amount.
A surrender charge will be subtracted from the Cash Value if a surrender charge
is in effect for that part of the Specified Amount decreased. The surrender
charges are shown on the Table of Surrender Charges in the Certificate on page
3A.1.
CHANGING YOUR DEATH BENEFIT OPTION
You may change your Death Benefit Option at any time. A $25 charge will be
applied to your Cash Value for each Death Benefit Option Change.
If you apply to change from the Level Death Benefit option to the Variable Death
Benefit option, AAL may require proof of insurability from you. Also, your
Specified Amount of insurance decreases so your death benefit immediately after
the change will be the same as immediately before the change. The change is not
allowed if it reduces your Specified Amount below $10,000.
If you change from the Variable Death Benefit option to the Level Death Benefit
option your Specified Amount increases. The increase is determined so your Death
Benefit immediately after the change will be the same as immediately before the
change.
DEATH BENEFIT GUARANTEE
The Death Benefit Guarantee, as long as it is in effect, assures that your
coverage will continue even if the Cash Value is insufficient to pay the current
monthly deductions. To keep the Death Benefit Guarantee in effect you must meet
the test described below. Basically, the test requires you to pay a minimum
amount of premiums, and the insured to be under age 65 (or the Certificate has
been in effect not more than 10 years).
AAL will test the Death Benefit Guarantee on each monthly deduction date as
follows:
1) the sum of all premiums paid (less any partial withdrawals) must be greater
than or equal to the Death Benefit Guarantee Premium (see next page) times the
number of months since the Certificate Issue Date, plus any outstanding loan,
and
2) the Insured's age is less than 65 or the Certificate has been in effect no
more than 10 years.
If part 1) of the test is not met, AAL will notify the Certificate Owner and
allow two months to pay enough premium or loan repayment to meet the
requirements of the test. If you do not pay the required premium or loan
repayment, the Death Benefit Guarantee will end, and can not be reinstated.
Changes in the Specified Amount and optional benefits on the Certificate will
change the Death Benefit Guarantee Premium. The new Death Benefit Guarantee
Premium is required from the first monthly deduction date following the change.
MATURITY BENEFIT
Upon the Insured's attaining age 100, the Certificate will provide a maturity
benefit equal the Cash Value less any loans.
ADDITIONAL BENEFITS
Several additional benefits are available on most Certificates. They include
Accidental Death Benefit, Disability Waiver, Guaranteed Purchase Option, and
Applicant Waiver. See your Certificate for details.
PREMIUMS
DEATH BENEFIT GUARANTEE PREMIUM
The Death Benefit Guarantee Premium is the minimum premium, on a monthly basis,
that is required to keep your Death Benefit Guarantee in effect. Your Death
Benefit Guarantee Premium is equal to:
1) a factor, based on age, sex, and risk class, multiplied by your Specified
Amount divided by 1,000; plus
2) the monthly administrative charge of $4; plus 3) a required premium for each
additional benefit you choose.
Your particular Death Benefit Guarantee Premium is listed on page 3A of your
Certificate.
You may choose to pay on a different basis than monthly or to pay lump sums. In
these cases, premiums paid in excess of the current month's Death Benefit
Guarantee Premium will be counted toward future Death Benefit Guarantee Premium
requirements.
FLEXIBILITY
You choose when and how much premium to pay, within certain restrictions. You
need to pay at least the Death Benefit Guarantee Premium for four years, without
taking any loans or partial withdrawals, to keep your Certificate in effect.
Failure to pay this Premium will likely result in the lapse of your Certificate.
After that time you may be able to pay less and keep your Certificate in effect.
However, if you do pay less, you will lose the Death Benefit Guarantee and you
run a greater risk that your Cash Value will not grow enough to keep your
Certificate in effect.
Planned periodic premiums are those you choose to pay on a regular basis. AAL
will send you billing statements of an amount you select. You can choose
quarterly, semi-annual or annual statements. Pre-authorized automatic monthly
check payments may also be arranged.
You may make payments in addition to planned periodic premiums. You also may
choose a new planned periodic premium. AAL recommends you pay at least the Death
Benefit Guarantee premiums to adequately fund your Certificate.
LIMITS
AAL reserves the right to:
- -Limit any increase in planned periodic premiums.
- -Limit the number and amount of payments in addition to planned periodic
payments.
- -Refuse any premium if the payment would increase the difference between the
Death Benefit and the Cash Value.
The Internal Revenue Code excludes life insurance death benefits from gross
income. To qualify for this exclusion, federal tax law limits the premiums you
may pay. AAL will return the portion of any premium payment that causes this
limit to be exceeded.
In the event of a reduction in the Specified Amount, if either the total premium
payments already made or the Cash Value exceeds the applicable limit stated in
the Internal Revenue Code regarding the definition of life insurance, AAL will
refund any excess premiums or Cash Value necessary to comply with the limit
stated in the Internal Revenue Code.
NET PREMIUM & PREMIUM ALLOCATION
Net premiums equal the premiums you pay less the 3% of premium charge. You
decide how to allocate your net premiums among the available accounts. At
purchase, you select a percentage for each account that will be used to allocate
each net premium.. The percentages must be whole numbers, and add to 100%. You
may change your allocation percentages at any time.
Your initial premium will be allocated to the accounts you choose (or to the
Money Market Account as discussed below) at the time the Certificate is issued.
AAL will issue your certificate according to AAL's standard administrative
procedures and once all underwriting and other requirements are met. AAL's
standard administrative procedure is to issue new Certificates which meet
underwriting and other requirements on the 29th - 31st of any month on the first
Valuation Date in the following month Certificates are issued only on a
Valuation Date from the 1st through the 28th of any month. Premiums paid after
issue are allocated according to the premium allocation percentages you have
chosen. This allocation occurs at the end of the day if AAL receives your
premium payment before the close of the New York Stock Exchange ("NYSE"), which
is usually 3:00 P.M. Central Time, and that day is a Valuation Date. If your
payment is received on a non-Valuation Date or after the NYSE closes, the
allocation occurs as of the end of the next Valuation Date. See definition of
"Valuation Date" on page --.
In certain states, a refund of premium or the greater of premium or accumulated
values is required if you exercise your free look privilege. See "Free Look" in
the "General Information Section". In these cases, AAL reserves the right to
allocate premiums to the Money Market Subaccount until the expiration of the
"free look period" plus an additional 5 day period. After that time AAL will
allocate your accumulated premiums to the accounts based on your net premium
allocation percentages.
INVESTMENT OPTIONS
You choose where to allocate your net premiums among the Fixed Account and
Subaccounts of the Variable Account.
FIXED ACCOUNT
The Fixed Account is a Cash Value accumulation option that credits an interest
rate. The Fixed Account is part of AAL's general account, which includes all of
AAL's assets other than those in any AAL separate account.
Cash Values allocated to the Fixed Account are combined with all the general
assets of AAL and are invested in those assets chosen by AAL and allowed by
applicable law. Any premiums allocated to the Fixed Account will be subject to
all fees and expenses associated with the Variable Account, except for the Fund
annual expenses and the mortality and expense risk charge.
AAL will quarterly declare an effective annual interest rate for the Fixed
Account.
Interest is credited on each premium allocated or accumulated value transferred
to the Fixed Account from the date of the allocation or transfer. Interest is
credited daily.
Under the Fixed Account option, the guaranteed minimum interest credited to the
Fixed Account will be at the effective rate of 4% per year, compounded daily.
AAL may credit interest at a rate in excess of 4% per year; however, AAL is not
obligated to do so. There is no specific formula for the determination of excess
interest. Such excess interest, if any, will be determined by AAL based on
numerous factors. Some of the factors that AAL may consider in determining
whether to credit interest above 4% to amounts allocated to the Fixed Account,
and the amount thereof, include, but are not limited to, general economic
trends, rates of return currently available and anticipated on AAL's
investments, regulatory and tax requirements and competitive factors.
ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 4%
PER YEAR WILL BE DETERMINED AT THE SOLE DISCRETION OF AAL. THE OWNER ASSUMES THE
RISK THAT INTEREST CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY NOT EXCEED THE
MINIMUM GUARANTEE OF 4% FOR ANY GIVEN YEAR.
Because of exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 ("1933 Act"), and the
Fixed Account has not been registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein are generally subject to the provisions of the
1933 or 1940 Acts. Disclosures regarding the Fixed Account option and the Fixed
Account, however, may be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements in prospectuses.
A lower rate of interest may be credited to the portion of the Fixed Account
securing a loan.
VARIABLE ACCOUNT
The Variable Account is AAL Variable Life Account I. It is a separate account of
AAL established by the Board of Directors of AAL on May 8, 1997 pursuant to the
laws of the State of Wisconsin. The Variable Account is registered with the
Securities and Exchange Commission (the "SEC") as a unit investment trust under
the Investment Company Act of 1940. Such registration, however, does not involve
supervision by the SEC of the management or investment policies or practices of
the Variable Account.
AAL owns the assets of the Variable Account and keeps them legally segregated
from the assets of the general account. The assets of the Variable Account
shall, at the time during the year that adjustments in the reserves are made,
have a value at least equal to the reserves and other contract liabilities with
respect to the Variable Account and, at all other times, shall have a value
approximately equal to or in excess of such reserves and liabilities. The assets
of the Variable Account shall not be chargeable with liabilities arising out of
any other business AAL may conduct, except to the extent that the assets of the
Variable Account exceed the reserves and other contract liabilities of the
Variable Account arising under the Certificates supported by the Variable
Account.
Income, and gains and losses, whether or not realized, from the assets in each
Subaccount are credited to or charged against that Subaccount without regard to
any of AAL's other income, gains or losses. The value of the assets in the
Variable Account is determined at the end of each Valuation Date.
The Variable Account currently consists of five Subaccounts, which are: Money
Market, Bond, Large Company Stock, Small Company Stock, and Balanced. Each
Subaccount invests in a corresponding portfolio of the AAL Variable Product
Series Fund, Inc. (a mutual fund - referred to below as the "Fund"). Additional
Portfolios may be added or substituted for the current Portfolios.
Net premiums allocated to a Subaccount, and the resulting Cash Value, will
accumulate based on the investment experience of that Subaccount's corresponding
Fund portfolio.
Each of these portfolios has a different investment objective. No assurance may
be given that any portfolio will achieve its investment objective.
The AAL Variable Product Series Fund, Inc. (the
"Fund") is a Maryland corporation registered with the SEC under the 1940 Act as
a diversified, open-end investment company (commonly known as a "Mutual Fund").
This registration does not involve supervision by the SEC of the management or
investment practices or policies of the Fund.
Shares of the Fund are currently offered to the AAL Variable Annuity Account I
and to the Variable Account to fund benefits payable under the Certificates. The
Fund may, at a later date, also offer its shares to other separate accounts of
AAL or to a subsidiary or affiliated company of AAL. Shares of the Fund may also
be offered directly to AAL.
The Fund currently consists of five separate Portfolios, each with its own
investment objectives, investment program, policies and restrictions. The
investment objectives of each Portfolio are described below. No assurance can be
given that each Portfolio of the Fund will achieve its investment objective.
INVESTMENT OBJECTIVES OF THE FUND PORTFOLIOS
The Money Market Portfolio: seeks to provide maximum current income to the
extent consistent with liquidity and a stable net asset value of $1.00 per share
by investing in a diversified portfolio of high quality, short-term money market
instruments.
The Bond Portfolio: seeks to achieve investment results that approximate the
total return of the Lehman Brothers Aggregate Bond Index by investing primarily
in bonds and other debt securities included in the index. This objective is
consistent with a goal of maximizing total return, consistent with reasonable
risk. Investments are in bonds and other debt securities included in the Index.
The Large Company Stock Portfolio: seeks to achieve investment results that
approximate the performance of the Standard & Poor's 500 Composite Stock Price
Index by investing primarily in common stocks included in the index.
The Balanced Portfolio: seeks to achieve investment results that reflect
investment in common stocks, bonds and money market instruments, each of which
will be selected consistent with the investment policies of the AAL Variable
Product Large Company Stock, Bond and Money Market Portfolios, respectively.
The Small Company Stock Portfolio: seeks to achieve investment results that
approximate the performance of the Wilshire Small Cap Index by investing in
common stocks included in the index.
Fund Expenses
AAL acts as investment adviser to the Fund. For this service, AAL deducts a
daily advisory fee of .35% per year of each portfolio's average daily net
assets. Additional portfolio expenses are currently reimbursed by AAL but this
reimbursement may be modified or canceled at any time. More information
concerning these additional expenses is contained in the Fund Prospectus.
TRANSFERS
You may transfer the Cash Value among the Subaccounts and Fixed Account by
submitting a written request to AAL's Home Office. You may also transfer by
telephone if you have completed the Telephone Transaction Authorization Form.
Any transfer among the Subaccounts or to the Fixed Account will result in the
crediting and cancellation of Accumulation Units based on the Accumulation Unit
values determined as of the end of the Valuation Period during which the
transfer request is received, in good order, by AAL. You should carefully
consider current market conditions and each portfolio's investment policies and
related risks before allocating money to the portfolios.
The total amount of any transfer must be at least $500, or it may be less as
long as you transfer the entire cash value from an account. Of the total
transfer being made, the amount transferred to any account must be at least $50.
Twelve transfers per Certificate Year may be made from Subaccounts without
charge. AAL will charge $25 for each transfer in excess of twelve.
Only one transfer may be made from the Fixed Account in each Certificate Year.
The transfer may not exceed the greater of $500 or 25% of the Cash Value in the
Fixed Account at the time of transfer. This transfer is not subject to charge.
REVIEW OF INVESTMENT STRATEGY
You should periodically review the allocation of your Cash Value among the
Subaccounts and Fixed Account. Consider the current market conditions,
investment risks and objectives of the portfolios and your own objectives. A
full description of the portfolio, its investment objectives, policies and
restrictions, its expenses, risks and other aspects of its operation is
contained in the accompanying Prospectus for the Fund. Read the accompanying
Fund Prospectus carefully.
VOTING PRIVILEGES
To the extent required by law, AAL will vote the Portfolio shares held in a
Subaccount at shareholder meetings of the Fund, if any, in accordance with
instructions received from persons having voting interests in the corresponding
Subaccount of the Variable Account. If, however, the 1940 Act or any regulation
thereunder should be amended or if the present interpretation thereof should
change, and as a result AAL determines that it is permitted to vote the Fund
shares in its own right, it may elect to do so.
The Owner will have the voting interest with respect to Fund shares attributable
to the Certificate
The number of votes which an Owner has the right to instruct will be calculated
separately for each Subaccount. The number of votes that each Owner may instruct
will be determined by dividing a Certificate's Accumulated Value in a Subaccount
by the Net Asset Value per share of the corresponding Portfolio in which the
Subaccount invests. Fractional shares will be counted. The number of votes of
the portfolio which the Owner has the right to instruct will be determined as of
the record date established by the portfolio for determining shareholders
eligible to vote at the meeting of the Fund. Voting instructions will be
solicited by written communications prior to such meeting in accordance with
procedures established by the Fund.
Any portfolio shares held in the Variable Account for which AAL does not receive
timely voting instructions, or which are not attributable to Owners will be
represented at the meeting and voted by AAL in proportion to the instructions
received from all Owners. Any portfolio shares held by AAL or its affiliates
will be voted in proportion to the aggregate votes of all shareholders in the
portfolio. Each person having a voting interest in a Subaccount will receive
proxy materials, reports and other materials relating to the appropriate
portfolio.
CASH VALUE
FIXED ACCOUNT CASH VALUE
The Fixed Account Cash Value reflects net premiums allocated to it, transfers to
or from the Subaccounts, credited interest, and any deductions. Each day the
Cash Value in the Fixed Account will change based upon these factors. See the
Certificate for further detail.
VARIABLE ACCOUNT CASH VALUE
Number of Accumulation Units
The number of Accumulation Units for this Certificate in any Subaccount may
increase or decrease at the end of each Valuation Period depending on the
transactions that occur in the Subaccount during the Valuation Period. When
transactions occur, the actual dollar amounts of the transactions are converted
to Accumulation Units. The number of Accumulation Units for a transaction in a
Subaccount is determined by dividing the dollar amount of the transaction by the
Accumulation Unit Value of the Subaccount at the end of the Valuation Period
during which the transaction occurs.
The number of Accumulation Units in a Subaccount increases when the following
transactions occur during the Valuation Period:
Net premiums are allocated to the Subaccount; or
Cash value is transferred to the Subaccount from another Subaccount or from the
Fixed Account.
The number of Accumulation Units in a Subaccount decreases when the following
transactions occur during the Valuation Period:
Cash Value is transferred from the Subaccount to another Subaccount or to the
Fixed Account, including loan transfers;
Partial withdrawals and partial withdrawal charges are taken from the
Subaccount; or
Monthly deductions or transfer charges are taken from the Subaccount.
A charge for a Death Benefit Option change is allocated to the Subaccount.
A charge for a Certificate change is allocated to the Subaccount.
Surrender Charges are allocated to the Subaccount.
Accumulation Unit Value
For each Subaccount, the initial Accumulation Unit Value was set when the
Subaccount was established. The Accumulation Unit Value may increase or decrease
from one Valuation Period to the next.
The Accumulation Unit Value for a Subaccount for any Valuation Period is equal
to:
The net asset value of the corresponding fund portfolio at the end of the
Valuation Period;
Plus the amount of any dividend, capital gain or other distribution made by the
fund portfolio if the "ex-dividend" date occurs during the Valuation Period;
Plus or minus any cumulative credit or charge for taxes reserved which is
determined by AAL to have resulted from the operation of the portfolio;
Divided by the total number of accumulation units held in the Subaccount at the
end of the Valuation Period before any of the transactions, referred to in the
Number of Accumulation Units subsection above, have occurred.
WHAT AFFECTS CASH VALUE
The Cash Value of your Certificate, at any one time, is determined by: (a)
multiplying the total number of Accumulation Units for each Subaccount by its
appropriate current Accumulation Unit Value; (b) if you have elected a
combination of Subaccounts, totaling the resulting values; and (c) adding any
value in the Fixed Account. While loans are not deducted from Cash Value, loans
do reduce the amount you would receive upon surrender of your Certificate and
the amount available to pay insurance charges. Loans also accrue interest
charges and may result in less interest credited to your Certificate.
Over the life of your Certificate, many factors determine its Cash Value. They
include:
- - premiums paid
- - the investment experience of the Subaccounts - interest credited to the Fixed
Account - loans taken and loan repayments - partial withdrawals taken - charges
and deductions taken
Because a Certificate's Cash Value is based on the variables listed above, it
cannot be predetermined. Cash Value in the Variable Account will largely be
determined by market conditions and investment experience of the Fund's
portfolios corresponding to the Subaccounts chosen by the Owner. The Owner will
bear all such risk.
The value of the Fixed Account is guaranteed as to principal and interest at 4%,
subject to the charges described in the "Charges" Section. There is no
guaranteed minimum Cash Value for the Variable Account.
SURRENDER VALUE
The Surrender Value is the total amount you may withdraw from the Certificate .
It is equal to the Cash Value less any Surrender Charges and any outstanding
loan principal and accrued interest.
You will be advised at least annually as to the number of Accumulation Units
which are credited to the Certificate, the current Accumulation Unit Values, the
Variable Account Cash Value, the Fixed Account Cash Value, the Cash Value and
the Surrender Value.
CHARGES
Charges are necessary to pay for the insurance provided, cover the expenses
generated by issuing and administering the Certificate, and to fund AAL's
fraternal activities. In addition to the charges described below, a $25 change
fee will be charged for all Certificate changes. This is a $25 charge that will
be assessed if you choose to make changes to your Certificate. Such Certificate
changes include a reduction of insurance charges that are in excess of standard
due to insurance underwriting requirements, a change from smoker to nonsmoker
risk class, a change in death benefit options, and changes to the additional
benefits under the Certificate.
PERCENT OF PREMIUM CHARGE
A charge of 3% of each premium payment is taken to cover sales and other
expenses and provide support for AAL's fraternal activities.
CASH VALUE CHARGES
On each Monthly Deduction Date charges are deducted from your Cash Value. These
include cost of insurance, administrative and issue expense charges, mortality
and risk expense charges and charges for additional benefits you may have
selected. (No mortality and risk expense charges are deducted from the Fixed
Account.)
The cost of insurance charge and additional benefit charges vary by risk class,
amount at risk, Specified Amount and, in most states, sex. The cost of insurance
rates, used to calculate these charges, are determined by AAL based on
expectations as to future mortality and expense experience. Any change in these
rates will be applied on a uniform basis to all insureds of the same risk class.
However, AAL cannot use cost of insurance rates higher than the annual
guaranteed cost of insurance rates shown in the Certificate. The guaranteed
rates are no greater than certain of the 1980 Commissioners Ordinary Mortality
Tables (and, where unisex cost of insurance rates apply, the 1980 Commissioners
Ordinary Mortality Table B). These rates are based on the age and risk class of
the Insured. They are also based on the sex of the Insured, except that unisex
rates are used where appropriate under applicable laws. AAL charges rates that
are currently lower than the guaranteed rates, and may also charge current rates
in the future.
A monthly administrative charge of $4 is deducted to cover administrative costs.
This charge is for expenses such as premium billing and collection, Certificate
value calculation, transaction confirmations and periodic reports.
The monthly issue expense charge covers issue costs. It is deducted for the
first 36 months. This charge will vary by age, risk class, Specified Amount and,
in most states, sex.
Monthly mortality and expense risk charges are deducted from the Variable
Account to pay for the mortality and expense risks borne by AAL. The mortality
risk assumed is that insureds, as a group, may live for a shorter period of time
than estimated and, therefore, the cost of insurance charges specified in the
Certificate will be insufficient to meet actual claims. The expense risk assumed
is that other expenses incurred in issuing and administering the certificates
and operating the Separate Account will be greater than the charges assessed for
such expenses. AAL will realize a gain from this charge to the extent it is not
needed to provide mortality benefits and expenses under the Certificates, and
will realize a loss to the extent the charge is not sufficient. The Monthly
Mortality and Expense Risk Charge is guaranteed never to exceed .075%
(approximately .9% annually). The charge is applied to the total cash value in
the Subaccounts on each Monthly Deduction Date. In addition, the Monthly
Mortality and Expense Risk Charge on certificates from their 15th Certificate
Anniversary, and beyond, is guaranteed at any time to be at least .04166%
percent (approximately .5% annually) less than the rate in effect at that time
for Certificates which have not reached their 15th Certificate Anniversary. The
current charges in effect are as follows: During the first 15 years the monthly
charge is .0625% (approximately .75% annually) of the total Subaccount Cash
Value. This charge drops to .02083% (approximately .25% annually) of the total
Subaccount Cash Value in Certificate Year 16.The Monthly Deduction is deducted
from each account on a basis proportional to the Cash Value in that account. For
Subaccounts, this is accomplished by selling Accumulation Units and withdrawing
their value from that account. For the Fixed Account the Cash Value is reduced
by the Fixed Account's proportion of the Monthly Deduction.
The Monthly Deduction is made as of the same day each month, beginning with the
Issue Date, if that day of the month is a Valuation Date. If that day of the
month does not fall on a Valuation Date, the deduction date is the nearest
previous Valuation Date.
SURRENDER CHARGE
If you choose to surrender your Certificate or reduce your Specified Amount, AAL
will reduce the Cash Value by the surrender charge assessed proportionately
against the amounts you have invested in each of your selected Subaccounts and
the Fixed Account. This charge is imposed as a deferred sales and administrative
charge. It covers expenses associated with underwriting, issuing and
distributing the Certificate.
The initial surrender charge is based on an amount per thousand of Specified
Amount for which the Certificate is issued. The amount per thousand varies by
sex, risk class, and Issue Age. Your actual surrender charges are listed on page
3A1 of your Certificate. The initial surrender charge is level for the first 3
years and, thereafter, it declines by 1/8th of the initial amount annually so
that, beginning in the 11th year after the Issue Date (assuming no increases in
Specified Amount) the surrender charge will be zero.
If you increase your Certificate's Specified Amount, a new surrender charge is
applicable, in addition to the existing surrender charge. It is based on an
amount per thousand of the Specified Amount increase. The amount per thousand
varies by sex, risk class, and age at time of increase. The actual surrender
charges for the increased Specified Amount will be listed on a new page 3A1 of
your Certificate, which will be mailed to you at the time of the increase. The
new surrender charge is level for the first 3 years after the increase and,
thereafter, it declines by 1/8th of the initial amount annually so that,
beginning in the 11th year after the increase date (assuming no additional
increases in Specified Amount) the surrender charge will be zero.
If you decrease the Specified Amount while the surrender charge applies, a
portion of the surrender charge will be assessed. The decrease will be
subtracted first from any previous increase in the Specified Amount, starting
with the most recent, then from the original Specified Amount. The portion of
the charge assessed will be proportional to the amount of the decrease, based on
the surrender charges for the Specified Amount from which the decrease is
subtracted.
TRANSFER CHARGE
Twelve transfers per Certificate Year may be made between Subaccounts and/or the
Fixed Account without charge. AAL will charge $25 for each transfer in excess of
twelve.
ACCESS TO CASH VALUE
PARTIAL WITHDRAWALS
You may take one partial withdrawal of your Cash Value per year at no charge.
$25 is charged for each additional withdrawal during a Certificate Year. The
amount of a partial withdrawal may not exceed the Surrender Value on the date of
the request. It is implemented by either the redemption of Accumulation Units
and/or reduction in the Fixed Account balance. The partial withdrawal will be
taken from the Subaccounts and Fixed Account according to the ratio that the
cash value in the Subaccount or Fixed Account of the Certificate bears to the
total Cash Value of the Certificate at the time of the partial withdrawal; or
according to any other administrative option which you choose and is available
at the time of the partial withdrawal.
For a Certificate with the Level Death Benefit Option:
A partial withdrawal will reduce your Cash Value, Specified Amount, Death
Benefit, and the amount of premiums considered paid to meet the Death Benefit
Guarantee premium requirement. If the Death Benefit is equal to the Specified
Amount at the time of the partial withdrawal, the amount of the reduction in the
Death Benefit will be equal to the amount of the partial withdrawal. If the
Death Benefit is greater than the Specified Amount, (a) the Specified Amount
will be reduced by the amount (if any) by which the withdrawal amount exceeds
the difference between the Death Benefit and the Specified Amount, (b) the new
Death Benefit will be based on the Death Benefit factor, Cash Value, and
Specified Amount after the reduction.
The Specified Amount remaining in effect after a partial withdrawal may not be
less than $10,000. Any request for a partial withdrawal that would reduce the
Specified Amount below this amount will not be granted.
For a Certificate with the Variable Death Benefit Option:
A partial withdrawal will reduce the Cash Value and Death Benefit by the amount
of the withdrawal, but will not reduce the Specified Amount.
LOANS
You make borrow up to 92% of your Cash Value using your Certificate as security
for a loan. Interest will accrue on an annual basis at 8% on the loan balance
until you reach your 15th Certificate anniversary. Thereafter the rate will drop
to 7 1/4% per annum. The loan will be taken from the Subaccounts and Fixed
Account according to the ratio that the Cash Value in the Subaccount or Fixed
Account of the Certificate bears to the total Cash Value of the Certificate at
the time of the loan; or according to any other administrative option which you
choose and is available at the time of the loan.
A lower interest rate may be credited to the portion of the Fixed Account Cash
Value that equals the amount of the total outstanding loan. AAL will determine
the rate credited. In no case will the rate credited be less than 4% annually.
The amount of loan allocated to each Subaccount will be transferred from that
account to the Fixed Account as security for the loan. Each month, if the total
loan (principal plus accrued interest) exceeds the total Fixed Account Cash
Value, the difference will be transferred from the Variable Account to the Fixed
Account as security for the loan.
You may repay all or part of your loan at any time while your Certificate is in
force. Unless you indicate otherwise to AAL, all payments will be assumed to be
premium payments. Upon your request, AAL will set up a loan repayment schedule
for you.
If you surrender your Certificate, you will receive the Cash Value less any
surrender charge and outstanding loan balance. Partial withdrawals also reduce
your premiums credited toward the Death Benefit Guarantee requirements. Loans
are added to the required premiums when testing whether Death Benefit Guarantee
requirements have been met.
Both partial withdrawals and loans will reduce the Cash Value available to pay
your insurance costs. You should carefully consider the impact on the insurance
your Certificate will be able to provide, now and in the future, before
exercising these privileges.
SURRENDER
You may surrender this Certificate for its Surrender Value by sending a written
request to AAL.
CERTIFICATE TERMINATION
EARLY TERMINATION AND REINSTATEMENT
Termination
Your Certificate will terminate if your Monthly Deduction is greater than your
Surrender Value, your Death Benefit Guarantee is not in effect, and payment
sufficient to cover the next two monthly deductions is not received within 61
days of notification of the Cash Value deficiency (in most states). If this Cash
Value deficiency occurs, you have the right to reinstate your Certificate,
within certain limitations. The requirements for reinstatement and associated
limitations are described in your Certificate.
Reinstatement
You may reinstate the Certificate any time within three years after it has
terminated so long as you did not surrender it for its surrender value. To
reinstate your Certificate you must submit evidence of insurability satisfactory
to AAL and pay a premium at least equal to:
The reinstated loan amount; plus
Any Surrender Charge at the time of reinstatement; plus The first two Monthly
Deduction amounts after reinstatement; less The Cash Value at termination; less
Any Surrender Charge credited back at reinstatement; plus The new Surrender
Charge taken for any reduction in the Specified Amount you request at
reinstatement plus 3% on the sum of the above to cover the percent of premium
charge.
The premium paid upon reinstatement will be used first to pay any unpaid monthly
deductions that occurred during the grace period. Your Certificate will then be
reinstated as of the date AAL approves your application for reinstatement.
If you reinstate this Certificate, AAL will not contest the validity of the
reinstated Certificate after it has been in effect during the lifetime of the
insured for two years from the date of reinstatement. After this Certificate has
been in force two years from the issue date, any contest of the validity of the
reinstated Certificate will be limited to statements made in the application for
reinstatement.
DEATH, MATURITY, AND SURRENDER
Your Certificate will terminate if the Insured dies, or if the Owner surrenders
the Certificate. If the Certificate is in effect at age 100, it will mature
(end) and the Cash Value less any outstanding loan will be paid to the Owner.
PAYOUT OPTIONS
SELECTION
All or part of the life insurance proceeds from death, maturity or surrender may
be applied to one of several Payout Options in place of a lump sum payment. You
may choose or change a payout option while the Insured is alive. The beneficiary
may choose an option at the Insured's death, unless you have chosen an option
which does not allow the beneficiary to change it.
OPTION 1 : INTEREST
The proceeds are left with AAL to earn interest. The rate of interest is
determined annually by the AAL Board of Directors. It will never be less than 3%
annually.
OPTION 2: A SELECTED AMOUNT OF INCOME
The proceeds with interest are used to make payments of a selected amount at
regular intervals until the proceeds with interest have been paid. The payment
period may not exceed 30 years. The rate of interest used will not be less than
3% annually.
OPTION 3 : A SET PERIOD
The proceeds with interest are used to make payments at regular intervals. You
may choose a specified number of years, not to exceed 30. Guaranteed payments
are shown in the Certificate. The rate of interest used will not be less than 3%
annually. The amount of payment may be greater than that guaranteed, as declared
annually by AAL's Board of Directors.
OPTION 4 : LIFE PAYMENT
The proceeds are left with AAL to earn interest. These funds are used to make
payments at regular intervals while the person named to receive payments is
alive. AAL will guarantee the amount of these payments for a specified number of
years. A period of 10, or 20 years may be selected.
The amount of the payments depends on the age and sex of the persons named to
receive payments at the time AAL issues the payment contract. Representative
guaranteed payments are shown in the Certificate. They are based on a guaranteed
effective annual interest rate of 3.5% using the "1983 Table a " annuitant
mortality table.
OPTION 5 : JOINT & SURVIVOR
The proceeds with interest are used to make payments at regular intervals while
both persons named to receive payments are alive. AAL will guarantee the amount
of these payments for a specified number of years. A period of 10, or 20 years
may be selected.
Upon the death of one of the persons named to receive payments, AAL will
continue making payments to the survivor with the payments reduced by 1/3 after
the end of the guaranteed period. If the survivor also dies during the
guaranteed period, the unpaid proceeds will be paid in one sum at the survivor's
death.
The amount of the payments depends on the age and sex of the persons named to
receive payments at the time AAL issues the payment contract. Representative
guaranteed payments are shown in the Certificate. They are based on a guaranteed
effective annual interest rate of 3.5% using the "1983 Table a" annuitant
mortality table.
HOW TO MAKE PAYMENTS AND RECEIVE SERVICE
APPLYING FOR A CERTIFICATE
AAL Variable Universal Life Certificates are sold by district representatives of
AAL who are also registered representatives of AALCMC. To apply for a AAL
Variable Universal Life Certificate please contact your AAL representative. You
can locate your representative by calling 1-800-???-??? or visiting our Webpage
www.aal.org.
TIMELY PROCESSING
AAL will process all requests in a timely fashion. Requests received by 3:00
p.m. Central Time on a Valuation Date will use the Certificate's Cash Value as
of the close of that Valuation Date. AAL will process requests received after
that time using the Certificate's Cash Value as of the close of business of the
following Valuation Date.
After your Certificate is issued, AAL will process payment of any amount due
from the Variable Account within seven calendar days after AAL receives your
written request. Payment may be postponed when the New York Stock Exchange has
been closed and for such other periods as the SEC may permit . Payment from the
Fixed Account Cash Value may be deferred
up to 6 months.
WRITTEN REQUESTS
You may exercise any of the following privileges: -Premium Payment -Change in
Death Benefit Option -Increase/Decrease in Specified Amount -Partial Withdrawal
- -Surrender -Reinstatement -Transfers -Dropping an Additional Benefit -Loan
- -Filing a Death Claim -Selecting/Changing a Settlement Option -Change in
Allocation Instructions -Loan repayment -Beneficiary Change(s) by sending
written notice (and payment and/or evidence of insurability, if applicable) to
AAL at its Home Office:
AID ASSOCIATION FOR LUTHERANS
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
TELEPHONE TRANSACTIONS
If AAL has received a properly completed Telephone Transaction Authorization
Form, you may perform various transactions over the phone. Phone services
include: partial withdrawals, transfers, premium payment allocation changes,
loans, and certain other transactions.
AAL has adopted reasonable security procedures to ensure the authenticity of
telephone instructions, including: requiring identifying information, recording
conversations, and providing written confirmations of transactions.
Nevertheless, AAL will honor telephone instructions from any person who provides
the correct identifying information, so there is a risk of possible loss to the
Owner if an unauthorized person uses this service in the Owner's name.
If several persons seek to effect telephone instructions at or about the same
time, or if AAL's recording equipment malfunctions, it may be impossible for you
to make a telephone transaction at that time. If this occurs, you should submit
a Written Request. Also, if due to malfunction or other circumstances, the
recording of the Owner's telephone request is incomplete or not fully
comprehensible, AAL will not process the transaction.
The Phone number for telephone transactions is 1-800-???-???
AAL reserves the right to restrict telephone transactions at any time.
DEATH CLAIMS
Written notice of death must be given to AAL. Notice should include the
Insured's name and Certificate number. Help may be obtained through an AAL
Capital Management Corporation Registered Representative.
A claim form will be sent, when AAL receives your notice. Complete the claim
form and send it to the Home Office along with a certified copy of the death
Certificate. Processing of the claim will begin as soon as these items are
received.
GENERAL INFORMATION
FREE LOOK
How to Cancel Your Certificate
Your Certificate provides for an initial "free look" period. That is, you as the
Certificate Owner, have the right to return your Certificate within 10 days
after you receive it. To return your Certificate you may either:
1. Deliver or mail your Certificate along with a written request to cancel to
your AAL Representative, or
2. Deliver or mail your Certificate along with a written request to cancel to
the Home Office:
AAL (Aid Association for Lutherans)
4321 Ballard Road
Appleton, WI 54919-0001
Generally within 7 days after AAL receives your request for cancellation, it
will cancel the Certificate and send you a refund. Some states may require a
"free look" period longer than 10 days.
The Amount Refunded After Canceling a Certificate During the "Free Look" Period
AAL will refund to you an amount equal to the Certificate's Accumulation Unit
Value as of the date the returned Certificate or notification of cancellation is
received by AAL. This may be more or less than the premium you paid depending
upon the investment experience of the Subaccount(s) you selected.
If your state requires a full refund of all premiums, your premium will be
allocated to the Money Market Subaccount until your "free look" plus five day
period has expired.
ENTIRE CONTRACT
The entire contract between you and AAL is made up of:
The Certificate including any attached riders, endorsements or amendments;
The application attached to the Certificate, including any applications for
increase in the Specified Amount; and
The AAL Articles of Incorporation and Bylaws which are in effect on the issue
date of the Certificate.
STATEMENTS IN THE APPLICATION
Statements made in the application will be treated as representations and not
warranties. No statement will be used by AAL to void the contract or to deny a
claim unless it appears in the application.
CHANGE OF CERTIFICATE
No representative of AAL except the president or the secretary may change any
part of the Certificate on behalf of AAL.
INCONTESTABILITY
AAL will not contest the validity of the Certificate after it has been in effect
during the lifetime of the insured for two years from the issue date. AAL will
not contest the validity of an increase in the Specified Amount after it has
been in effect during the lifetime of the insured for two years from the date of
increase. Any contest of the validity of the increase will be limited to
statements made in the application for the increase. See the Certificate for
more details.
MISSTATEMENT OF AGE OR SEX
The values of the Certificate are based on the insured's age and sex. If the
date of birth or sex shown on the application is wrong, the proceeds payable
will be adjusted to the amount that would be provided by the most recent cost of
insurance charge at the correct attained age or sex.
MAINTENANCE OF SOLVENCY
This provision applies only to values in the Fixed Account.
If AAL's reserves for any class of Certificates become impaired, you may be
required to make an extra payment. AAL's Board of Directors will determine the
amount of any extra payment based on each member's fair share of the deficiency.
If the payment is not made, it will be charged as a loan against the Certificate
with interest at a rate of 5 percent per year. You may choose an equivalent
reduction in benefits instead of or in combination with the loan. Any
indebtedness and interest charged against the Certificate, or any agreement for
a reduction in benefits, shall have priority over the interest of any owner,
beneficiary, or collateral assignee under the Certificate.
BASIS OF COMPUTATIONS
Minimum guaranteed Cash Values for the Fixed Account are based on the
Commissioner's 1980 Standard Ordinary Mortality Table, age last birthday, with
interest at the rate of 4 percent. These values equal or exceed the minimum
values required by law. A detailed statement of how AAL calculates cash values
for the Certificate has been filed with the insurance department of the state or
district where this Certificate was delivered.
REPORTS TO OWNERS
At least once each Certificate year, AAL will send you a report concerning the
current status of your Certificate. There is no charge for this report.
Upon your request, AAL will send you an illustration of hypothetical values for
the Certificate. AAL may charge a reasonable fee for each illustration
requested.
We will also send period reports with financial information on the Portfolios,
including information on the investments held in each Portfolio as required by
the Securities and Exchange Commission .
Confirmation notices will be sent during the year for certain Certificate
transactions.
MEMBERSHIP
For Insureds age Issue Age 15 and under, the Insured will become a benefit
member of AAL. For Insureds Issue Age 16 and over, the person who applied for
membership is a benefit member of AAL. The rights and benefits of membership are
set forth in the Articles of Incorporation and Bylaws of AAL. Membership cannot
be transferred.
OWNERSHIP
For Insureds age Issue Age 15 and under, the Insured is the owner of the
Certificate, unless ownership has been transferred. For Insureds Issue Age 16
and over, the person who is named as the Owner on the application for insurance
is the Owner, unless ownership has been transferred.
If you are not the insured, you should name a successor Owner who will become
the Owner if you die before the insured. If you die before the insured and there
is no successor Owner named, ownership of the Certificate will pass to your
estate.
During the Insured's lifetime, you may transfer ownership of the Certificate by
sending a signed written request to the AAL. The transfer must be approved by
AAL before it is valid.
BENEFICIARY
The beneficiary is the person, entity or organization named to receive the death
benefit after the Insured dies. The Bylaws of AAL list those eligible to be
beneficiaries. Beneficiaries are designated as first, second and third class.
You may name more than one person or organization in the same class.
If no beneficiary has been named or survives the insured, AAL will pay the
proceeds as follows:
To your estate if you are the Insured; or
To you if you are not the Insured.
During the Insured's lifetime, you may change the beneficiary by sending a
signed written request to AAL. The change must be approved by AAL before it is
valid.
COLLATERAL ASSIGNMENT
You may assign the Certificate as collateral security for a loan or other
obligation. This may limit your rights to the Cash Value and the beneficiary's
rights to the proceeds.
The assignments must be in writing and filed at our home office. AAL assumes no
responsibility as to the validity of any assignment. AAL is not liable for any
payment made or any other action taken on the Certificate before the assignment
was recorded at our home office.
Any Certificate loan obtained before an assignment is recorded at our home
office has priority over the assignment.
RIGHTS RESERVED BY AAL
Subject to applicable law, AAL reserves the right to make certain changes if, in
its judgment, they would best serve the interests of the Owners or would be
appropriate in carrying out the purposes of the Certificate. AAL will obtain,
when required, the necessary Owner approval or regulatory approval. Examples of
the changes AAL may make include, but are not limited to:
To operate the Variable Account in any form permitted under the 1940
Act or in any other form permitted by law.
To add, delete, combine, or modify Subaccounts in the Variable Account.
To add, delete, or substitute, for the portfolio shares held in any
Subaccount, the shares of another portfolio of the Fund or the shares of another
investment company or series thereof, or any other investment permitted by law.
To make any amendments to the Certificates necessary for the
Certificates to comply with the provisions of the Internal Revenue Code or any
other applicable federal or state law.
<TABLE>
<CAPTION>
<S> <C> <C>
DIRECTORS AND OFFICERS
Business Experience During the Position with Aid Association
for
Last Five (5) Years Lutherans
Herbert J. Arkebauer Professor, Southwest Missouri Director (6/72)
State University
Raymond G. Avischious President/CEO, Shurfine Central Director (5/77)
Corp.
Richard E. Beumer President/CEO, Sverdrup Director (2/87)
Corporation
Kenneth Daly Partner, KPMG Peat Marwick LLP Director (2/94)
Elizabeth A. Duda None Director (5/79)
Edward A. Engel President, E. A. Engel & Director (11/78)
Associates
Gary J. Greenfield President, Wisconsin Lutheran Director (1/93)
College
James W. Hanson None Director (8/86)
Robert H. Hoffman Executive, Taylor Corp. Director (2/87)
Robert E. Long Senior Vice President, Park Bank Director (2/82)
Robert B. Peregrine Attorney, Peregrine Law offices, Director (2/78)
S.C.
Kathi P. Seifert Group President, Kimberly Clark Director (12/94)
Corp.
Roger B. Wheeler President, Wheel-Air, Inc., Director (8/91)
Wheel-Air Charter, Inc.
E. Marlene Wilson President, Volunteer Management Director (6/81)
Associates
Rev. Thomas Zehnder President, Florida-Georgia Director (1/97)
District, Lutheran Church
Missouri Synod
Richard L. Gunderson Chairman of the Board, since Director, Chairman of the Board
1/97, CEO, 12/95 to 12/96,
President 9/85
to 11/95, Aid Association for
Lutherans
John O. Gilbert CEO since 1/97, President/COO Director, President/CEO
since 12/95, Executive Vice
President, 1/95 to 12/95, Senior
Vice President, 1/92 to 1/95, Aid
Association for Lutherans
Roger J. Johnson Executive Vice President since Executive Vice President
3/97, Senior Vice President,
11/95 to 3/97, prior to
that, Vice President , Aid
Association for Lutherans
Ronald G. Anderson Senior Vice President, Chief Senior Vice President, Chief
Investment Officer Aid Investment Officer
Association for Lutherans since
4/96, president, AAL Capital
Management Corporation since
1/97, Vice President, general Re
Corp. 3/95 to 3/96, Chairman
General Re Financial products
Corp. 1/91 to 3/95
Woodrow E. Eno Senior Vice President, Secretary, Senior Vice President,
Secretary,
General Counsel, Aid Association General Counsel
for Lutherans since 4/96, Vice
president, AEGON, 5/93 to 1/96,
Vice President/General Counsel
Health Insurance Association of
America, 7/80 to 5/93
Steven A. Weber Senior Vice President, since Senior Vice President
11/95, Vice President 2/89 to
11/95, Aid Association for
Lutherans
Jerome Laubenstein Senior Vice President since Senior Vice President
11/95, prior to that Vice
President, Aid Association for
Lutherans
Fred Ohlde Senior Vice President since Senior Vice President
11/95, prior to that Vice
President, Aid Association for
Lutherans
</TABLE>
FEDERAL TAX MATTERS
VARIABLE ACCOUNT TAX STATUS
Both investment income and realized capital gains of the Variable Account (i.e.,
income and capital gains distributed to the Variable Account by the Fund) are
reinvested without tax since the Internal Revenue Code (the "Code") presently
imposes no applicable tax. However, AAL reserves the right to make a deduction
for taxes, should they be imposed with respect to such items in the future.
LIFE INSURANCE QUALIFICATION
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Secretary of the Treasury has been granted authority to prescribe
regulations to carry out the purposes of the section, and proposed regulations
governing mortality charges were issued in 1991. AAL believes that the
Certificate meets the statutory definition of life insurance. As such, and
assuming the diversification standards of Section 817(h), discussed below, are
satisfied, (a) death benefits paid under the Certificate should generally be
excluded from the gross income of the beneficiary for federal income tax
purposes under Section 101(a)(1) of the Code and (b) You should not generally be
taxed on the Cash Value under a Certificate, including increments thereof, prior
to actual receipt.
AAL intends to comply with any future final regulations issued under Sections
7702 and 817(h) and any amendments to these sections, and reserves the right to
make such changes as deemed necessary to assure such compliance. Any changes
will apply uniformly to affected Certificate holders and will be made only after
advance written notice.
PRE-DEATH DISTRIBUTIONS
The taxation of pre-death distributions depends on whether the Certificate is
considered a modified endowment contract (a "MEC"). A Certificate's
qualification as a MEC is discussed below.
General Rules: Assuming a Certificate is not a MEC, upon surrender you will be
taxed on the excess of Surrender Value plus unpaid Certificate loans and
interest less gross premiums paid reduced by untaxed withdrawals.
Partial withdrawals are only taxable to the extent the withdrawal exceeds total
premiums paid less prior untaxed partial withdrawals. However, partial
withdrawals made within the first 15 years may be taxable in certain limited
instances where the Surrender Value plus unpaid loans exceeds the total premiums
paid less the untaxed portion of prior partial withdrawals.
Loans received under the Certificate, assuming the Certificate is not a MEC,
will not be treated as subject to tax when taken. Generally, amounts of loan
interest paid by individuals will be considered nondeductible "personal
interest".
Modified Endowment Contracts:
A class of contracts known as "MECs" has been created under Code Section 7702A.
Pre-death distribution rules for Certificates considered to be MECs will differ
from the general rules above. A contract will be a MEC if it fails the "7-Pay
Premium test". A Certificate fails this test if the amount paid into the
Certificate in the first seven years or in the first seven years after a
material change, exceeds the amount that would have been paid had the
Certificate provided for the payment of seven level annual premiums. AAL will
notify the you if the Certificate becomes a MEC.
A MEC Certificate may be aggregated with other MECs purchased by you from AAL
during any one calendar year for purposes of determining the taxable portion of
withdrawals from the Certificate. The Certificate is subject to a 7-Pay test
during the first seven Certificate years and any time a material change to the
contract takes effect. A material change, for these purposes, includes the
exchange of a life insurance Certificate for another, and conversion of a term
life Certificate to a whole life or universal life Certificate. In addition, an
increase in the future benefits provided constitutes a material change unless
the increase is attributable to (1) the payment of premiums necessary to fund
the lowest death benefit payable in the first 7 Certificate Years, or (2) the
crediting of interest or other earnings with respect to such premiums. A
reduction in death benefits during the first 7 Certificate Years, or during any
& pay test period, may also cause a Certificate to be considered a MEC.
All distributions, including Certificate loans and collateral assignments, from
a MEC Certificate will be currently taxable to the extent that the cash value of
the Certificate immediately before payment exceeds gross premiums paid
(increased by the amount of loans previously taxed and reduced by untaxed amount
previously received). These rules may also apply to distributions made during
the two year period prior to the time that a Certificate becomes a MEC. A
penalty tax equal to 10% of the amount includible in income will also apply to
certain surrenders or loans taken by you if you have not reached the age of
59&1/2, unless you are disabled, or the surrenders are part of a series of equal
periodic payments made not less frequently than annually for your life or life
expectancy. The penalty tax will also apply to income received on a surrender or
loan if the Owner of a MEC is a corporation.
DIVERSIFICATION REQUIREMENTS
For the Certificate to be treated as a life insurance contract for federal
income tax purposes, the Variable Account and the Fund must satisfy investment
diversification requirements set forth in Section 817(h) of the Code and
Treasury Department regulations thereunder. These requirements must be satisfied
at the end of each calendar quarter, or within 30 days thereafter.
The AAL Variable Product Series Fund, Inc. has met the diversification
requirements at all relevant items. AAL intends to take any action necessary to
maintain the compliance of the Variable Account and the Fund with the
diversification requirements. In addition, the Treasury Department may provide
future guidance concerning the extent to which you may direct investments in
variable funding options under the Certificate. If such guidance is issued, the
Certificate may need to be modified to comply with it.
OTHER CONSIDERATIONS
Because of the complexity of the law and its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Certificate or the exercise of options under a Certificate. The above comments
concerning federal income tax consequences are not exhaustive, and special rules
exist with respect to situations not discussed in the Prospectus.
The preceding description is based upon AAL's understanding of current federal
income tax law. AAL cannot assess the probability that changes in tax laws,
particularly affecting life insurance, will be made.
The preceding comments do not take into account estate and gift, state income or
other state tax considerations which may be involved in the purchase of a
Certificate or the exercise of elections under the Certificate. For complete
information on such federal and state tax considerations, a qualified tax
adviser should be consulted.
LITIGATION
There are no pending proceedings commenced by, or known to be contemplated by a
governmental authority, and no pending legal proceedings, material with respect
to prospective purchasers of the Certificates, to which the Variable Account,
AAL or the principal underwriter is a party to or to which the assets of the
Variable Account are subject. As a fraternal benefit society offering
certificates of insurance, AAL is ordinarily involved in litigation. AAL does
not believe that any current litigation or administrative proceeding is material
to the its ability to meet its obligations under the Certificate or to the
Variable Account, nor does AAL expect to incur significant losses from such
actions.
DISTRIBUTION
AAL Capital Management Corporation, 222 West College Avenue, Appleton Wisconsin,
54919-0007 ("AALCMC") is an indirect subsidiary of AAL and a registered
broker-dealer. AALCMC is a corporation organized under Delaware law in 1986 and
it serves as the principal underwriter of the Certificates. Certificates are
distributed by registered representatives of AALCMC. AALCMC also serves as the
principal underwriter of the AAL Variable Annuity and the AAL Mutual Funds.
AALCMC's fiscal year operates on a calendar year basis.
ILLUSTRATIONS
The following tables illustrate how the death benefits, Cash Values,
and Surrender Values of a hypothetical Certificate could vary over an extended
period of time, assuming hypothetical rates of return equivalent constant gross
annual rates of 0%, 6%, and 12%.
The Certificates illustrated include the following:
1. Male, Nonsmoker, Age 40, Variable Death Benefit, Specified Amount $250,000,
Current Rates
2. Male, Nonsmoker, Age 40, Variable Death Benefit, Specified Amount $250,000,
Guaranteed Rates
3. Male, Nonsmoker, Age 40, Level Death Benefit, Specified Amount $250,000,
Current Rates
4. Male, Nonsmoker, Age 40, Level Death Benefit, Specified Amount $250,000,
Guaranteed Rates
The values would be different from those shown if the gross annual investment
rates of return averaged 0%, 6%, or 12% over a period of years, but also
fluctuated above or below those averages for individual Certificate years. The
illustrations assume no Certificate loans or withdrawals have been taken. The
amounts would differ if unisex rates were used.
The second column of each table, labeled "Premiums Accumulated at 5%", shows the
amount which would accumulate if an amount equal to the annual premium, (after
taxes) were invested to earn interest at 5% compounded annually. All premium
payments are illustrated as if they were made at the beginning of the year.
The amounts shown for death benefits, Cash Values, and Surrender Values reflect
the fact that the net investment return on the Certificate is lower than the
gross investment return on the Variable Account. This results from the charges
levied against the Variable Account (e.g. the mortality and expense risk charge)
as well as the premium load, administrative charges and Surrender Charges. The
difference between the Cash Value and the Surrender Value is the Surrender
Charge.
The tables illustrate the cost of insurance and other charges at both current
rates and the maximum rates guaranteed in the Certificate. The amounts shown at
the end of each Certificate year reflect a daily investment advisory fee
equivalent to an annual rate of .35% of the aggregate average daily net assets
of the Subaccounts. Actual fees may vary by Subaccount and may be subject to
agreements by the sponsor to waive or otherwise reimburse each Fund for
operating expenses which exceed certain limits. There can be no assurance that
the expense reimbursement arrangements will continue in the future, and any
unreimbursed expenses would be reflected in the values included on the tables.
The effect of these investment management expenses on a 0% gross rate of return
would result in a net rate of return of (0.35)%, on 6% it would be 5.65%, and on
12% it would be 11.65%.
The tables assume the deduction of charges including administrative and sales
charges. The tables reflect the fact that we do not currently make any charge
against the Variable Account for state or Federal taxes. If such a charge is
made in the future, it will take a higher gross rate of return than the rates
shown to produce the death benefits, Cash Values, and Surrender Values shown.
AAL will furnish, upon request, a comparable illustration based on the proposed
Insured's Issue Age, Risk Class, Sex, Specified Amount, Death Benefit Option and
premium amount requested.
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Cash Values and
Surrender Values
Based on Current Charges
<TABLE>
Issue Age - 40 Level Death Benefit Option
Risk Class - Standard Nonsmoker Specified Amount - $250,000
Sex - Male Annual Premium - $2,375
<CAPTION>
End of Annual Premium End of Year DEATH
BENEFIT Assuming
Certificate Premiums Accumulated Hypothetical Gross Annual Investment
Return of
Year Paid at 5% 0% 6% 12%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $2,375 $2,494 $250,000 $250,000 $250,000
2 $2,375 $5,112 $250,000 $250,000 $250,000
3 $2,375 $7,862 $250,000 $250,000 $250,000
4 $2,375 $10,748 $250,000 $250,000 $250,000
5 $2,375 $13,780 $250,000 $250,000 $250,000
6 $2,375 $16,962 $250,000 $250,000 $250,000
7 $2,375 $20,304 $250,000 $250,000 $250,000
8 $2,375 $23,813 $250,000 $250,000 $250,000
9 $2,375 $27,497 $250,000 $250,000 $250,000
10 $2,375 $31,366 $250,000 $250,000 $250,000
15 $2,375 $53,812 $250,000 $250,000 $250,000
20 $2,375 $82,458 $250,000 $250,000 $250,000
25 $2,375 $119,019 $250,000 $250,000 $250,000
30 $2,375 $165,682 $250,000 $250,000 $396,571
End of Annual
End of Year CASH VALUE Assuming End of Year SURRENDER VALUE Assuming
Certificate Premiums Hypothetical Gross Hypothetical Gross Annual
Annual Investment Return of Investment Return of
Year Paid 0% 6% 12% 0% 6% 12%
1 $2,375 $1,456 $1,566 $1,678 $0 $0 $0
2 $2,375 $2,855 $3,167 $3,494 $5 $317 $644
3 $2,375 $4,195 $4,803 $5,463 $1,345 $1,953 $2,613
4 $2,375 $5,689 $6,692 $7,826 $3,196 $4,198 $5,333
5 $2,375 $7,143 $8,649 $10,423 $5,005 $6,512 $8,285
6 $2,375 $8,582 $10,704 $13,305 $6,800 $8,923 $11,524
7 $2,375 $10,003 $12,860 $16,503 $8,578 $11,435 $15,078
8 $2,375 $11,346 $15,060 $19,988 $10,277 $13,991 $18,919
9 $2,375 $12,653 $17,347 $23,836 $11,940 $16,634 $23,123
10 $2,375 $13,921 $19,724 $28,085 $13,565 $19,368 $27,729
15 $2,375 $19,411 $32,875 $56,904 $19,411 $32,875 $56,904
20 $2,375 $23,531 $49,225 $106,895 $23,531 $49,225 $106,895
25 $2,375 $24,126 $67,719 $193,014 $24,126 $67,719 $193,014
30 $2,375 $17,433 $86,519 $341,872 $17,433 $86,519 $341,872
</TABLE>
The values would be different from those shown above if the actual gross annual
rates of return averaged 0%, 6%, and 12% over a period of years but varied above
or below that average during the period. The above values assume no loans or
withdrawals are taken.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT EXPERIENCE OF THE VARIABLE ACCOUNT,
AND THE ALLOCATIONS MADE TO THE VARIABLE ACCOUNT. NO REPRESENTATION CAN BE MADE
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. RATES OF RETURN AND VALUES SET FORTH IN THE ILLUSTRATION ARE NOT
GUARANTEED.
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Cash Values and
Surrender Values
Based on Guaranteed Charges
<TABLE>
Issue Age - 40 Level Death Benefit Option
Risk Class - Standard Nonsmoker Specified Amount - $250,000
Sex - Male Annual Premium - $2,375
<CAPTION>
End of Annual Premium End of Year DEATH
BENEFIT Assuming
Certificate Premiums Accumulated Hypothetical Gross Annual Investment
Return of
Year Paid at 5% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 $2,375 $2,494 $250,000 $250,000 $250,000
2 $2,375 $5,112 $250,000 $250,000 $250,000
3 $2,375 $7,862 $250,000 $250,000 $250,000
4 $2,375 $10,748 $250,000 $250,000 $250,000
5 $2,375 $13,780 $250,000 $250,000 $250,000
6 $2,375 $16,962 $250,000 $250,000 $250,000
7 $2,375 $20,304 $250,000 $250,000 $250,000
8 $2,375 $23,813 $250,000 $250,000 $250,000
9 $2,375 $27,497 $250,000 $250,000 $250,000
10 $2,375 $31,366 $250,000 $250,000 $250,000
15 $2,375 $53,812 $250,000 $250,000 $250,000
20 $2,375 $82,458 $250,000 $250,000 $250,000
25 $2,375 $119,019 $250,000 $250,000 $250,000
30 $2,375 $165,682 $0 $250,000 $315,729
End of Annual
End of Year CASH VALUE Assuming End of Year SURRENDER VALUE Assuming
Certificate Premiums Hypothetical Gross Hypothetical Gross Annual
Annual Investment Return of Investment Return of
Year Paid 0% 6% 12% 0% 6% 12%
1 $2,375 $1,453 $1,564 $1,675 $0 $0 $0
2 $2,375 $2,847 $3,159 $3,485 $0 $309 $635
3 $2,375 $4,181 $4,786 $5,444 $1,331 $1,936 $2,594
4 $2,375 $5,642 $6,638 $7,767 $3,148 $4,145 $5,273
5 $2,375 $7,035 $8,529 $10,289 $4,898 $6,392 $8,152
6 $2,375 $8,354 $10,452 $13,023 $6,573 $8,670 $11,242
7 $2,375 $9,594 $12,403 $15,990 $8,169 $10,978 $14,565
8 $2,375 $10,751 $14,381 $19,211 $9,682 $13,312 $18,142
9 $2,375 $11,821 $16,382 $22,709 $11,109 $15,669 $21,997
10 $2,375 $12,797 $18,400 $26,512 $12,441 $18,043 $26,156
15 $2,375 $15,849 $28,347 $51,045 $15,849 $28,347 $51,045
20 $2,375 $14,829 $37,562 $90,822 $14,829 $37,562 $90,822
25 $2,375 $6,117 $42,341 $156,487 $6,117 $42,341 $156,487
30 $2,375 $0 $35,610 $272,180 $0 $35,610 $272,180
</TABLE>
The values would be different from those shown above if the actual gross annual
rates of return averaged 0%, 6%, and 12% over a period of years but varied above
or below that average during the period. The above values assume no loans or
withdrawals are taken.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT EXPERIENCE OF THE VARIABLE ACCOUNT,
AND THE ALLOCATIONS MADE TO THE VARIABLE ACCOUNT. NO REPRESENTATION CAN BE MADE
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. RATES OF RETURN AND VALUES SET FORTH IN THE ILLUSTRATION ARE NOT
GUARANTEED.
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Cash Values and
Surrender Values
Based on Current Charges
<TABLE>
Issue Age - 40 Variable Death Benefit Option
Risk Class - Standard Nonsmoker Specified Amount - $250,000
Sex - Male Annual Premium - $2,375
<CAPTION>
End of Annual Premium End of Year DEATH
BENEFIT Assuming
Certificate Premiums Accumulated Hypothetical Gross Annual Investment
Return of
Year Paid at 5% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 $2,375 $2,494 $251,451 $251,562 $251,673
2 $2,375 $5,112 $252,842 $253,153 $253,479
3 $2,375 $7,862 $254,170 $254,774 $255,430
4 $2,375 $10,748 $255,647 $256,641 $257,766
5 $2,375 $13,780 $257,079 $258,569 $260,324
6 $2,375 $16,962 $258,492 $260,588 $263,154
7 $2,375 $20,304 $259,883 $262,698 $266,285
8 $2,375 $23,813 $261,189 $264,838 $269,679
9 $2,375 $27,497 $262,453 $267,054 $273,411
10 $2,375 $31,366 $263,672 $269,347 $277,515
15 $2,375 $53,812 $268,808 $281,757 $304,822
20 $2,375 $82,458 $272,302 $296,408 $350,343
25 $2,375 $119,019 $271,824 $311,057 $423,351
30 $2,375 $165,682 $263,528 $321,085 $538,086
End of Annual
End of Year CASH VALUE Assuming End of Year SURRENDER VALUE Assuming
Certificate Premiums Hypothetical Gross Hypothetical Gross Annual
Annual Investment Return of Investment Return of
Year Paid 0% 6% 12% 0% 6% 12%
- -
1 $2,375 $1,451 $1,562 $2,678 $0 $0 $0
2 $2,375 $2,842 $3,153 $5,598 $0 $303 $629
3 $2,375 $4,170 $4,774 $8,783 $1,320 $1,924 $2,580
4 $2,375 $5,647 $6,641 $12,487 $3,153 $4,147 $5,272
5 $2,375 $7,079 $8,569 $16,560 $4,941 $6,432 $8,186
6 $2,375 $8,492 $10,588 $21,070 $6,710 $8,806 $11,373
7 $2,375 $9,883 $12,698 $26,062 $8,458 $11,273 $14,860
8 $2,375 $11,189 $14,838 $31,519 $10,120 $13,770 $18,610
9 $2,375 $12,453 $17,054 $37,537 $11,740 $16,342 $22,699
10 $2,375 $13,672 $19,347 $44,173 $13,316 $18,990 $27,158
15 $2,375 $18,808 $31,757 $88,897 $18,808 $31,757 $54,822
20 $2,375 $22,302 $46,408 $165,065 $22,302 $46,408 $100,343
25 $2,375 $21,824 $61,057 $290,584 $21,824 $61,057 $173,351
30 $2,375 $13,528 $71,085 $495,293 $13,528 $71,085 $288,086
</TABLE>
The values would be different from those shown above if the actual gross annual
rates of return averaged 0%, 6%, and 12% over a period of years but varied above
or below that average during the period. The above values assume no loans or
withdrawals are taken.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT EXPERIENCE OF THE VARIABLE ACCOUNT,
AND THE ALLOCATIONS MADE TO THE VARIABLE ACCOUNT. NO REPRESENTATION CAN BE MADE
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. RATES OF RETURN AND VALUES SET FORTH IN THE ILLUSTRATION ARE NOT
GUARANTEED.
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Cash Values and
Surrender Values
Based on Guaranteed Charges
<TABLE>
Issue Age - 40 Variable Death Benefit Option
Risk Class - Standard Nonsmoker Specified Amount - $250,000
Sex - Male Annual Premium - $2,375
<CAPTION>
End of Premium End of Year DEATH
BENEFIT Assuming
Certificate Accumulated Hypothetical Gross Annual Investment
Return of
Year Premiums at 5% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 $2,375 $2,494 $251,449 $251,559 $251,670
2 $2,375 $5,112 $252,834 $253,145 $253,470
3 $2,375 $7,862 $254,156 $254,757 $255,411
4 $2,375 $10,748 $255,599 $256,587 $257,706
5 $2,375 $13,780 $256,970 $258,448 $260,188
6 $2,375 $16,962 $258,259 $260,329 $262,865
7 $2,375 $20,304 $259,463 $262,226 $265,753
8 $2,375 $23,813 $260,577 $264,137 $268,870
9 $2,375 $27,497 $261,595 $266,052 $272,231
10 $2,375 $31,366 $262,511 $267,965 $275,856
15 $2,375 $53,812 $265,103 $276,946 $298,412
20 $2,375 $82,458 $263,282 $283,807 $331,785
25 $2,375 $119,019 $253,663 $283,633 $378,190
30 $2,375 $165,682 $0 $268,026 $439,423
End of
End of Year CASH VALUE Assuming End of Year SURRENDER VALUE Assuming
Certificate Hypothetical Gross Hypothetical Gross Annual
Annual Investment Return of Investment Return of
Year Premiums 0% 6% 12% 0% 6% 12%
1 $2,375 $1,449 $1,559 $1,670 $0 $0 $0
2 $2,375 $2,834 $3,145 $3,470 $0 $295 $620
3 $2,375 $4,156 $4,757 $5,411 $1,306 $1,907 $2,561
4 $2,375 $5,599 $6,587 $7,706 $3,105 $4,094 $5,213
5 $2,375 $6,970 $8,448 $10,188 $4,832 $6,310 $8,050
6 $2,375 $8,259 $10,329 $12,865 $6,478 $8,547 $11,084
7 $2,375 $9,463 $12,226 $15,753 $8,038 $10,801 $14,328
8 $2,375 $10,577 $14,137 $18,870 $9,508 $13,068 $17,801
9 $2,375 $11,595 $16,052 $22,231 $10,883 $15,340 $21,519
10 $2,375 $12,511 $17,965 $25,856 $12,155 $17,609 $25,500
15 $2,375 $15,103 $26,946 $48,412 $15,103 $26,946 $48,412
20 $2,375 $13,282 $33,807 $81,785 $13,282 $33,807 $81,785
25 $2,375 $3,663 $33,633 $128,190 $3,663 $33,633 $128,190
30 $2,375 $0 $18,026 $189,423 $0 $18,026 $189,423
</TABLE>
The values would be different from those shown above if the actual gross annual
rates of return averaged 0%, 6%, and 12% over a period of years but varied above
or below that average during the period. The above values assume no loans or
withdrawals are taken.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT EXPERIENCE OF THE VARIABLE ACCOUNT,
AND THE ALLOCATIONS MADE TO THE VARIABLE ACCOUNT. NO REPRESENTATION CAN BE MADE
THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. RATES OF RETURN AND VALUES SET FORTH IN THE ILLUSTRATION ARE NOT
GUARANTEED.
LEGAL AND ACTUARIAL MATTTERS
The legal validity of the Certificates described in this Prospectus has been
passed upon by Mark J. Mahoney, Esq. of the law department of AAL. Mayer Brown &
Platt has acted as special counsel on matters related to the federal securities
laws.
Actuarial matters in this prospectus have been examined by David C. Vanden
Heuvel FSA, MAAA Director and Associate Actuary , for AAL. His opinion on
actuarial matters is filed as an exhibit to the registration statement filed
with the Securities and Exchange Commission for the AAL Variable Life Account I.
This prospectus does not contain financial statements for the Separate Account
because it has not yet commenced operations, has no assets or liabilities and it
has received no income nor incurred any expenses as of the date of this
prospectus.
EXPERTS
The consolidated financial statements of Aid Association for Lutherans at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The financial statements of AAL should be considered only as bearing upon the
ability of AAL to meet its obligations under the Certificates. The financial
statements of AAL should not be considered as bearing on the investment
experience of the assets held in any variable account.
The most current financial statements of AAL are those as of the end of the most
recent fiscal year ended December 31, 1996. AAL does not prepare financial
statements more often than annually in the form required to be included in a
prospectus and believes that any incremental benefit to prospective Certificate
Owners that may result from preparing and delivering more current financial
statements, though unaudited, does not justify the additional cost that would be
incurred. In addition, AAL represents that there have been no adverse changes in
the financial condition or operations of AAL between the end of the fiscal year
ended December 31, 1996 and the date of this prospectus.
No Certificates will be offered for sale hereunder until such time as AAL has
amended this prospectus to include AAL's audited financial statements for the
year ended December 31, 1997
The financial statements for AAL, and the accompanying Reports of Independent
Auditors, follow.
Report of Independent Auditors
The Board of Directors
Aid Association for Lutherans
We have audited the accompanying consolidated balance sheets of Aid Association
for Lutherans (AAL) as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in certificate owners' surplus and
cash flows for the years then ended. These financial statements are the
responsibility of AAL's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AAL at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1, in 1996 AAL adopted certain accounting changes to
conform with generally accepted accounting principles for fraternal benefit
societies.
March 14, 1997
Aid Association for Lutherans
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands)
1996 1995
Assets
Investments:
Securities available for sale, at fair value
Fixed maturities $ 6,948,203 $ 6,879,601
Equity securities 539,113 453,398
Fixed maturities held to maturity, at amortized cost 4,423,637 4,069,372
Mortgage loans 3,298,335 2,952,533
Investment real estate 113,282 122,899
Certificate loans 501,263 500,306
Other invested assets 10,490 10,238
Total investments $ 15,834,323 $ 14,988,347
Cash and cash equivalents $ 106,568 $ 166,020
Premiums and fees receivable 12,198 11,500
Accrued investment income 19,9051 199,566
Deferred acquisition costs 704,515 643,540
Property and equipment 101,725 105,511
Assets held in separate accounts 313,072 49,067
Other assets 8,868 5,706
Total Assets $ 17,280,320 $ 16,169,257
Liabilities and Certificate Owners' Surplus
Certificate liabilities and accruals:
Future certificate benefits $ 2,504,708 $ 2,381,279
Unpaid claims and claim expenses 101,770 89,288
Total certificate liabilities and accruals $ 2,606,478 $ 2,470,567
Certificate Owner funds $ 12,434,551 $ 11,838,902
Liabilities related to separate accounts 313,072 49,067
Other liabilities 135,390 127,957
Total Liabilities $ 15,489,491 $414,486,493
Certificate Owners' Surplus
Accumulated surplus $ 1,642,126 $ 1,444,084
Unrealized appreciation on securities
available for sale 148,703 238,680
Total Certificate Owners' Surplus $ 1,790,829 $ 1,682,764
Total Liabilities and Certificate Owners' Surplus $ 17,280,320 16,169,257
See accompanying notes.
</TABLE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
<S> <C> <C>
December 31(in thousands)
1996 1995
Revenue
Insurance premiums $ 364,078 $ 370,222
Insurance charges 278,774 261,376
Net investment income 1,171,590 1,115,790
Net realized investment gains 62,959 16,598
Other revenue 68,200 41,951
Total revenue 1,945,601 1,805,937
Benefits and expenses
Certificate claims and other 345,786 324,870
benefits
Increase in certificate reserves 134,900 143,120
Interest credited 748,350 731,896
Surplus refunds 105,997 103,064
Total benefits 1,335,033 1,302,950
Underwriting, acquisition and 307,982 268,934
insurance expenses
Fraternal benefits and expenses 104,545 84,815
Total expenses 412,527 353,749
Total benefits and expenses 1,747,560 1,656,699
Net income $ 198,041 $ 149,238
</TABLE>
Consolidated Statements of Changes in Certificate Owners' Surplus
<TABLE>
<CAPTION>
Unrealized Accumulated Total certificate
appreciation surplus owners' surplus
(depreciation) of
securities available
for sale(In
Thousands)
<S> <C> <C> <C>
Balance at January 1, 1995 $ 9,057 $ 868,882 $ 877,939
Impact of adopting certain -321,267 425,964 104,697
accounting changes discussed in Note
1
Balance at January 1, 1995 as -312,210 1,294,846 982,637
adjusted
Net income -- 149,238 149,238
Increase in unrealized appreciation 550,890 550,890
of securities available for sale
Balance at December 31, 1995 238,680 1,444,085 1,682,765
Net income -- 198,041 198,041
Decrease in unrealized appreciation -89,977 -- -89,977
of securities available for sale
Balance at December 31, 1996 $ 148,703 $1,642,126 $1,790,829
</TABLE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 31(in thousands)
<S> <C> <C>
1996 1995
Operating Activities:
Net Income $198,041 $149,238
</TABLE>
Adjustments to reconcile net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
<S> <C> <C>
Increase in certificate liabilities and accruals 135,911 4,143,359
Increase in certificate owner funds 449,570 474,774
Increase in deferred acquisition costs -17,547 -32,026
Realized gains on investments -63,219 -17,530
Provisions for amortization and depreciation 20,309 19,120
Changes in other assets and liabilities 4,166 -5,698
Net cash provided by operating activities 727,231 731,237
Investing Activities:
Securities available for sale:
Purchases - fixed maturities -2,311,534 -2,218,311
Sales - fixed maturities 1,606,098 1,256,300
Maturities - fixed maturities 476,592 565,516
Purchases - equities -203,720 -229,771
Sales - equities 201,119 123,108
Securities held to maturity:
Purchases -785,732 -601,390
Maturities 435,374 369,741
Mortgage loans funded -559,005 -478,622
Mortgage loans repaid 207,904 166,830
Certificate loans, net -957 -6,873
Other 1,099 -102,670
Net cash used in investing activities -932,762 -1,156,142
Financing Activities:
Universal life and investment contract receipts 1,086,856 1,248,664
Universal life and investment contract withdrawals -940,777 -791,821
Net cash provided by financing activities 146,079 456,843
Net increase (decrease) in cash and cash equivalents -59,452 31,938
Cash and cash equivalents, beginning of year $106,568 $166,020
</TABLE>
Notes to Consolidated Financial Statements
December 31, 1996
Note 1. Summary of Significant Accounting Policies
Nature of Operations
AAL is the nation's largest fraternal benefit society in terms of assets and
individual life insurance in force. It provides its 1.7 million members with
life insurance and retirement products (both fixed and variable), as well as
disability income and long-term care insurance, in most states. Mutual funds are
offered to members by AAL's wholly-owned subsidiary, AAL Capital Management
Corporation. Credit union services are available to members from the AAL Member
Credit Union, an affiliate of AAL. AAL members are served by more than 2,000
district representatives across the country.
Basis of Presentation
The accompanying consolidated financial statements of AAL and its wholly-owned
subsidiaries have been prepared in accordance with generally accepted accounting
principles ("GAAP"). Prior to 1996, AAL prepared its financial statements in
conformity with accounting practices prescribed by the Office of the
Commissioner of Insurance of the State of Wisconsin (statutory-basis) which were
considered GAAP for fraternal benefit societies. FASB Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises ("FIN 40"), as amended, which is effective for
1996 annual financial statements and thereafter, no longer permits
statutory-basis financial statements to be described as being prepared in
conformity with GAAP. Accordingly, AAL has adopted GAAP including Statement of
Financial Accounting Standards 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts ("FAS 120"), which addresses the accounting for
long-duration and short-duration insurance and reinsurance contracts, including
all participating business.
Pursuant to the requirements of FIN 40 and FAS 120, the effect of the changes in
accounting have been applied retroactively and the previously issued 1995
financial statements have been restated for the change. The effect of the
changes applicable to years prior to January 1, 1995, has been presented as a
restatement of certificate owners' surplus as of that date.
The adoption had the effect of increasing net income for 1996 and 1995 by
approximately $68,339,000 and $34,772,000, respectively.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of AAL, its
wholly-owned subsidiary, AAL Holdings Inc., and its wholly-owned subsidiaries,
including AAL Capital Management Corporation and North Meadows Investment Ltd.
All significant intercompany transactions are eliminated.
The significant accounting practices used in preparation of the financial
statements are summarized on the following pages:
Investments
Investments in fixed maturities are classified as available for sale or held to
maturity according to the holder's intent. Securities classified in the
available for sale category are carried at fair value and consist of those
securities which AAL intends to hold for an indefinite period of time but not
necessarily to maturity. Securities in the held to maturity category are carried
at amortized cost and consist of those which AAL has both the ability and the
positive intent to hold to maturity. Changes in fair values of available for
sale securities, after adjustment of deferred acquisition costs (DAC), are
reported as unrealized appreciation or depreciation directly in certificate
owners' surplus and, accordingly, have no effect on net income. The DAC offsets
to the unrealized appreciation or depreciation represent valuation adjustments
of DAC that would have been required as a charge or credit to operations had
such unrealized amounts been realized. The amortized cost of fixed maturity
investments classified as available for sale and as held to maturity is adjusted
for amortization of premiums and accretion of discounts calculated using the
effective interest method. That amortization or accretion is included in net
investment income. Mortgage loans generally are stated at their outstanding
unpaid principal balances. Interest income is accrued on the unpaid principal
balance. Discounts and premiums are amortized to income using the interest
method. Investment real estate is valued at original cost plus capital
expenditures less accumulated depreciation and write-downs. Depreciation is
computed using the straight-line method over the estimated useful life of the
property. Accumulated depreciation and write-downs were $37,763,000 and
$34,660,000, at December 31, 1996 and 1995, respectively.
Certificate loans are generally valued at the aggregate unpaid balances. Other
investments, consisting of limited partnerships, are valued on the equity basis.
All investments are carried net of allowances for declines in value that are
other than temporary; the changes in those reserves are reported as realized
gains or losses on investments. Realized gains and losses on the sale of
investments and declines in value considered to be other than temporary are
recognized in the Consolidated Statements of Income on the specific
identification basis.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and include all highly liquid
investments purchased with an original maturity of three months or less.
Deferred Acquisition Costs
Costs which vary with and are primarily attributable to the production of new
business have been deferred to the extent such costs are deemed recoverable from
future profits. Such costs include commissions, selling, selection and
certificate issue expenses. For interest sensitive life, participating life and
investment products, these costs are amortized in proportion to estimated gross
profits from interest, mortality and other margins under the contracts.
Amortization of acquisition costs for other certificates is charged to expense
in proportion to premium revenue recognized.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. The
cost of property and equipment is being depreciated by the straight-line method
over the estimated useful lives. Accumulated depreciation was $103,938,000 and
$100,869,000 at December 31, 1996 and 1995, respectively.
Certificate Liabilities and Accruals
Reserves for future certificate benefits for participating life insurance are
net level reserves computed using the same interest and mortality assumptions as
used to compute the cash value. Reserves for future certificate benefits for
non-participating life insurance are also net level reserves, computed using
assumptions as to mortality, interest and withdrawal, with a provision for
adverse deviation. Interest assumptions generally range from 2.5% to 4.0%.
Reserves for future certificate benefits for universal life insurance and
deferred annuities consist of certificate account balances before applicable
surrender charges. The average interest rate credited to account balances in
1996 was 7.6% for universal life, 5.8% for portfolio-average deferred annuities,
and ranged from 5.7% to 6.3% for investment generation deferred annuities,
(IGA), introduced in 1995.
Reserves for accident and health certificates are generally computed using
current pricing assumptions. The interest rate assumptions range from 3.5% to
5.0%. Reserves are computed using a net level reserve method for Medicare
supplement certificates, a one-year preliminary term method for long-term care
certificates, and a two-year preliminary term method for disability income
certificates.
Claim reserves are established for future payments not yet due on claims already
incurred, relating primarily to accident and health certificates. These reserves
are based on past experience and applicable morbidity tables. Reserves are
continuously reviewed and updated, with any resulting adjustments reflected in
current operations.
Separate Accounts
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable annuity
contracts, and for which the certificate owner, rather than AAL, bears the
investment risk. Fees charged on separate account certificate owner deposits are
included in insurance charges. Separate account assets, which are stated at fair
value based on quoted market prices, and separate account liabilities are shown
separately in the Consolidated Balance Sheets. Operating results of the separate
accounts are not included in the Consolidated Statements of Income.
Insurance Premiums and Charges
For life and some annuity contracts other than universal life or investment
contracts, premiums are recognized as revenues over the premium paying period,
with reserves for future benefits established on a prorated basis from such
premiums.
Revenues for universal life and investment contracts consist of policy charges
for the cost of insurance, policy administration and surrender charges assessed
during the period. Expenses include interest credited to certificate account
balances and benefits incurred in excess of certificate account balances.
Certain profits on limited payment certificates are deferred and recognized over
the certificate term. For accident and health certificates, gross premiums are
prorated over the contract term of the certificates with the unearned premium
included in the certificate reserves.
Surplus Refunds
Surplus refunds are recognized over the certificate year and are reflected in
the Consolidated Statements of Income. The majority of life insurance
certificates, except for universal life and term certificates, begin to receive
surplus refunds at the end of the second certificate year. Surplus refunds are
not currently being paid on interest-sensitive and health insurance
certificates. Surplus refund scales are approved annually by AAL's Board of
Directors.
Fraternal Benefits
Fraternal benefits and expenses includes all fraternal activities as well as
expenses incurred to provide or administer fraternal benefits, and expenses
related to AAL's fraternal character. This would include items such as
benevolences to help meet the needs of people, educational benefits to raise
community and family awareness of an issue, as well as various programs and
church grants. Expenses, such as those necessary to maintain the branch system,
are also included.
Other Revenue
Other revenue consists primarily of concessions and investment advisory fees of
AAL Capital Management Corporation.
Income Taxes
AAL, a fraternal benefit society, qualifies as a tax-exempt organization under
the Internal Revenue Code. Accordingly, income received by AAL is generally
exempt from taxation. AAL's wholly-owned subsidiaries are subject to federal and
state taxation.
Note 2. Investments
AAL's investments in available for sale securities and held to maturity
securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Cost Gross Gross Estimated Fair
Unrealized Unrealized Value
Gains Losses
(Thousands)
Available for Sale Securities at
December 31, 1996
Fixed Maturity Securities
<S> <C> <C> <C> <C>
Loan Backed Obligations of U.S. $292,421 $2,625 -$1,276 $293,770
Government Corporations and
Agencies
Obligations of other governments, 278,167 5,907 -1,348 282,726
states and political subdivisions
Corporate Bonds 4,491,290 73,719 -48,044 4,516,965
Mortgage and Asset-Backed 1,877,261 15,114 -37,633 1,854,742
Securities
Total Fixed Maturity Securities 6,939,139 97,365 -88,301 6,948,203
Equity Securities 396,788 142,325 0 539,113
Total $7,335,927 $239,690 -$88,301 $7,487,316
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost Gross Gross Estimated
Unrealized Unrealized Fair Value
Gains Losses
(Thousands)
Held to Maturity Securities at
December 31, 1996
Fixed Maturity Securities
<S> <C> <C> <C> <C>
Loan Backed Obligations of U.S. $42,106 $1,881 -$782 $43,205
Government Corporations and
Agencies
Obligations of other governments, 397,200 15,875 -3,999 409,076
states and political subdivisions
Corporate Bonds 74,908 1,052 -1,248 74,712
Mortgage and Asset-Backed 3,064,485 141,260 -13,766 3,191,979
Securities
Total Fixed Maturity Securities 844,938 14,086 -8,030 850,995
Total $4,423,637 $174,154 -$27,825 $4,569,967
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
Available for sale (In Thousands)
securities at
December 31, 1995
Fixed maturity
securities
<S> <C> <C> <C> <C>
Loan backed $329,257 $5,949 $0 $335,206
obligations of U.S.
Government
corporations and
agencies
Obligations of other 276,646 14,882 0 291,528
governments, states
and political
subdivisions
Corporate bonds 4,074,798 170,609 6,799 4,238,608
Mortgage & 2,002,772 21,040 -9,553 2,014,259
asset-backed
securities
Total fixed maturity 6,683,473 212,480 -16,352 6,879,601
securities
Equity securities 364,732 88,666 453,398
Total $7,048,205 $301,146 -$16,352 $7,332,999
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost Gross Gross Estimated Fair
Unrealized Gains Unrealized Value
Losses
Held to maturity (In Thousands)
securities at December
31, 1995
Fixed maturity securities
<S> <C> <C> <C> <C>
U.S. Treasury securities $60,412 $3,385 -$328 $63,469
and non-loan backed
obligations of U.S.
Government corporations
and agencies
Loan backed obligations 429,971 28,017 -154 457,834
of U.S Government
corporations and agencies
Obligations of other 81,608 1,961 -245 83,324
governments, states and
political subdivisions
Corporate bonds 2,908,531 205,654 -4,660 3,109,525
Mortgage & asset-backed 588,850 19,880 -455 608,275
securities
$4,069,372 $258,897 -$5,842 $4,322,427
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for sale Held to maturity
Amortized Cost Fair Value Amortized Cost Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $42442 $42,613 $124,011 $125,181
Due after one year 2,690,343 2,713,062 1,208,261 1,247,610
through five years
Due after five years 1,817,920 1,819,148 1,176,274 1,230,269
through ten years
Due after ten years 218,752 224,868 672,953 706,836
Total fixed maturity 4,769,457 4,799,691 3,181,499 3,309,896
securities excluding
mortgage and
asset-backed bonds
Loan-backed obligations 292,421 293,770 397,200 409,076
of U.S. Government
corporations and agencies
Mortgage and 1,877,261 1,854,742 844,938 850,995
asset-backed securities
Total fixed maturity $6,939,139 $6,948,203 $4,423,637 $4,569,967
securities
</TABLE>
Major categories of AAL's investment income are summarized as follows:
Year Ended Year Ended
December 31, 1996 December 31, 1995
(In Thousands)
Fixed maturity securities $828,565 $807,481
Equity securities 11,030 7,973
Mortgage loans 284,534 256,251
Investment real estate 21,998 20,418
Certificate loans 34,882 34,618
Other invested assets 6,666 3,665
Gross investment income 1,187,675 1,130,406
Investment expenses 16,085 14,616
Net investment income $1,171,590 $1,115,790
AAL's realized gains and losses on investments are summarized as follows:
December 31, 1996 December 31, 1995
(Thousands)
Securities Available for Sale
Fixed Maturity Securities
Gross Realized Gains $41,313 $32,443
Gross Realized Losses -9,058 -8,955
Equity Securities
Gross Realized Gains 37,001 18,209
Gross Realized Losses -7,546 -4,960
Other Investments, Net 1,249 -20,139
Net Realized Gains $62,959 $16,598
Net unrealized gains on available for sale securities were credited directly to
certificate owners' surplus, as follows:
December 31, 1996 December 31, 1995
(Thousands)
Fair Value Adjustment to Available $151,389 $284,794
for Sale Securities
Decrease in Deferred Acquisition -2,686 -46,114
Costs
Net Unrealized Gains on Available $148,703 $238,680
for Sale Securities
The increase (decrease) in unrealized appreciation on investments in fixed
maturity and equity securities is as follows:
Year Ended December 31 1996 1995
(Thousands)
Fixed Maturity Securities -$187,064 $630,394
Available for Sale
Equity Securities Available for 53,659 79,610
Sale
Deferred Acquisition Costs 43,428 -159,114
Total -$89,977 $550,890
AAL invests in mortgage loans, principally involving commercial real estate.
Such investments consist of first mortgage liens on completed income producing
properties. AAL manages its investments in mortgage loans to limit credit risk
by diversifying among various geographic regions and property types follows:
<TABLE>
<CAPTION>
Principal 1996 Principal 1995 Percent 1996 Percent 1995
(Thousands)
Geographic Region
<S> <C> <C> <C> <C>
Pacific $1,148,613 $1,086,817 33.4 35.2
South Atlantic 1,204,145 1,108,102 35 35.9
Midwest 652,296 571,206 19 18.5
Other 432,983 320,810 12.6 10.4
Total Mortgage Loans $3,438,037 $3,086,935 100 100
Property Type
Office $1,035,954 $1,001,258 30.1 32.4
Industrial 1,056,824 929,260 30.7 30.1
Retail 448,101 431,798 13 14
Residential 433,128 357,021 12.6 11.6
Church 184,259 160,560 5.4 5.2
Other 279,771 207,038 8.2 6.7
Total Mortgage Loans $3,438,037 $3,086,935 100 100
</TABLE>
The following table presents changes in the allowance for credit losses:
1996 1995
(Thousands)
Balance at January 1 $134,402 $142,402
Provision for Credit Losses 9,066 18,138
Charge offs -3,766 -26,138
Recoveries 0 134,402
Balance at December 31 $139,702 $134,402
AAL's investment in mortgage loans includes $281,876,000 and $261,500,000 of
loans that are considered to be impaired as of December 31, 1996 and 1995,
respectively, for which the related allowance for credit losses are $56,043,000
and $60,010,000 at December 31, 1996 and 1995, respectively. AAL recorded
interest income on impaired loans of $19,366,000 and $18,259,000 for 1996 and
1995 respectively.
Note 3. Deferred Acquisition Costs
The changes in deferred acquisition costs are as follows:
(Thousands)
<TABLE>
<CAPTION>
Life Universal Life Other Annuities Health Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, $404,955 $80,309 $228,918 $56,446 $770,628
1995
Acquisition costs
deferred
Commissions, net of 36,989 10,290 23,795 9,219 80,293
certificate charges
other costs 13,192 4,834 4,960 5,409 28,395
total deferred 50,181 15,124 28,755 14,628 108,688
Acquisition costs -49,084 -5,665 -18,907 -3,006 -76,662
amortized
Increase in deferred 1,097 9,459 9,848 11,622 32,026
acquisition costs
Decrease related to -70,645 -7,707 -80,762 0 -159,114
unrealized gains on
fixed maturities
recorded as a separate
component of
certificate owner
surplus
Total increase -69,548 1,752 -70,914 11,622 -127,088
(decrease)
Balance as of December 335,407 82,061 158,004 68,068 643,540
31, 1995
Acquisition costs
deferred
Commissions, net of 34,046 10,756 24,316 9,509 78,627
certificate charges
other costs 12,064 4,758 5,165 5,512 27,499
total deferred 46,110 15,514 29,481 15,021 106,126
Acquisition costs -59,213 -12,021 -14,915 -2430 -88,579
amortized
Increase in deferred -13,103 3,493 14,566 12,591 17,547
acquisition costs
Increase related to 19,160 1,936 22,332 0 43428
unrealized gains on
fixed maturities
recorded as a separate
component of
certificate owner
surplus
Total increase 6,057 5,429 36,898 12,591 60,975
(decrease)
Balance as of December $341,464 $87,490 $194,902 $80,659 $704,515
31, 1996
</TABLE>
Note 4. Retirement and Savings Plans
Retirement Plans
AAL has noncontributory defined benefit pension plans covering substantially all
home office and field employees. AAL makes annual contributions to the plans
that meet or exceed the minimum amounts specified by the Employee Retirement
Income Security Act of 1974. AAL contributed $6,993,000 and $4,778,000 to the
plans in 1996 and 1995, respectively. The accumulated benefit obligation does
not reflect the actual benefits that will be paid on retirement, but rather the
liability that would exist if the plans were terminated as of the valuation
dates. Therefore, as part of the funding process that considers future benefits,
net assets are held in excess of the accumulated benefit obligation. Pension
plan assets are invested primarily in corporate bonds, listed stocks and
commercial paper. The following tables set forth the amounts recognized in AAL's
financial statements and the plans' funding status.
December 31(in thousands)
1996 1995
Actuarial Value of Benefit
Obligations
Vested Benefits -$144,356 -$132,823
Nonvested Benefits -6,467 -5,854
Accumulated benefit Obligation -150,823 -138,677
Projected Benefit Obligation of -202,489 -190,028
Service Rendered to Date
Plan Assets at Fair Value 242837 213,512
Funded Status-Excess of Plan 40,348 23,484
Assets over Projected Benefit
Obligation
Unrecognized Net Loss from Actual -30,762 -13,876
Experience Different from that
Assumed and Impact of Changes in
Assumptions
Prior Service Benefit Not Yet 903 969
Recognized in Net Pension Cost
Unrecognized net obligation at -11,697 -13,733
transition to Statement 87 on
January 1, 1987, being recognized
over a period of 18 years
Accrued pension liability -1,208 -3,156
included in other liabilities
Net Pension Cost includes the
following components
Service Cost 8,902 7,736
Interest Cost 14,862 13,742
Actual return on Plan Assets -31,061 -45,008
Net Amortization and Deferred item 12,342 27,844
Net Pension Cost $5,045 $4,296
The following summarizes certain assumptions included in the preceding
schedules:
December 31, 1996 December 31, 1995
Assumed Discount Rate 8.0% 8.0%
Expected Long-Term Rate of Return 8.5% 8.5%
on Plan Assets
Rate of Increase in Future 4.0-6.0% 4.0-6.0%
Compensation levels
Savings Plan
AAL also has a contributory savings plan covering substantially all home office
and field employees. The plan is defined under Internal Revenue Code section
401(k) as a profit sharing savings plan that allows participant contributions on
a before-tax basis as well as an after-tax basis. AAL's total contributions to
the plan for 1996 and 1995 were $3,609,000 and $3,537,000, respectively.
Note 5. Postretirement Benefits Other Than Pensions
AAL provides health and life insurance benefits for substantially all retired
home office and field employees. AAL accrues for the projected future cost of
providing postretirement benefits other than pensions as an expense over the
service life of employees.
The following tables set forth the amounts recognized in AAL's financial
statements and the postretirement benefit plan's funding status
December 31(in thousands)
1996 1995
Actuarial Value of Benefit
Obligations:
Retirees -$18,915 -$18,957
Fully Eligible Plan Participants -6,301 -5,529
Other Active Participants -11,975 -11,318
Total Accumulated Other -37,191 -35,804
Postretirement Benefits
Unrecognized net Loss -2,848 -2,238
Other Post retirement Liabilities -$40,039 -$38,042
The components of the net periodic postretirement benefit cost reported in
operations are summarized as follows:
December 31(in thousands)
1996 1995
Service benefits earned $1,385 $1,354
Interest cost on benefit 2,771 3,063
obligation
Actual return on plan assets 0 0
Net amortization and deferral 0 0
Net periodic postretirement $4,156 $4,417
benefit
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.0 percent for 1996 and 1995, and generally, the health care
cost trend rate estimate was 6.0 percent per year. The health care cost trend
rate assumption can have a significant effect on the amounts reported. However,
a one percentage point increase in the assumed health care cost trend rate would
not be significant to AAL.
Note 6. Synopsis of Statutory Financial Results
The accompanying financial statements differ from those prepared in accordance
with statutory accounting practices prescribed or permitted by regulatory
authorities. The more significant differences are as follows: (a) certain
acquisition costs of new business are deferred and amortized rather than being
charged to operations as incurred; (b) the liabilities for future certificate
benefits and expenses are based on reasonably conservative estimates of expected
mortality, interest, withdrawals and future maintenance and settlement expenses
rather than using statutory rates for mortality and interest; (c) certain
assets, principally cost in excess of net assets acquired, furniture, equipment
and agents' debit balances are reported as assets rather than being charged to
certificate owners' surplus and excluded from the balance sheet; (d) the
interest maintenance reserve and asset valuation reserve are reported as part of
certificate owners' surplus rather than as a liability; and (e) revenues for
universal life and investment-type contracts include mortality, expense and
surrender charges levied against the certificate owners' accounts rather than
including as revenues the premiums received on these certificates. Expenses
include interest added to the certificate owners' accounts rather then reserve
changes related to the investment portion of these policies. Summarized
statutory-basis financial information for Aid Association for Lutherans
Fraternal Benefit Society on an unconsolidated basis is as follows:
December 31(in thousands)
1996 1995
Assets $16,671,018 $15,442,524
Liabilities 15,577,883 14,499,841
Unassigned Funds 1,093,135 942,683
Total Liabilities and Unassigned $16,671,018 $15,442,524
Funds
December 31(in thousands)
1996 1995
Premium Income and Certificate $1663,403 $1,665,995
Proceeds
Net Investment Income 1162,629 1,110,545
Other Income 23,647 17,179
Total Income $2849,679 $2,793,719
December 31(in thousands)
1996 1995
Reserve increase $741,518 $1,078,575
Certificate Owners' benefits 1,285,702 1,112,138
Surplus refunds 107,472 102,772
Commissions and operating costs 367,155 338,908
Other 226,097 48,955
Total benefits and expenses $2,727,944 $2,681,348
Note 7. Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the accompanying balance sheets for these
instruments approximate their fair values.
Investment Securities
Fair values for fixed maturity securities are based on quoted market prices
where available, or are estimated using values obtained from independent pricing
services. All fixed maturity issues are individually priced based on year-end
market conditions, the credit quality of the issuing company, the interest rate
and the maturity of the issue. The fair values for investments in equity
securities are based on quoted market prices.
Mortgage Loans
The fair values for mortgage loans are estimated using discounted cash flow
analyses, based on interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
Certificate Loans
The carrying amounts reported in the accompanying balance sheets for these loans
are considered to be reasonable estimates of their fair value.
Financial Liabilities
The fair values for AAL's liabilities under investment-type contracts, such as
deferred annuities and other liabilities, including supplementary contracts
without life contingencies, deferred income settlement options and refunds on
deposit, are estimated to be the cash surrender value payable upon immediate
withdrawal. These amounts are included in certificate reserves in the
accompanying balance sheets.
The cost and estimated fair value of AAL's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 Cost 1996 Estimated Fair 1995 Cost 1995 Estimated
Value Fair Value
(Thousands)
Financial Assets
<S> <C> <C> <C> <C>
Fixed maturities $11,362,776 $11,518,170 $10,752,845 $11,202,027
Equity Securities 396,788 539,113 364,732 453,398
Mortgage Loans 3,298,335 3,633,788 2,952,533 3,511,314
Cash and Cash 106,568 106,568 166,020 166,020
equivalents
Certificate loans 501,263 501,263 500,306 500,306
Financial Liabilities
Deferred Annuities 7,393,259 7,291,815 7,169,742 7,047,240
other 521,632 519,688 471,120 469,475
</TABLE>
Year Ended
December 31, 1996 December 31, 1996
Net gain from operations $121,735 $112,371
Net realized capital gain 7,967 2,095
Net income $129,702 $114,466
Note 8. Contingent Liabilities
AAL is involved in various lawsuits and contingencies that have arisen from the
normal conduct of business. Contingent liabilities arising from litigation, tax
and other matters are not considered material in relation to the financial
position of AAL. AAL has not made any provision in the financial statements for
liabilities, if any, that might ultimately result from these contingencies.
