<PAGE> 1
Registration No.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT
TO FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
----------------------------
NATIONWIDE VLI SEPARATE ACCOUNT-4
(EXACT NAME OF TRUST)
----------------------------
NATIONWIDE LIFE INSURANCE COMPANY
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(EXACT NAME AND ADDRESS OF DEPOSITOR AND REGISTRANT)
DENNIS W. CLICK
SECRETARY
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------------------
Approximate date of proposed public offering: (As soon as practicable after the
effective date of this Registration Statement).
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall therefore become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
1 of 84
<PAGE> 2
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
<S> <C>
1...................................................Nationwide Life Insurance Company
The Variable Account
2...................................................Nationwide Life Insurance Company
3...................................................Custodian of Assets
4...................................................Distribution of The Policies
5...................................................The Variable Account
6...................................................Not Applicable
7...................................................Not Applicable
8...................................................Not Applicable
9...................................................Legal Proceedings
10...................................................Information About The Policies; How
The Cash Value Varies; Right to
Exchange for a Fixed Benefit Policy;
Reinstatement; Other Policy
Provisions
11...................................................Investments of The Variable
Account
12...................................................The Variable Account
13...................................................Policy Charges
Reinstatement
14...................................................Underwriting and Issuance -
Premium Payments
Minimum Requirements for
Issuance of a Policy
15...................................................Investments of the Variable
Account; Premium Payments
16...................................................Underwriting and Issuance -
Allocation of Cash Value
17...................................................Surrendering The Policy for Cash
18...................................................Reinvestment
19...................................................Not Applicable
20...................................................Not Applicable
21...................................................Policy Loans
22...................................................Not Applicable
23...................................................Not Applicable
24...................................................Not Applicable
25...................................................Nationwide Life Insurance Company
26...................................................Not Applicable
27...................................................Nationwide Life Insurance Company
28...................................................Company Management
29...................................................Company Management
30...................................................Not Applicable
31...................................................Not Applicable
32...................................................Not Applicable
33...................................................Not Applicable
34...................................................Not Applicable
35...................................................Nationwide Life Insurance Company
36...................................................Not Applicable
37...................................................Not Applicable
38...................................................Distribution of The Policies
39...................................................Distribution of The Policies
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
<S> <C>
40....................................................Not Applicable
41(a).................................................Distribution of The Policies
42....................................................Not Applicable
43....................................................Not Applicable
44....................................................How The Cash Value Varies
45....................................................Not Applicable
46....................................................How The Cash Value Varies
47....................................................Not Applicable
48....................................................Custodian of Assets
49....................................................Not Applicable
50....................................................Not Applicable
51....................................................Summary of The Policies;
Information About The Policies
52....................................................Substitution of Securities
53....................................................Taxation of The Company
54....................................................Not Applicable
55....................................................Not Applicable
56....................................................Not Applicable
57....................................................Not Applicable
58....................................................Not Applicable
59....................................................Financial Statements
</TABLE>
2
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY
P.O. Box 182150
Columbus, Ohio 43218-2150
(800) 547-7548, TDD (800) 238-3035
LAST SURVIVOR FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES
ISSUED BY NATIONWIDE LIFE INSURANCE COMPANY
THROUGH ITS NATIONWIDE VLI SEPARATE ACCOUNT-4
The life insurance policies offered by this prospectus are last survivor
flexible premium variable life insurance policies (collectively referred to as
the "Policies"). The Policies are designed to provide life insurance coverage on
two named Insureds with a death benefit payable on the death of the last
surviving insured. The Policies afford flexibility to vary the amount and
frequency of premium payments. The Policies may also provide a Cash Surrender
Value if the Policies are is surrendered during the lifetime of either Insured.
Nationwide Life Insurance Company (the "Company") guarantees to keep the Policy
in force if certain requirements defined within this prospectus are met. The
death benefit and Cash Value of the Policies may vary to reflect the experience
of the Nationwide VLI Separate Account-4 (the "Variable Account") or the Fixed
Account to which Cash Values are allocated.
The Policies described in this prospectus are designed to meet the definition of
"life insurance" under Section 7702 of the Internal Revenue Code of 1986, as
amended (the "Code").
The Policy Owner may allocate Net Premiums and Cash Value to the Fixed Account
and to one or more of the Sub-Accounts. The assets of each Sub-Account will be
used to purchase shares at Net Asset Value, in one or more the following series
of the Underlying Mutual Fund options:
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.,
A MEMBER OF THE AMERICAN CENTURY(SM) FAMILY OF INVESTMENTS
American Century VP Income & Growth
American Century VP International
American Century VP Value
DREYFUS
The Dreyfus Socially Responsible Growth Fund, Inc.
Dreyfus Stock Index Fund, Inc.
Dreyfus Variable Investment Fund - Capital Appreciation Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Equity-Income Portfolio: Service Class
VIP Growth Portfolio: Service Class
VIP High Income Portfolio: Service Class*
VIP Overseas Portfolio: Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Contrafund Portfolio: Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
VIP III Growth Opportunities Portfolio: Service Class
MORGAN STANLEY
Morgan Stanley Universal Funds, Inc. - Emerging Markets Debt Portfolio
Van Kampen American Capital Life Investment Trust -
Morgan Stanley Real Estate Securities Portfolio
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Total Return Fund
Nationwide Balanced Fund
Nationwide Equity Income Fund
Nationwide Global Equity Fund
Nationwide High Income Bond Fund*
Nationwide Multi Sector Bond Fund*
Nationwide Select Advisers Mid Cap Fund
Nationwide Small Cap Value Fund
1
<PAGE> 5
Nationwide Small Company Fund
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
AMT Guardian Portfolio
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund (formerly "Oppenheimer
Capital Appreciation Fund")
Oppenheimer Growth Fund
Oppenheimer Growth & Income Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
WARBURG PINCUS TRUST
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
* These Underlying Mutual Funds may invest in lower quality debt securities
commonly referred to as junk bonds.
THE COMPANY GUARANTEES THAT THE DEATH BENEFIT FOR A POLICY WILL NEVER BE LESS
THAN THE SPECIFIED AMOUNT STATED ON THE POLICY DATA PAGES AS LONG AS THE POLICY
IS IN FORCE. THERE IS NO GUARANTEED CASH SURRENDER VALUE. THIS PROSPECTUS
GENERALLY DESCRIBES ONLY THAT PORTION OF THE CASH VALUE ALLOCATED TO THE
VARIABLE ACCOUNT. IF THE CASH SURRENDER VALUE IS INSUFFICIENT TO COVER THE
CHARGES UNDER THE POLICY, THE POLICY WILL LAPSE. FOR A BRIEF SUMMARY OF THE
FIXED ACCOUNT, SEE "THE FIXED ACCOUNT OPTION."
INVESTMENT S IN THESE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, ANY ADVISER OF THE UNDERLYING MUTUAL FUNDS IDENTIFIED
ABOVE, THE U.S. GOVERNMENT, OR ANY BANK OR BANK AFFILIATE. INVESTMENTS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. ANY INVESTMENT IN THE CONTRACT
INVOLVES CERTAIN INVESTMENT RISK WHICH MAY INCLUDE THE POSSIBLE LOSS OF
PRINCIPAL.
THE BENEFITS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN EVERY
JURISDICTION. PLEASE REFER TO YOUR POLICY FOR SPECIFIC BENEFIT INFORMATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES AND EXCHANGE COMMISSION MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT
CONTAINS ANY MATERIAL INCORPORATED BY REFERENCE RELATING TO THIS PROSPECTUS.
INFORMATION ABOUT THIS PRODUCT AND OTHER BEST OF AMERICA PRODUCTS CAN BE
OBTAINED FROM THE WORLD- WIDE WEB AT WWW.BESTOFAMERICA.COM.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS
FOR THE UNDERLYING MUTUAL FUND OPTION(S) BEING CONSIDERED MUST ACCOMPANY THIS
PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH.
THE DATE OF THIS PROSPECTUS IS _______________.
2
<PAGE> 6
GLOSSARY OF TERMS
ATTAINED AGE-The age on the Policy Date, plus the number of full years since the
Policy Date.
ACCUMULATION UNIT-An accounting unit of measure used to calculate the Variable
Account Cash Value.
AVERAGE ISSUE AGE- Arithmetic average of the ages of the two Insureds at Policy
issuance.
BASIC COVERAGE-One of the two types of coverage of which the Specified Amount is
comprised; the other type is Supplemental Coverage (see "Underwriting and
Issuance").
BENEFICIARY-The person to whom the Death Proceeds are paid.
CASH SURRENDER VALUE-The Policy's Cash Value less Indebtedness and Surrender
Charge, if any.
CASH VALUE-The sum of the associated values in the Variable Account, the Fixed
Account and the Policy Loan Account.
CODE-The Internal Revenue Code of 1986, as amended.
COMPANY-Nationwide Life Insurance Company.
DEATH PROCEEDS-Amount of money payable to the Beneficiary if both Insureds die
while the Policy is in force.
FIXED ACCOUNT-An investment option which is funded by the General Account of the
Company.
GENERAL ACCOUNT-All assets of the Company other than those of the Variable
Account or of other separate accounts that have been or may be established by
the Company.
HOME OFFICE-The main office of the Company located in Columbus, Ohio.
INDEBTEDNESS-Amounts owed the Company as a result of Policy loans including both
principal and accrued interest.
INITIAL PREMIUM-The Initial Premium is the premium required for coverage to
become effective on the Policy Date. It is shown on the Policy Data Page.
INSUREDS-The persons whose lives are covered by the Policy, and who are named on
the Policy Data Page.
IRS- The Internal Revenue Service.
IRS GUIDELINE LEVEL PREMIUM- The amount of level annual premium, calculated in
accordance with the provisions of the Internal Revenue Code of 1986, as amended,
guaranteed mortality and expense charges, and an interest rate of 4%.
ISSUE AGE- For each Insured, the Issue Age is the Insured's age on his or her
last birthday on or before the Policy Date.
LIFETIME DEATH BENEFIT GUARANTEE PREMIUM- The IRS Guideline Level Premium.
LIMITED DEATH BENEFIT GUARANTEE PERIOD- The period running from the Policy Date
to the Policy Anniversary on or next following the younger Insured's 75th
birthday.
LIMITED DEATH BENEFIT GUARANTEE PREMIUMS- The percentages as set forth in the
charts located in the "Grace Period" section of this prospectus of the IRS
Guideline Level Premium.
MATURITY DATE-The Policy Anniversary on or next following the younger Insured's
100th birthday.
MINIMUM MONTHLY PREMIUM- The amount of premium that must be paid during the
first three years of the Limited Death Benefit Guaranteed Period to keep the
Policy in force.
MONTHLY ANNIVERSARY DAY-The same day as the Policy Date for each succeeding
month.
NET AMOUNT AT RISK- The difference between the death benefit and the Policy's
Cash Value, each calculated at the beginning of the policy month.
NET ASSET VALUE- The value of one share of an Underlying Mutual Fund at the end
of a market day or at the close of the New York Stock Exchange. Net Asset Value
is computed by adding the value of all portfolio holdings plus other assets,
deducting liabilities and then dividing the result by the number of shares
outstanding.
3
<PAGE> 7
NET PREMIUMS-Net Premiums are equal to the actual premiums minus the percent of
premium charges. The percent of premium charges are shown on the Policy Data
Page.
POLICY ANNIVERSARY-The same day and month as the Policy Date for succeeding
years.
POLICY CHARGES-All deductions made from the Cash Value.
POLICY DATE-The date the provisions of the Policy take effect, as shown on the
Policy Data Page.
POLICY LOAN ACCOUNT-The Portion of the Cash Value which results from Policy
Indebtedness.
POLICY OWNER-The person designated in the Policy application as the Owner.
POLICY YEAR-Each year commencing with the Policy Date and each Policy
Anniversary thereafter.
SCHEDULED PREMIUM-The Scheduled Premium is shown on the Policy Data Page.
SEC-The United States Securities and Exchange Commission.
SEC GUIDELINE LEVEL PREMIUM-The amount of level annual premium, calculated in
accordance with the provisions of Rule 6e-3(T) under the Investment Company Act
of 1940, guaranteed mortality and expense charges, and an interest rate of 5%.
SPECIFIED AMOUNT- A dollar amount used to determine the death benefit of the
Policy. The Specified Amount is the sum of the Basic Coverage and any
Supplemental Coverage. The Specified Amount is shown on the Policy Data Page.
The minimum Specified Amount is $100,000.
SUB-ACCOUNTS- Separate and district divisions of the Variable Account to which
specific Underlying Mutual Fund shares are allocated and for which Accumulation
Units are separately maintained.
SUPPLEMENTAL COVERAGE-One of two types of coverage of which the Specified Amount
is comprised; the other type is Basic Coverage. Supplemental Coverage, if
elected at issuance, can never exceed 90% of the Specified Amount (see
"Underwriting and Issuance"). Supplemental Coverage is not available in New
York.
SURRENDER CHARGE-An amount deducted from the Cash Value if the Policy is
surrendered.
UNDERLYING MUTUAL FUNDS-The underlying Mutual Funds which correspond to the
Sub-Accounts.
VALUATION DATE-Each day both the New York Stock Exchange and the Home Office are
open for business or any other day during which there is a sufficient degree of
trading such that the current Net Asset Value of the Accumulation Units might be
materially affected.
VALUATION PERIOD-A period commencing with the close of business on a Valuation
Date and ending at the close of business for the next succeeding Valuation Date.
VARIABLE ACCOUNT-Nationwide VLI Separate Account-4, a separate investment
account of Nationwide Life Insurance Company.
4
<PAGE> 8
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
GLOSSARY OF TERMS...........................................................................................3
SUMMARY OF THE POLICIES.....................................................................................8
Variable Life Insurance................................................................................8
The Variable Account and its Sub-Accounts..............................................................8
The Fixed Account......................................................................................8
Deductions and Charges.................................................................................8
Premiums..............................................................................................10
Death Benefit Guarantees..............................................................................10
-Lifetime Death Benefit Guarantee.....................................................................10
-Limited Death Benefit Guarantee......................................................................10
NATIONWIDE LIFE INSURANCE COMPANY..........................................................................10
THE VARIABLE ACCOUNT.......................................................................................10
Investments of the Variable Account...................................................................11
American Century Variable Portfolios, Inc., a member of the American Century(sm)
Family of Investments.............................................................................12
Dreyfus Stock Index Fund, Inc.........................................................................12
Dreyfus Variable Investment Fund......................................................................13
The Dreyfus Socially Responsible Growth Fund, Inc. ...................................................13
Fidelity Variable Insurance Products Fund.............................................................13
Fidelity Variable Insurance Products Fund II..........................................................14
Fidelity Variable Insurance Products Fund III.........................................................14
Morgan Stanley Universal Funds, Inc...................................................................14
Nationwide Separate Account Trust.....................................................................15
Subadvised Nationwide Funds...........................................................................15
Neuberger & Berman Advisers Management Trust..........................................................18
Oppenheimer Variable Account Funds....................................................................18
Van Eck Worldwide Insurance Trust.....................................................................19
Van Kampen American Capital Life Investment Trust.....................................................19
Warburg Pincus Trust..................................................................................20
Reinvestment..........................................................................................20
Transfers.............................................................................................20
Dollar Cost Averaging.................................................................................21
Substitution of Securities............................................................................21
Voting Rights.........................................................................................22
INFORMATION ABOUT THE POLICIES.............................................................................22
Underwriting and Issuance.............................................................................22
-Minimum Requirements for Issuance of a Policy........................................................22
-Premium Payments.....................................................................................22
Allocation of Cash Value..............................................................................23
Short-Term Right to Cancel Policy.....................................................................23
POLICY CHARGES.............................................................................................23
Deductions from Premiums..............................................................................23
Surrender Charges.....................................................................................24
Deductions from Cash Value............................................................................25
-Monthly Cost of Insurance............................................................................25
-Monthly Administrative Expense Charge................................................................26
-Monthly Mortality Expense Risk Charge................................................................26
Reduction of Charges.................................................................................26
Expenses of the Underlying Mutual Funds...............................................................27
HOW THE CASH VALUE VARIES..................................................................................30
How the Investment Experience is Determined...........................................................30
Net Investment Factor.................................................................................30
Determining the Cash Value............................................................................31
Valuation Periods and Valuation Dates.................................................................31
SURRENDERING THE POLICY FOR CASH...........................................................................31
Right to Surrender....................................................................................31
</TABLE>
5
<PAGE> 9
<TABLE>
<S> <C>
Cash Surrender Value..................................................................................31
Partial Surrenders....................................................................................31
Maturity Proceeds.....................................................................................32
Income Tax Withholding................................................................................32
POLICY LOANS...............................................................................................32
Taking a Policy Loan..................................................................................32
Effect on Investment Performance......................................................................32
Interest..............................................................................................33
Effect on Death Benefit and Cash Value................................................................33
Repayment.............................................................................................33
HOW THE DEATH BENEFIT VARIES...............................................................................33
Calculation of the Death Benefit......................................................................33
THE CASH VALUE ACCUMULATION TEST...........................................................................34
Proceeds Payable on Death.............................................................................35
RIGHT OF CONVERSION........................................................................................35
CHANGES OF INVESTMENT POLICY...............................................................................35
GRACE PERIOD...............................................................................................35
-Without Death Benefit Guarantees.....................................................................35
-Lifetime Death Benefit Guarantee.....................................................................35
-Limited Death Benefit Guarantee......................................................................36
REINSTATEMENT..............................................................................................36
THE FIXED ACCOUNT OPTION...................................................................................37
CHANGES IN EXISTING INSURANCE COVERAGE.....................................................................37
Specified Amount Increases............................................................................37
Specified Amount Decreases............................................................................37
Changes in the Death Benefit Option...................................................................38
OTHER POLICY PROVISIONS....................................................................................38
Policy Owner..........................................................................................38
Beneficiary...........................................................................................38
Assignment............................................................................................38
Incontestability......................................................................................38
Error in Age or Sex...................................................................................39
Suicide...............................................................................................39
Nonparticipating Policies.............................................................................39
Riders................................................................................................39
LEGAL CONSIDERATIONS.......................................................................................39
DISTRIBUTION OF THE POLICIES...............................................................................39
CUSTODIAN OF ASSETS........................................................................................40
TAX MATTERS................................................................................................40
Policy Proceeds.......................................................................................40
-Non-Resident Aliens..................................................................................41
-Taxation of Policy Split Option Rider................................................................41
-Withholding..........................................................................................41
-Federal Estate and Generation Skipping Taxes.........................................................41
-Taxation of the Policy...............................................................................42
-Description of Cash Value Accumulation Test and Guideline Premium/Cash Value Corridor Test...........43
Taxation of the Company...............................................................................43
Tax Changes...........................................................................................43
THE COMPANY................................................................................................44
COMPANY MANAGEMENT.........................................................................................44
Directors of the Company..............................................................................45
Executive Officers of the Company.....................................................................46
OTHER CONTRACTS ISSUED BY THE COMPANY......................................................................47
STATE REGULATION...........................................................................................47
REPORTS TO POLICY OWNERS...................................................................................47
ADVERTISING................................................................................................47
YEAR 2000 COMPLIANCE ISSUES................................................................................47
</TABLE>
6
<PAGE> 10
<TABLE>
<S> <C>
LEGAL PROCEEDINGS..........................................................................................48
EXPERTS....................................................................................................48
REGISTRATION STATEMENT.....................................................................................48
LEGAL OPINIONS.............................................................................................48
APPENDIX ..................................................................................................49
FINANCIAL STATEMENTS.......................................................................................55
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
THE PRIMARY PURPOSE OF THE POLICIES IS TO PROVIDE LIFE INSURANCE PROTECTION FOR
THE BENEFICIARY NAMED IN THE POLICY. NO CLAIM IS MADE THAT THE POLICIES ARE IN
ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF AN UNDERLYING
MUTUAL FUND.
7
<PAGE> 11
SUMMARY OF THE POLICIES
VARIABLE LIFE INSURANCE
The Policies offered by the Company are offered on a "last survivor" basis. The
Policies provide life insurance coverage on two Insureds named in the Policy,
and the death benefit is paid on the death of the last surviving Insured. The
Policies also may provide a Cash Surrender Value if the Policy is surrendered
while the Policy is in force. The death benefit and cash value of the Policies
may vary to reflect the experience of the Nationwide VLI Separate Account-4 (the
"Variable Account") or the Fixed Account to which Cash Values are allocated (see
"How the Death Benefit Varies"). There is no guaranteed Cash Surrender Value
(see "How the Cash Value Varies"). If the Cash Surrender Value is insufficient
to pay Policy Charges, and neither Death Benefit Guarantee (see "Grace Period")
is in effect, the Policy will lapse without value. Under certain conditions, a
Policy may become a Modified Endowment Contract as a result of a material change
or a reduction in benefits as defined by the Code. Excess premiums paid also may
cause the Policy to become a Modified Endowment Contract. A loan, distribution,
or other amount received from a Modified Endowment Contract during the life of
any Insured will be taxed to the extent of any accumulated income on the
Contract. Subject to certain exceptions, any amounts that are taxable
withdrawals will be subject to a 10% tax penalty. The Company will monitor
premiums paid and other policy transactions and will notify the Policy Owner
when the Policy's non-Modified Endowment Contract status is in jeopardy (see
"Tax Matters").
THE VARIABLE ACCOUNT AND ITS SUB-ACCOUNTS
The Company places the Policy's Net Premiums in the Variable Account or the
Fixed Account at the time the Policy is issued. The Policy Owner chooses the
Sub-Accounts and/or the Fixed Account into which the Cash Value will be
allocated (see "Allocation of Cash Value"). Assets of each Sub-Account are
invested at Net Asset Value in shares of corresponding Underlying Mutual Funds.
For a description of the Underlying Mutual Fund options and their investment
objectives, see "Investments of the Variable Account."
THE FIXED ACCOUNT
The Fixed Account is funded by the assets of the General Account. Cash Values
allocated to the Fixed Account are credited with interest daily at a rate
declared by the Company. The interest rate declared is at the Company's sole
discretion, but may never be less than an effective annual rate of 4%.
DEDUCTIONS AND CHARGES
The Company deducts certain charges from the assets of the Variable Account and
the Cash Value of the Policy. These charges are made for sales expenses, tax
expenses, providing life insurance protection and assuming the mortality and
expense risks. For a discussion of any charges imposed by the Underlying Mutual
Fund options, see the prospectuses of the respective Underlying Mutual Funds.
The Company deducts a sales load from each premium payment, which will not
exceed 5.0% during the first ten policy years or 1.5% thereafter. Currently, the
sales load is 5.0% during the first ten policy years and 0% thereafter. The
total sales load actually deducted from any Policy will be equal to the sum of
the front-end sales load plus any sales surrender charge that may be deducted
from Policies that are surrendered. In addition, the portion of the increase
charges attributable to an increase in Specified Amount that reimburse the
Company for expenses incurred during distribution will be added to the total
sales load deduction.
For the State of New York these premium deductions are 9.5% currently and
guaranteed for years 1-10 and 6% guaranteed and 4.5% currently beginning in year
eleven.
The Company also deducts a tax expense charge of 3.5%, both current and
guaranteed, from all premium payments. This charge compensates the Company for
premium taxes imposed by various state and local jurisdictions and for federal
taxes imposed under Section 848 of the Code. The charge includes a premium tax
deduction of 2.25% and a federal tax deduction of 1.25%.
The Company also deducts the following charges from the Policy's Cash Value on
the Policy Date and each subsequent Monthly Anniversary Day reflecting the sum
of:
1. monthly cost of insurance;
2. monthly cost of any additional benefits provided by riders to the
Policy;
3. monthly administrative expense, and
8
<PAGE> 12
4. the monthly mortality and expense risk charges.
The current monthly administrative expense charge referenced to Item 3
above is the sum of the per Policy charge and the per $1,000 Basic
Coverage charge as set forth below:
<TABLE>
<CAPTION>
Monthly Monthly Per $1,000 Basic
Policy Year(s) Per Policy Coverage
-------------- ---------- --------
<S> <C> <C>
1-10 $10.00 $0.04 but not less than
$20.00 or more than $80 per
policy
11+ $5.00 $0.02 but not less than
$10.00 or more than $40 per
policy
</TABLE>
The charge for year 11+ may be increased at the sole discretion of the
Company but may not exceed the charge for years 1-10. After either an
increase or a decrease in Specified Amount, the per $1000 portion of the
monthly administrative expense charge is based on the new Basic Coverage
currently in effect. For Policies issued in the State of New York, this
per policy charge is equal to $7.50 per month in all years, both
currently and guaranteed. The monthly per $1,000 basic coverage charge in
New York is $0.04 per $1,000 per month in the first year only, currently
and guaranteed and $0.00 thereafter.
The Company also deducts a charge to assume mortality and expense risks. The
Mortality and Expense Risk Charges will be assessed on a monthly basis at the
beginning of each Policy month and will be calculated as a percentage of the
assets of the Variable Account only. This charge will be deducted proportionally
solely from the assets in the Sub-Accounts.
The Mortality and Expense Risk Charge is equivalent to an annual effective rate
of 0.55% for policy years 1-10. This charge varies starting at the beginning of
Policy Year eleven, depending upon the amount of the Cash Value. If the Cash
Value is less than $25,000, the Mortality and Expense Risk Charge will remain at
0.55%. If the Cash Value is between $25,000 and $99,999, then the Mortality and
Expense Risk Charge will be reduced to 0.35%. If the Cash Value equals or
exceeds $100,000, then the Mortality and Expense Risk Charge will be 0.20%.
These charges are all guaranteed. In New York the annual effective rate is 0.55%
in years 1-10 and 0.35% beginning in Policy Year eleven, regardless of Cash
Value.
The Company deducts a Surrender Charge from the Cash Value for any Policy
surrendered during the first 14 Policy Years unless the average issue age is
greater than or equal to age 75, in which case there is a Surrender Charge for
only the first nine Policy Years. This Surrender Charge is comprised of an
Underwriting Surrender Charge and a Sales Surrender Charge. The maximum initial
Surrender Charge varies by issue ages, sexes, and underwriting classifications
of the Insureds and is calculated based on the Basic Coverage on the Policy
Date. The following table illustrates the maximum initial Surrender Charge per
$1,000 of initial Basic Coverage for Policies which are issued on a male
non-tobacco preferred and a female non-tobacco other than preferred basis.
Tobacco, non-tobacco "other than preferred" and preferred are risk classes
determined at Policy issuance in accordance with the Company's underwriting
guidelines (see Appendix 1 for specific examples)
<TABLE>
<CAPTION>
Per $1,000 of
Average Issue Age Initial Basic Coverage
----------------- ----------------------
<S> <C>
35 $5.39
45 8.37
55 11.16
65 15.67
75 23.20
</TABLE>
This Surrender Charge does not apply to increases in Specified Amount (see
"Glossary"). For further discussion of the Surrender Charge, see "Surrender
Charges."
Underlying Mutual Fund shares are purchased at Net Asset Value, which reflects
the deduction of investment management fees and certain other expenses. The
management fees are charged by each Underlying Mutual Fund's investment adviser
for managing the Underlying Mutual Fund and selecting its portfolio of
securities. Other Underlying Mutual Fund expenses can include such items as
interest expense on loans and contracts with
9
<PAGE> 13
transfer agents, custodians, and other companies that provide services to the
Underlying Mutual Fund (see "Expenses of the Underlying Mutual Funds").
PREMIUMS
A Policy may be issued to Insureds at ages consistent with the Company's
underwriting guidelines.
For a limited time, the Policy Owner has the right to cancel the Policy and
receive a full refund of premiums paid (see "Short-term Right to Cancel
Policy").
The Initial Premium is due and will be credited on the Policy Date. Any due and
unpaid monthly deductions will be subtracted from the Cash Value on the Policy
Date. Insurance will not be effective until the Initial Premium is paid. The
Initial Premium is shown on the Policy Data Page. The Initial Premium may be
paid to the Company at its Home Office or to an authorized agent. A premium
receipt will be furnished upon request.
Premiums other than the Initial Premium may be paid at any time while the Policy
is in force. Each premium payment must be at least $50. All premiums after the
first are payable at the Home Office. The Company will send Scheduled Premium
payment reminder notices according to the premium mode shown in the Policy Data
Page. The Company reserves the right to require satisfactory evidence of
insurability before accepting any additional premium payment which results in an
increase in the Net Amount at Risk. The Net Amount at Risk is the difference
between the Death Benefit and the Cash Value, each calculated at the beginning
of the Policy month. Also, the Company will refund any portion of any premium
payment which is determined to be in excess of the premium limit established by
law to qualify the Policy as a contract of life insurance. Where permitted by
state law, the Company may also require that any existing Policy Indebtedness be
repaid prior to accepting any additional premium payments.
DEATH BENEFIT GUARANTEES
- -LIFETIME DEATH BENEFIT GUARANTEE: The Policy will not lapse if cumulative
premiums, less any indebtedness and partial withdrawals are greater than or
equal to cumulative Lifetime Death Benefit Guarantee Premiums (see "Grace
Period").
- -LIMITED DEATH BENEFIT GUARANTEE: The Policy will not lapse during the Limited
Death Benefit Guarantee Period if cumulative premiums, less any indebtedness and
partial withdrawals, are greater than or equal to cumulative Limited Death
Benefit Guarantee Premiums. The Limited Death Benefit Guarantee Period runs from
the Policy Date to the Policy Anniversary on or next following the younger
Insured's 75th birthday (see "Grace Period").
NATIONWIDE LIFE INSURANCE COMPANY
The Company is a stock life insurance company organized under the laws of the
State of Ohio in March, 1929. The Company is a member of the "Nationwide
Insurance Enterprise" with its Home Office at One Nationwide Plaza, Columbus,
Ohio 43215.
The Company is a provider of life insurance, annuities and retirement products.
It is admitted to do business in all states, the District of Columbia, and
Puerto Rico (for additional information, see "The Company").
THE VARIABLE ACCOUNT
The Variable Account was established by the Company on December 3, 1987,
pursuant to Ohio law. The Company has caused the Variable Account to be
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940 (the
"1940 Act"). Nationwide Life Insurance Company, One Nationwide Plaza, Columbus,
Ohio 43215 serves as Trustee for the Trust. Nationwide Advisory Services, Inc.,
One Nationwide Plaza, Columbus, Ohio 43215 serves as principal underwriter for
the Trust. Such registration does not involve supervision of the management of
the Variable Account or of the Company by the Securities and Exchange
Commission.
The Variable Account is a separate investment account of the Company and as
such, is not chargeable with the liabilities arising out of any other business
the Company may conduct. The Company does not guarantee the investment
performance of the Variable Account. The death benefit and Cash Value under the
Policy may vary with the investment performance of the investments in the
Variable Account (see "How the Death Benefit Varies" and "How the Cash Value
Varies").
10
<PAGE> 14
Premium payments and Cash Value are allocated within the Variable Account among
one or more Sub-Accounts (see "Tax Matters"). The assets of each Sub-Account are
used to purchase shares of the Underlying Mutual Fund options designated by the
Policy Owner. Thus, the investment performance of a Policy depends upon the
investment performance of the Underlying Mutual Fund options designated by the
Policy Owner.
INVESTMENTS OF THE VARIABLE ACCOUNT
At the time of application, the Policy Owner elects to have the Net Premiums
allocated among one or more of the Sub-Accounts and the Fixed Account (see
"Allocation of Cash Value"). During the period in which the Policy Owner may
exercise his or her short-term right to cancel the Policy, all Net Premiums not
allocated to the Fixed Account are placed in the NSAT- Money Market Fund. At the
expiration of the period in which the Policy Owner may exercise his or her
short-term right to cancel the Policy, shares of the Underlying Mutual Funds
specified by the Policy Owner are purchased at Net Asset Value for the
respective Sub-Accounts. Any subsequent Net Premiums received after this period
will be allocated based on the Underlying Mutual Fund allocation factors.
No less than 5% of Net Premiums may be allocated to any one Sub-Account or the
Fixed Account. The Policy Owner may change the allocation of Net Premiums or may
transfer Cash Value from one Sub-Account to another, subject to such terms and
conditions as may be imposed by each Underlying Mutual Fund option and as set
forth in this prospectus (see "Transfers", "Allocation of Cash Value", and
"Short-Term Right to Cancel Policy").
Each of the Underlying Mutual Fund options is a registered investment company
which receives investment advice from a registered investment adviser:
1. American Century Variable Portfolios, Inc., a member of the American
Century(sm) Family of Investments, managed by American Century
Investment Management, Inc.;
2. Dreyfus Stock Index Fund, managed by The Dreyfus Corporation/Mellon
Equity Associates;
3. The Dreyfus Socially Responsible Growth Fund, Inc., managed by The
Dreyfus Corporation/NCM Capital Management Group;
4. Dreyfus Variable Investment Fund, managed by The Dreyfus Corporation;
5. Fidelity Variable Insurance Products Fund: Service Class, managed by
Fidelity Management & Research Company;
6. Fidelity Variable Insurance Products Fund II: Service Class, managed
by Fidelity Management & Research Company;
7. Fidelity Variable Insurance Products Fund III: Service Class, managed
by Fidelity Management & Research Company;
8. Morgan Stanley Universal Funds, Inc. managed by Morgan Stanley Asset
Management, Inc.
9. Nationwide Separate Account Trust, managed by Nationwide Advisory
Services, Inc.;
10. Neuberger & Berman Advisers Management Trust, managed by Neuberger &
Berman Management Incorporated;
11. Oppenheimer Variable Accounts Funds, managed by OppenheimerFunds,
Inc.;
12. Van Eck Worldwide Insurance Trust, managed by Van Eck Associates
Corporation;
13. Van Kampen American Capital Life Investment Trust, managed by Van
Kampen American Capital Asset Management, Inc.; and
14. Warburg Pincus Trust, managed by Warburg Pincus Asset Management, Inc.
The Underlying Mutual Fund options are NOT available to the general public
directly. The Underlying Mutual Funds are available as investment options in
variable life insurance policies or variable annuity contracts issued by life
insurance companies or, in some cases, through participation in certain
qualified pension or retirement plans.
Some of the Underlying Mutual Funds have been established by investment advisers
which manage publicly traded mutual funds having similar names and investment
objectives. While some of the Underlying Mutual Funds may be similar to, and may
in fact be modeled after publicly traded mutual funds, Policy purchasers
11
<PAGE> 15
should understand that the Underlying Mutual Funds are not otherwise directly
related to any publicly traded mutual fund. Consequently, the investment
performance of publicly traded mutual funds and any corresponding Underlying
Mutual Funds may differ substantially.
A summary of investment objectives is contained in the description of each
Underlying Mutual Fund below. These Underlying Mutual Fund options are available
only to serve as the underlying investment for variable annuity and variable
life contracts issued through separate accounts of life insurance companies
which may or may not be affiliated, also known as "mixed and shared funding."
There are certain risks associated with mixed and shared funding, which is
disclosed in the Underlying Mutual Funds' prospectuses. A full description of
the Underlying Mutual Funds, their investment policies and restrictions, risks
and charges are contained in the prospectuses of the respective Underlying
Mutual Funds. A prospectus for the Underlying Mutual Fund option(s) being
considered must accompany this prospectus and should be read in conjunction
herewith.
A copy of each prospectus can be obtained without charge from the Company by
calling 1-800-547-7548, TDD 1-800-238-3035, or by writing P.O. Box 182150,
Columbus, Ohio 43218-2150. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT
OBJECTIVES WILL BE ACHIEVED.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC., MEMBER OF THE AMERICAN CENTURY(SM)
FAMILY OF INVESTMENTS.
American Century Variable Portfolios, Inc. was organized as a Maryland
corporation in 1987. It is a diversified, open-end investment management company
which offers its shares only as investment vehicles for variable annuity and
variable life insurance products of insurance companies. American Century
Variable Portfolios, Inc. is managed by American Century Investment Management,
Inc.
-AMERICAN CENTURY VP INCOME & GROWTH
Investment Objective: Dividend growth, current income and capital
appreciation. The Fund seeks to achieve its investment objective by
investing in common stocks. The investment manager constructs the
portfolio to match the risk characteristics of the S&P 500 Stock Index
and then optimizes each portfolio to achieve the desired balance of risk
and return potential. This includes targeting a dividend yield that
exceeds that of the S&P 500. Such a management technique known as
"portfolio optimization" may cause the Fund to be more heavily invested
in some industries than in others. However, the Fund may not invest more
than 25% of its total assets in companies whose principal business
activities are in the same industry.
-AMERICAN CENTURY VP INTERNATIONAL
Investment Objective: To seek capital growth. The Fund will seek to
achieve its investment objective by investing primarily in securities of
foreign companies that meet certain fundamental and technical standards
of selection and, in the opinion of the investment manager, have
potential for appreciation. Under normal conditions, the Fund will invest
at least 65% of its assets in common stocks or other equity securities of
issuers from at least three countries outside the United States. While
securities of United States issuers may be included in the portfolio from
time to time, it is the primary intent of the manager to diversify
investments across a broad range of foreign issuers. Although the primary
investment of the Fund will be common stocks (defined to include
depository receipts for common stock and other equity equivalents), the
Fund may also invest in other types of securities consistent with the
Fund's objective. When the manager believes that the total capital growth
potential of other securities equals or exceeds the potential return of
common stocks, the Fund may invest up to 35% of its assets in such other
securities. There can be no assurance that the Fund will achieve its
objectives.
-AMERICAN CENTURY VP VALUE
Investment Objective: The investment objective of the Fund is long-term
capital growth; income is a secondary objective. The equity securities in
which the Fund will invest will be primarily securities of
well-established companies with intermediate-to-large market
capitalizations that are believed by management to be undervalued at the
time of purchase. Under normal market conditions, the Fund expects to
invest at least 80% of the value of its total asset in equity securities,
including common and preferred stock, convertible preferred stock and
convertible debt obligations.
DREYFUS STOCK INDEX FUND, INC.
The Dreyfus Stock Index Fund, Inc. ("Fund") is an open-end, non-diversified,
management investment company incorporated under Maryland law on January 24,
1989 and commenced operations on September 29, 1989.
12
<PAGE> 16
The Fund offers its shares only as investment vehicles for variable annuity and
variable life insurance products of insurance companies. The Dreyfus Corporation
("Dreyfus") serves as the Fund's manager, while Mellon Equity Associates, an
affiliate of Dreyfus, serves as the Fund's index manager. Dreyfus is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned subsidiary
of Mellon Bank Corporation.
Investment Objective: To provide investment results that correspond to
the price and yield performance of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Composite Stock
Price Index. The Fund is neither sponsored by nor affiliated with
Standard & Poor's Corporation.
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund ("Fund") is an open-end, management investment
company. It was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts on October 29, 1986 and commenced operations
on August 31, 1990. The Fund offers its shares only as investment vehicles for
variable annuity and variable life insurance products of insurance companies.
Dreyfus serves as the Fund's manager. Fayez Sarofim & Company serves as the
sub-adviser and provides day-to-day management of the Portfolio.
-CAPITAL APPRECIATION PORTFOLIO
Investment Objective: The Portfolio's primary investment objective is to
provide long-term capital growth consistent with the preservation of
capital; current income is a secondary investment objective. This
Portfolio invests primarily in the common stocks of domestic and foreign
issuers.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end, diversified,
management investment company incorporated under Maryland law on July 20, 1992
and commenced operations on October 7, 1993. The Fund offers its share only as
investment vehicles for variable annuity and variable life insurance products of
insurance companies. Dreyfus serves as the Fund's investment adviser. NCM
Capital Management Group, Inc. serves as the Fund's sub-investment adviser and
provides day-to-day management of the Fund's portfolio.
Investment Objective: Capital growth through equity investment in
companies that, in the opinion of the Fund's advisers, not only meet
traditional investment standards, but which also show evidence that they
conduct their business in a manner that contributes to the enhancement
of the quality of life in America. Current income is secondary to the
primary goal.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fidelity Variable Insurance Products Fund (VIP) is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
November 13, 1981. Shares of VIP are purchased by insurance companies to fund
benefits under variable life insurance policies and variable annuity contracts.
Fidelity Management & Research Company ("FMR") is the manager for VIP and its
portfolios.
-VIP EQUITY-INCOME PORTFOLIO: SERVICE CLASS
Investment Objective: Reasonable income by investing primarily in
income-producing equity securities. In choosing these securities FMR also
will consider the potential for capital appreciation. The Portfolio's
goal is to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 Composite Stock Price
Index.
-VIP GROWTH PORTFOLIO: SERVICE CLASS
Investment Objective: Capital appreciation. This Portfolio will invest in
the securities of both well-known and established companies, and smaller,
less well-known companies which may have a narrow product line or whose
securities are thinly traded. These latter securities will often involve
greater risk than may be found in the ordinary investment security. FMR's
analysis and expertise plays an integral role in the selection of
securities and, therefore, the performance of the Portfolio. Many
securities which FMR believes would have the greatest potential may be
regarded as speculative, and investment in the Portfolio may involve
greater risk than is inherent in other underlying mutual funds. It is
also important to point out that this Portfolio makes sense for you if
you can afford to ride out changes in the stock market because it invests
primarily in common stocks. FMR can also make temporary investments in
securities such as investment-grade bonds, high-quality preferred stocks
and short-term notes, for defensive purposes when it believes market
conditions warrant.
13
<PAGE> 17
-VIP HIGH INCOME PORTFOLIO: SERVICE CLASS
Investment Objective: High level of current income by investing primarily
in high-risk, lower-rated, high-yielding, fixed-income securities, while
also considering growth of capital. FMR will seek high current income
normally by investing the Portfolio's assets as follows:
- at least 65% in income-producing debt securities and preferred
stocks, including convertible securities
- up to 20% in common stocks and other equity securities when
consistent with the Portfolio's primary objective or acquired as
part of a unit combining fixed-income and equity securities
Higher yields are usually available on securities that are lower-rated or
that are unrated. Lower-rated securities are usually defined as Ba or
lower by Moody's Investor Service, Inc. ("Moody's"); BB or lower by
Standard & Poor's and may be deemed to be of a speculative nature. The
Portfolio may also purchase lower-quality bonds such as those rated Ca3
by Moody's or C- by Standard & Poor's which provide poor protection for
payment of principal and interest (commonly referred to as "junk bonds").
For a further discussion of lower-rated securities, please see the "Risks
of Lower-Rated Debt Securities" section of the Portfolio's prospectus.
-VIP OVERSEAS PORTFOLIO: SERVICE CLASS
Investment Objective: Long-term capital growth primarily through
investments in foreign securities. This Portfolio provides a means for
investors to diversify their own portfolios by participating in companies
and economies outside the United States.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Fidelity Variable Insurance Products Fund II (VIP II) is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on March 21, 1988. VIP II's shares are purchased by insurance companies to
fund benefits under variable life insurance policies and variable annuity
contracts. FMR is the manager of VIP II and its portfolios.
-VIP II CONTRAFUND PORTFOLIO: SERVICE CLASS
Investment Objective: To seek capital appreciation by investing primarily
in companies that FMR believes to be undervalued due to an overly
pessimistic appraisal by the public. This strategy can lead to
investments in domestic or foreign companies, small and large, many of
which may not be well known. The Portfolio primarily invests in common
stock and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
The Fidelity Variable Insurance Products Fund III (VIP III) is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on July 14, 1994. VIP III's shares are purchased by insurance companies to
fund benefits under variable life insurance policies and variable annuity
contracts. FMR is the manager of VIP III and it's portfolios.
-VIP III GROWTH OPPORTUNITIES PORTFOLIO: SERVICE CLASS
Investment Objective: Capital growth by investing primarily in common
stocks and securities convertible into common stocks. The Portfolio,
under normal conditions, will invest at least 65% of its total assets in
securities of companies that FMR believes have long-term growth
potential. Although the Portfolio invests primarily in common stock and
securities convertible into common stock, it has the ability to purchase
other securities, such as preferred stock and bonds, that may produce
capital growth. The Portfolio may invest in foreign securities without
limitation.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Morgan Stanley Universal Funds, Inc. is a mutual fund designed to provide
investment vehicles for variable annuity contracts and variable life insurance
policies and for certain tax-qualified investors. Its Emerging Markets Debt
Portfolio is managed by Morgan Stanley Asset Management, Inc.
14
<PAGE> 18
-EMERGING MARKETS DEBT PORTFOLIO
Investment Objective: High total return by investing primarily in dollar
and non-dollar denominated fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which
the issuer is located.
NATIONWIDE SEPARATE ACCOUNT TRUST
Nationwide Separate Account Trust ("NSAT") is a diversified open-end management
investment company created under the laws of Massachusetts. NSAT offers shares
in the mutual funds listed below, each with its own investment objectives.
Shares of NSAT will be sold primarily to separate accounts to fund the benefits
under variable life insurance policies and variable annuity contracts issued by
life insurance companies. The assets of NSAT are managed by Nationwide Advisory
Services, Inc. ("NAS"), a wholly-owned subsidiary of Nationwide Life Insurance
Company.
-CAPITAL APPRECIATION FUND
Investment Objective: Long-term growth by primarily investing in a
diversified portfolio of the common stock of companies which NAS
determines have a better-than-average potential for sustained capital
growth over the long term.
-GOVERNMENT BOND FUND
Investment Objective: As high a level of income as is consistent with the
preservation of capital by investing in a diversified portfolio of
securities issued or backed by the U.S. Government, its agencies or
instrumentalities.
-MONEY MARKET FUND
Investment Objective: As high a level of current income as is considered
consistent with the preservation of capital and liquidity by investing
primarily in money market instruments.
-TOTAL RETURN FUND
Investment Objective: Capital growth by investing in common stocks of
companies that NAS believes will have above-average earnings or otherwise
provide investors with above-average potential for capital appreciation.
To maximize this potential, NAS may also utilize from time to time,
securities convertible into common stock, warrants and options to
purchase such stocks.
SUBADVISED NATIONWIDE FUNDS
-NATIONWIDE BALANCED FUND
Subadviser: Salomon Brothers Asset Management, Inc.
Investment Objective: Primarily seeks above-average income compared to a
portfolio entirely invested in equity securities. The Fund's secondary
objective is to take advantage of opportunities for growth of capital and
income. The Fund seeks its objective primarily through investments in a
broad variety of securities, including equity securities, fixed-income
securities and short term obligations. Under normal market conditions, it
is anticipated that the Fund will invest at least 40% of the Fund's total
assets in equity securities and at least 25% in fixed-income senior
securities. The Fund's subadviser, Salomon Brothers Asset Management,
Inc., will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of "investment grade" securities, but the Fund
may invest up to 20% of its net assets in non-convertible fixed-income
securities rated below investment grade or determined by the subadviser
to be of comparable quality. These securities are commonly known as junk
bonds. In addition, the Fund may invest an unlimited amount in
convertible securities rated below investment grade.
15
<PAGE> 19
-NATIONWIDE EQUITY INCOME FUND
Subadviser: Federated Investment Counseling
Investment Objective: Seeks above average income and capital appreciation
by investing at least 65% of its assets in income-producing equity
securities. Such equity securities include common stocks, preferred
stocks, and securities (including debt securities) that are convertible
into common stocks. The portion of the Fund's total assets invested in
each type of equity security will vary according to the Fund's
subadviser's assessment of market, economic conditions and outlook.
-NATIONWIDE GLOBAL EQUITY FUND
Subadviser: J. P. Morgan Investment Management Inc.
Investment Objective: To provide high total return from a globally
diversified portfolio of equity securities. Total return will consist of
income plus realized and unrealized capital gains and losses. The Fund
seeks its investment objective through country allocation, stock
selection and management of currency exposure. Under normal market
conditions, J.P. Morgan Investment Management Inc., intends to keep the
Fund essentially fully invested with at least 65% of the value of its
total assets in equity securities consisting of common stocks and other
securities with equity characteristics such as preferred stocks,
warrants, rights, convertible securities, trust certificates, limited
partnership interests and equity participations. The Fund's primary
equity instruments are the common stock of companies based in the
developed countries around the world. The assets of the Fund will
ordinarily be invested in the securities of at least five different
countries.
-NATIONWIDE HIGH INCOME BOND FUND
Subadviser: Federated Investment Counseling
Investment Objective: Seeks to provide high current income by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities. To meet its objective, the Fund intends to invest at
least 65% of its assets in lower-rated fixed income securities such as
preferred stocks, bonds, debentures, notes, equipment lease certificates
and equipment trust certificates which are rated BBB or lower by Standard
& Poor's or Fitch Investors Service or Baa or lower by Moody's (or if not
rated, are determined by the Fund's subadviser to be of a comparable
quality). Such investments are commonly referred to as "junk bonds." For
a further discussion of lower-rated securities, please see the "High
Yield Securities" section of the Fund's prospectus.
-NATIONWIDE MULTI SECTOR BOND FUND
Subadviser: Salomon Brothers Asset Management, Inc. with Salomon Brothers
Asset Management Limited
Investment Objective: Primarily seeks a high level of current income.
Capital appreciation is a secondary objective. The Fund seeks to achieve
its objectives by investing in a globally diverse portfolio of
fixed-income investments and by giving the subadviser, Salomon Brothers
Asset Management, Inc. broad discretion to deploy the Fund's assets among
certain segments of the fixed-income market that the subadviser believes
will best contribute to achievement of the Fund's investment objectives.
The Fund reserves the right to invest predominantly in securities rated
in medium or lower categories, or as determined by the subadviser to be
of comparable quality, commonly referred to as "junk bonds." Although the
subadviser has the ability to invest up to 100% of the Fund's assets in
lower-rated securities, the subadviser does not anticipate investing in
excess of 75% of the Fund's assets in such securities. The Subadviser has
entered into a subadvisory agreement with its London based affiliate,
Salomon Brothers Asset Management Limited, pursuant to which the
subadviser has delegated to Salomon Brothers Asset Management Limited
responsibility for management of the Fund's investments in non-dollar
denominated debt securities and currency transactions.
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<PAGE> 20
-NATIONWIDE SELECT ADVISERS MID CAP FUND
Subadvisers: First Pacific Advisors, Inc., Pilgrim Baxter & Associates,
Ltd., and Rice, Hall, James & Associates
Investment Objective: Capital appreciation by investing primarily in
equity securities of medium-sized companies (market capitalization
between $500 million and $7 billion). Under normal market conditions, the
Fund will invest in equity securities consisting of common stock,
preferred stock and securities convertible into common stocks, including
convertible preferred stock and convertible bonds. NAS has chosen the
Fund's subadvisers because they utilize a number of different investment
styles. In utilizing these different styles, NAS hopes to increase
prospects for investment return and to reduce market risk and volatility.
-NATIONWIDE SMALL CAP VALUE FUND
Subadviser: The Dreyfus Corporation
Investment Objective: Capital appreciation through investment in a
diversified portfolio of equity securities of companies with a median
market capitalization of approximately $1 billion. Under normal market
conditions, at least 75% of the Fund's total assets will be invested in
equity securities of companies with market capitalizations at the time of
purchase of between $200 million and $2.5 billion. The Fund will invest
in equity securities of domestic and foreign issuers characterized as
"value" companies according to criteria established by The Dreyfus
Corporation, the Fund's subadviser.
-NATIONWIDE SMALL COMPANY FUND
Subadvisers: The Dreyfus Corporation, Neuberger & Berman, L.P., Pictet
International Management Limited with Van Eck Associates Corporation,
Strong Capital Management, Inc. and Warburg Pincus Asset Management, Inc.
Investment Objective: Long-term growth of capital by investing primarily
in equity securities of domestic and foreign companies with market
capitalizations of less than $1 billion at the time of purchase. The
subadvisers were chosen because they utilize a number of different
investment styles when investing in small company stocks. By utilizing
different investment styles, NAS hopes to increase prospects for
investment return and to reduce market risk and volatility.
-NATIONWIDE STRATEGIC GROWTH FUND
Subadviser: Strong Capital Management Inc.
Investment Objective: Capital growth by investing primarily in equity
securities that the Fund's subadviser believes have above-average growth
prospects. The Fund will generally invest in companies whose earnings are
believed to be in a relatively strong growth trend, and to a lesser
extent, in companies in which significant further growth is not
anticipated but whose market value is thought to be undervalued. Under
normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities, including common stocks, preferred stocks,
and securities convertible into common or preferred stocks, such as
warrants and convertible bonds. The Fund may invest up to 35% of its
total assets in debt obligations, including intermediate- to long-term
corporate or U.S. Government debt securities.
-NATIONWIDE STRATEGIC VALUE FUND
Subadviser: Strong Capital Management Inc./Schafer Capital Management
Inc.
Investment Objective: Primarily long-term capital appreciation; current
income is a secondary objective. The Fund seeks to meet its objectives by
investing in securities which are believed to offer the possibility of
increase in value, primarily common stocks of established companies
having a strong financial position and a low stock market valuation at
the time of purchase in relation to investment value. Other than
considered appropriate for cash reserves, the Fund will generally
maintain a fully invested position in common stocks of publicly held
companies, primarily in stocks of companies listed on a national
securities exchange or other equity securities (common stock or
securities convertible into common stock). Investments may also be made
in debt securities which are convertible into common stocks and in
warrants or other rights to purchase common stock, which in such case are
considered equity securities by the Fund. Strong Capital Management, Inc.
has subcontracted with Schafer Capital Management, Inc. to subadvise the
Fund.
17
<PAGE> 21
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Neuberger & Berman Advisers Management Trust ("N&B AMT") is an open-end,
diversified management investment company consisting of several series. Shares
of the series of N&B AMT are offered in connection with certain variable annuity
contracts and variable life insurance policies issued through life insurance
company separate accounts and are also offered directly to qualified pension and
retirement plans outside of the separate account context.
The Guardian, Partners and Mid-Cap Growth Portfolios of N&B AMT invest all of
their investable assets in a corresponding series of Advisers Managers Trust
managed by Neuberger & Berman Management Incorporated ("N&B Management"). Each
series then invests in securities in accordance with an investment objective,
policies and limitations identical to those of the Portfolio. This
"master/feeder fund" structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
(For more information regarding "master/feeder fund" structure, see "Special
Information Regarding Organization, Capitalization, and Other Matters" in the
underlying mutual fund prospectus.) The investment advisor is N&B Management.
-AMT GUARDIAN PORTFOLIO
Investment Objective: Capital appreciation and secondarily, current
income. The Portfolio and its corresponding series seek to achieve these
objectives by investing in common stocks of long-established,
high-quality companies. N&B Management uses a value-oriented investment
approach in selecting securities, looking for low price-to-earnings
ratios, strong balance sheets, solid management, and consistent earnings.
-AMT MID-CAP GROWTH PORTFOLIO
Investment Objective: Capital appreciation by investing in equity
securities of medium-sized companies that N&B Management believes have
the potential for long-term, above-average capital appreciation.
Medium-sized companies have market capitalizations form $300 million to
$10 billion at the time of investment. The Portfolio and its
corresponding series may invest up to 10% of its net assets, measured at
the time of investment, in corporate debt securities that are below
investment grade or, if unrated, deemed by N&B Management to be of
comparable quality. Securities that are below investment grade, as well
as unrated securities, are often considered to be speculative and usually
entail greater risk. As a part of the Portfolio's investment strategy,
the Portfolio may invest up to 20% of its net assets in securities of
issuers organized and doing business principally outside the United
States. This limitation does not apply with respect to foreign securities
that are denominated in U.S. dollars.
-AMT PARTNERS PORTFOLIO
Investment Objective: Capital growth by investing primarily in the common
stock of established companies. Its investment program seeks securities
believed to be undervalued based on fundamentals such as low
price-to-earnings ratios, consistent cash flows, and the company's track
record through all parts of the market cycle.
OPPENHEIMER VARIABLE ACCOUNT FUNDS
The Oppenheimer Variable Account Funds are an open-end, diversified management
investment company organized as a Massachusetts business trust in 1984. Shares
of the Funds are sold to provide benefits under variable life insurance policies
and variable annuity contracts. OppenheimerFunds, Inc. is the investment
adviser.
-OPPENHEIMER AGGRESSIVE GROWTH FUND (FORMERLY "OPPENHEIMER CAPITAL
APPRECIATION FUND")
Investment Objective: Capital appreciation by investing in "growth type"
companies. Such companies are believed to have relatively favorable
long-term prospects for increasing demand for their goods or services, or
to be developing new products, services or markets and normally retain a
relatively larger portion of their earnings for research, development and
investment in capital assets. The Fund may also invest in cyclical
industries in "special situations" that OppenheimerFunds, Inc. believes
present opportunities for capital growth.
18
<PAGE> 22
-OPPENHEIMER GROWTH FUND
Investment Objective: Capital appreciation by investing in securities of
well-known established companies. Such securities generally have a
history of earnings and dividends and are issued by seasoned companies
(companies which have an operating history of at least five years
including predecessors). Current income is a secondary consideration in
the selection of the Fund's portfolio securities.
-OPPENHEIMER GROWTH & INCOME FUND
Investment Objective: High total return, which stocks, preferred stocks,
convertible securities and warrants. Debt investments will include bonds,
participation includes growth in the value of its shares as well as
current income from quality and debt securities. In seeking its
investment objectives, the Fund may invest in equity and debt securities.
Equity investments will include common interests, asset-backed
securities, private-label mortgage-backed securities and CMOs, zero
coupon securities and U.S. debt obligations, and cash and cash
equivalents. From time to time, the Fund may focus on small to medium
capitalization issuers, the securities of which may be subject to greater
price volatility than those of larger capitalized issuers.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust ("Van Eck Trust") is an open-end management
investment company organized as a business trust under the laws of the
Commonwealth of Massachusetts on January 7, 1987. Shares of Van Eck Trust are
offered only to separate accounts of insurance companies to fund the benefits of
variable life insurance policies and variable annuity contracts. The investment
advisor and manager is Van Eck Associates Corporation.
-WORLDWIDE EMERGING MARKETS FUND
Investment Objective: Seeks long-term capital appreciation by investing
primarily in equity securities in emerging markets around the world. The
Fund emphasizes investment in countries that, compared to the world's
major economies, exhibit relatively low gross national product per
capita, as well as the potential for rapid economic growth.
-WORLDWIDE HARD ASSETS FUND
Investment Objective: Long-term capital appreciation by investing
primarily in "Hard Asset Securities." For the Fund's purpose, "Hard
Assets" are real estate, energy, timber, and industrial and precious
metals. Income is a secondary consideration.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Van Kampen American Capital Life Investment Trust is an open-end diversified
management investment company organized as a Delaware business trust. Shares are
offered in separate portfolios which are sold only to insurance companies to
provide funding for variable life insurance policies and variable annuity
contracts. Van Kampen American Capital Asset Management, Inc. serves as the
Fund's investment adviser.
- MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
Investment Objective: Long-term capital growth by investing principally
in a diversified portfolio of securities of companies operating in the
real estate industry ("Real Estate Securities"). Current income is a
secondary consideration. Real Estate Securities include equity
securities, including common stocks and convertible securities, as well
as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a company that
derives at least 50% of its assets (marked to market), gross income or
net profits from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of real estate
investment trusts. The Portfolio may invest up to 25% of its total assets
in securities issued by foreign issuers, some or all of which may also be
Real Estate Securities.
19
<PAGE> 23
WARBURG PINCUS TRUST
The Warburg Pincus Trust is an open-end management investment company organized
in March 1995 as a business trust under the laws of The Commonwealth of
Massachusetts. The Trust offers its shares to insurance companies for allocation
to separate accounts for the purpose of funding variable annuity and variable
life contracts. Portfolios are managed by Warburg Pincus Asset Management, Inc.
("Warburg").
-GROWTH & INCOME PORTFOLIO
Investment Objective: Long-term growth of capital and income by investing
primarily in dividend-paying equity securities. Under normal market
conditions, the Portfolio will invest substantially all of its asset in
equity securities that Warburg considers to be relatively undervalued
based upon research and analysis, taking into account factors such as
price/book ratio, price/cash flow ratio, earnings growth, debt/capital
ratio and multiples of earnings of comparable securities. Although the
Portfolio may hold securities of any size, it currently expects to focus
on companies with market capitalizations of $1 billion or greater at the
time of initial purchase.
-INTERNATIONAL EQUITY PORTFOLIO
Investment Objective: Long-term capital appreciation by investing
primarily in a broadly diversified portfolio of equity securities of
companies, wherever organized, that in the judgment of Warburg have their
principal business activities and interests outside the United States.
The Portfolio will ordinarily invest substantially all of its assets, but
no less than 65% of its total assets, in common stocks, warrants and
securities convertible into or exchangeable for common stocks. The
Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing
international economies and markets through increased earning power and
improved utilization or recognition of assets.
-POST-VENTURE CAPITAL PORTFOLIO
Investment Objective: Long-term growth of capital by investing primarily
in equity securities of issuers in their post-venture capital stage of
development and pursues an aggressive investment strategy. Under normal
market conditions, the Portfolio will invest at least 65% of its total
assets in equity securities of "post-venture capital companies." A
post-venture capital company is one that has received venture capital
financing either: (a) during the early stages of the company's existence
or the early stages of the development of a new product or service; or
(b) as part of a restructuring or recapitalization of the company. The
Portfolio may invest up to 10% of its assets in venture capital and other
investment funds.
REINVESTMENT
The Underlying Mutual Funds described above have as a policy the distribution of
dividends in the form of additional shares (or fractions thereof) of the
Underlying Mutual Funds. The distribution of additional shares will not affect
the number of Accumulation Units attributable to a particular Policy.
TRANSFERS
After the first Policy Anniversary, the Policy Owner may annually transfer a
portion of the value of the Variable Account to the Fixed Account, without
penalty or adjustment. The Policy Owner may request a transfer of up to 100% of
the Cash Value from the Variable Account to the Fixed Account. The Company
reserves the right to restrict transfers to the Fixed Account to 25% of the Cash
Value. The Policy Owner's Cash Value in each Sub-Account will be determined as
of the date the transfer request is received in the Home Office in good order.
The Policy Owner may transfer a portion of the value of the Fixed Account to the
Variable Account once each Policy Year, without penalty or adjustment. The
Policy Owner may request a transfer of up to 100% of the Cash Value in the Fixed
Account to the Sub-Accounts. The Company reserves the right to restrict the
amounts of such transfers to 25% of the Cash Value in the Fixed Account.
Transfers may be made once per Valuation Date and may be made either in writing
or, in states allowing such transfers, by telephone. In states allowing
telephone transfers, and if the Policy Owner so elects, the Company will also
permit the Policy Owner to utilize the Telephone Exchange Privilege for
exchanging amounts among Sub-Account options. The Company will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Such procedures may include any or all of the following, or such other
procedures as the Company may, from time to time, deem reasonable: requesting
identifying information, such as name, contract number, Social Security Number,
and/or personal identification number; tape recording all telephone
transactions; and providing written confirmation thereof to both the Policy
Owner and any agent of
20
<PAGE> 24
record at the last address of record. Although failure to follow reasonable
procedures may result in the Company's liability for any losses due to
unauthorized or fraudulent telephone transfers, the Company will not be liable
for following instructions communicated by telephone which it reasonably
believes to be genuine. Any losses incurred pursuant to actions taken by the
Company in reliance on telephone instructions reasonably believed to be genuine
will be borne by the Contract Owner. The Company may determine to withdraw the
Telephone Exchange Privilege, upon 30 days written notice to Policy Owners.
Policy Owners who have entered into a Dollar Cost Averaging Agreement with the
Company (see "Dollar Cost Averaging" below) may transfer from the Fixed Account
to the Variable Account under the terms of that agreement.
Policies described in this prospectus may in some cases be sold to individuals
who independently utilize the services of a firm or individual engaged in market
timing. Generally, such firms or individuals obtain authorization from multiple
Policy Owners to make transfers and exchanges among the Sub-Accounts on the
basis of perceived market trends. Because of the unusually large transfers of
funds associated with some of these transactions, the ability of the Company or
Underlying Mutual Funds to process such transactions may be compromised, and the
execution of such transactions may possibly disadvantage or work to the
detriment of other Policy Owners not utilizing market timing services.
Accordingly, the right to exchange Cash Surrender Values among the Sub-Accounts
may be subject to modification if such rights are exercised by a market timing
firm or any other third party authorized to initiate transfer or exchange
transactions on behalf of multiple Policy Owners. THE RIGHTS OF INDIVIDUAL
POLICY OWNERS TO EXCHANGE CASH SURRENDER VALUES, WHEN INSTRUCTIONS ARE SUBMITTED
DIRECTLY BY THE POLICY OWNER, OR BY THE POLICY OWNER'S REPRESENTATIVE OF RECORD
AS AUTHORIZED BY THE EXECUTION OF A VALID NATIONWIDE LIMITED POWER OF ATTORNEY
FORM, WILL NOT BE MODIFIED IN ANY WAY. In modifying such rights, the Company
may, among other things, not accept: (1) the transfer or exchange instructions
of any agent acting under a power of attorney on behalf of more than one Policy
Owner; or (2) the transfer or exchange instructions of individual policy owners
who have executed pre-authorized transfer or exchange forms which are submitted
by market timing firms or other third parties on behalf of more than one Policy
Owner at the same time. The Company will not impose any such restrictions or
otherwise modify exchange rights unless such action is reasonably intended to
prevent the use of such rights in a manner that will disadvantage or potentially
impair the contract rights of other Policy Owners.
DOLLAR COST AVERAGING
The Policy Owner may direct the Company to automatically transfer from the
NSAT-Government Bond Fund, Fidelity VIP High Income Portfolio, NSAT-Money Market
Fund, NSAT-Nationwide High Income Bond Fund or the Fixed Account, to any other
Sub-Account within the Variable Account. Dollar Cost Averaging will occur on a
monthly basis or on another frequency permitted by the Company. Dollar Cost
Averaging is a long-term investment program which provides for regular, level
investments over time. The Company makes no guarantees that Dollar Cost
Averaging will result in a profit or protect against loss. To qualify for Dollar
Cost Averaging, there must be a minimum total Cash Value, less Policy
Indebtedness, of $15,000. The minimum monthly transfer is $100. In addition,
Dollar Cost Averaging monthly transfers from the Fixed Account must be equal to
or less than 1/30th of the Fixed Account value when the program is requested.
Transfers will be processed until either the value in the originating funds is
exhausted or the Policy Owner instructs the Home Office in writing to cancel the
transfers.
The Company reserves the right to discontinue establishing new Dollar Cost
Averaging programs. The Company also reserves the right to assess a processing
fee for this service.
SUBSTITUTION OF SECURITIES
If shares of the Underlying Mutual Fund options should no longer be available
for investment by the Variable Account or, if in the judgment of the Company's
management, further investment in such Underlying Mutual Funds should become
inappropriate in view of the purposes of the Policy, the Company may substitute
shares of another Underlying Mutual Fund for shares already purchased or to be
purchased in the future by Net Premium payments under the Policy. No
substitution of securities in the Variable Account may take place without prior
approval of the Securities and Exchange Commission, and under such requirements
as it and any state insurance department may impose.
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<PAGE> 25
VOTING RIGHTS
Voting rights under the Policies apply ONLY with respect to Cash Value allocated
to the Sub-Accounts.
In accordance with its view of applicable law, the Company will vote the shares
of the Underlying Mutual Funds at regular and special meetings of the
shareholders. These shares will be voted in accordance with instructions
received from Policy Owners. If the 1940 Act or any regulation thereunder should
be amended or if the present interpretation changes permitting the Company to
vote the shares of the Underlying Mutual Funds in its own right, the Company may
elect to do so.
The Policy Owner is the person who has voting interest under the Policy. The
number of Underlying Mutual Fund shares attributable to each Policy Owner is
determined by dividing any portion of the Policy's Cash Value derived from
participation in that Underlying Mutual Fund by the Net Asset Value of one share
of that Underlying Mutual Fund.
The number of shares which may be voted will be determined as of a date chosen
by the Company, but not more than 90 days prior to the meeting of the Underlying
Mutual Fund. Each person having a voting interest will receive periodic reports
relating to the Underlying Mutual Fund, proxy material and a form with which to
give such voting instructions.
Voting instruction will be solicited by written communication at least 21 days
prior to such meeting. Underlying Mutual Fund shares held by the Company or by
the Variable Account as to which no timely instructions are received will be
voted by the Company in the same proportion as the voting instructions which are
received.
Notwithstanding contrary Policy Owner voting instructions, the Company may vote
Underlying Mutual Fund shares in any manner necessary to enable the Underlying
Mutual Fund to: (1) make or refrain from making any change in the investments or
investment policies for any of the Underlying Mutual Funds, if required by an
insurance regulatory authority; (2) refrain from making any change in the
investment policies or any investment adviser or principal underwriter of any
portfolio which may be initiated by Policy Owners or the Underlying Mutual
Fund's Board of Directors, provided the Company's disapproval of the change is
reasonable and, in the case of a change in the investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise inappropriate in light of the portfolio's objective
and purposes; or (3) enter into or refrain from entering into any advisory
agreement or underwriting contract, if required by any insurance regulatory
authority.
INFORMATION ABOUT THE POLICIES
UNDERWRITING AND ISSUANCE
- -Minimum Requirements for Issuance of a Policy
The Policies provide life insurance coverage and the flexibility to vary the
amount and frequency of premium payments, subject to applicable tax
requirements. At issue of the Policy, the Policy Owner selects the premium and
Specified Amount, which consists of the Basic Coverage and Supplemental
Coverage, if any. The proportion of Supplemental Coverage is irrevocably elected
by the Policy Owner at issue, and thus, once elected such proportion cannot
change. A Policy Owner can apply to increase or decrease the Specified Amount no
more than once per Policy Year.
The minimum Specified Amount is $100,000. Supplemental Coverage cannot exceed
90% of the Specified Amount.
The Supplemental Coverage differs from the Basic Coverage in several respects:
(1) Supplemental Coverage has lower cost of insurance rates, on a current basis;
(2) has no Surrender charges; and (3) has no monthly per unit charge, on a
current basis. Supplemental Coverage is not available for Policies issued in the
State of New York.
Policies may be issued to Insureds at ages consistent with the Company's
underwriting guidelines. Before issuing any Policy, the Company requires
satisfactory evidence of insurability which may include medical examinations.
- -Premium Payments
The Initial Premium for a Policy is payable in full to an authorized agent or at
the Home Office. Upon payment of an initial premium, temporary insurance may be
provided, subject to a maximum amount. The effective date of
22
<PAGE> 26
permanent insurance coverage is dependent upon completion of all underwriting
requirements, payment of the entire Initial Premium, and delivery of the Policy
while both Insureds are still living.
Each premium payment must be at least $50. Additional premium payments may be
made at any time while the Policy is in force. However, the Company reserves the
right to require satisfactory evidence of insurability before accepting any
additional premium payment which results in an increase in the net amount at
risk. Also, the Company will refund any portion of any premium payment which is
determined to be in excess of the premium limit established by law to qualify
the Policy as a contract for life insurance. Where permitted by state law, the
Company may also require that any existing Policy Indebtedness be repaid prior
to accepting any additional premium payments. Additional premium payments or
other changes to the contract, may jeopardize the Policy's non-modified
endowment status. The Company will monitor premiums paid and other Policy
transactions and will notify the Policy Owner when non-modified endowment
contract status is in jeopardy (see "Tax Matters").
ALLOCATION OF CASH VALUE
When the Policy is issued, the Net Premiums will be allocated to the NSAT- Money
Market Fund (for any Net Premiums allocated to a Sub-Account on the application)
or to the Fixed Account until the expiration of the period in which the Policy
Owner may exercise his or her short-term right to cancel the Policy (see
"Short-Time Right to Cancel Policy"). At the expiration of the period in which
the Policy Owner may exercise his or her short term right to cancel the Policy,
shares of the Underlying Mutual Funds specified by the Policy Owner will be
purchased at Net Asset Value for the respective Sub-Account(s). The Policy Owner
may change the allocation of Net Premiums or may transfer Cash Value from one
Sub-Account to another, subject to such terms and conditions as may be imposed
by each Underlying Mutual Fund and as set forth in the prospectus. Net Premiums
allocated to the Fixed Account at the time of application may not be transferred
prior to the first Policy Anniversary (see "Transfers" and "Investments of the
Variable Account").
The designation of investment allocations will be made by the prospective Policy
Owner at the time of application for a Policy. The Policy Owner may change the
way in which future Net Premiums are allocated by giving written notice to the
Company. All percentage allocations must be in whole numbers, and must be at
least 5%. The sum of allocations must equal 100%.
SHORT-TERM RIGHT TO CANCEL POLICY
A Policy may be returned for cancellation and a full refund of premium within 10
days after the Policy is received, within 45 days after the application for
insurance is signed, or within 10 days after the Company mails or delivers a
Notice of Right of Withdrawal, whichever is latest. The Policy can be mailed or
delivered to the registered representative who sold it, or to the Company.
Immediately after such mailing or delivery, the Policy will be deemed void from
the beginning. The Company will refund either the total premiums paid or, the
Cash Value less Indebtedness, as prescribed by the state in which the Policy was
issued, within seven days after it receives the Policy. The scope of this right
may vary by state. The Policy provision approved or used in a particular state
will be disclosed in any Policy issued.
POLICY CHARGES
DEDUCTIONS FROM PREMIUMS
The Company deducts a sales load from each premium payment which will not exceed
5.0% of such premium payment during the first ten policy years or 1.5% of such
premium payment thereafter. Currently, the sales load is 5.0% during the first
ten policy years and 0% thereafter. The total sales load actually deducted from
any Policy will be equal to the sum of this front-end sales load plus any sales
surrender charge that may be deducted from Policies that are surrendered. In
addition, the portion of the increase charges that reimburse the Company for
expenses incurred during distribution will be added to the total sales load
deduction.
The Company also deducts a tax expense charge of 3.5%, both current and
guaranteed, from all premium payments. This charge reimburses the Company for
premium taxes imposed by various state and local jurisdictions and for federal
taxes imposed under Section 848 of the Code. This Charge includes a premium tax
deduction of 2.25% and a federal tax deduction of 1.25%.
The 2.25% premium tax deduction approximates the Company's average expense for
state and local premium tax. Premium taxes vary by jurisdiction ranging from
zero to more than 4%. The premium tax deduction is made whether or not any
premium tax applies and the deduction may be higher or lower than the premium
tax imposed. The 1.25% federal tax deduction is designed to reimburse the
Company for expenses incurred from
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<PAGE> 27
federal taxes imposed under Section 848 of the Code (enacted by the Omnibus
Budget Reconciliation Act of 1990). The Company does not expect to make a profit
from the tax expense charge.
For the State of New York these premium deductions are 9.5% currently and
guaranteed for years 1-10 and 6% guaranteed and 4.5% currently beginning in year
eleven.
SURRENDER CHARGES
The Company deducts a Surrender Charge from the Policy's Cash Value for any
Policy surrendered during the first fourteen Policy Years, unless the average
issue age is greater than or equal to age 75, in which case there is a Surrender
Charge for only the first nine Policy Years. The maximum Surrender Charge varies
by the issue ages, sexes, and underwriting classifications of the Insureds and
is calculated based on the initial Basic Coverage on the Policy Date. The
following table illustrates the maximum Surrender Charge per $1,000 of initial
Basic Coverage for Policies which are issued on a male non-tobacco preferred and
a female non-tobacco other than preferred basis (see Appendix 1 for specific
examples) based on $1 million specified amount.
<TABLE>
<CAPTION>
Per $1,000 of
Average Issue Age Initial Basic Coverage
----------------- ----------------------
<S> <C>
35/35 $5.54
45/45 8.51
55/55 11.30
65/65 15.82
75/75 23.34
</TABLE>
The Surrender Charge is comprised of two components: an underwriting surrender
charge and sales surrender charge. The underwriting surrender charge varies by
average issue age in the following manner:
<TABLE>
<CAPTION>
Underwriting Surrender
Charge per $1,000 of Initial
Average Issue Age Basic Coverage
----------------- --------------
<S> <C>
0-39 $4.00
40-49 6.00
50-59 7.00
60-85 8.00
</TABLE>
The remainder of the Surrender Charge which is not attributable to the
underwriting surrender charge component represents the sales surrender charge
component. In no event will this component exceed 23.75% of the lesser of the
SEC Guideline Level Premium in the first year or the premiums actually paid in
the first year. The maximum sales surrender charge per $1,000 of initial Basic
Coverage based upon a Policy issued on a male non-tobacco preferred and a female
non-tobacco other than preferred basis and is shown in the following table.
<TABLE>
<CAPTION>
Sales Surrender Charge per $1,000
of Initial
Average Issue Age Basic Coverage
----------------- --------------
<S> <C>
35/35 $1.54
45/45 2.51
55/55 4.30
65/65 7.82
75/75 15.34
</TABLE>
The purpose of the sales surrender charge is to reimburse the Company for some
of the expenses incurred in the distribution of the Policies.
The underwriting surrender charge is designed to cover the administrative
expenses associated with underwriting and issuing the Policy, including the
costs of processing applications, conducting medical exams, determining
insurability and the Insured's underwriting class, and establishing Policy
records. The Company does not expect to profit from the underwriting surrender
charges. The Surrender Charge may be insufficient to recover certain expenses
related to the sale of the Policies. Unrecovered expenses are born by the
Company's general assets which may include profits, if any, from mortality and
expense risk charges (see "Deductions from
24
<PAGE> 28
Cash Value"). Additional premiums and/or income earned on assets in the Variable
Account have no effect on these charges. The Surrender Charge does not apply to
increases or decreases in Specified Amount.
The Surrender Charge is reduced in subsequent Policy Years in the following
manner:
<TABLE>
<CAPTION>
FOR AN AVERAGE ISSUE AGE LESS THAN 75:
Surrender Charge Surrender Charge Surrender Charge
as a % of Initial as a % of Initial as a % of Initial
Policy Year Surrender Charge Policy Year Surrender Charges Policy Year Surrender Charge
<S> <C> <C> <C> <C> <C>
1 100% 6 85% 11 60%
2 100% 7 80% 12 45%
3 100% 8 75% 13 30%
4 95% 9 70% 14 15%
5 90% 10 65% 15+ 0%
<CAPTION>
FOR AN AVERAGE ISSUE AGE GREATER THAN OR EQUAL TO 75:
Surrender Charge Surrender Charge
as a % of Initial as a % of Initial
Policy Year Surrender Charge Policy Year Surrender Charges
<S> <C> <C> <C>
1 100% 6 60%
2 100% 7 45%
3 90% 8 30%
4 80% 9 15%
5 70% 10+ 0%
</TABLE>
DEDUCTIONS FROM CASH VALUE
The Company also deducts the following charges from the Policy's Cash Value on
the Policy Date and each subsequent Monthly Anniversary Day:
1. monthly cost of insurance; plus
2. monthly cost of any additional benefits provided by riders; plus
3. monthly administrative expense; plus
4. monthly mortality and expense risk charges
Items 1 through 3 above will be charged proportionately to the Cash Value in
each Sub-Account and the Fixed Account. The monthly mortality and expense risk
charges will be charged proportionately to the Cash Value in each Sub-Account.
- -Monthly Cost of Insurance
The monthly cost of insurance charge is determined in a manner that reflects the
anticipated mortality of the two Insureds and the fact that the death benefit is
not payable until the death of the second Insured to die.
The monthly cost of insurance charge for each Policy month is determined by
multiplying the monthly cost of insurance rate by the net amount at risk. The
net amount at risk is the difference between the death benefit and the Policy's
Cash Value, each calculated at the beginning of the policy month.
Monthly cost of insurance rates will not exceed those guaranteed in the Policy.
Guaranteed cost of insurance rates are based on the 1980 Commissioners Standard
Ordinary Mortality Table, Age Last Birthday (1980 CSO). Guaranteed cost of
insurance rates for Policies issued on a substandard basis are based on
appropriate multiples of the 1980 CSO. These mortality tables are sex distinct.
In addition, separate mortality tables will be used for standard and
non-tobacco.
The rate class of an Insured may affect the cost of insurance rate. The Company
currently places Insureds into both standard rate classes and substandard
classes that involve a higher mortality risk. In an otherwise identical Policy,
an Insured in the standard rate class will have a lower cost of insurance than
an Insured in a rate class with higher mortality risks.
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<PAGE> 29
- -Monthly Administrative Expense Charge
The Company deducts a monthly Administrative Expense Charge to reimburse it for
certain expenses related to maintenance of the Policies, accounting and record
keeping and periodic reporting to Policy Owners. This charge is designed only to
reimburse the Company for certain actual administrative expenses. The Company
does not expect to recover from this charge any amount in excess of aggregate
maintenance expenses. Currently, this charge is the sum of the per policy charge
and the per $1,000 Basic Coverage charge as set forth below:
<TABLE>
<CAPTION>
Policy Year(s) Per Policy Per $1,000 Basic Coverage
-------------- ---------- -------------------------
<S> <C> <C>
1-10 $10.00 $0.04 but not less than
$20.00 or more than $80 per
policy
11+ $5.00 $0.02 but not less than
$10.00 or more than $40 per
policy
</TABLE>
The charge for year 11+ may be increased at the sole discretion of the Company
but may not exceed the charge for years 1-10. After a change in Specified
Amount, the per $1000 portion of the monthly administrative Expense Charge is
based on the new Basic Coverage in effect. For Policies issued in the State of
New York, this per policy charge is equal to $7.50 per month in all years, both
currently and guaranteed. The monthly per $1,000 basic coverage charge in New
York is $0.04 per $1,000 in the first year only, subject to a minimum of $20.00
and a maximum of $80.00 per policy, currently and guaranteed and $0.00
thereafter.
- -Monthly Mortality Expense Risk Charge
The Company assumes certain risks for guaranteeing the mortality and expense
charges. The mortality risk assumed under the Policies is that both Insureds may
die sooner than expected. The expense risk assumed is that the actual expenses
incurred in issuing and administering the Policies may be greater than expected.
In addition, the Company assumes risks associated with the non-recovery of
policy issue, underwriting and other administrative expenses due to Policies
which lapse or are surrendered in the early Policy Years.
To compensate the Company for assuming these risks associated with the Policies,
the Company deducts a mortality and expense risk charge at the beginning of each
policy month. The Mortality and Expense Risk Charge will apply solely to the
assets in the Variable Account. This charge will be deducted proportionately
from the assets in the Sub-Accounts.
The Mortality and Expense Risk Charge is equivalent to an annual effective rate
of 0.55% for policy years 1-10. This charge varies starting at the beginning of
policy year eleven depending upon the amount of the Cash Value. If the Cash
Value is less than $25,000, the Mortality and Expense Risk Charge will remain at
0.55%. If the Cash Value is between $25,000 and $99,999, then the Mortality and
Expense Risk Charge will be reduced to 0.35%. If the Cash Value equals or
exceeds $100,000, then the Mortality and Expense Risk Charge will be 0.20%.
These charges are all guaranteed. In the State of New York the annual effective
rate is 0.55% in years 1-10 and 0.35% beginning in year eleven, regardless of
Cash Value.
REDUCTION OF CHARGES
The Policy is available for purchase by individuals, corporations and other
groups. For group or sponsored arrangements (including employees of the Company
and their family members) and for special exchange programs which the Company
may make available from time to time, the Company reserves the right to reduce
or eliminate the sales load, surrender charge, monthly administrative charge,
monthly cost of insurance charges or other charges normally assessed on certain
multiple life cases where it is expected that the size or nature of such cases
will result in savings of sales, underwriting, administrative or other costs.
Eligibility for and the amount of these reductions will be determined by a
number of factors, including the number of Insureds, the total premium expected
to be paid, total assets under management for the Policy Owner, the nature of
the relationship among individual Insureds, the purpose for which the Policies
are being purchased, the expected persistency of individual Policies, and any
other circumstances which, in the opinion of the Company is rationally related
to the expected reduction in expenses. The extent and nature of reductions may
change from
26
<PAGE> 30
time to time. Any variations in the charge structure will be determined in a
uniform manner reflecting differences in costs of services and not unfairly
discriminatory to Policy Owners.
EXPENSES OF THE UNDERLYING MUTUAL FUNDS
Underlying Mutual Fund shares are purchased at Net Asset Value, which reflects
the deduction of investment management fees and certain other expenses. The
management fees are charged by each Underlying Mutual Fund's investment adviser
for managing the Underlying Mutual Fund and selecting its portfolio of
securities. Other Underlying Mutual Fund expenses can include such items as
interest expense on loans and contracts with transfer agents, custodians, and
other companies that provide services to the Underlying Mutual Fund. The
management fees and other expenses for each Underlying Mutual Fund for its most
recently completed fiscal year, expressed as a percentage of the Underlying
Mutual Fund's average assets, are as follows:
<TABLE>
<CAPTION>
UNDERLYING MUTUAL FUND ANNUAL EXPENSES
(AFTER EXPENSE REIMBURSEMENT)
- -----------------------------------------------------------------------------------------------------------------------------------
Management Total Portfolio
Fees Other Expenses 12b-1 Fees Operating Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century Variable Portfolios, Inc. - 0.70% 0.00% 0.00% 0.70%
American Century VP Income & Growth
- -----------------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 1.50% 0.00% 0.00% 1.50%
American Century VP International
- -----------------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 1.00% 0.00% 0.00% 1.00%
American Century VP Value
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
The Dreyfus Socially Responsible Growth 0.75% 0.01% 0.00% 0.76%
Fund, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund, Inc. 0.25% 0.03% 0.00% 0.28%
- -----------------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund - Capital 0.75% 0.05% 0.00% 0.80%
Appreciation Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio: 0.50% 0.05% 0.10% 0.65%
Service Class*
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio: Service 0.60% 0.07% 0.10% 0.77%
Class*
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio: Service 0.59% 0.11% 0.10% 0.80%
Class*
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio: Service 0.75% 0.16% 0.10% 1.01 %
Class*
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio: 0.60% 0.08% 0.10% 0.78%
Service Class*
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities 0.60% 0.13% 0.10% 0.83%
Portfolio: Service Class*
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Universal Funds, Inc. - 0.04% 1.26% 0.00% 1.30%
Emerging Markets Debt Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Capital Appreciation Fund 0.60% 0.09% 0.00% 0.69%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Government Bond Fund 0.50% 0.08% 0.00% 0.58%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Money Market Fund 0.40% 0.08% 0.00% 0.48%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Total Return Fund 0.60% 0.07% 0.00% 0.67%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Balanced Fund 0.75% 0.15% 0.00% 0.90%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Equity Income Fund 0.80% 0.15% 0.00% 0.95%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Global Equity Fund 1.00% 0.20% 0.00% 1.20%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide High Income Bond Fund 0.80% 0.15% 0.00% 0.95%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Multi-Sector Bond Fund 0.75% 0.15% 0.00% 0.90%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Select Advisers Mid Cap 1.05% 0.15% 0.00% 1.20%
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Small Cap Value Fund 0.90% 0.15% 0.00% 1.05%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Small Company Fund 1.00% 0.11% 0.00% 1.11%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Strategic Growth Fund 0.90% 0.10% 0.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------------------
NSAT - Nationwide Strategic Value Fund 0.90% 0.10% 0.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT - Guardian Portfolio 0.60% 0.40% 0.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT - Mid-Cap Growth 0.60% 0.40% 0.00% 1.00%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT - Partners Portfolio 0.80% 0.06% 0.00% 0.86%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - 0.71% 0.02% 0.00% 0.73%
Oppenheimer Aggressive Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
Management Total Portfolio
Fees Other Expenses 12b-1 Fees Operating Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oppenheimer Variable Account Funds - 0.73% 0.02% 0.00% 0.75%
Oppenheimer Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - 0.75% 0.08% 0.00% 0.83%
Oppenheimer Growth & Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - 0.80% 0.00% 0.00% 0.80%
Worldwide Emerging Markets Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - 1.00% 0.17% 0.00% 1.17%
Worldwide Hard Assets Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment 1.00% 0.07% 0.00% 1.07%
Trust - Morgan Stanley Real Estate
Securities Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Growth & Income 0.65% 0.35% 0.00% 1.00%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - International Equity 1.00% 0.35% 0.00% 1.35%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Post-Venture Capital 1.07% 0.33% 0.00% 1.40%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Underlying Mutual Fund expenses shown above are assessed at the
Underlying Mutual Fund level and are not direct charges against Variable
Account assets or reductions from Cash Value. These Underlying Mutual Fund
expenses are taken into consideration in computing each Underlying Mutual
Fund's Net Asset Value, which is the share price used to calculate the unit
values of the Variable Account. The management fees and other expenses are
more fully described in the prospectuses for each Underlying Mutual Fund.
The information relating to the Underlying Mutual Fund expenses was
provided by the Underlying Mutual Fund and was not independently verified
by the Company. The following Underlying Mutual Funds are subject to the
following fee waiver and/or expense reimbursement arrangements:
<TABLE>
<CAPTION>
-------------------------- -------------------------------------------------------------------------------
FUND EXPENSES WITHOUT REIMBURSEMENT FOR WAIVER
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
<S> <C>
Fidelity VIP Equity - The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Income Portfolio: are net of any fee waivers or expense reimbursements. The investment adviser
Service Class has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such waivers
or reimbursement, Management Fees would have equaled 0.50%, Other Expenses would
have equaled 0.08%, 12b-1 Fees would have equaled 0.10% and Total Portfolio
Operating Expenses would have equaled 0.68%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
Fidelity VIP Growth The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Portfolio: Service Class are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 0.60%,
Other Expenses would have equaled 0.09%, 12b-1 Fees would have equaled 0.10%
and Total Portfolio Operating Expenses would have equaled 0.79%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
Fidelity VIP Overseas The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Portfolio: Service Class are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such waivers
or reimbursements, Management Fees would have equaled 0.75%, Other Expenses
would have equal 0.17%, 12b-1 Fees would have equaled 0.10% and Total Portfolio
Operating Expenses would have equaled 1.02%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
Fidelity VIP II The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Contrafund Portfolio: are net of any fee waivers or expense reimbursements. The investment adviser
Service Class has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such waivers
or reimbursements, Management Fees would have equaled 0.60%, Other Expenses
would have equaled 0.11%, 12b-1 Fees would have equaled 0.10% and Total Portfolio
Operating Expenses would have equaled 0.81%.
-------------------------- -------------------------------------------------------------------------------
Fidelity VIP III Growth The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Opportunities Portfolio: are net of any fee waivers or expense reimbursements. The investment adviser
Service Class has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such waivers
or reimbursements, Management Fees would have equaled 0.60%, Other Expenses
would have equaled 0.14%, 12b-1 Fees would have equaled 0.10% and Total Portfolio
Operating Expenses would have equaled 0.84%.
-------------------------- -------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
-------------------------- -------------------------------------------------------------------------------
FUND EXPENSES WITHOUT REIMBURSEMENT FOR WAIVER
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
<S> <C>
Morgan Stanley Universal The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Funds, Inc. - Emerging are net of any fee waivers or expense reimbursements. The investment adviser
Markets Debt Portfolio has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 0.80%, Other
Expenses would have equaled 1.26% and Total Portfolio Operating Expenses would
have equaled 2.06%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide Balanced The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.15%, Other
Expenses would have equaled 3.75% and Total Portfolio Operating Expenses would
have equaled 4.90%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide Equity The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Income Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.20%, Other
Expenses would have equaled 4.43% and Total Portfolio Operating Expenses would
have equaled 5.63%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide Global The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Equity Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.40%, Other
Expenses would have equaled 1.44% and Total Portfolio Operating Expenses would
have equaled 2.84%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide High The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Income Bond Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.20%, Other
Expenses would have equaled 0.98% and Total Portfolio Operating Expenses would
have equaled 2.18%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Multi-Sector Bond Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.15%, Other
Expenses would have equaled 3.26% and Total Portfolio Operating Expenses would
have equaled 4.41%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide Select The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Advisers Mid Cap Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.45%, Other
Expenses would have equaled 1.86% and Total Portfolio Operating Expenses would
have equaled 3.31%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide Small The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Cap Value Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.30%, Other
Expenses would have equaled 5.01% and Total Portfolio Operating Expenses would
have equaled 6.31%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Strategic Growth Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.30%, Other
Expenses would have equaled 5.03% and Total Portfolio Operating Expenses would
have equaled 6.33%.
-------------------------- -------------------------------------------------------------------------------
NSAT-Nationwide The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Strategic Value Fund are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.30%, Other
Expenses would have equaled 4.24% and Total Portfolio Operating Expenses would
have equaled 5.54%.
-------------------------- -------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
-------------------------- -------------------------------------------------------------------------------
FUND EXPENSES WITHOUT REIMBURSEMENT FOR WAIVER
-------------------------- -------------------------------------------------------------------------------
<S> <C>
Van Eck Worldwide The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Insurance Trust - are net of any fee waivers or expense reimbursements. The investment adviser
Worldwide Emerging has voluntarily agreed to reimburse a portion of the management fees and/or
Markets Fund other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.00%, Other
Expenses would have equaled 0.34% and Total Portfolio Operating Expenses would
have equaled 1.34%.
-------------------------- -------------------------------------------------------------------------------
Van Eck Worldwide The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Insurance Trust - are net of any fee waivers or expense reimbursements. The investment adviser
Worldwide Hard Assets has voluntarily agreed to reimburse a portion of the management fees and/or
Fund other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.00%, Other
Expenses would have equaled 0.18% and Total Portfolio Operating Expenses would
have equaled 1.18%.
-------------------------- -------------------------------------------------------------------------------
Warburg Pincus Trust - The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Growth & Income Portfolio are net of any fee waivers or expense reimbursements. The investment adviser
has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 0.75%, Other
Expenses would have equaled 0.45% and Total Portfolio Operating Expenses would
have equaled 1.20%.
-------------------------- -------------------------------------------------------------------------------
-------------------------- -------------------------------------------------------------------------------
Warburg Pincus Trust - The Management Fees, Other Expenses and Total Portfolio Operating Expenses
International Equity are net of any fee waivers or expense reimbursements. The investment adviser
Portfolio has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such
waivers or reimbursements, Management Fees would have equaled 1.00%, Other
Expenses would have equaled 0.36% and Total Portfolio Operating Expenses would
have equaled 1.36%.
-------------------------- -------------------------------------------------------------------------------
Warburg Pincus Trust - The Management Fees, Other Expenses and Total Portfolio Operating Expenses
Post-Venture Capital are net of any fee waivers or expense reimbursements. The investment adviser
Portfolio has voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Without such waivers
or reimbursements, Management Fees would have equaled 1.25%, Other Expenses would
have equaled 0.33% and Total Portfolio Operating Expenses would have equaled 1.58%
-------------------------- -------------------------------------------------------------------------------
</TABLE>
HOW THE CASH VALUE VARIES
On any date during the Policy Year, the Cash Value equals the Cash Value on the
preceding Valuation Date, plus any Net Premium applied since the previous
Valuation Date, minus any partial surrenders, plus or minus any investment
results, and less any Policy Charges.
There is no guaranteed Cash Value. The Cash Value will vary with the investment
experience of the Variable Account and/or the daily crediting of interest in the
Fixed Account and Policy Loan Account depending on the allocation of Cash Value
by the Policy Owner.
HOW THE INVESTMENT EXPERIENCE IS DETERMINED
The Cash Value in each Sub-Account is converted to Accumulation Units of that
Sub-Account. The conversion is accomplished by dividing the amount of Cash Value
allocated to a Sub-Account by the value of an Accumulation Unit for the
Sub-Account of the Valuation Period during which the allocation occurs.
The value of an Accumulation Unit for each Sub-Account was arbitrarily set
initially at $10 when the Underlying Mutual Fund shares in that Sub-Account were
available for purchase. The value for any subsequent Valuation Period is
determined by multiplying the Accumulation Unit value for each Sub-Account for
the immediately preceding Valuation Period by the net investment factor for the
Sub-Account during the subsequent Valuation Period. The value of an Accumulation
Unit may increase or decrease from Valuation Period to Valuation Period. The
number of Accumulation Units will not change as a result of investment
experience.
NET INVESTMENT FACTOR
The net investment factor for any Valuation Period is determined by dividing (a)
by (b) where:
(a) is the net of:
(1) the Net Asset Value per share of the Underlying Mutual Fund held
in the Sub-Account determined at the end of the current Valuation
Period; and
30
<PAGE> 34
(2) the per share amount of any dividend or capital gain distributions
made by the Underlying Mutual Fund option held in the Sub-Account
if the "ex-dividend" date occurs during the current Valuation
Period.
(b) is the Net Asset Value per share of the Underlying Mutual Fund held in the
Sub-Account determined at the end of the immediately preceding Valuation Period.
The Net Investment Factor may be greater or less than one; therefore, the value
of an Accumulation Unit may increase or decrease. The Company does not currently
assess any charge for income taxes incurred by the Company as a result of the
operations of the Sub-Accounts (see "Taxation of the Company"). The Company
reserves the right to assess a charge for such taxes against the Variable
Account if the Company determines that such taxes will be incurred.
DETERMINING THE CASH VALUE
The sum of the value of all Variable Account Accumulation Units attributable to
the Policy and amounts credited to the Fixed Account and the Policy Loan Account
is the Cash Value. The number of Accumulation Units credited each Sub-Account is
determined by dividing the net amount allocated to the Sub-Account by the
Accumulation Unit Value for the Sub-Account for the Valuation Period during
which the premium is received by the Company. In the event part or all of the
Cash Value is surrendered or charges or deductions are made against the Cash
Value, an appropriate number of Accumulation Units from the Variable Account and
an appropriate amount from the Fixed Account will be deducted in the same
proportion that the Policy Owner's interest in the Variable Account and the
Fixed Account bears to the total Cash Value.
The Cash Value in the Fixed Account and the Policy Loan Account is credited with
interest daily at an effective annual rate which the Company periodically
declares. The annual effective rate will never be less than 4%. Upon request,
the Company will inform the Policy Owner of the then applicable rates for each
account.
VALUATION PERIODS AND VALUATION DATES
A Valuation Period is the period commencing at the close of business on the New
York Stock Exchange and ending at the close of business for the next succeeding
Valuation Date. A Valuation Date is each day that the New York Stock Exchange
and the Home Office are open for business or any other day during which there is
sufficient degree of trading that the current Net Asset Value of the
Accumulation Units might be materially affected.
SURRENDERING THE POLICY FOR CASH
RIGHT TO SURRENDER
The Policy Owner may surrender the Policy in full at any time while the Policy
is in force and receive its Surrender Value. The cancellation will be effective
as of the date the Company receives a proper written request for cancellation
and the Policy. Such written request must be signed and, where permitted, the
signature guaranteed by a member firm of the New York, American, Boston,
Midwest, Philadelphia or Pacific Stock Exchange, or by a commercial bank or a
savings and loan, which is a member of the Federal Deposit Insurance
Corporation. In some cases, the Company may require additional documentation of
a customary nature.
CASH SURRENDER VALUE
The Surrender Value increases or decreases daily to reflect the investment
experience of the Variable Account and the daily crediting of interest in the
Fixed Account and the Policy Loan Account. The Surrender Value equals the
Policy's Cash Value, next computed after the date the Company receives a proper
written request for surrender and the Policy, minus any charges, Indebtedness or
other deductions due on that date, minus any Surrender Charge.
PARTIAL SURRENDERS
Partial Surrenders may be made at any time after the first Policy Anniversary.
Partial surrenders will be permitted only if they satisfy the following
requirements:
1. The minimum partial surrender is $500;
2. The partial surrender may not reduce the Specified Amount to less
than the Minimum Issue Amount ($100,000);
31
<PAGE> 35
3. After the partial surrender, the Policy continues to qualify as
life insurance.
4. The maximum partial surrender is equal to the available Cash
Surrender Value less the greater of $500 and three monthly
deductions.
The Company reserves the right to limit the number of partial surrenders in each
Policy Year.
When a partial surrender is made, the Cash Value is reduced by the amount of the
partial surrender. Also, under death benefit Option 1, the Specified Amount is
reduced by the amount of the partial surrender. The Basic and Supplemental
Specified amounts are reduced proportionally. Partial surrender amounts must be
first deducted from the values in the Sub-Accounts. Partial surrenders will be
deducted from the Fixed Account only to the extent that insufficient values are
available in the Sub-Accounts. The Company reserves the right to deduct a fee
for each partial surrender of not more than the lesser of $25 and 2% of the
amount of the partial surrender.
On a current basis, the Company does not deduct the above fee. Certain partial
surrenders may result in currently taxable income and tax penalties (see "Tax
Matters").
MATURITY PROCEEDS
The Maturity Date is the Policy Anniversary on or next following the younger
Insured's 100th birthday. The maturity proceeds will be payable to the Policy
Owner on the Maturity Date provided the Policy is still in force. The Maturity
Proceeds will be equal to the amount of the Policy's Cash Value, less any
Indebtedness.
INCOME TAX WITHHOLDING
Federal law requires the Company to withhold income tax from any portion of
surrender proceeds that is subject to tax, unless the Policy Owner advises the
Company, in writing, of his or her request not to withhold.
If the Policy Owner requests that the Company not withhold taxes, or if the
taxes withheld are insufficient, the Policy Owner may be liable for payment of
an estimated tax. The Policy Owner should consult his or her tax advisor.
POLICY LOANS
TAKING A POLICY LOAN
After the first Policy Year, the Policy Owner may take a Policy loan using the
Policy as security. Maximum Policy Indebtedness is limited to 90% of the Cash
Value less any Surrender Charge. Maximum Policy Indebtedness, in Texas, is
limited to 90% of the Cash Value in the Sub-Accounts and 100% of the Cash Value
in the Fixed Account less any Surrender Charge less interest due on the next
Policy Anniversary. The Cash Value less Surrender Charge is determined as of the
loan date. The Company will not grant a loan for an amount less than $1,000.
Should the Death Proceeds become payable, the Policy be surrendered, or the
Policy mature while a loan is outstanding, the amount of Policy Indebtedness
will be deducted from the Death Benefit, Surrender Value or the Maturity Value,
respectively.
Any request for a Policy loan must be in written form satisfactory to the
Company. The request must be signed and, where permitted, the signature
guaranteed by a member firm of the New York, American, Boston, Midwest,
Philadelphia or Pacific Stock Exchange; or by a Commercial Bank or a Savings and
Loan which is a member of the Federal Deposit Insurance Corporation. Certain
policy loans may result in currently taxable income and tax penalties (see "Tax
Matters").
A Policy Owner considering the use of policy loans in connection with his or her
retirement income plan should consult a personal tax adviser regarding potential
tax consequences that may arise if necessary payments are not made to keep the
Policy from lapsing. The amount of such payments necessary to prevent the Policy
from lapsing would increase with age (see "Tax Matters").
EFFECT ON INVESTMENT PERFORMANCE
When a loan is made, an amount equal to the amount of the loan is transferred
from the Variable Account to the Policy Loan Account. If the assets relating to
a Policy are held in more than one Sub-Account, withdrawals from Sub-Accounts
will be made in proportion to the assets in each Sub-Account at the time of the
loan. Policy loans will be transferred from the Fixed Account only when
insufficient amounts are available in the Sub-Accounts. The amount taken out of
the Variable Account will not be affected by the Variable Account's investment
experience while the loan is outstanding.
32
<PAGE> 36
INTEREST
On a current basis, policy loans are credited with an annual effective rate of
5.1% during policy years 2 through 10 and an annual effective rate of 6% during
the 11th and subsequent policy years. The rate is guaranteed never to be lower
than 5.1%. The Company may change the current interest crediting rate on policy
loans at any time at its sole discretion. The loan interest rate is 6% per year
for all Policy loans. In the event that it is determined that such loans will be
treated, as a result of the differential between the interest crediting rate and
the loan interest rate, as taxable distributions under any applicable ruling,
regulation, or court decision, the Company retains the right to increase the net
cost (by decreasing the interest crediting rate) on all subsequent policy loans
to an amount that would result in the transaction being treated as a loan under
Federal tax law. If this amount is not prescribed by such ruling, regulation, or
court decision, the amount will be that which the Company considers to be more
likely to result in the transaction being treated as a loan under Federal tax
law.
Amounts transferred to the Policy Loan Account will earn interest daily from the
date of transfer. The earned interest is transferred from the Policy Loan
Account to a Variable Account or the Fixed Account on each Policy Anniversary,
at the time a new loan is requested, or at the time of loan repayment. The
earned interest will be allocated according to the Underlying Mutual Fund
allocation factors in effect at the time of the transfer.
Interest is charged daily and is payable at the end of each Policy Year or at
the time of loan repayment. Unpaid interest will be added to the existing Policy
Indebtedness as of the due date and will be charged interest at the same rate as
the rest of the Indebtedness.
Whenever the total Policy Indebtedness exceeds the Cash Value less any Surrender
Charges, the Company will send a notice to the Policy Owner and the assignee, if
any. The Policy will terminate without value 61 days after the mailing of the
notice unless a sufficient repayment is made during that period. A repayment is
sufficient if it is large enough to reduce the total Policy Indebtedness to an
amount equal to the total Cash Value less any Surrender Charges plus an amount
sufficient to continue the Policy in force for 3 months.
EFFECT ON DEATH BENEFIT AND CASH VALUE
A Policy loan, whether or not repaid, will have a permanent effect on the Death
Benefit and Cash Value because the investment results of the Variable Account or
the Fixed Account will apply only to the non-loaned portion of the Cash Value.
The longer the loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the Variable Account or the Fixed Account
while the loan is outstanding, the effect could be favorable or unfavorable.
REPAYMENT
All or part of the Indebtedness may be repaid at any time while the Policy is in
force during either Insured's lifetime. Any payment intended as a loan
repayment, rather than a premium payment, must be identified as such. Loan
repayments will be credited to the Sub-Accounts and the Fixed Account in
proportion to the Policy Owner's Underlying Mutual Fund allocation factors in
effect at the time of the repayment. Each repayment may not be less than $50.
The Company reserves the right to require that any loan repayments resulting
from Policy loans transferred from the Fixed Account must be first allocated to
the Fixed Account.
HOW THE DEATH BENEFIT VARIES
CALCULATION OF THE DEATH BENEFIT
At issue, the Policy Owner selects premium and the Specified Amount which
consists of the Basic Coverage and the Supplemental Coverage, if any (see
"Underwriting and Insurance").
While the Policy is in force, the death benefit will never be less than the
Specified Amount. The death benefit may vary with the Cash Value of the Policy,
which depends on investment performance.
The Policy Owner chooses one of two death benefit options. Under Option 1, the
death benefit will be the greater of the Specified Amount or the Applicable
Percentage of Cash Value (see below). Under Option 1, the amount of the death
benefit will ordinarily not change for several years to reflect the investment
performance and may not change at all. If investment performance is favorable,
the amount of death benefit may increase. To see how and when investment
performance will begin to affect death benefits, please see the illustrations.
Under Option 2, the death benefit will be the greater of the Specified Amount
plus the Cash Value, or the Applicable Percentage of Cash Value. Under "Option
2," the amount of the Death Benefit will vary directly with the investment
performance.
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<PAGE> 37
The term "Applicable Percentage" means the percentage shown in the "Applicable
Percentage of Cash Value Table." The Applicable Percentage depends on whether
the Policy Owner elected the Guideline Premium/Cash Value Corridor Test or the
Cash Value Accumulation Test. The following tables illustrate applicable
percentages:
<TABLE>
<CAPTION>
TABLE OF APPLICABLE PERCENTAGES OF CASH VALUE FOR GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST
Attained Age Percentage Attained Age Percentage Attained Age Percentage
of Younger of Cash of Younger of Cash of Younger of Cash
Insured Value Insured Value Insured Value
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
0-40 250% 60 130% 80 105%
41 243% 61 128% 81 105%
42 236% 62 126% 82 105%
43 229% 63 124% 83 105%
44 222% 64 122% 84 105%
45 215% 65 120% 85 105%
46 209% 66 119% 86 105%
47 203% 67 118% 87 105%
48 197% 68 117% 88 105%
49 191% 69 116% 89 105%
50 185% 70 115% 90 105%
51 178% 71 113% 91 104%
52 171% 72 111% 92 103%
53 164% 73 109% 93 102%
54 157% 74 107% 94 101%
55 150% 75 105% 95 101%
56 146% 76 105% 96 101%
57 142% 77 105% 97 101%
58 138% 78 105% 98 101%
59 134% 79 105% 99 101%
100 100%
</TABLE>
THE CASH VALUE ACCUMULATION TEST
This test also requires the Death Benefit to exceed an applicable percentage of
the Cash Value. These applicable percentages are the net inverses of net single
premiums based on an interest rate of 4% and 1980 CSO guaranteed mortality as
prescribed in Code Section 7702 for the Cash Value Accumulation Test. These
premiums vary with the ages, sexes, and risk classifications of the Insureds.
The table below provides an example of applicable percentages for the Cash Value
Accumulation Test. This example is for a male non-tobacco preferred issue age 55
and a female non-tobacco preferred issue age 55.
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Policy Year Cash Value Policy Year Cash Value Policy Year Cash Value
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1 302% 16 174% 31 121%
2 290% 17 169% 32 119%
3 279% 18 164% 33 118%
4 269% 19 159% 34 116%
5 259% 20 154% 35 115%
6 249% 21 150% 36 113%
7 240% 22 146% 37 112%
</TABLE>
34
<PAGE> 38
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Policy Year Cash Value Policy Year Cash Value Policy Year Cash Value
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
8 231% 23 142% 38 111%
9 223% 24 139% 39 110%
10 215% 25 136% 40 108%
11 207% 26 133% 41 107%
12 200% 27 130% 42 106%
13 193% 28 127% 43 104%
14 186% 29 125% 44 103%
15 180% 30 123% 45 102%
</TABLE>
PROCEEDS PAYABLE ON DEATH
The actual Death Proceeds payable on the death of the last surviving Insured
will be the death benefit as described above, less any Policy Indebtedness, and
less any unpaid Policy Charges. Under certain circumstances, the Death Proceeds
may be adjusted (see "Incontestability", "Error in Age or Sex", and "Suicide").
RIGHT OF CONVERSION
The Policy Owner may at any time, upon written request to the Company within 24
months of the Policy Date, make an irrevocable, one time election to transfer
all Sub-Account Cash Values to the Fixed Account. The Right of Conversion
provision is subject to state availability.
CHANGES OF INVESTMENT POLICY
The Company may materially change the investment policy of the Variable Account.
The Company must inform the Policy Owners and obtain all necessary regulatory
approvals. Any change must be submitted to the various state insurance
departments which may disapprove it if deemed detrimental to the interests of
the Policy Owners or if it renders the Company's operations hazardous to the
public. A Policy Owner who objects may, upon written request, transfer all
Sub-Account Cash Values to the Fixed Account. The Policy Owner has the later of
60 days (6 months in Pennsylvania) from the date of the investment policy change
or 60 days (6 months in Pennsylvania) from being informed of such change to make
this transfer. No transfer charge will be assessed.
GRACE PERIOD
- -Without Death Benefit Guarantees
If the Surrender Value on a Monthly Anniversary Day is not sufficient to cover
the current monthly deduction, and no Death Benefit Guarantee is in effect, a
Grace Period will be allowed for the payment of a premium of at least 4 times
the current monthly deduction. The Company will send you a notice at the start
of the Grace Period at the last known address stating the amount of premium
required. The Grace Period will end 61 days after the later of the day the
Company mails the notice and the Monthly Anniversary Date when the Surrender
Value was insufficient. If the required amount is not paid by the end of the
Grace Period, this Policy will terminate without value. The Company will pay the
Death Proceeds if the Death Proceeds become payable during the Grace Period. -
Lifetime Death Benefit Guarantee
The Policy will not lapse if on each Monthly Anniversary Date, (1) is greater
than or equal to (2), where:
1. is the sum of all premiums paid to date less any Indebtedness and
less any previous partial surrenders; and
2. is the sum of the Lifetime Death Benefit Guarantee Premiums due
since the Policy Date including such premium for the current
Monthly Anniversary Date.
The Lifetime Death Benefit Guarantee is not permanently lost when premium
payments fall below those required to maintain this benefit. Payment of enough
premium to make (1) greater than or equal to (2) restores the
35
<PAGE> 39
benefit. Any increase or decrease in Specified Amount would increase or decrease
the minimum guaranteed amount, respectively. The Lifetime Death Benefit
Guarantee Premium is shown on the Policy Data Page. The Lifetime Death Benefit
Guarantee Premium is the same as the IRS Guideline Level Premium.
- - Limited Death Benefit Guarantee
During the Limited Death Benefit Guarantee Period, the Policy will not lapse if
on each Monthly Anniversary Date (1) is greater than or equal to (2), where:
1. is the sum of all premiums paid to date less any Indebtedness and
less any previous partial surrenders; and
2. is the sum of the Limited Death Benefit Guarantee Premiums due
since the Policy Date including such premium for the current
Monthly Anniversary Date.
The Limited Death Benefit Guarantee is not permanently lost when premium
payments fall below those required to maintain this benefit. Payment of enough
premium to make (1) greater than or equal to (2) restores the benefit. Any
increase or decrease in Specified Amount would increase or decrease the minimum
guaranteed amount, respectively.
The Limited Death Benefit Guarantee Period runs from the Policy Date to the
Policy Anniversary on or next following the younger Insured's 75th birthday.
The Limited Death Benefit Guarantee Premium is shown on the Policy Data Page.
For the first three Policy Years, the required premium is calculated from the
Minimum Monthly Premium associated with the actual Issue Age, Sex and
Underwriting Class. For Policy Years four and over, the required premium is the
percentage of the IRS Guideline Level Premium shown below.
<TABLE>
<CAPTION>
AVERAGE OF INSUREDS ISSUE AGES UNDER OPTION 1
----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
POLICY SIZE 0-39 40-45 46 47 48 49 50-59 60+
(000) ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
100-249 50 50 52 54 56 58 60 60
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
250-499 50 50 52 54 56 58 60 60
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
500+ 50 50 52 4 56 58 60 60
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE OF INSUREDS ISSUE AGES UNDER OPTION 2*
----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
POLICY SIZE 0-39 40-45 46 47 48 49 50-59 60+
(000) ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
100-249 20 20 20 21 22 23 24 24
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
250-499 20 20 20 21 22 23 24 24
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
500+ 20 20 20 21 22 23 24 24
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
<FN>
* Shown as a percentage of the Option 2 IRS Guideline Level Premium.
</TABLE>
REINSTATEMENT
If the Grace Period ends and the Policy Owner has neither paid the required
premium nor surrendered the Policy for its Cash Surrender Value, the Policy
lapses. The Policy Owner may reinstate the Policy provided both Insureds are
alive on the date of reinstatement by:
1. submitting a written request at any time within 3 years after the
end of the Grace Period and prior to the Maturity Date;
2. providing evidence of insurability of both Insureds satisfactory
to the Company;
3. paying sufficient premium to cover all policy charges that were
due and unpaid during the Grace Period if the Policy terminated in
the fourth or later policy year;
4. paying sufficient premium to keep the Policy in force for 3 months
from the date of reinstatement; and
5. paying or reinstating any Indebtedness against the Policy which
existed at the end of the Grace Period.
36
<PAGE> 40
The effective date of a reinstated Policy will be the Monthly Anniversary Day on
or next following the date the application for reinstatement is approved by the
Company. If your Policy is reinstated, the Cash Value on the date of
reinstatement, but prior to applying any premiums or loan repayments received,
will be set equal to the lesser of:
1. the Cash Value at the end of the Grace Period; or
2. the Surrender Charge for the Policy Year in which the Policy was
reinstated.
Unless the Policy Owner has provided otherwise, all amounts will be allocated
based on the Underlying Mutual Fund allocation factors in effect at the start of
the Grace Period.
THE FIXED ACCOUNT OPTION
Under exemptive and exclusionary provisions, interests in the General Account
have not been registered under the Securities Act of 1933 and the General
Account has not been registered as an investment company under the 1940 Act.
Accordingly, neither the General Account nor any interests therein is subject to
the provisions of these Acts, and the Company has been advised that the staff of
the SEC has not reviewed the disclosures in this prospectus relating to the
Fixed Account option. Disclosures regarding the General Account may, however, be
subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
A Policy Owner may elect to allocate or transfer all or part of the Cash Value
to the Fixed Account and the amount allocated or transferred becomes part of the
General Account. The General Account consist of all assets of the Company other
than those in the Variable Account and in other separate accounts that have been
or may be established by the Company. Subject to applicable law, the Company has
sole discretion over the investment of the assets of the General Account, and
Policy Owners do not share in the investment experience of those assets. The
Company guarantees that the part of the Cash Value invested under the Fixed
Account option will accrue interest daily at an effective annual rate that the
Company declares periodically. The Fixed Account crediting rate will not be less
than an effective annual rate of 4%. Upon request the Company will inform a
Policy Owner of the then applicable rate. The Company is not obligated to credit
interest at a higher rate.
CHANGES IN EXISTING INSURANCE COVERAGE
The Policy Owner may request certain changes in the insurance coverage under the
Policy. Any request must be in writing and received at the Home Office. No
change will take effect unless the Cash Surrender Value, after the change, is
sufficient to keep the Policy in force for at least 3 months. Any approved
change will have an effective date of the Monthly Anniversary Day on or next
following the date the Company approves the application for the change. Basic
Coverage and Supplemental Coverage will change proportionally. The Company
reserves the right to limit the number of Specified Amount changes to one each
Policy Year.
SPECIFIED AMOUNT INCREASES
After the first Policy Year, the Policy Owner may request an increase to the
Specified Amount. Any increase will be subject to the following conditions:
1. satisfactory evidence of insurability of both Insureds is
provided;
2. the increase is for a minimum of $10,000; and
3. age limits are the same as for a new issue.
SPECIFIED AMOUNT DECREASES
After the first Policy Year, the Policy Owner may also request a decrease to the
Specified Amount. Any such decrease will reduce insurance in the following
order:
1. insurance provided by the most recent increase;
2. the next most recent increases successively; and
3. insurance provided under the original application.
The Company will refuse a request for a decrease which would:
1. reduce the Specified Amount to less than the minimum issue amount;
or
37
<PAGE> 41
2. disqualify the Policy as a contract for life insurance.
CHANGES IN THE DEATH BENEFIT OPTION
After the first Policy Year, the Policy Owner may change the death benefit
option under the Policy. If the change is from Option 1 to Option 2, the
Specified Amount will be decreased by the amount of the Cash Value. Basic
Coverage and Supplemental Coverage will be decreased proportionally. If the
change is from Option 2 to Option 1, the Specified Amount will be increased by
the amount of the Cash Value. Basic Coverage and Supplemental Coverage will be
increased proportionally. Evidence of insurability is not required for a change
from Option 2 to Option 1. The Company reserves the right to require evidence of
insurability for a change from Option 1 to Option 2. The effective date of the
change will be the Monthly Anniversary Date on or next following the date the
Company approves the request for change. Only one change of option is permitted
per Policy Year. A change in death benefit option will not be permitted if it
results in the total premiums paid exceeding the then current maximum premium
limitations prescribed by the IRS to qualify the Policy as a life insurance
contract.
OTHER POLICY PROVISIONS
POLICY OWNER
While either Insured is living, all rights in this Policy are vested in the
Policy Owner named in the application or as subsequently changed, subject to
assignment, if any.
The Policy Owner may name a contingent Policy Owner or a new Policy Owner while
either Insured is living. Any change must be in a written form satisfactory to
the Company and recorded at the Home Office. Once recorded, the change will be
effective when signed. The change will not affect any payment made or action
taken by the Company before it was recorded. The Company may require that the
Policy be submitted for endorsement before making a change.
If the Policy Owner dies before both Insureds have died, and there is no
contingent Policy Owner, the Policy Owner's rights in this Policy belong to the
Policy Owner's estate.
BENEFICIARY
The Beneficiary(ies) shall be as named in the application or as subsequently
changed, subject to assignment, if any.
The Policy Owner may name a new Beneficiary while either Insured is living. Any
change must be in a written form satisfactory to the Company and recorded at the
Home Office. Once recorded, the change will be effective when signed. The change
will not affect any payment made or action taken by the Company before it was
recorded.
If any Beneficiary predeceases the Insured, that Beneficiary's interest passes
to any surviving Beneficiary(ies), unless otherwise provided. Multiple
Beneficiaries will be paid in equal shares, unless otherwise provided. If no
named Beneficiary is living when Death Proceeds become payable, the Death
Proceeds will be paid to the Policy Owner or the Policy Owner's estate.
ASSIGNMENT
While either Insured is living, the Policy Owner may assign his or her rights in
the Policy. The assignment must be in writing, signed by the Policy Owner and
recorded by the Home Office. Any assignment will not affect any payments made or
actions taken by the Company before it was recorded. The Company is not
responsible for any assignment not submitted for recording, nor is the Company
responsible for the sufficiency or validity of any assignment. The assignment
will be subject to any Indebtedness.
INCONTESTABILITY
The Company will not contest payment of the Death Proceeds based on the initial
Specified Amount after the Policy has been in force during the lifetimes of both
Insureds for 2 years from the Policy Date. For any increase in Specified Amount
requiring evidence of insurability, the Company will not contest payment of the
Death Proceeds based on such an increase after it has been in force during the
lifetimes of both Insureds for 2 years from its effective date.
38
<PAGE> 42
ERROR IN AGE OR SEX
If the age or sex of either Insured has been misstated, the affected benefits
will be adjusted by the ratio of the last monthly cost of insurance deducted to
the monthly cost of insurance that would have been deducted based on the true
age and sex of each Insured.
SUICIDE
If either Insured dies by suicide, while sane or insane, within two years from
the Policy Date, the Company will pay no more than the sum of the premiums paid,
less any Indebtedness and less any partial surrenders. If either Insured dies by
suicide, while sane or insane, within two years from the date an application is
accepted for an increase in the Specified Amount, the Company will pay no more
than the amount paid for such additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends are payable. These
Policies do not share in the profits or surplus earnings of the Company.
RIDERS
A rider may be added as an addition to the Policy. Riders currently include:
1. Maturity Extension Endorsement;
2. Policy Split Option; and
3. Estate Protection.
Rider availability varies by state.
LEGAL CONSIDERATIONS
On July 6, 1983, the U.S. Supreme Court held in Arizona Governing Committee v.
Norris that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
This decision applies only to benefits derived from premiums paid on or after
August 1, 1983. The Policies offered by this prospectus are based upon actuarial
tables which distinguish between men and women and thus the Policies provide
different benefits to men and women of the same age. Accordingly, employers and
employee organizations should consider, in consultation with legal counsel, the
impact of Norris on any employment related insurance or benefit program before
purchasing this Policy.
DISTRIBUTION OF THE POLICIES
The Policies will be sold by licensed insurance agents in those states where the
Policies may lawfully be sold. Such agents will be registered representatives of
broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. ("NASD"). The
Policies will be distributed by the General Distributor, Nationwide Advisory
Services, Inc. ("NAS").
NAS is a corporation which was organized under the laws of the State of Ohio on
April 8, 1965. NAS is both a broker-dealer and registered investment adviser. As
such, it is the principal underwriter for several open-end investment companies
and for a number of separate accounts issued by the Company and Nationwide Life
and Annuity Insurance Company ("NLAIC") to fund the benefits of variable
insurance and annuity policies. NAS also currently acts as the investment
adviser and/or administrator for the mutual fund portfolios sold through NAS's
registered representatives and for some of the mutual fund portfolios which act
as underlying investment options for the variable insurance and annuity policies
issued by the Company or NLAIC.
NAS acts as general distributor for the Nationwide Multi-Flex Variable Account,
Nationwide DC Variable Account, Nationwide DCVA-II, Nationwide Variable
Account-II, Nationwide Variable Account-5, Nationwide Variable Account-6,
Nationwide Variable Account-8, Nationwide Variable Account - 9, Nationwide VA
Separate Account-A, Nationwide VA Separate Account-B, Nationwide VA Separate
Account-C, Nationwide VL Separate Account-A, Nationwide VL Separate Account-B,
Nationwide VL Separate Account-C, Nationwide VLI Separate Account-2, Nationwide
VLI Separate Account-3, Nationwide VLI Separate Account-4, NACo Variable Account
and the Nationwide Variable Account, all of which are separate investment
accounts of the Company or its affiliates. NAS is a wholly owned subsidiary of
the Company.
39
<PAGE> 43
NAS also acts as principal underwriter for the Nationwide Investing Foundation,
Nationwide Separate Account Trust, Financial Horizons Investment Trust,
Nationwide Investing Foundation II, Nationwide Investing Foundation III, and
Nationwide Asset Allocation Trust, which are open-end management investment
companies.
Gross first year commissions plus any expense allowance payments paid by the
Company on the sale of these policies provided by the General Distributor will
not exceed 80% of first year premiums up to the target premium plus 4% of any
excess premium payments. Gross renewal commissions in years 2-10 paid by the
Company will not exceed 4% of actual premium payment, and will not exceed 1% in
years 11+.
CUSTODIAN OF ASSETS
The Company serves as the Custodian of the assets of the Variable Account.
TAX MATTERS
POLICY PROCEEDS
Section 7702 of the Code provides that if certain tests are met, a Policy will
be treated as a life insurance Policy for federal tax purposes. The Company will
monitor compliance with these tests. The Policy should thus receive the same
federal income tax treatment as fixed benefit life insurance. As a result, the
Death Proceeds payable under a Policy are excludable from gross income of the
beneficiary under Section 101 of the Code.
Although the Company believes that the Policy is in compliance with Section 7702
of the Code, the manner in which Section 7702 should be applied to certain
features of a last survivor variable life insurance Policy is not directly
addressed by Section 7702. In the absence of final regulations or other guidance
issued under Section 7702, there is some uncertainty whether a last survivor
variable life insurance contract will satisfy the Section 7702 definition of a
life insurance contract.
Section 7702A of the Code defines Modified Endowment Contracts as those Policies
issued or materially changed on or after June 21, 1988 on which the total
premiums paid during the first seven years exceed the amount that would have
been paid if the Policy provided for paid up benefits after seven level annual
premiums (see "Information about the Policies"). The Code provides for taxation
of surrenders, partial surrenders, loans, collateral assignments and other
pre-death distributions from Modified Endowment Contracts (other than certain
distributions to terminally ill individuals) are subject to federal income taxes
a manner similar to the way annuities are taxed. Modified Endowment Contract
distributions are defined by the Code as amounts not received as an annuity and
are taxable to the extent the Cash Value of the Policy exceeds, at the time of
distribution, the premiums paid into the Policy. A 10% tax penalty generally
applies to the taxable portion of such distributions unless the Policy Owner is
over age 59 1/2 or disabled. Under certain circumstances, certain distributions
made under a Policy on the life of a "terminally ill individual", as that term
is defined in the Code, are excludible from gross income.
The Policies offered by this prospectus may or may not be issued as Modified
Endowment Contracts. The Company will monitor premiums paid and will notify the
Policy Owner when the Policy's non-modified endowment status is in jeopardy. If
a Policy is not a Modified Endowment Contract, a cash distribution during the
first 15 years after a Policy is issued which causes a reduction in death
benefits may still become fully or partially taxable to the Owner pursuant to
Section 7702(f)(7) of the Code. The Policy Owner should carefully consider this
potential effect and seek further information before initiating any changes in
the terms of the Policy. Under certain conditions, a Policy may become a
Modified Endowment as a result of a material change or a reduction in benefits
as defined by Section 7702A(c) of the Code.
In addition to meeting the tests required under Sections 7702, Section 817(h) of
the Code requires that the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the Secretary of the
Treasury, set the standards for measuring the adequacy of this diversification.
To be adequately diversified, each Sub-Account must meet certain tests. The
Company believes that the investments of the Variable Account meet the
applicable diversification standards. The regulations provide that a variable
life Policy which does not satisfy the diversification standards will not be
treated as life insurance under Section 7702 of the Code, unless the failure to
satisfy regulations was inadvertent, the failure is corrected, and the Policy
Owner or the Company pays an amount to the IRS. The amount will be based on the
tax that would have been paid by the Policy Owner if the income, for the period
the Policy was not diversified, had been received by the Policy Owner. If the
failure to diversify is not corrected in this manner, the Policy Owner of the
life Policy will be deemed the owner of the underlying securities and will be
taxed on the earnings of his or her account.
40
<PAGE> 44
Representatives of the IRS have suggested, from time to time, that the number of
Underlying Mutual Funds available or the number of transfer opportunities
available under a variable product may be relevant in determining whether the
product qualifies for the desired tax treatment. No formal guidance has been
issued in this area. Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of Underlying Mutual Funds, transfers between
Underlying Mutual Funds, exchanges of Underlying Mutual Funds or changes in
investment objectives of Underlying Mutual Funds such that the Policy would no
longer qualify as life insurance under Section 7702 of the Code, the Company
will take whatever steps are available to remain in compliance.
The Company will monitor compliance with these regulations and, to the extent
necessary, will change the objectives or assets of the Sub-Account investments
to remain in compliance.
A total surrender or cancellation of the Policy by lapse or the maturity of the
Policy on its Maturity Date may have adverse tax consequences. If the amount
received by the Policy Owner plus total Policy Indebtedness exceeds the premiums
paid into the Policy, the excess generally will be treated as taxable income,
regardless of whether or not the Policy is a modified endowment contract.
- - Non-Resident Aliens
Pre-death distributions under modified endowment contracts to nonresident aliens
("NRAs") are generally subject to federal income tax and tax withholding, at a
statutory rate of 30% of the amount of income that is distributed. The Company
is required to withhold such amount from the distribution and remit it to the
IRS. Distributions to certain NRAs may be subject to lower, or in certain
instances zero, tax and withholding rates, if the United States has entered into
an applicable treaty. However, in order to obtain the benefits of such treaty
provisions, the NRA must give to the Company sufficient proof of his or her
residency and citizenship in the form and manner prescribed by the Internal
Revenue Service. In addition, the NRA must obtain an individual Taxpayer
Identification Number from the IRS, and furnish that number to the Company prior
to the distribution. If the Company does not have the proper proof of
citizenship or residency and a proper individual Taxpayer Identification Number
prior to any distribution, the Company will be required to withhold 30% of the
income, regardless of any treaty provision.
A pre-death distribution may not be subject to withholding where the recipient
sufficiently establishes to the Company that such payment is effectively
connected to the recipient's conduct of a trade or business in the United States
and that such payment is includable in the recipient's gross income for United
States federal income tax purposes, Any such distributions may be subject to
back-up withholding at the statutory rate (currently 31%) if no taxpayer
identification number, or an incorrect taxpayer identification number, is
provided.
- -Taxation of Policy Split Option Rider
The Policy Split Option Rider permits a Policy to be split into two other single
life insurance contracts upon the occurrence of a divorce of the joint Insureds
or certain other changes in federal estate tax.
A Policy split could have adverse tax consequences. It is not clear whether a
Policy split will be treated as a nontaxable exchange under Section 1035 of the
Code. If a Policy split is not treated as a nontaxable exchange, a split could
result in the recognition of taxable income in an amount up to any gain in the
Policy at the time of the split. Additionally, it is not clear whether, in all
circumstances, the resulting individual contracts would be treated as life
insurance contracts for federal income tax purposes and, if so treated, whether
the individual contracts would be classified as Modified Endowment Contracts.
Before the Policy Owner exercises rights provided by the Policy split option
rider, it is important that a tax adviser be consulted regarding the possible
consequences of a Policy split.
- - Withholding
Distributions of income from a modified endowment contract are subject to
federal income tax withholding; however, the recipient may elect not to have the
withholding taken from the distribution. A distribution of income from a
modified endowment contract may be subject to mandatory back-up withholding
(which cannot be waived). The mandatory back-up withholding rate is 31% of the
income that is distributed and will arise of no Taxpayer Identification Number
is provided to the Company, or if the IRS notifies the Company that back-up
withholding is required.
- - Federal Estate and Generation-Skipping Transfer Taxes
The federal estate tax is integrated with the federal gift tax under a unified
tax rate schedule. In general, in 1998,
41
<PAGE> 45
an estate of less than $625,000 (inclusive of certain predeath gifts) will not
incur a federal estate tax liability. In addition, an unlimited marital
deduction may be available for federal estate tax purposes, for certain amounts
that pass to the surviving spouse.
Upon the death of the last Insured to die, the death benefit will generally be
included in such Insured's federal gross estate if: (1) the Death Proceeds were
payable to or for the benefit of such Insured's estate; or (2) such Insured held
any "incident of ownership" in the Policy at death or at any time within three
years of death. An incident of ownership is, in general, any right that may be
exercised by the Policy, such as the right to borrow on the Policy, or the right
to name a new Beneficiary.
If the Policy Owner (whether or not he or she is an Insured) transfers ownership
of the Policy to another person, such transfer may be subject to a federal gift
tax. In addition, if such Policy Owner transfers the Policy to someone two or
more generations younger than the Policy Owner, the transfer may be subject to
the federal generation-skipping transfer tax ("GSTT"), the taxable amount being
the value of the Policy.
Similarly, if the Beneficiary is two or more generations younger than an
Insured, the payment of the Death Proceeds at the death of such Insured may be
subject to the GSTT. Pursuant to regulations recently promulgated by the U.S.
Treasury Department, the Company may be required to withhold a portion of the
Death Proceeds and pay them directly to the IRS as the GSTT liability.
The GSTT provisions generally apply to the same transfers that are subject to
estate or gift taxes.
The tax rate is a flat rate equal to the maximum estate tax rate (currently
55%), and there is a provision for an aggregate $1 million exemption. Due to the
complexity of these rules, the Policy Owner should consult with counsel and
other competent advisors regarding these taxes,
State and local estate, inheritance income and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or Beneficiary. A Policy Owner should consult with a competent tax
adviser for specific information regarding the applicability of such taxes.
TAXATION OF THE POLICY
Section 7702 of the Code provides that, if one of two alternative qualification
tests is met, a Policy will be treated as life insurance for federal tax
purposes. The two tests are referred to as the Cash Value Accumulation Test and
the Guideline Premium/Cash Value Corridor Test.
Under the Cash Value Accumulation Test, the terms of the Policy must, generally,
provide that the cash surrender value of the Policy, as defined in Section 7702
of the Code, cannot at any time exceed the net single premium required to fund
the future benefits under the Policy. The net single premium under the Policy
will vary according to the age, sex and underwriting classification of the
Insureds. Under this test, premiums may be paid as long as the death benefits is
at least equal to the benefit that could be purchased with a net single premium
equal to the Cash Value. A table showing an example of the relationship between
the Cash Value and death benefit under this test is found in the "How the Death
Benefit Varies" section.
Under the Guideline Premium/Cash Value Corridor Test, the sum of the premiums
paid into the Policy cannot, at any time, exceed the guideline premium
limitation described in Section 7702 of the Code. Additionally, a minimum death
benefit must be provided, based on the Cash Value. A table showing the required
relationship between the Cash Value and the Death Benefit under this test is
found in the "How the Death Benefit Varies" section. Policy Owners selecting
this test may also select either an Option 1 or Option 2 death benefit. A
detailed explanation of the two options is found under the heading "How the
Death Benefit Varies."
The Policy Owners must choose one of these two qualifications tests on the
application. Once elected, the qualification test cannot be changed for the
duration of the Policy. If neither test is designated on the application, the
Guideline Premium/Cash Value Corridor Test with and Option 1 Death Benefit will
be assumed by the Company to have been selected.
The Policy should receive the same federal tax treatment as a fixed benefit life
insurance Policy. The Death Benefit paid under the Policy that satisfies the
statutory definition of life insurance is excludable from the gross income of
the beneficiary under Section 101 of the Code.
Regardless of which test is selected, the Company will monitor compliance with
statutory definition of life insurance for federal tax purposes.
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<PAGE> 46
DESCRIPTION OF CASH VALUE ACCUMULATION TEST AND GUIDELINE PREMIUM/CASH VALUE
CORRIDOR TEST
Section 7702(b)(1) of the Code provides that if one of two alternate tests are
met, a Policy will be treated as a life insurance for federal tax purposes. The
two tests are referred to as the Cash Value Accumulation Test and the Guideline
Premium/Cash Value Corridor Test.
The Cash Value Accumulation Test generally requires that under the terms of a
life insurance Policy, the death benefit must be sufficient so that the cash
surrender value, as defined in Section 7702(f)(2), does not at any time exceed
the net single premium required to fund the future benefits under the Policy.
The net single premium under the Policy will vary according to the age, sex and
underwriting classification of the Insureds.
Under the Cash Value Accumulation Test, there is no limit to the amount that may
be paid in premiums as long as there is sufficient death benefit in relation to
the Account Value at all times. A table containing the applicable percentage of
Cash Value can be found in the "How the Death Benefit Varies" section.
The Guideline Premium/Cash Value Corridor Test requires that the sum of the
premiums paid into the Contract does not at any time exceed the guideline
premium limitation. Additionally, a minimum corridor of Death Benefit in
relation to Account Value must be maintained.
Policy Owners who elect this test are given the option of electing either an
Option 1 or Option 2 death benefit. Please refer to "How The Death Benefit
Varies" for a detailed explanation.
The Policy Owners must make the election of death benefit qualification tests on
the application. Once elected, the Death Benefit qualification test cannot be
changed for the duration of the Policy. If no option is designated, the
guideline premium test Option 1 will be assumed by the Company to have been
selected.
Regardless of which test is selected, the Company will monitor compliance to
assure that the Policy meets the statutory definition of life insurance for
federal tax purposes. The Policy should thus receive the same federal income tax
treatment as fixed benefit life insurance. As a result, the Death Proceeds
payable under a Policy are excludable from gross income of the beneficiary under
Section 101 of the Code.
The Policy Owner elects either the Cash Value Accumulation Test or the Guideline
Premium/Cash Value Corridor Test in the application. This election is
irrevocable.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since the
Variable Account is not a separate entity from the Company and its operations
form a part of the Company, it will not be taxed separately as a "regulated
investment company" under Sub-chapter M of the Code. Investment income and
realized capital gains on the assets of the Variable Account are reinvested and
taken into account in determining the value of Accumulation Units. As a result,
such investment income and realized capital gains are automatically applied to
increase reserves under the Policies.
The Company does not initially expect to incur any Federal income tax liability
that would be chargeable to the Variable Account. Based upon these expectations,
no charge is currently being made against the Variable Account for federal
income taxes. If, however, the Company determines that on a separate company
basis such taxes may be incurred, it reserves the right to assess a charge for
such taxes against the Variable Account.
The Company may also incur state and local taxes (in addition to premium taxes)
in several states. At present, these taxes are not significant. If they
increase, however, charges for such taxes may be made.
TAX CHANGES
The foregoing discussion, which is based on the Company's understanding of
federal tax laws as they are currently interpreted by the IRS, is general and is
not intended as tax advice.
The Code has been subjected to numerous amendments and changes, and it is
reasonable to believe that it will continue to be revised. The United States
Congress has, in the past, considered numerous legislative proposals that, if
enacted, could change the tax treatment of the Policies. It is reasonable to
believe that such proposals, and other proposals will be considered in the
future, and some may be enacted into law. In addition, the U.S. Treasury
Department may amend existing regulations, issue new regulations, or adopt new
interpretations of existing law that may be at variance with its current
positions on these matters. In addition, current state law (which is not
discussed herein), and future amendments to state law, may affect the tax
consequences of the Policy.
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<PAGE> 47
If the Policy Owner, Insured, or Beneficiary or other person receiving any
benefit or interest in or from the Policy is not both a resident and citizen of
the United States, there may be a tax imposed by a foreign country, in addition
to any tax imposed by the United States. The foreign law (including regulations,
rulings, and case law) may change and impose additional taxes on the Policy, the
Death Benefit, or other Distributions and/or ownership of the Policy, or a
treaty may be amended and all or part of the favorable treatment may be
eliminated.
Any or all of the foregoing may change from time to time without any notice, and
the tax consequences arising out of a Policy may be changed retroactively. There
is no way of predicting if when, and to what extent any such change may take
place. No representation is made as to the likelihood of the continuation of
these current laws, interpretations, and policies.
THE FOREGOING IS A GENERAL EXPLANATION AS TO CERTAIN TAX MATTERS PERTAINING TO
INSURANCE POLICIES. IT IS NOT INTENDED TO BE LEGAL OR TAX ADVICE, AND SHOULD NOT
TAKE THE PLACE OF YOUR INDEPENDENT LEGAL, TAX AND/OR FINANCIAL ADVISOR.
THE COMPANY
The life insurance business, which includes product lines in health insurance,
annuities and retirement products, is the only business in which the Company is
engaged.
The Company markets its Policies through independent insurance brokers, general
agents, and registered representatives of registered NASD broker/dealer firms.
The Company, in common with other insurance companies, is subject to regulation
and supervision by the regulatory authorities of the states in which it is
licensed to do business. A license from the state insurance department is a
prerequisite to the transaction of insurance business in that state. In general,
all states have statutory administrative powers. Such regulation relates, among
other things, to licensing of insurers and their agents, the approval of policy
forms, the methods of computing reserves, the form and content of statutory
financial statements, the amount of policyholders' and stockholders' dividends,
and the type of distribution of investments permitted.
The Company operates in the highly competitive field of life insurance. There
are approximately 2,300 stock, mutual and other types of insurers in the life
insurance business in the United States, and a large number of them compete with
the registrant in the sale of insurance policies.
As is customary in insurance company groups, employees are shared with the other
insurance companies in the group. In addition to its direct salaried employees,
the Company shares employees with Nationwide Mutual Insurance Company and
Nationwide Mutual Fire Insurance Company.
The Company serves as depositor for the Nationwide Variable Account, Nationwide
Variable Account-II, Nationwide Variable Account-3, Nationwide Variable
Account-4, Nationwide Variable Account-5, Nationwide Variable Account-6,
Nationwide Fidelity Advisor Variable Account, Nationwide Variable Account-8,
Nationwide Variable Account-9, MFS Variable Account, Nationwide Multi-Flex
Variable Account, Nationwide VLI Separate Account, Nationwide VLI Separate
Account-2, Nationwide VLI Separate Account-3, Nationwide VLI Separate Account-4,
NACo Variable Account, Nationwide DC Variable Account and Nationwide DCVA-II,
each of which is a registered investment company.
The Company does not presently own or lease any materially important physical
properties when its property holdings are viewed in relation to its total
assets. The Company shares the Home Office, other facilities and equipment with
Nationwide Mutual Insurance Company.
COMPANY MANAGEMENT
Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance
Company, together with Nationwide Mutual Insurance Company, Nationwide Mutual
Fire Insurance Company, Nationwide Property and Casualty Insurance Company and
Nationwide General Insurance Company and their affiliated companies comprise the
Nationwide Insurance Enterprise.
The companies listed above have substantially common boards of directors and
officers. Nationwide Financial Services, Inc. ("NFS") is the sole shareholder of
Nationwide Life Insurance Company. NFS serves as a holding company for other
financial institutions. Nationwide Life Insurance Company is the sole owner of
Nationwide Life
44
<PAGE> 48
and Annuity Insurance Company. Each of the directors and officers listed below
is a director or officer respectively of at least one or more of the other major
insurance affiliates of the Nationwide Insurance Enterprise. Messrs. McFerson,
Gasper, Woodward, Fuellgraf and Weihl and Ms. Thomas are also trustees of one or
more of the registered investment companies distributed by Nationwide Advisory
Services, a registered broker-dealer affiliated with the Nationwide Insurance
Enterprise.
<TABLE>
<CAPTION>
DIRECTORS OF THE COMPANY
DIRECTORS OF THE DEPOSITOR NAME AND POSITIONS AND OFFICERS WITH DEPOSITOR PRINCIPAL OCCUPATION
PRINCIPAL BUSINESS ADDRESS
<S> <C> <C>
Lewis J. Alphin Director Farm Owner and Operator (1)
519 Bethel Church Road
Mount Olive, NC 28365
A. I. Bell Director Farm Owner and Operator (1)
4121 North River Road West
Zanesville, OH 43701
Keith W. Eckel Director Partner, Fred W. Eckel Sons;
1647 Falls Road President, Eckel Farms, Inc. (1)
Clarks Summit, PA 18411
Willard J. Engel Director Retired General Manager, Lyon County
301 East Marshall Street Co-operative Oil Company (1)
Marshall, MN 44691
Fred C. Finney Director Owner and Operator, Moreland Fruit
1558 West Moreland Road Farm; Operator, Melrose Orchard (1)
Wooster, OH 44691
Charles L. Fuellgraf, Jr. Director Chief Executive Officer, Fuellgraf
600 South Washington Street Electric Company (1)
Butler, PA 16001
Joseph J. Gasper President and Chief Operating Officer President and Chief Operating Officer,
One Nationwide Plaza and Director Nationwide Life Insurance Company and
Columbus, OH 43215 Nationwide Life and Annuity Insurance
Company (2)
Dimon R. McFerson Chairman and Chief Executive Chairman and Chief Executive
One Nationwide Plaza Officer-Nationwide Insurance Enterprise Officer-Nationwide Insurance
Columbus, OH 43215 and Director Enterprise (2)
David O. Miller Chairman of the Board and Director President, Owen Potato Farm, Inc.;
115 Sprague Drive Partner, M&M Enterprises (1)
Hebron, OH 43025
Yvonne L. Montgomery Director Senior Vice President-General Manager
Suite 1600 Southern Customer Operations for U.S.
2859 Paces Ferry Road Customer Operations, Xerox Corporation
Atlanta, GA 30339 (2)
C. Ray Noecker Director Owner and Operator Noecker Farms (1)
2770 Winchester Southern S.
Ashville, OH 43103
James F. Patterson Director Vice President, Pattersons, Inc.;
8765 Mulberry Road President, Patterson Farms, Inc. (1)
Chesterland, OH 44026
Arden L. Shisler Director President and Chief Executive Officer,
1356 North Wenger Road K&B Transport, Inc. (1)
Dalton, OH 44618
</TABLE>
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<PAGE> 49
<TABLE>
<S> <C> <C>
Robert L. Stewart Director Owner and Operator Sunnydale Farms and
88740 Fairview Road Mining (1)
Jewett, OH 43986
Nancy C. Thomas Director Farm Owner and Operator, Da-Ma-Lor
10835 Georgetown Street NE Farms (1)
Louisville, OH 44641
Harold W. Weihl Director Farm Owner and Operator, Weihl Farms
14282 King Road (1)
Bowling Green, OH 43402
<FN>
1) Principal Occupation for last 5 years
2) Prior to assuming this current position, held other executive management
positions with the same or affiliated companies.
</TABLE>
Each of the directors is a director of the other major insurance affiliates of
the Nationwide Insurance Enterprise, except Mr. Gasper who is a director only of
the Company and Nationwide Life Insurance Company. Messrs. McFerson and Gasper
are directors of Nationwide Advisory Services, Inc., a registered broker-dealer.
Messrs. McFerson, Miller, Patterson, Shisler and Fuellgraf are directors of
Nationwide Financial Services, Inc. Messrs. Fuellgraf, McFerson, Ms. Thomas and
Mr. Weihl are trustees of Nationwide Investing Foundation, and Nationwide
Investing Foundation III, registered investment companies. Messrs. McFerson,
Gasper and Woodward are trustees of Nationwide Separate Account Trust and
Nationwide Asset Allocation Trust, registered investment companies. Mr. McFerson
is trustee of Financial Horizons Investment Trust and Nationwide Investing
Foundation II, registered investment companies. Mr. Engel is a director of
Western Cooperative Transport.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE COMPANY
OFFICERS OF THE DEPOSITOR OFFICES OF THE DEPOSITOR
NAME AND PRINCIPAL BUSINESS ADDRESS
<S> <C>
Robert A. Oakley Executive Vice President-Chief Financial Officer
One Nationwide Plaza
Columbus, OH 43215
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
One Nationwide Plaza
Columbus, OH 43215
W. Sidney Druen Senior Vice President and General Counsel and Assistant
One Nationwide Plaza Secretary
Columbus, OH 43215
Harvey S. Galloway, Jr. Senior Vice President and Chief Actuary, Health and Annuities
One Nationwide Plaza
Columbus, OH 43215
Richard A. Karas Senior Vice President - Sales and Financial Services
One Nationwide Plaza
Columbus, OH 43215
Susan A. Wolken Senior Vice President - Life Company Operations
One Nationwide Plaza
Columbus, OH 43215
Matthew S. Easley Vice President-Life Marketing and Administrative Services
One Nationwide Plaza
Columbus, OH 43215
Timothy E. Murphy Vice President-Strategic Marketing
One Nationwide Plaza
Columbus, OH 43215
</TABLE>
46
<PAGE> 50
<TABLE>
<S> <C>
R. Dennis Noice Vice President Retail Operations
One Nationwide Plaza
Columbus, OH 43215
Joseph P. Rath Vice President-Product and Market Compliance
One Nationwide Plaza
Columbus, OH 43215
</TABLE>
OTHER CONTRACTS ISSUED BY THE COMPANY
The Company does presently and will, from time to time, offer variable contracts
and policies with benefits which vary in accordance with the investment
experience of a separate account of the Company.
STATE REGULATION
The Company is subject to the laws of Ohio governing insurance companies and to
regulation by the Ohio Insurance Department. An annual statement in a prescribed
form is filed with the Insurance Department each year covering the operation of
the Company for the preceding year and its financial condition as of the end of
such year. Regulation by the Insurance Department includes periodic examination
to determine the Company's contract liabilities and reserves so that the
Insurance Department may certify the items are correct. The Company's books and
accounts are subject to review by the Insurance Department at all times and a
full examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. Such regulation does not, however,
involve any supervision of management or investment practices or policies. In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which it may operate.
REPORTS TO POLICY OWNERS
The Company will mail to the Policy Owner, at the last known address of record,
an annual statement showing the amount of the current death benefit, the Cash
Value, and Cash Surrender Value, premiums paid and monthly charges deducted
since the last report, the amounts invested in the Fixed Account and in the
Variable Account and in each Sub-Account, and any Policy Indebtedness.
Policy Owners will also be sent annual and semi-annual reports containing
financial statements for the Variable Account as required by the 1940 Act.
In addition, Policy Owners will receive statements of significant transactions,
such as changes in Specified Amount, changes in death benefit option, changes in
future premium allocation, transfers among Sub-Accounts, premium payments,
loans, loan repayments, reinstatement and termination.
ADVERTISING
The Company is ranked and rated by independent financial rating services,
including Moody's, Standard & Poor's and A.M. Best Company. The purpose of these
ratings is to reflect the financial strength or claims-paying ability of the
Company. The ratings are not intended to reflect the investment experience or
financial strength of the Variable Account. The Company may advertise these
ratings from time to time. In addition, the Company may include in certain
advertisements, endorsements in the form of a list of organizations, individuals
or other parties which recommend the Company or the Contracts. Furthermore, the
Company may occasionally include in advertisements comparisons of currently
taxable and tax deferred investment programs, based on selected tax brackets, or
discussions of alternative investment vehicles and general economic conditions.
YEAR 2000 COMPLIANCE ISSUES
The Company has developed a plan to address issues related to the Year 2000. The
problem relates to many existing computer programs using only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Company has been evaluating its exposure to the Year
2000 issue through a review of all of its operating systems as well as
dependencies on the systems of others since 1996. The Company expects all system
changes and replacements needed to achieve Year 2000 compliance to be completed
by the end of 1998. Compliance testing will be completed in the first quarter of
1999. The Company charges all costs associated with these system changes as the
costs are incurred.
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<PAGE> 51
Operating expenses in 1997 include approximately $45 million on technology
projects, which includes costs related to Year 2000 and the development of a new
policy administration system for traditional life insurance products and other
system enhancements. The Company anticipates spending a comparable amount in
1998 on technology projects, including Year 2000 initiatives. These expenses do
not have an effect on the assets of the Variable Account and are not charged
through to the Contract Owner.
LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the ordinary
course of its business, none of which is expected to have a material adverse
effect on the Company.
The General Distributor, Nationwide Advisory Services, Inc. is not engaged in
any litigation of any material nature.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. In February 1997, Nationwide Life Insurance Company
was named as a defendant in a lawsuit filed in New York Supreme Court related to
the sale of whole life policies on a "vanishing premium" basis (John H. Snyder
v. Nationwide Life Insurance Co.). The plaintiff in such lawsuit seeks to
represent a national class of Nationwide Life policyholders and claims
unspecified compensatory and punitive damages. This lawsuit has not been
certified as a class action. In April, 1997, a motion to dismiss the Snyder
complaint in its entirety was filed by the defendants, and the plaintiff has
opposed such motion.
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance contract and the other who was the owner of a variable annuity
contract, commenced an action against Nationwide Life Insurance Company and the
American Century group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this action, plaintiffs seek to
represent a class of variable life insurance contract owners and variable
annuity contract owners whom they claim were allegedly misled when purchasing
these variable contracts into believing that some portion of their premiums were
invested in a publicly traded mutual fund when, in fact, the premium monies were
invested in a mutual fund whose shares may only be purchased by insurance
companies. The complaint seeks unspecified compensatory, treble and punitive
damages. In January 1998, both Nationwide Life Insurance Company and American
Century filed motions to dismiss the entire complaint. Plaintiffs' counsel have
opposed these motions and the federal court in Texas heard arguments on the
motions to dismiss in April, 1998. This lawsuit is in an early stage and has not
been certified as a class action. Nationwide Life Insurance Company intends to
defend this case vigorously.
There can be no assurance that any litigation relating to pricing and sales
practices will not have a material adverse effect on the Company in the future.
EXPERTS
The audited financial statements have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Variable Account, the Company, and the Policies
offered hereby. Statements contained in this prospectus as to the content of
Policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
LEGAL OPINIONS
Legal matters in connection with the Policies described herein are being passed
upon by Druen, Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus,
Ohio 43215. All the members of such firm are employed by the Nationwide Mutual
Insurance Company.
48
<PAGE> 52
APPENDIX
ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, AND DEATH BENEFITS
The illustrations in this prospectus have been prepared to help show how values
under the Polices change with investment performance. The illustrations
demonstrate how Cash Values, Cash Surrender Values and Death Benefits under a
Policy would vary over time if the hypothetical gross investment rates of return
were a uniform annual effective rate of either 0%, 6% or 12%. If the
hypothetical gross investment rate of return averages 0%, 6% or 12% over a
period of years, but fluctuates above or below those averages for individual
years, the Cash Values,, Cash Surrender Values and Death Benefits may be
different. For hypothetical returns of 0% and 6%, the illustrations also
illustrate when the Policies would go into default, at which time additional
premium payments would be required to continue the Policy in force. The
illustrations also assume there is not Policy Indebtedness, no additional
premium payments are made, no Cash Values are allocated to the Fixed Account,
and there are no changes in the Specified Amount or Death Benefit option.
The amounts shown for the Cash Value, Cash Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Variable Account sub-accounts is lower than the gross
return. This is due to the deduction of Underlying Mutual Fund investment
advisory fees and other expenses which are equivalent to an annual effective
rate of 0.90%. This effective rate is based on the average of the fund expenses
for the preceding year for all mutual fund options available under the policy as
of March 13, 1998.
Taking into account the Underlying Mutual Fund expenses, gross annual rates of
return of 0%, 6% and 12% correspond to net investment experience at constant
annual rates of 0.90%, 5.10% and 11.10%, respectively.
The illustrations also reflect the fact that the Company makes monthly charges
for providing insurance protection. Current values reflect current cost of
insurance charges and guaranteed values reflect the maximum cost of insurance
charges guaranteed in the Policy. The values shown are for policies which are
issued as standard. Policies issued on a substandard basis would result in lower
Cash Values and Death Benefits than those illustrated. Death Benefit Option 1
has been assumed in all the illustrations.
The illustrations reflect that the Company deducts a sales load from each
premium payment. Charges for state premium and federal taxes are also deducted
from each premium payment. The illustrations reflect the fact that no charges
for federal or state income taxes are currently made against the Variable
Account. If such a charge is made in the future, it will require a higher gross
investment return than illustrated in order to produce the net after-tax returns
shown in the illustrations.
In addition, the illustrations reflect the fact that the Company deducts a
monthly administrative charge at the beginning of each Policy month. The
illustrations also reflect that the Company deducts a monthly charge to assume
mortality and expense risks. This mortality and expense risk charge is assessed
at the beginning of each policy month and is calculated as a percentage of the
assets of the Variable Account only.
The Cash Surrender Values shown in the illustrations reflect that the Company
will deduct a Surrender Charge from the Policy's Cash Value for any Policy
surrendered in the first fourteen years.
Upon request, the Company will furnish a comparable illustration based on the
proposed Insureds' age, sex, smoking classification, rating classification and
premium payment requested.
49
<PAGE> 53
<TABLE>
<CAPTION>
$12,150 ANNUAL PREMIUM: $1,000,000 SPECIFIED AMOUNT
MALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
FEMALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
OPTION 1 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT
----------------------- ----------------------- ----------------
RETURN
- ------
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12,758 10,320 435 1,000,000 10,957 1,072 1,000,000 11,595 1,709 1,000,000
2 26,153 20,399 10,513 1,000,000 22,309 12,423 1,000,000 24,295 14,409 1,000,000
3 40,218 30,224 20,339 1,000,000 34,058 24,172 1,000,000 38,201 28,316 1,000,000
4 54,986 39,784 30,393 1,000,000 46,205 36,814 1,000,000 53,423 44,032 1,000,000
5 70,493 49,063 40,166 1,000,000 58,751 49,854 1,000,000 70,079 61,182 1,000,000
6 86,775 58,045 49,642 1,000,000 71,693 63,290 1,000,000 88,301 79,899 1,000,000
7 103,872 66,708 58,799 1,000,000 85,025 77,117 1,000,000 108,230 100,322 1,000,000
8 121,823 75,019 67,605 1,000,000 98,730 91,316 1,000,000 130,014 122,600 1,000,000
9 140,671 82,939 76,019 1,000,000 112,784 105,864 1,000,000 153,811 146,891 1,000,000
10 160,462 90,427 84,001 1,000,000 127,161 120,735 1,000,000 179,800 173,374 1,000,000
11 181,243 98,661 92,730 1,000,000 143,306 137,375 1,000,000 209,932 204,001 1,000,000
12 203,063 106,481 102,033 1,000,000 159,889 155,440 1,000,000 243,028 238,579 1,000,000
13 225,973 113,815 110,849 1,000,000 176,914 173,949 1,000,000 279,417 276,451 1,000,000
14 250,030 120,638 119,156 1,000,000 194,391 192,908 1,000,000 319,475 317,992 1,000,000
15 275,289 126,919 126,919 1,000,000 212,318 212,318 1,000,000 363,621 363,621 1,000,000
16 301,810 132,828 132,828 1,000,000 230,890 230,890 1,000,000 412,488 412,488 1,000,000
17 329,658 138,394 138,394 1,000,000 250,176 250,176 1,000,000 466,665 466,665 1,000,000
18 358,899 143,652 143,652 1,000,000 270,253 270,253 1,000,000 526,812 526,812 1,000,000
19 389,601 148,665 148,665 1,000,000 291,229 291,229 1,000,000 593,681 593,681 1,000,000
20 421,839 153,545 153,545 1,000,000 313,253 313,253 1,000,000 668,125 668,125 1,000,000
21 455,688 157,489 157,489 1,000,000 335,727 335,727 1,000,000 750,733 750,733 1,000,000
22 491,230 160,358 160,358 1,000,000 358,602 358,602 1,000,000 842,599 842,599 1,000,000
23 528,549 161,995 161,995 1,000,000 381,833 381,833 1,000,000 945,027 945,027 1,000,000
24 567,734 162,213 162,213 1,000,000 405,366 405,366 1,000,000 1,058,971 1,058,971 1,072,017
25 608,878 160,765 160,765 1,000,000 429,124 429,124 1,000,000 1,185,007 1,185,007 1,198,839
26 652,080 157,321 157,321 1,000,000 453,001 453,001 1,000,000 1,324,378 1,324,378 1,338,933
27 697,441 151,452 151,452 1,000,000 476,859 476,859 1,000,000 1,478,441 1,478,441 1,493,631
28 745,071 142,609 142,609 1,000,000 500,533 500,533 1,000,000 1,648,668 1,648,668 1,664,385
29 795,082 130,139 130,139 1,000,000 523,851 523,851 1,000,000 1,836,660 1,836,660 1,852,766
30 847,594 113,285 113,285 1,000,000 546,659 546,659 1,000,000 2,044,157 2,044,157 2,060,486
<FN>
ASSUMPTIONS:
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE.
(2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS
APPENDIX.
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY NATIONWIDE LIFE OR THE TRUST THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
50
<PAGE> 54
<TABLE>
<CAPTION>
$14,000 ANNUAL PREMIUM: $1,000,000 SPECIFIED AMOUNT
MALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
FEMALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
OPTION 2 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT
----------------------- ----------------------- ----------------
RETURN
- -----
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,700 11,988 1,663 1,011,953 12,725 2,400 1,012,688 13,463 3,138 1,013,423
2 30,135 23,708 13,383 1,023,599 25,922 15,597 1,025,801 28,223 17,898 1,028,092
3 46,342 35,147 24,822 1,034,923 39,592 29,267 1,039,339 44,396 34,071 1,044,111
4 63,359 46,289 36,481 1,045,912 53,738 43,929 1,053,297 62,109 52,300 1,061,596
5 81,227 57,116 47,824 1,056,544 68,357 59,064 1,067,666 81,498 72,206 1,080,667
6 99,988 67,609 58,832 1,066,800 83,446 74,670 1,082,438 102,711 93,935 1,101,458
7 119,688 77,739 69,479 1,076,651 98,993 90,733 1,097,593 125,905 117,645 1,124,105
8 140,372 87,470 79,726 1,086,057 114,973 107,229 1,113,098 151,238 143,494 1,148,745
9 162,090 96,754 89,526 1,094,966 131,352 124,124 1,128,909 178,877 171,649 1,175,519
10 184,895 105,540 98,829 1,103,328 148,089 141,378 1,144,975 209,001 202,290 1,204,577
11 208,840 115,199 109,004 1,112,668 166,792 160,597 1,163,127 243,780 237,585 1,238,397
12 233,982 124,312 119,665 1,121,416 185,947 181,300 1,181,642 281,839 277,193 1,275,312
13 260,381 132,848 129,750 1,129,537 205,537 202,439 1,200,496 323,493 320,396 1,315,609
14 288,100 140,775 139,227 1,136,999 225,543 223,995 1,219,663 369,089 367,540 1,359,608
15 317,205 148,049 148,049 1,143,754 245,934 245,934 1,239,099 418,997 418,997 1,407,642
16 347,765 154,864 154,864 1,150,016 266,921 266,921 1,259,032 473,880 473,880 1,460,364
17 379,853 161,249 161,249 1,155,819 288,556 288,556 1,279,512 534,300 534,300 1,518,299
18 413,546 167,241 167,241 1,161,205 310,908 310,908 1,300,604 600,891 600,891 1,582,046
19 448,923 172,916 172,916 1,166,256 334,081 334,081 1,322,415 674,391 674,391 1,652,306
20 486,070 178,402 178,402 1,171,113 358,246 358,246 1,345,123 755,679 755,679 1,729,919
21 525,073 182,745 182,745 1,174,778 382,465 382,465 1,367,736 844,578 844,578 1,814,606
22 566,027 185,778 185,778 1,177,087 406,552 406,552 1,390,065 941,715 941,715 1,906,930
23 609,028 187,313 187,313 1,177,861 430,295 430,295 1,411,898 1,047,766 1,047,766 2,007,502
24 654,179 187,135 187,135 1,176,894 453,438 453,438 1,432,978 1,163,443 1,163,443 2,116,962
25 701,588 184,966 184,966 1,173,921 475,644 475,644 1,452,975 1,289,471 1,289,471 2,235,953
26 751,368 180,448 180,448 1,168,600 496,477 496,477 1,471,459 1,426,558 1,426,558 2,365,103
27 803,636 173,129 173,129 1,160,497 515,378 515,378 1,487,883 1,575,392 1,575,392 2,505,007
28 858,518 162,458 162,458 1,149,090 531,653 531,653 1,501,576 1,736,619 1,736,619 2,656,218
29 916,144 147,825 147,825 1,133,805 544,506 544,506 1,511,775 1,910,886 1,910,886 2,819,293
30 976,651 128,593 128,593 1,114,057 553,071 553,071 1,517,664 2,098,877 2,098,877 2,994,824
<FN>
ASSUMPTIONS:
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE.
(2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS
APPENDIX.
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY NATIONWIDE LIFE OR THE TRUST THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
51
<PAGE> 55
<TABLE>
<CAPTION>
$12,150 ANNUAL PREMIUM: $1,000,000 SPECIFIED AMOUNT
MALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
FEMALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
OPTION 1 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT
----------------------- ----------------------- ----------------
RETURN
- ------
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12,758 10,311 425 1,000,000 10,947 1,062 1,000,000 11,584 1,699 1,000,000
2 26,153 20,356 10,470 1,000,000 22,264 12,378 1,000,000 24,248 14,363 1,000,000
3 40,218 30,116 20,230 1,000,000 33,942 24,057 1,000,000 38,079 28,194 1,000,000
4 54,986 39,568 30,177 1,000,000 45,973 36,581 1,000,000 53,173 43,782 1,000,000
5 70,493 48,684 39,787 1,000,000 58,338 49,441 1,000,000 69,631 60,734 1,000,000
6 86,775 57,430 49,027 1,000,000 71,016 62,613 1,000,000 87,556 79,153 1,000,000
7 103,872 65,757 57,849 1,000,000 83,968 76,060 1,000,000 107,055 99,146 1,000,000
8 121,823 73,603 66,189 1,000,000 97,142 89,728 1,000,000 128,232 120,818 1,000,000
9 140,671 80,885 73,965 1,000,000 110,464 103,544 1,000,000 151,190 144,270 1,000,000
10 160,462 87,511 81,085 1,000,000 123,850 117,424 1,000,000 176,038 169,613 1,000,000
11 181,243 93,994 88,062 1,000,000 138,140 132,209 1,000,000 204,095 198,164 1,000,000
12 203,063 99,772 95,324 1,000,000 152,394 147,946 1,000,000 234,551 230,102 1,000,000
13 225,973 104,587 101,621 1,000,000 166,511 163,545 1,000,000 267,619 264,653 1,000,000
14 250,030 108,304 106,821 1,000,000 180,371 178,888 1,000,000 303,543 302,060 1,000,000
15 275,289 110,748 110,748 1,000,000 193,815 193,815 1,000,000 342,592 342,592 1,000,000
16 301,810 111,680 111,680 1,000,000 206,630 206,630 1,000,000 385,058 385,058 1,000,000
17 329,658 110,777 110,777 1,000,000 218,521 218,521 1,000,000 431,269 431,269 1,000,000
18 358,899 107,608 107,608 1,000,000 229,102 229,102 1,000,000 481,604 481,604 1,000,000
19 389,601 101,642 101,642 1,000,000 237,898 237,898 1,000,000 536,556 536,556 1,000,000
20 421,839 92,227 92,227 1,000,000 244,370 244,370 1,000,000 596,797 596,797 1,000,000
21 455,688 78,665 78,665 1,000,000 247,915 247,915 1,000,000 663,256 663,256 1,000,000
22 491,230 60,253 60,253 1,000,000 247,856 247,856 1,000,000 737,205 737,205 1,000,000
23 528,549 36,141 36,141 1,000,000 243,408 243,408 1,000,000 820,350 820,350 1,000,000
24 567,734 5,223 5,223 1,000,000 233,590 233,590 1,000,000 914,969 914,969 1,000,000
25 608,878 (*) (*) (*) 217,083 217,083 1,000,000 1,022,913 1,022,913 1,037,848
26 652,080 (*) (*) (*) 192,063 192,063 1,000,000 1,142,002 1,142,002 1,157,946
27 697,441 (*) (*) (*) 156,006 156,006 1,000,000 1,272,935 1,272,935 1,289,853
28 745,071 (*) (*) (*) 105,407 105,407 1,000,000 1,416,701 1,416,701 1,434,538
29 795,082 (*) (*) (*) 35,430 35,430 1,000,000 1,574,330 1,574,330 1,593,009
30 847,594 (*) (*) (*) (*) (*) (*) 1,746,897 1,746,897 1,766,317
<FN>
ASSUMPTIONS:
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE.
(2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS
APPENDIX.
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY NATIONWIDE LIFE OR THE TRUST THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
52
<PAGE> 56
<TABLE>
<CAPTION>
$14,000 ANNUAL PREMIUM: $1,000,000 SPECIFIED AMOUNT
MALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
FEMALE: NON-TOBACCO: PREFERRED ISSUE: AGE 55
OPTION 2 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT
----------------------- ----------------------- ----------------
RETURN
- ------
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ----- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,700 11,979 1,654 1,011,948 12,715 2,390 1,012,683 13,452 3,127 1,013,418
2 30,135 23,665 13,340 1,023,574 25,876 15,551 1,025,776 28,175 17,850 1,028,065
3 46,342 35,036 24,711 1,034,858 39,473 29,148 1,039,269 44,270 33,945 1,044,038
4 63,359 46,065 36,257 1,045,774 53,496 43,688 1,053,149 61,849 52,041 1,061,437
5 81,227 56,722 47,429 1,056,292 67,925 58,633 1,067,392 81,026 71,734 1,080,368
6 99,988 66,963 58,187 1,066,371 82,730 73,954 1,081,965 101,918 93,141 1,100,936
7 119,688 76,735 68,475 1,075,958 97,865 89,605 1,096,820 124,637 116,377 1,123,242
8 140,372 85,963 78,219 1,084,982 113,261 105,518 1,111,887 149,289 141,545 1,147,376
9 162,090 94,553 87,326 1,093,349 128,825 121,598 1,127,067 175,964 168,736 1,173,415
10 184,895 102,398 95,687 1,100,953 144,444 137,733 1,142,246 204,750 198,038 1,201,426
11 208,840 110,254 104,059 1,108,714 161,069 154,874 1,158,604 237,105 230,910 1,233,188
12 233,982 117,134 112,487 1,115,492 177,580 172,934 1,174,817 272,000 267,354 1,267,390
13 260,381 122,900 119,803 1,121,152 193,820 190,722 1,190,729 309,553 306,455 1,304,138
14 288,100 127,401 125,852 1,125,542 209,604 208,055 1,206,153 349,873 348,324 1,343,527
15 317,205 130,435 130,435 1,128,463 224,690 224,690 1,220,846 393,032 393,032 1,385,611
16 347,765 131,737 131,737 1,129,651 238,753 238,753 1,234,482 439,036 439,036 1,430,378
17 379,853 130,956 130,956 1,128,757 251,362 251,362 1,246,631 487,798 487,798 1,477,722
18 413,546 127,635 127,635 1,125,327 261,952 261,952 1,256,726 539,106 539,106 1,527,407
19 448,923 121,239 121,239 1,118,827 269,844 269,844 1,264,090 592,635 592,635 1,579,086
20 486,070 111,194 111,194 1,108,688 274,279 274,279 1,267,967 647,978 647,978 1,632,323
21 525,073 96,900 96,900 1,094,292 274,444 274,444 1,267,543 704,663 704,663 1,686,618
22 566,027 77,714 77,714 1,075,000 269,486 269,486 1,261,971 762,172 762,172 1,741,422
23 609,028 53,116 53,116 1,050,330 258,507 258,507 1,250,357 819,921 819,921 1,796,117
24 654,179 22,538 22,538 1,019,716 240,504 240,504 1,231,704 877,206 877,206 1,849,960
25 701,588 (*) (*) (*) 214,266 214,266 1,204,806 933,075 933,075 1,901,962
26 751,368 (*) (*) (*) 178,282 178,282 1,168,164 986,234 986,234 1,950,782
27 803,636 (*) (*) (*) 130,723 130,723 1,119,956 1,034,990 1,034,990 1,994,682
28 858,518 (*) (*) (*) 69,373 69,373 1,057,944 1,077,207 1,077,207 2,031,477
29 916,144 (*) (*) (*) (*) (*) (*) 1,110,453 1,110,453 2,058,683
30 976,651 (*) (*) (*) (*) (*) (*) 1,132,114 1,132,114 2,073,628
<FN>
ASSUMPTIONS:
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE.
(2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS
APPENDIX.
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY NATIONWIDE LIFE OR THE TRUST THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
53
<PAGE> 57
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1997 1996
------
----------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $13,204.1 $12,304.6
Equity securities 80.4 59.1
Mortgage loans on real estate, net 5,181.6 5,272.1
Real estate, net 311.4 265.8
Policy loans 415.3 371.8
Other long-term investments 25.2 28.7
Short-term investments 358.4 4.8
---------- ---------
19,576.4 18,306.9
---------- ---------
Cash 175.6 43.8
Accrued investment income 210.5 210.2
Deferred policy acquisition costs 1,665.4 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 438.4 426.5
Assets held in Separate Accounts 37,724.4 26,926.7
---------- ---------
$59,790.7 $47,766.3
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Future policy benefits and claims $18,702.8 $17,600.6
Other liabilities 885.6 1,101.1
Liabilities related to Separate Accounts 37,724.4 26,926.7
---------- ---------
57,312.8 45,628.4
---------- ---------
Commitments and contingencies (notes 7 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 527.9
Retained earnings 1,312.3 1,432.6
Unrealized gains on securities available-for-sale, net 247.1 173.6
---------- ---------
2,477.9 2,137.9
---------- ---------
$59,790.7 $47,766.3
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $ 545.2 $ 400.9 $ 286.6
Traditional life insurance premiums 205.4 198.6 199.1
Net investment income 1,409.2 1,357.8 1,294.0
Realized gains (losses) on investments 11.1 (0.3) (1.7)
Other 46.5 35.9 20.7
---------- ---------- ----------
2,217.4 1,992.9 1,798.7
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Other benefits and claims 178.2 178.3 165.2
Policyholder dividends on participating policies 40.6 41.0 39.9
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Other operating expenses 384.9 342.4 273.0
---------- ---------- ----------
1,787.5 1,677.4 1,511.1
---------- ---------- ----------
Income from continuing operations before federal income tax expense 429.9 315.5 287.6
Federal income tax expense 150.2 110.9 99.8
---------- ---------- ----------
Income from continuing operations 279.7 204.6 187.8
Income from discontinued operations (less federal income tax expense
of $4.5 and $7.4 in 1996 and 1995, respectively) - 11.3 24.7
---------- ---------- ----------
Net income $ 279.7 $ 215.9 $ 212.5
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains
(losses)
Additional on securities Total
Common paid-in Retained available- shareholder's
stock capital earnings for-sale, net equity
----------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $3.8 $ 606.2 $1,378.2 $(119.7) $1,868.5
Capital contribution - 51.0 - (4.1) 46.9
Net income - - 212.5 - 212.5
Dividends to shareholder - - (7.5) - (7.5)
Unrealized gains on securities available-
for-sale, net - - - 508.1 508.1
-------- -------- -------- -------- ---------
December 31, 1995 3.8 657.2 1,583.2 384.3 2628.5
Net income - - 215.9 - 215.9
Dividends to shareholder - (129.3) (366.5) (39.8) (535.6)
Unrealized losses on securities available-
for-sale, net - - - (170.9) (170.9)
-------- -------- -------- -------- ---------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Capital contribution - 836.8 - - 836.8
Net income - - 279.7 - 279.7
Dividends to shareholder - (450.0) (400.0) - (850.0)
Unrealized gains on securities available-
for-sale, net - - - 73.5 73.5
-------- -------- -------- -------- ---------
December 31, 1997 $3.8 $ 914.7 $1,312.3 $ 247.1 $2,477.9
======== ======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 279.7 $ 215.9 $ 212.5
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3)
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Amortization and depreciation (2.0) 7.0 10.2
Realized (gains) losses on invested assets, net (11.1) (0.3) 3.3
(Increase) decrease in accrued investment income (0.3) 2.8 (16.9)
(Increase) decrease in other assets (12.7) (38.9) 39.9
(Decrease) increase in policy liabilities (23.1) (151.0) 123.9
Increase in other liabilities 230.6 191.4 27.0
Other, net (10.9) (61.7) 1.8
----------- --------- --------
Net cash provided by operating activities 1,146.1 858.3 1,113.4
----------- --------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6
Proceeds from sale of securities available-for-sale 574.5 299.6 107.3
Proceeds from maturity of fixed maturity securities held-to-maturity - - 564.4
Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8
Proceeds from sale of real estate 34.8 18.5 48.3
Proceeds from repayments of policy loans and sale of other invested assets 22.7 22.8 53.6
Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,942.4)
Cost of fixed maturity securities held-to-maturity acquired - - (593.6)
Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0)
Cost of real estate acquired (24.9) (7.9) (10.9)
Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9)
Short-term investments, net (354.8) 28.0 77.8
----------- --------- --------
Net cash used in investing activities (1,959.8) (771.3) (1,725.0)
----------- --------- --------
Cash flows from financing activities:
Proceeds from capital contributions 836.8 - -
Cash dividends paid - (50.0) (7.5)
Increase in investment product and universal life insurance
product account balances 2,488.5 1,781.8 1,883.7
Decrease in investment product and universal life insurance
product account balances (2,379.8) (1,784.5) (1,258.7)
----------- --------- --------
Net cash provided by (used in) financing activities 945.5 (52.7) 617.5
----------- --------- --------
Net increase in cash 131.8 34.3 5.9
Cash, beginning of year 43.8 9.5 3.6
----------- --------- --------
Cash, end of year $ 175.6 $ 43.8 $ 9.5
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11
1997, NFS completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 11 and 15. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. Subsidiaries that are
classified and reported as discontinued operations are not
consolidated but rather are reported as "Investment in
subsidiaries classified as discontinued operations" in the
accompanying consolidated balance sheets and "Income from
discontinued operations" in the accompanying consolidated
statements of income. All significant intercompany balances and
transactions have been eliminated.
(b) VALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1997 or 1996.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed annuities. Universal life insurance products
include universal life insurance, variable universal life
insurance and other interest-sensitive life insurance policies.
Revenues for investment products and universal life insurance
products consist of net investment income, asset fees, cost of
insurance, policy administration and surrender charges that have
been earned and assessed against policy account balances during
the period. Policy benefits and claims that are charged to expense
include interest credited to policy account balances and benefits
and claims incurred in the period in excess of related policy
account balances.
TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
(d) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) SEPARATE ACCOUNTS
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $365.5 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the Separate Accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
Future policy benefits for traditional life insurance policies
have been calculated using a net level premium method based on
estimates of mortality, morbidity, investment yields and
withdrawals which were used or which were being experienced at the
time the policies were issued, rather than the assumptions
prescribed by state regulatory authorities. See note 4.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) PARTICIPATING BUSINESS
Participating business represents approximately 50% in 1997 (52%
in 1996 and 54% in 1995) of the Company's life insurance in force,
77% in 1997 (78% in 1996 and 79% in 1995) of the number of life
insurance policies in force, and 27% in 1997 (40% in 1996 and 47%
in 1995) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) REINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 11 and 15.
(j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 - REPORTING
COMPREHENSIVE INCOME was issued in June 1997 and is effective for
fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders and includes net income.
Comprehensive income would be reported in addition to earnings
amounts currently presented. The Company will adopt the statement
and begin reporting comprehensive income in the first quarter of
1998.
(k) RECLASSIFICATION
Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ - $ 313.7
Obligations of states and political subdivisions 1.6 - - 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
------------ --------- --------- -----------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
------------ --------- --------- -----------
$ 12,800.7 $ 498.3 $ (14.5) $ 13,284.5
============ ========= ========= ===========
December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 275.7 $ 4.8 $ (1.3) $ 279.2
Obligations of states and political subdivisions 6.2 0.5 - 6.7
Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
------------ --------- --------- -----------
Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6
Equity securities 43.9 15.6 (0.4) 59.1
------------ --------- --------- -----------
$ 12,014.8 $ 400.3 $ (51.4) $ 12,363.7
============ ========= ========= ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, 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>
Amortized Estimated
(in millions of dollars) cost fair value
-------------- ----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 419.2 $ 422.1
Due after one year through five years 4,573.5 4,708.4
Due after five years through ten years 2,772.6 2,879.7
Due after ten years 1,333.4 1,443.6
----------- -----------
9,098.7 9,453.8
Mortgage-backed securities 3,634.2 3,750.3
----------- -----------
$ 12,732.9 $ 13,204.1
=========== ===========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- ----------
<S> <C> <C>
Gross unrealized gains $ 483.8 $349.0
Adjustment to deferred policy acquisition costs (103.7) (81.9)
Deferred federal income tax (133.0) (93.5)
-------- -------
$ 247.1 $173.6
======== =======
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $137.5 $(289.2) $876.3
Equity securities (2.7) 8.9 -
Fixed maturity securities held-to-maturity - - 75.6
------- ------- -------
$134.8 $(280.3) $ 951.9
======= ======= =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $574.5 million, $299.6 million and $107.3 million,
respectively. During 1997, gross gains of $9.9 million ($6.6 million
and $4.8 million in 1996 and 1995, respectively) and gross losses of
$18.0 million ($6.9 million and $2.1 million in 1996 and 1995,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25.4 million to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of $3.5
million.
As permitted by the Financial Accounting Standards Board's Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November
1995, the Company transferred nearly all of its fixed maturity
securities previously classified as held-to-maturity to
available-for-sale. As of December 14, 1995, the date of transfer, the
fixed maturity securities had amortized cost of $3.32 billion,
resulting in a gross unrealized gain of $155.9 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million ($51.8 million as
of December 31, 1996), which includes $3.9 million ($41.7 million as of
December 31, 1996) of impaired mortgage loans on real estate for which
the related valuation allowance was $0.1 million ($8.5 million as of
December 31, 1996) and $16.0 million ($10.1 million as of December 31,
1996) of impaired mortgage loans on real estate for which there was no
valuation allowance. During 1997, the average recorded investment in
impaired mortgage loans on real estate was approximately $31.8 million
($39.7 million in 1996) and interest income recognized on those loans
was $1.0 million ($2.1 million in 1996), which is equal to interest
income recognized using a cash-basis method of income recognition.
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
------------- -------------
<S> <C> <C>
Allowance, beginning of year $51.0 $49.1
(Reductions) additions charged to operations (1.2) 4.5
Direct write-downs charged against the allowance (7.3) (2.6)
------ ------
Allowance, end of year $42.5 $51.0
====== ======
</TABLE>
Real estate is presented at cost less accumulated depreciation of $45.1
million as of December 31, 1997 ($30.3 million as of December 31, 1996)
and valuation allowances of $11.1 million as of December 31, 1997
($15.2 million as of December 31, 1996).
Investments that were non-income producing for the twelve month period
preceding December 31, 1997 amounted to $19.4 million ($26.8 million
for 1996) and consisted of $3.0 million ($0.2 million in 1996) in
securities available-for-sale, $16.4 million ($20.6 million in 1996) in
real estate and none ($5.9 million in 1996) in other long-term
investments.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 911.6 $ 917.1 $ 685.8
Equity securities 0.8 1.3 1.3
Fixed maturity securities held-to-maturity - - 201.8
Mortgage loans on real estate 457.7 432.8 395.5
Real estate 42.9 44.3 38.3
Short-term investments 22.7 4.2 10.6
Other 21.0 4.0 7.2
-------- -------- --------
Total investment income 1,456.7 1,403.7 1,340.5
Less investment expenses 47.5 45.9 46.5
-------- -------- --------
Net investment income $1,409.2 $1,357.8 $1,294.0
======== ======== ========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 3.6 $(3.5) $ 4.2
Equity securities 2.7 3.2 3.4
Mortgage loans on real estate 1.6 (4.1) (7.1)
Real estate and other 3.2 4.1 (2.2)
------ ------ ------
$11.1 $(0.3) $(1.7)
====== ====== ======
</TABLE>
Fixed maturity securities with an amortized cost of $6.2 million as
of December 31, 1997 and 1996 were on deposit with various
regulatory agencies as required by law.
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts
represents approximately 86% and 87% of the total liability for future
policy benefits as of December 31, 1997 and 1996, respectively. The
average interest rate credited on investment product policies was
approximately 6.1%, 6.3% and 6.6% for the years ended December 31,
1997, 1996 and 1995, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
INTEREST RATES: Interest rates vary by issue year and were 6.9%
and 6.6% in 1997 and 1996, respectively. Interest rates have
generally ranged from 6.0% to 10.5% for previous issue years.
WITHDRAWALS: Rates, which vary by issue age, type of coverage and
policy duration, are based on Company experience.
MORTALITY: Mortality and morbidity rates are based on published
tables, modified for the Company's actual experience.
The Company has entered into a reinsurance contract to cede a portion
of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were
$220.2 million and $240.5 million as of December 31, 1997 and 1996,
respectively. The contract is immaterial to the Company's results of
operations. The ceding of risk does not discharge the original insurer
from its primary obligation to the policyholder. Under the terms of the
contract, Franklin has established a trust as collateral for the
recoveries. The trust assets are invested in investment grade
securities, the market value of which must at all times be greater than
or equal to 102% of the reinsured reserves.
The Company has reinsurance agreements with certain affiliates as
described in note 11. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(5) FEDERAL INCOME TAX
The Company's current federal income tax liability was $60.1 million
and $30.2 million as of December 31, 1997 and 1996, respectively.
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $200.1 $183.0
Liabilities in Separate Accounts 242.0 188.4
Mortgage loans on real estate and real estate 19.0 23.4
Other assets and other liabilities 59.2 53.7
------- ------
Total gross deferred tax assets 520.3 448.5
Less valuation allowance (7.0) (7.0)
------- ------
Net deferred tax assets 513.3 441.5
------- ------
Deferred tax liabilities:
Deferred policy acquisition costs 480.5 399.3
Fixed maturity securities 193.3 133.2
Deferred tax on realized investment gains 40.1 37.6
Equity securities and other long-term investments 7.5 8.2
Other 22.2 25.4
------- ------
Total gross deferred tax liabilities 743.6 603.7
------- ------
Net deferred tax liability $230.3 $162.2
======= ======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1997, 1996 and 1995.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable $121.7 $116.5 $88.7
Deferred tax expense (benefit) 28.5 (5.6) 11.1
------ ------ ------
$150.2 $110.9 $99.8
====== ====== ======
</TABLE>
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
(in millions of dollars) Amount % Amount % Amount %
---------------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $150.5 35.0 $110.4 35.0 $100.6 35.0
Tax exempt interest and dividends
received deduction - 0.0 (0.2) (0.1) - 0.0
Other, net (0.3) (0.1) 0.7 0.3 (0.8) (0.3)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $150.2 34.9 $110.9 35.2 $ 99.8 34.7
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $91.8 million, $115.8 million and
$51.8 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices.
MORTGAGE LOANS ON REAL ESTATE, NET: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using 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.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in Separate Accounts is based on quoted market prices. The
fair value of liabilities related to Separate Accounts is the
amount payable on demand, which includes certain surrender
charges.
INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 13.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6
Equity securities 80.4 80.4 59.1 59.1
Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9
Policy loans 415.3 415.3 371.8 371.8
Short-term investments 358.4 358.4 4.8 4.8
Cash 175.6 175.6 43.8 43.8
Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7
Liabilities:
Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5
Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5
Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
</TABLE>
(7) RISK DISCLOSURES
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduce demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $341.4 million
extending into 1998 were outstanding as of December 31, 1997. The
Company also had $63.9 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1997.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 20% (21% in 1996) in any geographic area and no more than 2% (2%
in 1996) with any one borrower as of December 31, 1997. As of December
31, 1997, 46% (44% in 1996) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1997 and 1996. See note 4.
(8) PENSION PLAN
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. Benefits are based upon the highest average annual
salary of a specified number of consecutive years of the last ten years
of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan (the Retirement Plan). Immediately prior to the merger,
the plans were amended to provide consistent benefits for service after
January 1, 1996. These amendments had no significant impact on the
accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1997, 1996 and 1995 were $7.5 million, $7.4
million and $10.5 million, respectively.
The Company had no net accrued pension expense as of December 31, 1997
($1.1 million as of December 31, 1996).
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide
Insurance Companies and Affiliates Retirement Plan as a whole for the
year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 77.3 $ 75.5 $ 64.5
Interest cost on projected benefit obligation 118.6 105.5 95.3
Actual return on plan assets (328.0) (210.6) (249.3)
Net amortization and deferral 196.4 101.8 143.4
-------- -------- --------
$ 64.3 $ 72.2 $ 53.9
======== ======== ========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
</TABLE>
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547.5 $1,338.6
Nonvested 13.5 11.1
-------- ---------
$1,561.0 $1,349.7
======== =========
Net accrued pension expense:
Projected benefit obligation for services rendered to date $2,033.8 $1,847.8
Plan assets at fair value 2,212.9 1,947.9
--------- ---------
Plan assets in excess of projected benefit obligation 179.1 100.1
Unrecognized prior service cost 34.7 37.9
Unrecognized net gains (330.7) (202.0)
Unrecognized net asset at transition 33.3 37.2
--------- ---------
$ (83.6) $ (26.8)
========= =========
</TABLE>
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future compensation levels 4.25% 4.75%
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau (ELICW).
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1997 and 1996 was $36.5 million and $34.9 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and
1995 was $3.0 million, $3.3 million and $3.1 million, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 93.3 $ 93.0
Fully eligible, active plan participants 31.6 23.7
Other active plan participants 113.0 84.0
-------- --------
Accumulated postretirement benefit obligation 237.9 200.7
Plan assets at fair value 69.2 63.0
-------- --------
Plan assets less than accumulated postretirement benefit obligation (168.7) (137.7)
Unrecognized transition obligation of affiliates 1.5 1.7
Unrecognized net losses (gains) 1.6 (23.2)
-------- --------
$(165.6) $(159.2)
======== ========
</TABLE>
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year) $ 7.0 $ 6.5 $ 6.2
Interest cost on accumulated postretirement
benefit obligation 14.0 13.7 14.2
Actual return on plan assets (3.6) (4.3) (2.7)
Amortization of unrecognized transition
obligation of affiliates 0.2 0.2 3.0
Net amortization and deferral (0.5) 1.8 (1.6)
------- ------ ------
$17.1 $17.9 $19.1
======= ====== ======
</TABLE>
Actuarial assumptions used for the measurement of the APBO and the
NPPBC for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of return on plan
assets, net of tax 5.89% 4.80% 8.00%
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
For the plan as a whole, a one percentage point increase in the assumed
health care cost trend rate would increase the APBO as of December 31,
1997 by $0.4 million and have no impact on the NPPBC for the year ended
December 31, 1997.
(10) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The statutory capital and surplus of NLIC as of December 31, 1997, 1996
and 1995 was $1.13 billion, $1.00 billion and $1.36 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1997, 1996 and 1995 was $111.7 million, $73.2 million and
$86.5 million, respectively.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-month period immediately
following the $850.0 million dividend would be an extraordinary
dividend under Ohio insurance laws. Accordingly, no such dividend could
be paid without prior regulatory approval. The Company has no reason to
believe that any reasonably foreseeable dividend to be paid by NLIC
would not receive the required approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) TRANSACTIONS WITH AFFILIATES
As part of the restructuring described in note 1, NLIC paid a dividend
valued at $485.7 million to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of ELICW, National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid
an equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the
Company made lease payments to NMIC and its subsidiaries of $8.4
million, $9.1 million and $9.0 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $85.8 million, $101.6 million and $107.1
million in 1997, 1996 and 1995, respectively. The allocations are based
on techniques and procedures in accordance with insurance regulatory
guidelines. Measures used to allocate expenses among companies include
individual employee estimates of time spent, special cost studies,
salary expense, commissions expense and other methods agreed to by the
participating companies that are within industry guidelines and
practices. The Company believes these allocation methods are
reasonable. In addition, the Company does not believe that expenses
recognized under the inter-company agreements are materially different
than expenses that would have been recognized had the Company operated
on a stand alone basis. Amounts payable to NMIC from the Company under
the cost sharing agreement were $20.5 million and $15.1 million as of
December 31, 1997 and 1996, respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1997 and
1996 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
<PAGE> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements exist between NLIC and,
respectively, NMIC and ELICW whereby all of NLIC's accident and health
and group life insurance business is ceded on a modified coinsurance
basis. NLIC entered into the reinsurance agreements during 1996 because
the accident and health and group life insurance business was unrelated
to the Company's long-term savings and retirement products.
Accordingly, the accident and health and group life insurance business
has been accounted for as discontinued operations for all periods
presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment
risk associated with changes in interest rates is borne by ELICW or
NMIC, as the case may be. Risk of asset default is retained by the
Company, although a fee is paid by ELICW or NMIC, as the case may be,
to the Company for the Company's retention of such risk. The agreements
will remain in force until all policy obligations are settled. However,
with respect to the agreement between NLIC and NMIC, either party may
terminate the contract on January 1 of any year with prior notice. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated
parties. Amounts ceded to NMIC and ELICW for the years ended December
31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW
-------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Premiums $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and other expenses $100.7 $225.9 $100.5 $246.6
</TABLE>
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $211.0 million and $4.8 million as of
December 31, 1997 and 1996, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to
NLIC. Farmland merged into WCLIC effective June 30, 1995. The
contribution resulted in a direct increase to consolidated
shareholder's equity of $46.9 million. As discussed in note 15, WCLIC
is accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1997 were $66.1
million, $76.9 million and $57.3 million, respectively.
(12) BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into a $600.0 million
revolving credit facility which provides for a $600.0 million loan over
a five year term on a fully revolving basis with a group of national
financial institutions. The credit facility provides for several and
not joint liability with respect to any amount drawn by either NLIC or
NMIC. NLIC and NMIC pay facility and usage fees to the financial
institutions to maintain the revolving credit facility. All previously
existing line of credit agreements were canceled. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to
be material to the Company's financial position or results of
operations.
(14) SEGMENT INFORMATION
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by the Company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts. The Life
Insurance segment consists of insurance products that provide a death
benefit and may also allow the customer to build cash value on a
tax-deferred basis. In addition, the Company reports corporate expenses
and investments, and the related investment income supporting capital
not specifically allocated to its product segments in a Corporate and
Other segment. In addition, all realized gains and losses and
investment management fees and other revenue earned from mutual funds,
other than the portion allocated to the variable annuities and life
insurance segments, are reported in the Corporate and Other segment.
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1997, 1996 and 1995 and assets as of December 31, 1997,
1996 and 1995, by segment.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 404.0 $ 284.6 $ 189.1
Fixed Annuities 1,141.4 1,092.6 1,052.0
Life Insurance 473.1 435.6 409.1
Corporate and Other 198.9 180.1 148.5
----------- ---------- ----------
$ 2,217.4 $ 1,992.9 $ 1,798.7
=========== ========== ==========
Income from continuing operations before federal income tax
expense:
Variable Annuities $ 150.9 $ 90.3 $ 50.8
Fixed Annuities 169.5 135.4 137.0
Life Insurance 70.9 67.2 67.6
Corporate and Other 38.6 22.6 32.2
----------- ---------- ----------
$ 429.9 $ 315.5 $ 287.6
=========== ========== ==========
Assets:
Variable Annuities $ 35,278.7 $ 25,069.7 $ 17,333.0
Fixed Annuities 14,436.3 13,994.7 13,250.4
Life Insurance 3,901.4 3,353.3 3,027.4
Corporate and Other 6,174.3 5,348.6 4,896.8
----------- ---------- ----------
$ 59,790.7 $ 47,766.3 $ 38,507.6
=========== ========== ==========
</TABLE>
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(15) DISCONTINUED OPERATIONS
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, NLIC effected certain transactions with respect to certain
subsidiaries and lines of business that were unrelated to long-term
savings and retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend
payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of three subsidiaries: ELICW, NCC
and WCLIC. ELICW writes group accident and health and group life
insurance business and maintains it offices in Wausau, Wisconsin. NCC
is a property and casualty company with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. WCLIC writes high dollar term life insurance
policies and is located in San Francisco, California. ELICW, NCC and
WCLIC have been accounted for as discontinued operations in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
Also, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 11 for a
complete discussion of the reinsurance agreements. The Company has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated
companies. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company did not recognize any gain or loss on the disposal of the
accident and health and group life insurance business. The assets,
liabilities, results of operations and activities of discontinued
operations are distinguished physically, operationally and for
financial reporting purposes from the remaining assets, liabilities,
results of operations and activities of the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ - $ 668.9 $ 776.9
Net income $ - $ 11.3 $ 24.7
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Assets, consisting primarily of investments $247.3 $3,288.5 $3,206.7
Liabilities, consisting primarily of policy benefits and claims $247.3 $2,802.8 $2,700.0
</TABLE>
<PAGE> 58
PART II - OTHER INFORMATION
CONTENTS OF REGISTRATION STATEMENT
This Form S-6 Registration Statement comprises the following papers and
documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 79 pages.
Representations and Undertakings.
The Signatures.
<TABLE>
<CAPTION>
The following exhibits required by Forms N-8B-2 and S-6:
<S> <C> <C>
1. Power of Attorney dated April 1, 1998 Attached hereto.
2. Resolution of the Depositor's Board of Directors Included with the Registration Statement on Form N-8B-2 for
authorizing the establishment of the Registrant, the Nationwide VLI Separate Account-2 (File No. 811-5311),
adopted and is hereby incorporated by reference.
3. Distribution Contracts Underwriting or Distribution of contracts between the
Registrant and Principal Underwriter - Filed previously in
connection with Registration Statement (SEC File No.
33-86408) on November 14, 1994 and hereby incorporated by
reference.
4. Form of Security Included with Registration Statement on Form S-6 for the Nationwide
VLI Separate Account-2 ('33 Act File No. 33-63179, '40 Act File No.
811-5311) and is hereby incorporated by reference.
5. Articles of Incorporation of Depositor Included with the Registration Statement on Form N-8B-2 for
the Nationwide VLI Separate Account-2 (File No. 811-5311),
and is hereby incorporated by reference.
6. Application form of Security Included with Registration Statement on Form S-6 for the Nationwide
VLI Separate Account-2 ('33 Act File No. 33-63179, '40 Act File No.
811-5311) and is hereby incorporated by reference.
7. Opinion of Counsel Attached hereto.
</TABLE>
<PAGE> 59
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Nationwide Life Insurance Company:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Columbus, Ohio
May 13, 1998 KPMG Peat Marwick LLP
<PAGE> 60
REPRESENTATIONS AND UNDERTAKINGS
The Registrant and the Company hereby make the following representations and
undertakings:
(a) This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of 1940 (the "Act"). The Registrant and the
Company elect to be governed by Rule 6e-3(T)(b)(13)(i)(A) under the Act
with respect to the Policies described in the prospectus. The Policies
have been designed in such a way as to qualify for the exemptive relief
from various provisions of the Act afforded by Rule 6e-3(T).
(b) Paragraph (b) (13) (iii) (F) of Rule 6e-3(T) is being relied on for the
deduction of the mortality and expense risk charges ("risk charges")
assumed by the Company under the Policies. The Company represents that
the risk charges are within the range of industry practice for comparable
policies and reasonable in relation to all of the risks assumed by the
issuer under the Policies. Actuarial memoranda demonstrating the
reasonableness of these charges are maintained by the Company, and will
be made available to the Securities and Exchange Commission (the
"Commission") on request.
(c) The Company has concluded that there is a reasonable likelihood that the
distribution financing arrangement of the separate account will benefit
the separate account and the contractholders and will keep and make
available to the Commission on request a memorandum setting forth the
basis for this representation.
(d) The Company represents that the separate account will invest only in
management investment companies which have undertaken to have a board of
directors, a majority of whom are not interested persons of the company,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
(e) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant hereby undertakes to file with the
Commission such supplementary and periodic information, documents, and
reports as may be prescribed by any rule or regulation of the Commission
heretofore or hereafter duly adopted pursuant to authority conferred in
that section.
(f) The fees and charges deducted under the Policy in the aggregate are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by the Company.
<PAGE> 61
SIGNATURES
As required by the Securities Act of 1933, the Registrant, Nationwide VLI
Separate Account - 4, has caused this Registration Statement to be signed on its
behalf in the City of Columbus, and State of Ohio, on this 13th day of May,
1998.
<TABLE>
<CAPTION>
NATIONWIDE VLI SEPARATE ACCOUNT-4
---------------------------------------
(Registrant)
(Seal) NATIONWIDE LIFE INSURANCE COMPANY
- ------ ---------------------------------------
Attest: (Sponsor)
W. SIDNEY DRUEN By: JOSEPH P. RATH
- -------------------------------------- ----------------------------------
W. Sidney Druen Joseph P. Rath
Assistant Secretary Vice President - Office of Product
and Market Compliance
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 13th day of May, 1998.
SIGNATURE TITLE
<S> <C> <C>
LEWIS J. ALPHIN Director
- ---------------------------------
Lewis J. Alphin
A. I. BELL Director
- ---------------------------------
A. I. Bell
KEITH W. ECKEL Director
- ---------------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- ---------------------------------
Willard J. Engel
FRED C. FINNEY Director
- ---------------------------------
Fred C. Finney
CHARLES L. FUELLGRAF, JR. Director
- ---------------------------------
Charles L. Fuellgraf, Jr.
JOSEPH J. GASPER President and Chief
- --------------------------------- Operating Office and Director
Joseph J. Gasper
DIMON R. McFERSON Chairman and Chief Executive Officer
- --------------------------------- Nationwide Insurance Enterprise and Director
Dimon R. McFerson
DAVID O. MILLER Chairman of the Board and Director
- ---------------------------------
David O. Miller
YVONNE L. MONTGOMERY Director
- ---------------------------------
Yvonne L. Montgomery
C. RAY NOECKER Director
- ---------------------------------
C. Ray Noecker
ROBERT A. OAKLEY Executive Vice President-
- --------------------------------- Chief Financial Officer
Robert A. Oakley
JAMES F. PATTERSON Director By/s/JOSEPH P. RATH
- --------------------------------- ----------------------------
James F. Patterson Joseph P. Rath
Attorney-in-Fact
ARDEN L. SHISLER Director
- ---------------------------------
Arden L. Shisler
ROBERT L. STEWART Director
- ---------------------------------
Robert L. Stewart
NANCY C. THOMAS Director
- ---------------------------------
Nancy C. Thomas
HAROLD W. WEIHL Director
- ---------------------------------
Harold W. Weihl
</TABLE>
<PAGE> 1
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each of the undersigned as
directors and/or officers of NATIONWIDE LIFE INSURANCE COMPANY, and NATIONWIDE
LIFE AND ANNUITY INSURANCE COMPANY, both Ohio corporations, which have filed or
will file with the U.S. Securities and Exchange Commission under the provisions
of the Securities Act of 1933, as amended, and if applicable, of the Investment
Company Act of 1940, as amended, various Registration Statements and amendments
thereto for the registration under said Act of Individual Deferred Variable
Annuity Contracts in connection with MFS Variable Account, Nationwide Variable
Account, Nationwide Variable Account-II, Nationwide Variable Account-3,
Nationwide Variable Account-4, Nationwide Variable Account-5, Nationwide
Variable Account-6, Nationwide Fidelity Advisor Variable Account, Nationwide
Multi-Flex Variable Account, Nationwide Variable Account-8, Nationwide Variable
Account-9, Nationwide VA Separate Account-A, Nationwide VA Separate Account-B,
Nationwide VA Separate Account-C and Nationwide VA Separate Account-Q; and the
registration of fixed interest rate options subject to a market value adjustment
offered under some or all of the aforementioned individual Variable Annuity
Contracts in connection with Nationwide Multiple Maturity Separate Account and
Nationwide Multiple Maturity Separate Account-A, and the registration of Group
Flexible Fund Retirement Contracts in connection with Nationwide DC Variable
Account, Nationwide DCVA-II, and NACo Variable Account; and the registration of
Group Common Stock Variable Annuity Contracts in connection with Separate
Account No. 1; and the registration of variable life insurance policies in
connection with Nationwide VLI Separate Account, Nationwide VLI Separate
Account-2, Nationwide VLI Separate Account-3, Nationwide VLI Separate Account-4,
Nationwide VLI Separate Account-5, Nationwide VL Separate Account-A and
Nationwide VL Separate Account-B, Nationwide VL Separate Account-C, and
Nationwide VL Separate Account-D hereby constitutes and appoints Dimon R.
McFerson, Joseph J. Gasper, W. Sidney Druen, Mark R. Thresher, and Joseph P.
Rath, and each of them with power to act without the others, his/her attorney,
with full power of substitution and resubstitution, for and in his/her name,
place and stead, in any and all capacities, to approve, and sign such
Registration Statements and any and all amendments thereto, with power to affix
the corporate seal of said corporation thereto and to attest said seal and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the U.S. Securities and Exchange Commission, hereby granting
unto said attorneys, and each of them, full power and authority to do and
perform all and every act and thing requisite to all intents and purposes as
he/she might or could do in person, hereby ratifying and confirming that which
said attorneys, or any of them, may lawfully do or cause to be done by virtue
hereof. This instrument may be executed in one or more counterparts.
IN WITNESS WHEREOF, the undersigned have herewith set their names and
seals as of this 22nd day of May, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Lewis J. Alphin /s/ Yvonne L. Montgomery
- ------------------------------------------------- --------------------------------------------------
Lewis J. Alphin, Director Yvonne L. Montgomery, Director
/s/ A. I. Bell /s/ C. Ray Noecker
- ------------------------------------------------- -------------------------------------------------
A. I. Bell, Director C. Ray Noecker, Director
/s/ Keith W. Eckel /s/ Robert A. Oakley
- ------------------------------------------------- --------------------------------------------------
Keith W. Eckel, Director Robert A. Oakley, Executive Vice President - Chief
Financial Officer
/s/ Willard J. Engel /s/ James F. Patterson
- ------------------------------------------------- --------------------------------------------------
Willard J. Engel, Director James F. Patterson, Director
/s/ Fred C. Finney /s/ Arden L. Shisler
- ------------------------------------------------- --------------------------------------------------
Fred C. Finney, Director Arden L. Shisler, Director
/s/ Charles L. Fuellgraf /s/ Robert L. Stewart
- ------------------------------------------------- --------------------------------------------------
Charles L. Fuellgraf, Jr., Director Robert L. Stewart, Director
/s/ Joseph J. Gasper /s/ Nancy C. Thomas
- ------------------------------------------------- --------------------------------------------------
Joseph J. Gasper, President and Chief Operating Officer Nancy C. Thomas, Director
and Director
/s/ Dimon R. McFerson /s/ Harold W. Weihl
- ------------------------------------------------- --------------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive Harold W. Weihl, Director
Officer-Nationwide Insurance Enterprise and Director
/s/ David O. Miller
- -------------------------------------------------
David O. Miller, Chairman of the Board, Director
</TABLE>
<PAGE> 1
Exhibit 7
[DRUEN, DIETRICH, REYNOLDS & KOOGLER LETTERHEAD]
May 13, 1998
Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43216
Ladies and Gentlemen:
We have prepared the Registration Statement filed with the United States
Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933, as amended, Last Survivor Flexible Premium Variable
Universal Life Insurance Policies to be sold by Nationwide Life Insurance
Company (the "Company") and to be issued and administered through Nationwide
VLI Separate Account - 4. In connection therewith, we have examined the
Articles of Incorporation and the Code of Regulations of the Company, minutes
of meetings of the Board of Directors, pertinent provisions of federal and
Ohio laws, together with such other documents as we have deemed relevant for
the purposes of this opinion. Based on the foregoing, it is our opinion that:
1. The Company is a stock life insurance company duly organized and validly
existing under the laws of the State of Ohio and duly authorized to issue
and sell life, accident and health insurance and annuity contracts.
2. Nationwide VLI Separate Account - 4 has been properly created and is a
validly existing separate account pursuant to the laws of the State of Ohio.
3. The issuance and sale of the Last Survivor Flexible Premium Variable
Universal Life Insurance Policies have been duly authorized by the Company.
When issued and sold in the manner stated in the prospectus constituting a
part of the Registration Statement, the policies will be legal and binding
obligations of the Company in accordance with their terms, except that
clearance must be obtained, or the policy must be approved, prior to the
issuance thereof in certain jurisdictions.
<PAGE> 2
Nationwide Life Insurance Company
May 13, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Opinions" in the prospectus contained in the Registration Statement.
Very truly yours,
DRUEN, DIETRICH, REYNOLDS & KOOGLER
Brian M. Bacon
