Please read this prospectus before investing, and keep it on file for future
reference. It contains important information about the Perspective Advisors
Fixed and Variable Annuity that you ought to know before investing.
To learn more about the Perspective Advisors Fixed and Variable Annuity
contract, you can obtain a free copy of the Statement of Additional Information
(SAI) dated April 1, 1998, by calling Jackson National at (800) 766-4683 or by
writing Jackson National at: Annuity Service Center, P.O. Box 378002, Denver,
Colorado 80237-8002. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of this prospectus. The Table of Contents
of the SAI appears at the end of this prospectus. The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding registrants that file electronically with the
SEC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
THE PERSPECTIVE ADVISORS
FIXED AND VARIABLE ANNUITY
Issued by Jackson National Life Insurance Company and Jackson National Separate
Account III
The fixed and variable annuity contract is an individual, flexible premium
deferred annuity with 2 guaranteed accounts which offer an interest rate that is
guaranteed by Jackson National Life Insurance Company (Jackson National) and 22
investment portfolios. You can put your money in any of the guaranteed accounts
and/or the investment portfolios but you may not put your money in more than
eighteen of the investment options during the life of your contract.
The investment portfolios purchase shares of the following series of the JNL
Series Trust:
JNL Aggressive Growth Series
JNL Global Equities Series
JNL/Alliance Growth Series
JNL/JPM International & Emerging Markets Series
JNL/PIMCO Total Return Bond Series
JNL/Putnam Growth Series
JNL/Putnam Value Equity Series
JNL/S&P Conservative Growth Series II
JNL/S&P Moderate Growth Series II
JNL/S&P Aggressive Growth Series II
JNL/S&P Very Aggressive Growth Series II
JNL/S&P Equity Growth Series II
JNL/S&P Equity Aggressive Growth Series II
Goldman Sachs/JNL Growth & Income Series
Lazard/JNL Small Cap Value Series
Lazard/JNL Mid Cap Value Series
PPM America/JNL Money Market Series
Salomon Brothers/JNL Balanced Series
Salomon Brothers/JNL Global Bond Series
Salomon Brothers/JNL High Yield Bond Series
T. Rowe Price/JNL International Equity
Investment Series
T. Rowe Price/JNL Mid-Cap Growth Series
APRIL 1, 1998
<PAGE>
TABLE OF CONTENTS
Key Facts
Fee Table
The Annuity Contract
The Company
The Guaranteed Accounts
The Separate Account
Investment Portfolios
Contract Charges
Purchases
Transfers
Access to Your Money
Income Payments (The Income Phase)
Death Benefit
Taxes
Other Information
Table of Contents of the Statement of Additional Information
<PAGE>
KEY FACTS
Annuity Service Center: 1 (800) 766-4683
Mail Address: P.O. Box 378002, Denver, Colorado
80237-8002
Delivery Address: 8055 East Tufts Avenue, Second Floor,
Denver, Colorado 80237
Institutional Marketing Group
Service Center: 1 (800) 777-7779
Mail Address: P.O. Box 30386, Lansing, Michigan
48909-9692
Delivery Address: 5901 Executive Drive, Lansing,
Michigan 48911 Attn: IMG
Home Office: 5901 Executive Drive, Lansing, Michigan
48911
The Annuity Contract The fixed and variable annuity contract
offered by Jackson National provides a
means for investing on a tax-deferred
basis in the guaranteed accounts of
Jackson National and the investment
portfolios. The contract is intended
for retirement savings or other
long-term investment purposes and provides
for a death benefit and income options.
The contract has two phases: the
accumulation phase and the income phase.
During the accumulation phase, earnings
accumulate on a tax-deferred basis and are
taxed as income when you make a withdrawal.
The income phase occurs when you begin
receiving regular payments from your
contract. The amount of money you accumulate
in your contract during the accumulation
phase will determine the amount of income
payments during the income phase.
Investment Options You can put money into any of the
guaranteed accounts and/or the investment
portfolios but you may not put your money in
more than eighteen of the investment options
during the life of your contract.
The guaranteed accounts offer an interest
rate that is guaranteed by Jackson National.
While your money is in a guaranteed account,
the interest your money earns and your
principal are guaranteed by Jackson
National.
The investment portfolios purchase shares of
series of mutual funds. These series are
described in the attached JNL Series Trust
prospectus. The value of the investment
portfolios will vary in accordance with the
investment performance of the series. You
bear the investment risk under the contract
for all amounts allocated to the investment
portfolios.
Expenses The contract has insurance features and
investment features, and there are costs
related to each.
Jackson National makes a deduction for its
insurance charges which is equal to 1.50% of
the daily value of the contracts invested in
the investment portfolios. During the
accumulation phase, Jackson National deducts
a $50 annual contract maintenance charge
from your contract.
Jackson National may assess a state premium
tax charge which ranges from 0-4%, depending
upon the state, when you begin receiving
regular income payments from your contract,
when you make a withdrawal or, in states
where required, at the time premium payments
are made.
There are also investment charges which
range from .20% to 1.25% of the average
daily value of the series, depending on the
series.
Purchases Under most circumstances, you can buy a
contract for $25,000 or more. You can add
$5,000 or more ($2,000 or more for a
qualified plan contract) at any time during
the accumulation phase.
Access to Your Money You can take money out of your
contract during the accumulation phase. You
may have to pay income tax and a tax penalty
on any money you take out.
Income Payments If you want to receive regular income from
your annuity, you can choose one of
four options: (1) monthly payments for
the annuitant's life; (2) monthly
payments for the annuitant's life and the
life of another person (usually the
annuitant's spouse); (3) monthly payments
for the annuitant's life, but with
payments continuing to you or your
designated beneficiary for 10 or 20 years
if the annuitant dies before the end of
the selected period; and (4) payments
for a period of 5 to 30 years.
During the income phase, you have the same
investment choices you had during the
accumulation phase. You can choose to have
payments come from the guaranteed accounts,
the investment portfolios or both. If you
choose to have any part of your payments
come from the investment portfolios, the
dollar amount of your payments may go up or
down. If you choose a variable income
option, you may make transfers between
investment portfolios but you may not make
transfers in to or out of the guaranteed
accounts.
Death Benefit If you die before moving to the
income phase, the person you have chosen as
your beneficiary will receive a death
benefit.
Free Look You can cancel the contract within
twenty days after receiving it (or whatever
period is required in your state). Under
most circumstances, Jackson National will
return the amount your contract is worth on
the day we receive your request. This may be
more or less than your original payment.
Taxes The Internal Revenue Code provides that you
will not be taxed on the earnings on the
money held in your contract until you take
money out (this is referred to as
tax-deferral). There are different rules as
to how you will be taxed depending on how
you take the money out and the type of
contract you have (non-qualified or
qualified).
<PAGE>
FEE TABLE
Owner Transaction Expenses
Withdrawal Charge:
None
Transfer Fee:
No charge for first 15 transfers in a contract year; thereafter, the
fee is $25 per transfer.
Contract Maintenance Charge:
$50 per contract per year
Separate Account Annual Expenses (as a percentage of average account value)
Mortality and Expense Risk Charges 1.35%
Administration Charge .15%
Total Separate Account Annual Expenses 1.50%
Series Annual Expenses
(as a percentage of series average net assets)
<TABLE>
<CAPTION>
Other Expenses Total
Management (After Series
JNL Series Trust Fee Reimbursement) Annual
Expenses
- ----------------------------------------------------------------- ------------- ----------------- ------------
<S> <C> <C> <C>
JNL Aggressive Growth Series .95% .15% 1.10%
JNL Global Equities Series 1.00% .15% 1.15%
JNL/Alliance Growth Series .775% .15%* .925%
JNL/JPM International & Emerging Markets Series .975% .15%* 1.125%
JNL/PIMCO Total Return Bond Series .70% .15%* .85%
JNL/Putnam Growth Series .90% .15% 1.05%
JNL/Putnam Value Equity Series .90% .15% 1.05%
JNL/S&P Conservative Growth Series II .20% 0%* .20%
JNL/S&P Moderate Growth Series II .20% 0%* .20%
JNL/S&P Aggressive Growth Series II .20% 0%* .20%
JNL/S&P Very Aggressive Growth Series II .20% 0%* .20%
JNL/S&P Equity Growth Series II .20% 0%* .20%
JNL/S&P Equity Aggressive Growth Series II .20% 0%* .20%
Goldman Sachs/JNL Growth & Income Series .925% .15%* 1.075%
Lazard/JNL Small Cap Value Series 1.05% .15%* 1.20%
Lazard/JNL Mid Cap Value Series .975% .15%* 1.125%
PPM America/JNL Money Market Series .60% .15% .75%
Salomon Brothers/JNL Balanced Series .80% .15%* .95%
Salomon Brothers/JNL Global Bond Series .85% .15% 1.00%
Salomon Brothers/JNL High Yield Bond Series .80% .15%* .95%
T. Rowe Price/JNL International Equity Investment Series 1.10% .15% 1.25%
T. Rowe Price/JNL Mid-Cap Growth Series .95% .15% 1.10%
- -----------------------------------------------------------------------------------------------------
</TABLE>
* The JNL/Alliance Growth Series, JNL/JPM International & Emerging Markets
Series, JNL/PIMCO Total Return Bond Series, Goldman Sachs/JNL Growth &
Income Series, Lazard/JNL Small Cap Value Series, Lazard/JNL Mid Cap Value
Series, Salomon Brothers/JNL Balanced Series and Salomon Brothers/JNL High
Yield Bond Series commenced operations on March 2, 1998, and the JNL/S&P
Conservative Growth Series II, JNL/S&P Moderate Growth Series II, JNL/S&P
Aggressive Growth Series II, JNL/S&P Very Aggressive Growth Series II,
JNL/S&P Equity Growth Series II, and JNL/S&P Equity Aggressive Growth
Series II commenced operations on April 1, 1998. Estimated expenses for the
first fiscal year of operation are shown.
Actual expenses may be greater or lesser than those shown.
Currently, the adviser reimburses each of the Series for certain annual
expenses. These reimbursements are voluntary and may be modified or discontinued
at any time. The adviser may be entitled to a refund of reimbursements made on
or after April 1, 1998. See the attached JNL Series Trust prospectus for
additional information.
Currently, the adviser voluntarily reimburses each of the following Series for
annual expenses (excluding management fees) in excess of .15% of average daily
net assets. Prior to reimbursement, total Series annual expenses as a percentage
of net assets for the period ended December 31, 1997, were: JNL Aggressive
Growth Series -- 1.17%; JNL Global Equities Series -- 1.37%; JNL/Putnam Growth
Series -- 1.05%; JNL/Putnam Value Equity Series -- 1.09%; PPM America/JNL Money
Market Series -- .76%; Salomon Brothers/JNL Global Bond Series -- 1.07%; T. Rowe
Price/JNL International Equity Investment Series -- 1.32%; and T. Rowe Price/JNL
Mid-Cap Growth Series -- 1.06%; and are expected to be: JNL/Alliance Growth
Series -- 1.38%; JNL/JPM International & Emerging Markets Series -- 1.92%;
JNL/PIMCO Total Return Bond Series -- 1.33%; Goldman Sachs/JNL Growth & Income
Series -- 1.56%; Lazard/JNL Small Cap Value Series -- 1.65%; Lazard/JNL Mid Cap
Value Series -- 1.58%; Salomon Brothers/JNL Balanced Series -- 1.43%; and
Salomon Brothers/JNL High Yield Bond Series -- 1.43%.
Currently, the adviser voluntarily reimburses each of the following Series for
all annual expenses (excluding management fees). Prior to reimbursement, total
Series annual expenses as a percentage of net assets are expected to be: JNL/S&P
Conservative Growth Series II -- .32%, JNL/S&P Moderate Growth Series II --
.32%, JNL/S&P Aggressive Growth Series II -- .32%, JNL/S&P Very Aggressive
Growth Series II -- .32%, JNL/S&P Equity Growth Series II -- .32%, JNL/S&P
Equity Aggressive Growth Series II -- .32%. Because these Series invest in other
Series of the JNL Series Trust, these Series will indirectly bear their pro rata
share of fees and expenses of the underlying Series in addition to the expenses
shown. The adviser does not reimburse these Series for their pro rata share of
underlying Series expenses.
<PAGE>
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets.
<TABLE>
<CAPTION>
Time Periods
- ------------------------------------------------------------------------------ -------- ---------
1 3
year years
- ------------------------------------------------------------------------------ -------- ---------
<S> <C> <C>
JNL Aggressive Growth Portfolio $27 $84
JNL Global Equities Portfolio 28 85
JNL/Alliance Growth Portfolio 26 79
JNL/JPM International & Emerging Markets Portfolio 28 85
JNL/PIMCO Total Return Bond Portfolio 25 76
JNL/Putnam Growth Portfolio 27 82
JNL/Putnam Value Equity Portfolio 27 82
JNL/S&P Conservative Growth Portfolio II 18 55
JNL/S&P Moderate Growth Portfolio II 18 55
JNL/S&P Aggressive Growth Portfolio II 18 55
JNL/S&P Very Aggressive Growth Portfolio II 18 55
JNL/S&P Equity Growth Portfolio II 18 55
JNL/S&P Equity Aggressive Growth Portfolio II 18 55
Goldman Sachs/JNL Growth & Income Portfolio 27 83
Lazard/JNL Small Cap Value Portfolio 28 87
Lazard/JNL Mid Cap Value Portfolio 28 85
PPM America/JNL Money Market Portfolio 24 73
Salomon Brothers/JNL Balanced Portfolio 26 79
Salomon Brothers/JNL Global Bond Portfolio 26 81
Salomon Brothers/JNL High Yield Bond Portfolio 26 79
T. Rowe Price/JNL International Equity Investment Portfolio 29 88
T. Rowe Price/JNL Mid-Cap Growth Portfolio 27 84
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Explanation of Fee Table and Examples
The purpose of the Fee Table and Examples is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly. The Fee
Table reflects the expenses of the separate account and the series underlying
the investment portfolios. Premium taxes may also apply.
The Examples reflect the contract maintenance charge which is determined by
dividing the total amount of such charges expected to be collected during the
year by the total estimated average net assets of the investment portfolios.
THE EXAMPLE DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
Financial Statements
The financial statements of Jackson National for the years ended December 31,
1997, December 31, 1996; and December 31, 1995, and the applicable auditor's
reports thereon are contained in the SAI.
<PAGE>
THE ANNUITY CONTRACT
The fixed and variable annuity contract offered by Jackson National is a
contract between you, the owner, and Jackson National Life Insurance Company, an
insurance company. The contract provides a means for investing on a tax-deferred
basis in guaranteed accounts and investment portfolios. The contract is intended
for retirement savings or other long-term investment purposes and provides for a
death benefit and guaranteed income options.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
accumulate on a tax-deferred basis and are taxed as income when you make a
withdrawal.
The contract offers guaranteed accounts. The guaranteed accounts offer an
interest rate that is guaranteed by Jackson National for the duration of the
guaranteed account period. While your money is in a guaranteed account, the
interest your money earns and your principal are guaranteed by Jackson National.
The value of a guaranteed account may be reduced if you make a withdrawal prior
to the end of the guaranteed account period, but will never be less than the
premium payments accumulated at 3% per year. If you choose to have your annuity
payments come from the guaranteed accounts, your payments will remain level
throughout the entire income phase.
The contract also offers investment portfolios. The investment portfolios are
designed to offer a higher return than the guaranteed accounts. HOWEVER, THIS IS
NOT GUARANTEED. IT IS POSSIBLE FOR YOU TO LOSE YOUR MONEY. If you put money in
the investment portfolios, the amount of money you are able to accumulate in
your contract during the accumulation phase depends upon the performance of the
investment portfolios you select. The amount of the income payments you receive
during the income phase also will depend, in part, on the performance of the
investment portfolios you choose for the income phase.
As the owner, you can exercise all the rights under the contract. You and your
spouse can be joint owners. You can assign the contract at any time during your
lifetime but Jackson National will not be bound until we receive written notice
of the assignment.
THE COMPANY
Jackson National is a stock life insurance company organized under the laws of
the state of Michigan in June 1961. Its legal domicile and principal business
address is 5901 Executive Drive, Lansing, Michigan 48911. Jackson National is
admitted to conduct life insurance and annuity business in the District of
Columbia and all states except New York. Jackson National is ultimately a
wholly-owned subsidiary of Prudential Corporation plc (London, England),
THE GUARANTEED ACCOUNTS
If you select a guaranteed account, your money will be placed with Jackson
National's other assets. The guaranteed accounts are not registered with the SEC
and the SEC does not review the information we provide to you about the
guaranteed accounts. Your contract contains a more complete description of the
guaranteed accounts.
THE SEPARATE ACCOUNT
The Jackson National Separate Account III was established by Jackson National on
October 23, 1997, pursuant to the provisions of Michigan law, as a segregated
asset account of the company. The separate account meets the definition of a
"separate account" under the federal securities laws and is registered with the
SEC as a unit investment trust under the Investment Company Act of 1940, as
amended.
The assets of the separate account legally belong to Jackson National and the
obligations under the contracts are obligations of Jackson National. However,
the contract assets in the separate account are not chargeable with liabilities
arising out of any other business Jackson National may conduct. All of the
income, gains and losses resulting from these assets are credited to or charged
against the contracts and not against any other contracts Jackson National may
issue.
The separate account is divided into investment portfolios. Jackson National
does not guarantee the investment performance of the separate account or the
investment portfolios.
INVESTMENT PORTFOLIOS
You can put money in any or all of the investment portfolios. The investment
portfolios purchase shares of the following series of the JNL Series Trust:
JNL Aggressive Growth Series
JNL Global Equities Series
JNL/Alliance Growth Series
JNL/JPM International & Emerging Markets Series
JNL/PIMCO Total Return Bond Series
JNL/Putnam Growth Series
JNL/Putnam Value Equity Series
JNL/S&P Conservative Growth Series II
JNL/S&P Moderate Growth Series II
JNL/S&P Aggressive Growth Series II
JNL/S&P Very Aggressive Growth Series II
JNL/S&P Equity Growth Series II
JNL/S&P Equity Aggressive Growth Series II
Goldman Sachs/JNL Growth & Income Series
Lazard/JNL Small Cap Value Series
Lazard/JNL Mid Cap Value Series
PPM America/JNL Money Market Series
Salomon Brothers/JNL Balanced Series
Salomon Brothers/JNL Global Bond Series
Salomon Brothers/JNL High Yield Bond Series
T. Rowe Price/JNL International Equity Investment Series
T. Rowe Price/JNL Mid-Cap Growth Series
The series are described in the attached JNL Series Trust prospectus. Jackson
National Financial Services, Inc. serves as investment adviser for all of the
series. Janus Capital Corporation serves as sub-adviser for the JNL Aggressive
Growth and JNL Global Equities Series; Alliance Capital Management L.P. serves
as sub-adviser for the JNL/Alliance Growth Series; J.P. Morgan Investment
Management Inc. serves as sub-adviser for the JNL/JPM International & Emerging
Markets Series; Pacific Investment Management Company serves as sub-adviser for
the JNL/PIMCO Total Return Bond Series; Putnam Investment Management, Inc.
serves as sub-adviser for the JNL/Putnam Growth and JNL/Putnam Value Equity
Series; Goldman Sachs Asset Management serves as sub-adviser for the Goldman
Sachs/JNL Growth & Income Series; Lazard Asset Management serves as sub-adviser
for the Lazard/JNL Small Cap Value and Lazard/JNL Mid Cap Value Series; PPM
America, Inc. serves as sub-adviser for the PPM America/JNL Money Market Series;
Salomon Brothers Asset Management Inc serves as sub-adviser for the Salomon
Brothers/JNL Balanced, Salomon Brothers/JNL Global Bond and Salomon Brothers/JNL
High Yield Bond Series; Standard & Poor's Investment Advisory Services, Inc.
serves as sub-adviser for the JNL/S&P Conservative Growth Series II, JNL/S&P
Moderate Growth Series II, JNL/S&P Aggressive Growth Series II, JNL/S&P Very
Aggressive Growth Series II, JNL/S&P Equity Growth Series II, and JNL/S&P Equity
Aggressive Growth Series II; T. Rowe Price Associates, Inc. serves as
sub-adviser for the T. Rowe Price/JNL Mid-Cap Growth Series; and Rowe
Price-Fleming International, Inc. serves as sub-adviser for the T. Rowe
Price/JNL International Equity Investment Series.
Depending on market conditions, you can make or lose money in any of the
investment portfolios. You should read the prospectus for the series carefully
before investing. Additional investment portfolios may be available in the
future.
Voting Rights
To the extent required by law, Jackson National will obtain from you and other
owners of the contracts instructions as to how to vote when the series solicits
proxies in conjunction with a vote of shareholders. When Jackson National
receives instructions, we will vote all the shares Jackson National owns in
proportion to those instructions.
Substitution
Jackson National may be required to substitute an investment portfolio with
another portfolio. We will not do this without the prior approval of the SEC.
Jackson National will give you notice of our intent to do this.
CONTRACT CHARGES
There are charges and other expenses associated with the contracts that reduce
the return on your investment in the contract. These charges may be a lesser
amount where required by state law or as described below, but will not be
increased. These charges and expenses are:
Insurance Charges
Each day Jackson National makes a deduction for its insurance charges. We do
this as part of our calculation of the value of the accumulation units and
annuity units. On an annual basis, this charge equals 1.50% of the daily value
of the contracts invested in an investment portfolio, after expenses have been
deducted. This charge is for the mortality risks, expense risks and
administrative expenses assumed by Jackson National.
Contract Maintenance Charge
During the accumulation phase, Jackson National deducts a $50 annual contract
maintenance charge on each anniversary of the date on which your contract was
issued. If you make a complete withdrawal from your contract, the contract
maintenance charge will also be deducted. This charge is for administrative
expenses.
Jackson National will not deduct this charge, if when the deduction is to be
made, the value of your contract is $50,000 or more. Jackson National may
discontinue this practice at any time.
Transfer Fee
A transfer fee of $25 will apply to transfers in excess of 15 in a contract
year. Jackson National may waive the transfer fee in connection with
pre-authorized automatic transfer programs, or may charge a lesser fee where
required by state law.
Other Expenses
Jackson National pays the operating expenses of the Separate Account. There are
deductions from and expenses paid out of the assets of the series. These
expenses are described in the attached JNL Series Trust prospectus.
Premium Taxes
Some states and other governmental entities charge premium taxes or other
similar taxes. Jackson National is responsible for the payment of these taxes
and may make a deduction from the value of the contract for them. Premium taxes
generally range from 0% to 4% depending on the state.
Income Taxes
Jackson National will make a deduction from the contract for any income taxes
which it incurs because of the contract. Currently, we are not making any such
deduction.
Distribution of Contracts
Jackson National Financial Services, Inc., located at 5901 Executive Drive,
Lansing, Michigan 48911, serves as the distributor of the contracts. Jackson
National Financial Services, Inc. is a wholly-owned subsidiary of Jackson
National.
Commissions will be paid to broker-dealers who sell the contracts. While
commissions may vary, they are not expected to exceed 3% of the contract value.
Under certain circumstances, Jackson National may pay persistency bonuses, in
addition to the standard commissions. Jackson National may use any of its
corporate assets to cover the cost of distribution, including any profit from
the contract insurance charges.
PURCHASES
You can buy a contract for $25,000 or more under most circumstances. The maximum
we accept without our prior approval is $1 million.
You can add $5,000 or more to a non-qualified plan contract or $2,000 or more to
a qualified plan contract ($50 under the automatic payment plan) at any time
during the accumulation phase.
The minimum that you may allocate to a guaranteed account or investment
portfolio is $100. There is a $100 minimum balance requirement for each
guaranteed account and investment portfolio.
When you purchase a contract, Jackson National will allocate your premium to one
or more of the guaranteed accounts and/or the investment portfolios you have
selected. Your allocations must be in whole percentages ranging from 0% to 100%.
Jackson National will allocate additional premiums in the same way unless you
tell us otherwise.
There may be more than eighteen investment options available under the contract;
however, you may not allocate your money to more than eighteen investment
options during the life of your contract.
Jackson National will issue your contract and allocate your first premium within
2 business days after we receive your complete application and first premium. If
your application is not complete, we will contact you to get the necessary
information. If for some reason Jackson National is unable to complete this
process within 5 business days, we will either return your money or get your
permission to keep it until we receive all of the necessary information.
The Jackson National business day closes when the New York Stock Exchange
closes, usually 4:00 p.m. Eastern time.
Accumulation Units
The contract value allocated to the investment portfolios will go up or down
depending on the performance of the portfolios. In order to keep track of the
value of your contract, Jackson National uses a unit of measure called an
accumulation unit. (An accumulation unit is similar to a share of a mutual
fund.) During the income phase it is called an annuity unit.
Every business day Jackson National determines the value of an accumulation unit
for each of the investment portfolios. This is done by:
1. determining the total amount of money invested in the particular
investment portfolio;
2. subtracting any insurance charges and any other charges, such as
taxes;
3. dividing this amount by the number of outstanding accumulation units.
The value of an accumulation unit may go up or down from day to day.
When you make a premium payment, Jackson National credits your contract with
accumulation units. The number of accumulation units credited is determined at
the close of Jackson National's business day by dividing the amount of the
premium allocated to any investment portfolio by the value of the accumulation
unit for that investment portfolio.
TRANSFERS
You can transfer money between guaranteed accounts and investment portfolios
during the accumulation phase. During the income phase, you can transfer money
between investment portfolios.
You can make 15 transfers every year during the accumulation phase without
charge. The minimum amount that you can transfer is $100 (unless the transfer is
made under a pre-authorized automatic transfer program). If the remaining value
in a guaranteed account or investment portfolio would be less than $100 after a
transfer, you must transfer the entire value or you may not make the transfer.
Telephone Transactions
If you elect the telephone transfer privilege on your application, you may make
transfers by telephone. You must complete your telephone call authorizing a
transfer by the close of Jackson National's business day (usually 4:00 p.m.
Eastern time) in order to receive that day's accumulation unit value for an
investment portfolio.
Jackson National has procedures which are designed to provide reasonable
assurance that telephone authorizations are genuine. Our procedures include
requesting identifying information and tape recording telephone communications.
Jackson National and its affiliates disclaim all liability for any claim, loss
or expense resulting from any alleged error or mistake in connection with a
telephone transfer which was not properly authorized by you. However, if Jackson
National fails to employ reasonable procedures to ensure that all telephone
transfers are properly authorized, we may be held liable for such losses.
Jackson National reserves the right to modify or discontinue at any time and
without notice the acceptance of instructions from someone other than you and/or
the telephone transfer privilege.
ACCESS TO YOUR MONEY
You can have access to the money in your contract: (1) by making either a
partial or complete withdrawal or (2) by electing to receive income payments.
Your beneficiary can have access to the money in your contract when a death
benefit is paid.
When you make a complete withdrawal you will receive the value of the contract
on the day you made the withdrawal less any premium tax and less any contract
maintenance charge. Except in connection with the systematic withdrawal program,
you must withdraw at least $500 or, if less, the entire amount in the guaranteed
account or investment portfolio from which you are making the withdrawal. After
your withdrawal, you must have at least $100 left in the guaranteed account or
investment portfolio.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL
YOU MAKE.
There are limitations on withdrawals from a qualified plan referred to as a
403(b) annuity. See "Taxes."
Systematic Withdrawal Program
You can arrange to have money automatically sent to you periodically while your
contract is still in the accumulation phase. You will have to pay taxes on money
you receive and withdrawals you make before you reach 59 1/2 may be subject to a
10% tax penalty.
We reserve the right to charge a fee for participation or to discontinue
offering this program in the future.
Suspension of Withdrawals
Jackson National may be required to suspend or delay withdrawals from a contract
when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists so that it is not reasonably practicable to
dispose of shares of the investment portfolios or determine investment
portfolio values;
4. the SEC, by order, may permit for the protection of owners.
Jackson National has reserved the right to defer payment for a withdrawal or
transfer from the guaranteed accounts for the period permitted by law, but not
more than six months.
INCOME PAYMENTS (THE INCOME PHASE)
The income phase occurs when you begin receiving regular payments from your
contract. The income date is the month and year in which those payments begin.
You can choose the income date and an income option. The income options are
described below.
If you do not choose an income option, we will assume that you selected Option 3
which provides a life annuity with 120 months of guaranteed payments.
You can change the income date or income option at any time before the income
date. You must give us 7 days notice. Income payments must begin by your 90th
birthday under a non-qualified contract (or an earlier date under a qualified
contract if required by law).
At the income date, you can choose whether payments will come from the
guaranteed accounts, the investment portfolios or both. Unless you tell us
otherwise, your income payments will be based on the investment allocations that
were in place on the income date.
If you choose to have any portion of your annuity payments come from the
investment portfolio(s), the dollar amount of your payment will depend upon
three things: 1) the value of your contract in the investment portfolio(s) on
the income date, 2) the assumed investment rate used in the annuity table for
the contract, and 3) the performance of the investment portfolios you selected.
If the actual performance exceeds the assumed rate, your income payments will
increase. Similarly, if the actual rate is less than the assumed interest rate,
your income payments will decrease.
You can choose to have income payments made monthly, quarterly, semi-annually,
or annually. However, if you have less than $5,000 to apply toward an income
option and state law permits, Jackson National may provide your payment in a
single lump sum. Likewise, if your first income payment would be less than $50
and state law permits, Jackson National may set the frequency of payments so
that the first payment would be at least $50.
Income Options
The annuitant is the person whose life we look to when we make income payments.
(Each description assumes that you are the owner and annuitant.) The following
income options may not be available in all states.
OPTION 1 - Life Income. This income option provides monthly payments for your
life.
OPTION 2 - Joint and Survivor Annuity. This income option provides monthly
payments for your life and for the life of another person (usually your spouse)
selected by you.
OPTION 3 - Life Annuity With 120 or 240 Monthly Payments Guaranteed. This income
option provides monthly payments for your life, but with payments continuing to
your beneficiary for the remainder of 10 or 20 years (as you select) if you die
before the end of the selected period.
OPTION 4 - Income for a Specified Period. This income option provides monthly
payments for any number of years from 5 to 30.
ADDITIONAL OPTIONS - Other income options may be made available by Jackson
National.
If you choose an income option for which payments are based on life expectancy,
you cannot make a withdrawal during the income phase.
DEATH BENEFIT
Death of Owner Before the Income Date
If you die before moving to the income phase, the person you have chosen as your
beneficiary will receive a death benefit. If you have a joint owner, the death
benefit will be paid when the first joint owner dies. The surviving joint owner
will be treated as the beneficiary. Any other beneficiary designated will be
treated as a contingent beneficiary. Joint owners must be spouses (unless
otherwise permitted by state law)..
The death benefit is the greater of the current value of your contract or the
guaranteed minimum death benefit.
Prior to the first anniversary of the contract issue date, the guaranteed
minimum death benefit is equal to total premiums minus the sum of total
withdrawals, charges and premium taxes incurred in the first contract year.
On each anniversary of the contract issue date prior to the date of death, the
guaranteed minimum death benefit is calculated based on your attained age. It is
calculated as follows:
Ages 0 - 70: The greater of the guaranteed minimum death benefit on the last
contract anniversary adjusted for any premiums paid since the last contract
anniversary minus the sum of total withdrawals, charges and premium taxes
incurred since the last contract anniversary accumulated at 2%, and the current
value of the contract.
Ages 71 - 80: The greater of the guaranteed minimum death benefit on the last
contract anniversary adjusted for any premiums paid since the last contract
anniversary minus the sum of total withdrawals, charges and premium taxes
incurred since the last contract anniversary and the current value of the
contract.
Ages 81 and greater: The guaranteed minimum death benefit on the last
contract anniversary adjusted for any premiums paid since the last contract
anniversary minus the sum of total withdrawals, charges and premium taxes
incurred since the last contract anniversary.
After the first anniversary of the contract issue date, at any time between
anniversaries, the guaranteed minimum death benefit is equal to the guaranteed
minimum death benefit on the last contract anniversary prior to the date of
death adjusted for any premiums paid since the last contract anniversary minus
the sum of total withdrawals, charges and premium taxes incurred since the last
contract anniversary.
The entire death benefit must be paid within 5 years of the date of death unless
the beneficiary elects to have the death benefit payable under an income option.
The death benefit payable under an income option must be paid over the
beneficiary's lifetime or for a period not extending beyond the beneficiary's
life expectancy. Payments must begin within one year of the date of death.
Unless the beneficiary chooses to receive the death benefit in a single sum, the
beneficiary must elect an income option within the 60 day period beginning with
the date Jackson National receives proof of death. If the beneficiary chooses to
receive the death benefit in a single sum and all the necessary requirements are
met, Jackson National will pay the death benefit within 7 days. If the
beneficiary is your spouse, he/she can continue the contract in his/her own name
at the then current contract value.
Death of Owner After the Income Date
If you or a joint owner die after moving to the income phase, any remaining
payments under the income option elected will continue at least as rapidly as
under the method of distribution in effect at the date of death. If you die, the
beneficiary becomes the owner. If the joint owner dies, the surviving joint
owner, if any, will be the designated beneficiary. Any other beneficiary
designation on record at the time of death will be treated as a contingent
beneficiary.
Death of Annuitant
If the annuitant is not an owner or joint owner and the annuitant dies before
the income date, you can name a new annuitant. If you do not name a new
annuitant within 30 days of the death of the annuitant, you will become the
annuitant. However, if the owner is a non-natural person (for example, a
corporation), then the death of the annuitant will be treated as the death of
the owner, and a new annuitant may not be named.
If the annuitant dies after the income date, the death benefit, if any, will be
as provided for in the income option selected. Death benefits will be paid at
least as rapidly as under the method of distribution in effect at the
annuitant's death.
TAXES
The following is general information and is not intended as tax advice to any
individual. You should consult your own tax adviser.
The Internal Revenue Code (Code) provides that you will not be taxed on the
earnings on the money held in your contract until you take money out (this is
referred to as tax-deferral). There are different rules as to how you will be
taxed depending on how you take the money out and the type of contract you have
(non-qualified or qualified).
Non-Qualified Contracts - General Taxation
You will not be taxed on increases in the value of your contract until a
distribution (either as a withdrawal or as an income payment) occurs. When you
make a withdrawal you are taxed on the amount of the withdrawal that is
earnings. For income payments, a portion of each income payment is treated as a
partial return of your premium and will not be taxed. The remaining portion of
the income payment will be treated as ordinary income. How the income payment is
divided between taxable and non-taxable portions depends on the period over
which income payments are expected to be made. Income payments received after
you have received all of your premium are treated as income.
If a non-qualified contract is owned by a non-natural person (e.g., corporation
or certain other entities other than tax-qualified trusts), the contract will
generally not be treated as an annuity for tax purposes.
Qualified and Non-Qualified Contracts
If you purchase the contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your contract
is referred to as a non-qualified contract.
If you purchase the contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your contract is referred to as a qualified
contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts),
H.R. 10 Plans (sometimes referred to as Keogh Plans), and pension and
profit-sharing plans, which include 401(k) plans.
Withdrawals - Non-Qualified Contracts
If you make a withdrawal from your contract, the Code treats the withdrawal as
first coming from earnings and then from your premium payments. Withdrawn
earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a 10% penalty. Some withdrawals will be
exempt from the penalty. They include any amounts: (1) paid on or after the
taxpayer reaches age 59 1/2; (2) paid after you die; (3) paid if the taxpayer
becomes totally disabled (as that term is defined in the Code); (4) paid in a
series of substantially equal payments made annually (or more frequently) under
a lifetime annuity; (5) paid under an immediate annuity; or (6) which come from
premiums made prior to August 14, 1982.
Withdrawals - Qualified Contracts
There are special rules that govern qualified contracts. We have provided
additional discussion in the Statement of Additional Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of premiums from certain Tax-Sheltered Annuities.
Withdrawals can only be made when an owner: (1) reaches age 59 1/2; (2) leaves
his/her job; (3) dies; (4) becomes disabled (as that term is defined in the
Code); or (5) in the case of hardship. However, in the case of hardship, the
owner can only withdraw the premium and not any earnings.
Withdrawals - Roth IRAs
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Qualified distributions from Roth IRAs are entirely tax
free. A qualified distribution requires that the individual has held the Roth
IRA for at least five years and, in addition, that the distribution is made
either after the individual reaches age 59 1/2, on account of the individual's
death or disability, or as qualified first-time home purchase, subject to
$10,000 lifetime maximum, for the individual, or for a spouse, child,
grandchild, or ancestor.
Withdrawals - Investment Adviser Fees
The Internal Revenue Service has, through a series of Private Letter Rulings,
held that the payment of investment adviser fees from an IRA or a Tax-Sheltered
Annuity is permissible under certain circumstances and will not be considered a
distribution for income tax purposes. The Rulings require that in order to
receive this favorable tax treatment, the annuity contract must, under a written
agreement, be solely liable (not jointly with the contract owner) for payment of
the adviser's fee and the fee must actually be paid from the annuity contract to
the adviser. Withdrawals from non-qualified contracts for the payment of
investment adviser fees will be considered distributions from the contract.
Restrictions Under the Texas Optional Retirement Program (ORP)
Contracts issued to participants in ORP contain restrictions required under the
Texas Administrative Code. In accordance with those restrictions, a participant
in ORP will not be permitted to make withdrawals prior to such participant's
retirement, death, attainment of age 70 1/2 year or termination of employment in
a Texas public institution of higher education. The restrictions on withdrawal
do not apply in the event a participant in ORP transfers the contract value to
another approved contract or vendor during the period of ORP participation.
Assignment
An assignment may be a taxable event. If the contract is issued pursuant to a
qualified plan, there may be limitations on your ability to assign the contract.
Diversification
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. Jackson National believes that the underlying investments are
being managed so as to comply with these requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, and not Jackson
National would be considered the owner of the shares of the investment
portfolios. If this occurs, it will result in the loss of the favorable tax
treatment for the contract.
It is unknown to what extent owners are permitted to select investment
portfolios, to make transfers among the investment portfolios or the number and
type of investment portfolios from which owners may select. If any guidance is
provided which is considered a new position, then the guidance would generally
be applied prospectively. However, if such guidance is considered not to be a
new position, it may be applied retroactively. This would mean that you, as the
owner of the contract, could be treated as the owner of the investment
portfolios. Due to the uncertainty in this area, Jackson National reserves the
right to modify the contract in an attempt to maintain favorable tax treatment.
OTHER INFORMATION
Dollar Cost Averaging
You can arrange to automatically have a regular amount of money periodically
transferred into the investment portfolios. This theoretically gives you a lower
average cost per unit over time than you would receive if you made a one time
purchase.
To participate in this program, you must have a total contract value of at least
$15,000 (unless we waive this requirement). Certain other restrictions may
apply.
Jackson National does not currently charge for participation in this program. We
may do so in the future.
Rebalancing
You can arrange to have Jackson National automatically reallocate money between
investment portfolios periodically to keep the blend you select.
Jackson National does not currently charge for participation in this program. We
may do so in the future.
Free Look
If you cancel the contract within twenty days after receiving it (or whatever
period is required in your state), Jackson National will return the amount your
contract is worth on the day we receive your request. This may be more or less
than your original payment. If required by law, Jackson National will return
your premium.
Advertising
From time to time, Jackson National may advertise several types of performance
for the investment portfolios. Total return is the overall change in the value
of an investment in an investment portfolio over a given period of time.
Standardized average annual total return is calculated in accordance with SEC
guidelines. Non-standardized total return may be for periods other than those
required or may otherwise differ from standardized average annual total return.
Yield refers to the income generated by an investment over a given period of
time.
Performance will be calculated by determining the percentage change in the value
of an accumulation unit by dividing the increase (decrease) for that unit by the
value of the accumulation unit at the beginning of the period. Performance will
reflect the deduction of the insurance charges and may reflect the deduction of
the contract maintenance charge and withdrawal charge. The deduction of the
contract maintenance and/or the withdrawal charge would reduce the percentage
increase or make greater any percentage decrease.
If a series has been in existence for a longer period than the investment
portfolio, performance will be based upon the period quoted.
Market Timing and Asset Allocation Services
Market timing and asset allocation services offered by third parties must comply
with Jackson National's administrative systems, rules and procedures.
Modification of the Contract
Only the President, Vice President, Secretary or Assistant Secretary of Jackson
National may approve a change to or waive a provision of the contract. Any
change or waiver must be in writing. Jackson National may change the terms of
the contract in order to comply with changes in applicable law, or otherwise as
deemed necessary by Jackson National.
Legal Proceedings
There are no material legal proceedings, other than ordinary routine litigation
incidental to the business, to which Jackson National Life Insurance Company,
Jackson National Financial Services, Inc., and the Jackson National Separate
Account III are parties.
Questions
If you have questions about your contract, you may call or write to us at:
Jackson National Life Annuity Service Center, (800) 766-4683, P.O. Box 378002,
Denver, Colorado 80237-8002 or Institutional Marketing Group Service Center:
(800) 777-7779, P.O. Box 30386, Lansing, Michigan 48909-9692.
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
General Information and History .......................................... 2
Services ................................................................. 2
Purchase of Securities Being Offered ..................................... 2
Underwriters ............................................................. 2
Calculation of Performance ............................................... 3
Additional Tax Information ............................................... 5
Income Payments; Net Investment Factor .................................. 14
Financial Statements .....................................................15
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 1, 1998
INDIVIDUAL DEFERRED FIXED AND VARIABLE ANNUITY CONTRACTS
ISSUED BY THE JACKSON NATIONAL SEPARATE ACCOUNT III
OF JACKSON NATIONAL LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than set forth in the
Prospectus and should be read in conjunction with the Prospectus dated April 1,
1998. The Prospectus may be obtained from Jackson National Life Insurance
Company by writing P.O. Box 378002, Denver, Colorado 80237-8002, or calling
1-800-766-4683.
TABLE OF CONTENTS
Page
General Information and History.............................................. 2
Services..................................................................... 2
Purchase of Securities Being Offered......................................... 2
Underwriters................................................................. 2
Calculation of Performance................................................... 3
Additional Tax Information................................................... 5
Income Payments; Net Investment Factor ..................................... 14
Financial Statements ....................................................... 15
<PAGE>
General Information and History
Jackson National Separate Account III (Separate Account) is a separate
investment account of Jackson National Life Insurance Company (Jackson
National). Jackson National is a wholly-owned subsidiary of Brooke Life
Insurance Company, and is ultimately a wholly-owned subsidiary of Prudential
Corporation plc, London, England, the largest life insurance company in the
United Kingdom.
Services
Jackson National has responsibility for administration of the contracts and
the Separate Account. We maintain records of the name, address, taxpayer
identification number and other pertinent information for each contract owner
and the number and type of contracts issued to each contract owner, and records
with respect to the value of each contract.
Jackson National is also the custodian of the assets of the Separate
Account.
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, audits and reports on Jackson National's financial statements, including
the financial statements of the Separate Account, and performs other
professional accounting, auditing and advisory services when engaged to do so by
Jackson National.
Blazzard, Grodd & Hasenauer, P.C. of Westport, Connecticut has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the contracts described in the Prospectus.
Purchase of Securities Being Offered
The contracts will be sold by licensed insurance agents in states where the
contracts may be lawfully sold. The agents will be registered representatives of
broker-dealers that are registered under the Securities Exchange Act of 1934 and
members of the National Association of Securities Dealers, Inc. (NASD).
Underwriters
The contracts are offered continuously and are distributed by Jackson
National Financial Services, Inc. (JNFSI), 5901 Executive Drive, Lansing,
Michigan 48911. JNFSI is a subsidiary of Jackson National.
<PAGE>
Calculation of Performance
When Jackson National advertises performance for an investment portfolio
(except the PPM America/JNL Money Market Portfolio), we will include quotations
of standardized average annual total return to facilitate comparison with
standardized average annual total return advertised by other variable annuity
separate accounts. Standardized average annual total return for an investment
portfolio will be shown for periods beginning on the date the investment
portfolio first invested in the corresponding series. We will calculate
standardized average annual total return according to the standard methods
prescribed by rules of the Securities and Exchange Commission. Standardized
average annual total return for a specific period is calculated by taking a
hypothetical $1,000 investment in an investment portfolio at the offering on the
first day of the period ("initial investment"), and computing the ending
redeemable value ("redeemable value") of that investment at the end of the
period. The redeemable value is then divided by the initial investment and
expressed as a percentage, carried to at least the nearest hundredth of a
percent. Standardized average annual total return is annualized and reflects the
deduction of the insurance charges and the contract maintenance charge. The
redeemable value also reflects the effect of any applicable withdrawal charge
that may be imposed at the end of the period. No deduction is made for premium
taxes which may be assessed by certain states.
Jackson National may also advertise non-standardized total return.
Non-standardized total return may be for periods other than those required to be
presented or may otherwise differ from standardized average annual total return.
Non-standardized total return may assume a larger initial investment which more
closely approximates the size of a typical contract.
Standardized average annual total return quotations will be current to the
last day of the calendar quarter preceding the date on which an advertisement is
submitted for publication. Both standardized average annual total return
quotations and non-standardized total return quotations will be based on rolling
calendar quarters and will cover at least periods of one, five, and ten years,
or a period covering the time the investment portfolio has been in existence, if
it has not been in existence for one of the prescribed periods. If the
corresponding series has been in existence for longer than the investment
portfolio, the non-standardized total return quotations will show the investment
performance the investment portfolio would have achieved (reduced by the
applicable charges) had it been held in the series for the period quoted.
Standardized average annual total return is not available for periods before the
investment portfolio was in existence.
Quotations of standardized average annual total return and non-standardized
total return are based upon historical earnings and will fluctuate. Any
quotation of performance should not be considered a guarantee of future
performance. Factors affecting the performance of a series include general
market conditions, operating expenses and investment management. An owner's
withdrawal value upon surrender of a contract may be more or less than original
cost.
Jackson National may advertise the current annualized yield for a 30-day
period for an investment portfolio. The annualized yield of an investment
portfolio refers to the income generated by the investment portfolio over a
specified 30-day period. Because this yield is annualized, the yield generated
by an investment portfolio during the 30-day period is assumed to be generated
each 30-day period. The yield is computed by dividing the net investment income
per accumulation unit earned during the period by the price per unit on the last
day of the period, according to the following formula:
a-b 6
YIELD = 2[(---+1) -1]
cd
Where:
a = net investment income earned during the period
by the Series attributable
to shares owned by the investment portfolio.
b = expenses for the investment portfolio accrued
for the period (net of reimbursements).
c = the average daily number of accumulation units
outstanding during the period.
d = the maximum offering price per accumulation
unit on the last day of the period.
Net investment income will be determined in accordance with rules
established by the Securities and Exchange Commission. Accrued expenses will
include all recurring fees that are charged to all contracts.
Because of the charges and deductions imposed by the Separate Account, the
yield for an investment portfolio will be lower than the yield for the
corresponding series. The yield on amounts held in the investment portfolios
normally will fluctuate over time. Therefore, the disclosed yield for any given
period is not an indication or representation of future yields or rates of
return. An investment portfolio's actual yield will be affected by the types and
quality of portfolio securities held by the series and the series operating
expenses.
Any current yield quotations of the PPM America/JNL Money Market Portfolio,
subject to Rule 482 of the Securities Act of 1933, will consist of a seven
calendar day historical yield, carried at least to the nearest hundredth of a
percent. We may advertise yield for the Portfolio based on different time
periods, but we will accompany it with a yield quotation based on a seven day
calendar period.
The PPM America/JNL Money Market Portfolio yield will be calculated by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one accumulation unit at
the beginning of the base period, subtracting a hypothetical charge reflecting
deductions from contracts, and dividing the net change in account value by the
value of the account at the beginning of the period to obtain a base period
return and multiplying the base period return by (365/7). The PPM America/JNL
Money Market Portfolio's effective yield is computed similarly but includes the
effect of assumed compounding on an annualized basis of the current yield
quotations of the Portfolio.
The PPM America/JNL Money Market Portfolio's yield and effective yield will
fluctuate daily. Actual yields will depend on factors such as the type of
instruments in the series' portfolio, portfolio quality and average maturity,
changes in interest rates, and the series' expenses. Although the investment
portfolio determines its yield on the basis of a seven calendar day period, it
may use a different time period on occasion. The yield quotes may reflect the
expense limitations described in the series' Prospectus or Statement of
Additional Information. There is no assurance that the yields quoted on any
given occasion will be maintained for any period of time and there is no
guarantee that the net asset values will remain constant. It should be noted
that neither a contract owner's investment in the PPM America/JNL Money Market
Portfolio nor that Portfolio's investment in the PPM America/JNL Money Market
Series, is guaranteed or insured. Yields of other money market funds may not be
comparable if a different base or another method of calculation is used.
Additional Tax Information
NOTE: INFORMATION CONTAINED HEREIN SHOULD NOT BE SUBSTITUTED FOR THE ADVICE
OF A PERSONAL TAX ADVISER. JACKSON NATIONAL DOES NOT MAKE ANY GUARANTEE
REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN CERTAIN
SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE
OR OTHER TAX LAWS.
General
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code"),
governs taxation of annuities in general. An individual owner is not taxed on
increases in the value of a contract until distribution occurs, either in the
form of a withdrawal or as annuity payments under the annuity option elected.
For a withdrawal received as a total surrender (total redemption or a death
benefit), the recipient is taxed on the portion of the payment that exceeds the
cost basis of the contract. For a payment received as a partial withdrawal,
federal tax liability is determined on a last-in, first-out basis, meaning
taxable income is withdrawn before the cost basis of the contract is withdrawn.
For contracts issued in connection with non-qualified plans, the cost basis is
generally the premiums, while for contracts issued in connection with qualified
plans there may be no cost basis. The taxable portion of a withdrawal is taxed
at ordinary income tax rates. Tax penalties may also apply.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includable in taxable income. The exclusion amount for payments based
on a fixed annuity option is determined by multiplying the payment by the ratio
that the cost basis of the contract (adjusted for any period certain or refund
feature) bears to the expected return under the contract. The exclusion amount
for payments based on a variable annuity option is determined by dividing the
cost basis of the contract (adjusted for any period certain or refund guarantee)
by the number of years over which the annuity is expected to be paid. Payments
received after the investment in the contract has been recovered (i.e. when the
total of the excludable amounts equals the investment in the contract) are fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of qualified plans there may be no cost basis in the contract within the
meaning of Section 72 of the Code. Owners, annuitants and beneficiaries under
the contracts should seek competent financial advice about the tax consequences
of distributions.
Jackson National is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
Jackson National and its operations form a part of Jackson National.
Withholding Tax on Distributions
The Code generally requires Jackson National (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of qualified plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct transfer. This requirement is mandatory and
cannot be waived by the owner.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax sheltered annuity qualified under Section
403(b) of the Code (other than (1) a series of substantially equal annuity
payments for the life (or life expectancy) of the employee, or joint lives (or
joint life expectancies) of the employee, and his or her designated beneficiary,
or for a specified period of ten years or more); and (2) minimum distributions
required to be made under the Code. Failure to "rollover" the entire amount of
an eligible rollover distribution (including an amount equal to the 20% portion
of the distribution that was withheld) could have adverse tax consequences,
including the imposition of a penalty tax on premature withdrawals, described
later in this section.
Withdrawals or distributions from a contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the owner may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
Generally, the amount of any payment of interest to a non-resident alien of
the United States shall be subject to withholding of a tax equal to thirty (30%)
percent of such amount or, if applicable, a lower treaty rate. A payment may not
be subject to withholding where the recipient sufficiently establishes that such
payment is effectively connected to the recipient's conduct of a trade or
business in the United States and such payment is included in recipient's gross
income.
Diversification -- Separate Account Investments
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to earnings allocable to the contract prior to the receipt of
payments under the contract. The Code contains a safe harbor provision which
provides that annuity contracts such as the contracts meet the diversification
requirements if, as of the close of each calendar quarter, the underlying assets
meet the diversification standards for a regulated investment company, and no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
The Treasury Department has issued Regulations establishing diversification
requirements for the investment portfolios underlying variable contracts. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (1) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (2) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
Jackson National intends that each series of the JNL Series Trust will be
managed by its respective investment adviser in such a manner as to comply with
these diversification requirements.
The Treasury Department has indicated that the diversification Regulations
do not provide guidance regarding the circumstances in which contract owner
control of the investments of the Separate Account will cause the contract owner
to be treated as the owner of the assets of the Separate Account, thereby
resulting in the loss of favorable tax treatment of the contract. At this time
it cannot be determined whether additional guidance will be provided and what
standards may be contained in such guidance.
The amount of owner control which may be exercised under the contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the owner with
respect to earnings allocable to the contract prior to receipt of payments under
the contract.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the owner
being retroactively determined to be the owner of the assets of the Separate
Account.
Due to the uncertainty in this area, Jackson National reserves the right to
modify the contract in an attempt to maintain favorable tax treatment.
Multiple Contracts
The Code provides that multiple annuity contracts which are issued within a
calendar year to the same contract owner by one company or its affiliates are
treated as one annuity contract for purposes of determining the tax consequences
of any distribution. Such treatment may result in adverse tax consequences
including more rapid taxation of the distributed amounts from such multiple
contracts. Owners should consult a tax adviser prior to purchasing more than one
annuity contract in any calendar year.
Contracts Owned by Other than Natural Persons
Under Section 72(u) of the Code, the investment earnings on premiums
for contracts will be taxed currently to the owner if the owner is a non-natural
person, e.g., a corporation or certain other entities. Such contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to contracts held by a trust or other entity as an
agent for a natural person nor to contracts held by certain qualified plans.
Purchasers should consult their own tax counsel or other tax adviser before
purchasing a contract to be owned by a non-natural person.
Tax Treatment of Assignments
An assignment or pledge of a contract may have tax consequences, and may
also be prohibited by ERISA in some circumstances. Owners should, therefore,
consult competent legal advisers should they wish to assign or pledge their
contracts.
Qualified Plans
The contracts offered by the Prospectus are designed to be suitable for use
under various types of qualified plans. Taxation of owners in each qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Owners, annuitants and beneficiaries are cautioned that benefits under a
qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued to fund the plan.
Tax Treatment of Withdrawals
Non-Qualified Plans
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate Premiums
made, any amount withdrawn not in the form of an annuity payment will be treated
as coming first from the earnings and then, only after the income portion is
exhausted, as coming from the principal. Withdrawn earnings are included in a
taxpayer's gross income. Section 72 further provides that a 10% penalty will
apply to the income portion of any distribution. The penalty is not imposed on
amounts received: (1) after the taxpayer reaches 59 1/2; (2) upon the death of
the owner; (3) if the taxpayer is totally disabled as defined in Section
72(m)(7) of the Code; (4) in a series of substantially equal periodic payments
made at least annually for the life (or life expectancy) of the taxpayer or for
the joint lives (or joint life expectancies) of the taxpayer and his
beneficiary; (5) under an immediate annuity; or (6) which are allocable to
premium payments made prior to August 14, 1982.
Qualified Plans
In the case of a withdrawal under a qualified contract, a ratable portion
of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a qualified contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including contracts issued and qualified under Code Sections 401 (H.R. 10 and
Corporate Pension and Profit Sharing plans), 403(b) (tax-sheltered annuities)
and 408(b) (IRAs). To the extent amounts are not included in gross income
because they have been rolled over to an IRA or to another eligible qualified
plan, no tax penalty will be imposed.
The tax penalty will not apply to the following distributions: (1) if
distribution is made on or after the date on which the owner or annuitant (as
applicable) reaches age 59 1/2; (2) distributions following the death or
disability of the owner or annuitant (as applicable) (for this purpose
"disability" is defined in Section 72(m)(7) of the Code); (3) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the owner or annuitant (as applicable) or the joint lives (or
joint life expectancies) of such owner or annuitant (as applicable) and his or
her designated beneficiary; (4) distributions to an owner or annuitant (as
applicable) who has separated from service after he has attained age 55; (5)
distributions made to the owner or annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the owner or annuitant (as applicable) for amounts paid during
the taxable year for medical care; (6) distributions made to an alternate payee
pursuant to a qualified domestic relations order; (7) distributions from an IRA
for the purchase of medical insurance (as described in Section 213(d)(1)(D) of
the Code) for the contract owner or annuitant (as applicable) and his or her
spouse and dependents if the contract owner or annuitant (as applicable) has
received unemployment compensation for at least 12 weeks (this exception will no
longer apply after the contract owner or annuitant (as applicable) has been
re-employed for at least 60 days); (8) distributions from an Individual
Retirement Annuity made to the owner or annuitant (as applicable) to the extent
such distributions do not exceed the qualified higher education expenses (as
defined in Section 72(t)(7) of the Code) of the owner or annuitant (as
applicable) for the taxable year; and (9) distributions from an Individual
Retirement Annuity made to the owner or annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8) of
the Code). The exception stated in items (4) and (6) above do not apply in the
case of an IRA. The exception stated in (3) above applies to an IRA without the
requirement that there be a separation from service.
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to the following: when the owner attains age 59 1/2, separates from
services, dies, becomes disabled (within the meaning of Section 72(m)(7) of the
Code), or in the case of hardship. Hardship withdrawals do not include any
earnings on salary reduction contributions. These limitations on withdrawals
apply to: (1) salary reduction contributions made after December 31, 1988; (2)
income attributable to such contributions; and (3) income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or exchanges between certain qualified plans. Tax penalties may
also apply. While the foregoing limitations only apply to certain contracts
issued in connection with Section 403(b) qualified plans, all owners should seek
competent tax advice regarding any withdrawals or distributions.
The taxable portion of a withdrawal or distribution from contracts issued
under certain types of plans may, under some circumstances, be "rolled over"
into another eligible plan so as to continue to defer income tax on the taxable
portion. Effective January 1, 1993, such treatment is available for an "eligible
rollover distribution" made by certain types of plans (as described above under
"Taxes -- Withholding Tax on Distributions") that is transferred within 60 days
of receipt into another eligible plan or an IRA, or an individual retirement
account described in section 408(a) of the Code. Plans making such eligible
rollover distributions are also required, with some exceptions specified in the
Code, to provide for a direct transfer of the distribution to the transferee
plan designated by the recipient.
Amounts received from IRAs may also be rolled over into other IRAs,
individual retirement accounts or certain other plans, subject to limitations
set forth in the Code.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year following the year in which the employee attains
the later of age 70 1/2 or the date of retirement. In the case of an IRA,
distribution must commence no later than April 1 of the calendar year following
the year in which the owner attains age 70 1/2. Required distributions must be
over a period not exceeding the life or life expectancy of the individual or the
joint lives or life expectancies of the individual and his or her designated
beneficiary. If the required minimum distributions are not made, a 50% penalty
tax is imposed as to the amount not distributed.
Types of Qualified Plans
The following are general descriptions of the types of qualified plans with
which the contracts may be used. Such descriptions are not exhaustive and are
for general information purposes only. The tax rules regarding qualified plans
are very complex and will have differing applications depending on individual
facts and circumstances. Each purchaser should obtain competent tax advice prior
to purchasing a contract issued under a qualified plan.
Contracts issued pursuant to qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this Prospectus. Generally, contracts issued pursuant to qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from qualified plan contracts.
(a) H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to
establish qualified plans for themselves and their employees, commonly
referred to as "H.R. 10" or "Keogh" Plans. Contributions made to the
plan for the benefit of the employees will not be included in the
gross income of the employees until distributed from the plan. The tax
consequences to owners may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all
plans on such items as: amounts of allowable contributions; form,
manner and timing of distributions; transferability of benefits;
vesting and non-forfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. Purchasers of contracts for use with an
H.R. 10 Plan should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
(b) Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and
scientific organizations described in Section 501(c) (3) of the Code.
These qualifying employers may make contributions to the contracts for
the benefit of their employees. Such contributions are not included in
the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the
tax-sheltered annuity is limited to certain maximums imposed by the
Code. Furthermore, the Code sets forth additional restrictions
governing such items as transferability, distributions,
non-discrimination and withdrawals. Employee loans are not allowed
under these contracts. Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
(c) Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to
contribute to an individual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Under applicable limitations, certain
amounts may be contributed to an IRA which will be deductible from the
individual's gross income. These IRAs are subject to limitations on
eligibility, contributions, transferability and distributions. Sales
of contracts for use with IRAs are subject to special requirements
imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish an
IRA. Purchasers of contracts to be qualified as IRAs should obtain
competent tax advice as to the tax treatment and suitability of such
an investment.
(d) Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers
to establish various types of retirement plans for employees. These
retirement plans may permit the purchase of the contracts to provide
benefits under the plan. Contributions to the plan for the benefit of
employees will not be included in the gross income of the employee
until distributed from the plan. The tax consequences to owners may
vary depending upon the particular plan design. However, the Code
places limitations on all plans on such items as amount of allowable
contributions; form, manner and timing of distributions; vesting and
non-forfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, transferability
of benefits, withdrawals and surrenders. Purchasers of contracts for
use with corporate pension or profit sharing plans should obtain
competent tax advice as to the tax treatment and suitability of such
an investment.
(e) Non-Qualified Deferred Compensation Plans -- Section 457
Under Section 457 of the Code, governmental and certain other
tax-exempt employers may establish, for the benefit of their
employees, deferred compensation plans which may invest in annuity
contracts. The Code, as in the case of qualified plans, establishes
limitations and restrictions on eligibility, contributions and
distributions. Under these plans, contributions made for the benefit
of the employees will not be included in the employees' gross income
until distributed from the plan.
(f) Roth IRAs
Beginning in 1998, individuals may purchase a new type of
non-deductible IRA, known as a Roth IRA. Purchase payments for a Roth
IRA are limited to a maximum of $2,000 per year. Lower maximum
limitations apply to individuals with adjusted gross incomes between
$95,000 and $110,000 in the case of single taxpayers, between $150,000
and $160,000 in the case of married taxpayers filing joint returns,
and between $0 and $15,000 in the case of married taxpayers filing
separately. An overall $2,000 annual limitation continues to apply to
all of a taxpayer's IRA contributions, including Roth IRAs and
non-Roth IRAs.
Qualified distributions from Roth IRAs are entirely tax free. A
qualified distribution requires that the individual has held the Roth
IRA for at least five years and, in addition, that the distribution is
made either after the individual reaches age 59 1/2, on the
individual's death or disability, or as a qualified first-time home
purchase, subject to a $10,000 lifetime maximum, for the individual, a
spouse, child, grandchild, or ancestor. Any distribution which is not
a qualified distribution is taxable to the extent of earnings in the
distribution. Distributions are treated as made from contributions
first and therefore no distributions are taxable until distributions
exceed the amount of contributions to the Roth IRA. The 10% penalty
tax and the regular IRA exceptions to the 10% penalty tax apply to
taxable distributions from a Roth IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA.
Furthermore, An individual may make a rollover contribution from a
non-Roth IRA to a Roth IRA, unless the individual has adjusted gross
income over $100,000 or the individual is a married taxpayer filing a
separate return. The individual must pay tax on any portion of the IRA
being rolled over that represents income or a previously deductible
IRA contribution. However, for rollovers in 1998, the individual may
pay that tax ratably over the four taxable year periods beginning with
the tax year 1998. There are no similar limitations on rollovers from
a Roth IRA to another Roth IRA.
Income Payments; Net Investment Factor
See "Income Payments (The Income Phase)" in the Prospectus.
The net investment factor is an index applied to measure the net investment
performance of an investment portfolio from one valuation date to the next.
Since the net investment factor may be greater or less than or equal to one, and
the factor that offsets the investment rate assumed is slightly less than one,
the value of an annuity unit (which changes with the product of that factor) and
the net investment may increase, decrease or remain the same.
The net investment factor for any investment portfolio for any valuation
period is determined by dividing (a) by (b) and then subtracting (c) from the
result where:
(a) is the net result of:
(1) the net asset value of a series share held in the
investment portfolio determined as of the valuation
date at the end of the valuation period, plus
(2) the per share amount of any dividend or other
distribution declared by the series if the
"ex-dividend" date occurs during the valuation period,
plus or minus
(3) a per share credit or charge with respect to any taxes
paid or reserved for by Jackson National during the
valuation period which are determined by Jackson
National to be attributable to the operation of the
investment portfolio (no federal income taxes are
applicable under present law );
(b) is the net asset value of the series share held in the investment
portfolio determined as of the valuation date at the end of the
preceding valuation period; and
(c) is the asset charge factor determined by Jackson National for the
valuation period to reflect the charges for assuming the
mortality and expense risks and the administration charge.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Consolidated Financial Statements
Jackson National Life Insurance Company
[GRAPHIC](R)
Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Jackson National Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated income statements and consolidated statements of stockholder's
equity and of cash flows present fairly, in all material respects, the financial
position of Jackson National Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
February 6, 1998
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
(In thousands)
- --------------------------------------------------------------------------------
December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Assets
Investments:
Cash and short-term investments $ 2,526,163 $ 660,246
Fixed maturities held to maturity, at amortized cost
(market value: 1996, $4,160,485) - 4,168,277
Investments available for sale, at market value:
Fixed maturities (amortized cost: 1997, $25,622,420; 1996, $19,796,064) 26,604,978 20,225,507
Equities (cost: 1997; $157,916; 1996, $156,767) 252,963 202,442
Mortgage loans 1,597,223 843,860
Policy loans 624,192 594,962
Other invested assets 171,220 118,662
---------------- ----------------
Total investments 31,776,739 26,813,956
Accrued investment income 386,412 338,099
Deferred acquisition costs 1,140,034 1,231,388
Variable annuity assets 1,122,239 369,569
Reinsurance recoverable 226,219 155,451
Value of acquired insurance in force 169,245 183,284
Deferred income taxes - 131,470
Other assets 80,197 75,373
================ ================
Total assets $ 34,901,085 $ 29,298,590
================ ================
Liabilities and Stockholder's Equity
Liabilities
Policy reserves and liabilities:
Reserves for future policy benefits $ 661,728 $ 624,733
Deposits on investment contracts 25,125,774 24,021,621
Guaranteed investment contracts 2,769,249 1,464,010
Other policyholder funds 15,674 16,098
Claims payable 159,022 139,617
Reverse repurchase and dollar roll repurchase agreements 1,426,473 -
Variable annuity liabilities 1,122,239 369,569
Surplus note payable 249,168 -
Liability for guaranty fund assessments 81,776 89,104
Income taxes currently payable to Parent 143,295 140,364
Deferred income taxes 43,086 -
Other liabilities 488,452 419,523
---------------- ----------------
Total liabilities 32,285,936 27,284,639
---------------- ----------------
Stockholder's Equity
Capital stock, $1.15 par value; authorized 50,000 shares;
outstanding 12,000 shares
13,800 13,800
Additional paid-in capital 832,982 648,982
Net unrealized gain on investments,
net of tax of $237,212 in 1997 and $97,155 in 1996 440,537 180,432
Retained earnings 1,327,830 1,170,737
---------------- ----------------
Total stockholder's equity 2,615,149 2,013,951
================ ================
Total liabilities and stockholder's equity $ 34,901,085 $ 29,298,590
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Income Statement
(In thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
Revenues
Premiums and other considerations $ 275,851 $ 292,448 $ 310,231
Net investment income 2,242,101 1,997,032 1,836,372
Net realized investment gains 80,335 18,573 84,626
Fee income:
Mortality charges 136,285 123,245 128,695
Surrender charges 66,638 64,933 54,380
Expense charges 20,175 20,641 20,308
Variable annuity fees 10,202 1,948 -
Net asset management fees 5,219 946 201
Net retained commissions 443 325 168
----------------- ----------------- ------------------
Total fee income 238,962 203,752
212,038
Other income 31,251 28,741 8,768
----------------- ----------------- ------------------
Total revenues 2,868,500 2,548,832 2,443,749
----------------- ----------------- ------------------
Benefits and Expenses
Death benefits 279,014 281,011
282,973
Interest credited on deposit liabilities 1,586,249 1,449,852 1,379,435
Interest expense on surplus notes 16,330 - -
Increase (decrease) in reserves, net of
reinsurance recoverables (23,292) 3,568 43,680
Other policyholder benefits 16,170 14,446 17,511
Commissions 274,906 232,901 214,060
General and administrative expenses 169,473 146,800 127,389
Taxes, licenses and fees 21,852 23,535 56,472
Deferral of acquisition costs (320,246) (262,351) (227,093)
Amortization of acquisition costs 216,112 175,062 142,308
Amortization of insurance in force 14,039 13,279 12,379
----------------- ----------------- ------------------
Total benefits and expenses 2,250,607 2,080,065 2,047,152
----------------- ----------------- ------------------
Pretax income 617,893 468,767 396,597
Income tax expense 216,300 164,100 140,000
----------------- ----------------- ------------------
Net income $ 401,593 $ 304,667 $ 256,597
================= ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Stockholder's Equity
(In thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
Capital stock, beginning and end of year $ 13,800 $ 13,800 $ 13,800
----------------- ----------------- ------------------
Additional paid-in capital
Beginning of year 648,982 603,982 603,982
Capital contributions 184,000 45,000 -
----------------- ----------------- ------------------
End of year 603,982
832,982 648,982
----------------- ----------------- ------------------
Net unrealized gain (loss) on investments
Beginning of year (353,692)
180,432 389,883
Change in market value of investments
available for sale, net of taxes and
related deferred acquisition costs 260,105 (209,451) 743,575
----------------- ----------------- ------------------
End of year 389,883
440,537 180,432
----------------- ----------------- ------------------
Retained earnings
Beginning of year 1,170,737 648,473
885,570
Net income 401,593 304,667 256,597
Dividends paid to stockholder (244,500) (19,500) (19,500)
----------------- ----------------- ------------------
End of year 1,327,830 1,170,737 885,570
----------------- ----------------- ------------------
Total stockholder's equity $ 2,615,149 $ 2,013,951 $ 1,893,235
================= ================= ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
(In thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
---------------- ---------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 401,593 $ 304,667 $ 256,597
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment gains (80,335) (18,573) (84,626)
Interest credited on deposit liabilities 1,586,249 1,449,852 1,379,435
Other charges (233,300) (210,767) (203,383)
Amortization of discount and premium on
investments (18,437) (55,808) (32,261)
Change in:
Deferred income taxes 34,500 44,600 (364)
Accrued investment income (48,313) (11,077) (15,469)
Deferred acquisition costs (104,134) (87,289) (84,785)
Value of acquired insurance in force 14,039 13,279 12,379
Income taxes currently payable to Parent 2,931 38,317 58,672
Other assets and liabilities, net 52,413 (92,839) 91,116
---------------- ---------------- ------------------
Net cash provided by operating activities 1,607,206 1,374,362 1,377,311
---------------- ---------------- ------------------
Cash flows from investing activities:
Sales of:
Fixed maturities and equities available for sale 9,078,616 3,281,105 2,994,755
Mortgage loans 47,282 16,360 3,840
Principal repayments, maturities, calls and redemptions:
Available for sale 960,844 1,052,506 257,793
Held to maturity - 465,862 289,266
Purchases of:
Fixed maturities and equities available for sale (11,588,708) (5,716,350) (4,782,081)
Fixed maturities held to maturity - (557,749) (1,050,039)
Mortgage loans (801,008) (685,938) (140,379)
Other investing activities 1,332,795 - -
---------------- ---------------- ------------------
Net cash used by investing activities (970,179) (2,144,204) (2,426,845)
---------------- ---------------- ------------------
Cash flows from financing activities: Policyholders
account balances:
Deposits 5,849,300 4,198,094 2,589,863
Withdrawals (4,089,935) (2,540,112) (1,713,037)
Net transfers to separate accounts (719,138) (341,482) (748)
Surplus note payable 249,163 - -
Payment of cash dividends to Parent (244,500) (19,500) (19,500)
Capital contribution from Parent 184,000 45,000 -
---------------- ---------------- ------------------
Net cash provided by financing activities 1,228,890 1,342,000 856,578
---------------- ---------------- ------------------
Net increase (decrease) in cash and short-term
investments 1,865,917 572,158 (192,956)
Cash and short-term investments, beginning of period 660,246 88,088 281,044
================ ================ ==================
Cash and short-term investments, end of period $ 2,526,163 $ 660,246 $ 88,088
================ ================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
1. Nature of Operations
Jackson National Life Insurance Company, Inc. (the "Company" or "JNL") is
wholly owned by Brooke Life Insurance Company ("Brooke Life" or the
"Parent") which is ultimately a wholly owned subsidiary of Prudential
Corporation, plc ("Prudential"), London, England. JNL is licensed to sell
individual annuity products, including immediate and deferred annuities,
variable annuities, guaranteed investment contracts ("GICs"), and
individual life insurance products in 49 states and the District of
Columbia.
The accompanying consolidated financial statements include JNL and its
wholly owned subsidiaries, Jackson National Life Insurance Company of New
York, an insurance company; Chrissy Corporation, an advertising agency;
Jackson National Financial Services, Inc., an investment advisor and broker
dealer, and Jackson National Life Distributors, Inc., a broker dealer.
During the second quarter of 1997, the Company sold Jackson National
Compania De Seguros De Vida S.A. ("Argentina"), a life insurance company of
which JNL owned 90% of the common stock.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with the current year presentation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results may differ from those estimates.
Investments
Cash and short-term investments which primarily include cash, commercial
paper, and money market instruments are carried at cost, which approximates
fair value. These investments have maturities of three months or less and
are considered cash equivalents for reporting cash flows.
Fixed maturities include bonds, notes, redeemable preferred stocks,
mortgage-backed securities and structured securities. All fixed maturities
are considered available for sale and are carried at aggregate market
value. Previously, fixed maturities which the Company had the ability and
intent to hold to maturity were reported at amortized cost. Fixed
maturities are reduced to estimated net realizable value for declines in
market value considered to be other than temporary.
Equity securities which include common stocks and non-redeemable preferred
stocks are carried at market value.
Mortgage loans are carried at the unpaid principal balances, net of
unamortized discounts and premiums.
Policy loans are carried at the unpaid principal balances.
Real estate is carried at the lower of depreciated cost or fair value.
Limited partnership investments are accounted for using the equity method.
Realized gains and losses on the sale of investments are recognized in
income at the date of sale and are determined using the specific cost
identification method. Acquisition premiums and discounts on
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
investments are amortized to investment income using call or maturity
dates. The changes in unrealized gains or losses of investments classified
as available for sale, net of tax and the effect of the deferred
acquisition costs adjustment are excluded from income and credited or
charged directly to stockholder's equity.
Derivative Financial Instruments
The Company enters into financial derivative transactions, including swaps,
put-swaptions, futures and options to reduce and manage business risks.
These transactions manage the risk of a change in the value, yield, price,
cash flows, or quantity of, or a degree of exposure with respect to assets,
liabilities, or future cash flows, which the Company has acquired or
incurred. Hedge accounting practices are supported by cash flow matching,
duration matching and scenario testing.
Interest rate swap agreements generally involve the exchange of fixed and
floating payments over the life of the agreement without an exchange of the
underlying principal amount. Interest rate swap agreements outstanding at
December 31, 1997 hedge available for sale securities and are carried at
fair value with the change in value reflected in stockholder's equity.
Amounts paid or received on interest rate swap agreements, if any, are
included in investment income. Accrued amounts payable to or receivable
from counterparties are included in other liabilities or other assets.
Realized gains and losses from the settlement or termination of the
interest rate swaps are deferred and amortized over the life of the
specific hedged assets as an adjustment to the yield.
Index swap agreements generally involve the exchange of payments based on a
short-term interest rate index for payments based on the total return of a
bond or equity index over the life of the agreement without an exchange of
the underlying principal amount. Index swap agreements outstanding at
December 31, 1997 hedge the anticipated purchase of investment grade
available for sale bonds and are carried at fair value. Fair value and
amounts paid or received on the swaps are deferred and will adjust the
basis of bonds acquired upon expiration of the swaps.
Put-swaptions purchased provide the Company with the right, but not the
obligation, to require the writers to pay the Company the present value of
a long duration interest rate swap at future exercise dates. These
put-swaptions are entered into as a hedge against significant upward
movements in interest rates. Premiums paid for put-swaption contracts are
included in other invested assets and are being amortized to investment
income over the remaining terms of the contracts with maturities of up to 5
years. Put-swaptions, designated as a hedge of available for sale
securities, are carried at fair value with the change in value reflected in
stockholder's equity.
Equity index futures contracts and equity index call options are used in
conjunction with equity index-linked immediate and deferred annuities
offered by the Company. These transactions are accounted for as hedges of
the associated annuity liabilities. The variation margin on futures
contracts is deferred and, upon closing of the contracts, adjusts the basis
of option contracts purchased. The cost of options acquired is amortized
into net investment income over the option term. The fair value of option
contracts is deferred until recognition of the associated index-linked
annuity liability.
Derivative financial instruments are primarily held for hedging purposes.
High yield index swaps and equity index swaps were held for investment
purposes in 1997 and 1996.
The Company manages the potential credit exposure for over-the-counter
derivative contracts through careful evaluation of the counterparty credit
standing, collateral agreements, and master netting agreements. The Company
is exposed to credit-related losses in the event of nonperformance by
counterparties, however, it does not anticipate nonperformance.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Deferred Acquisition Costs
Certain costs of acquiring new business, principally commissions and
certain costs associated with policy issue and underwriting which vary with
and are primarily related to the production of new business, have been
capitalized as deferred acquisition costs. Deferred acquisition costs are
increased by interest thereon and amortized in proportion to anticipated
premium revenues for traditional life policies and in proportion to
estimated gross profits for annuities and interest-sensitive life products.
As certain fixed maturities and equity securities available for sale are
carried at aggregate market value, an adjustment is made to deferred
acquisition costs equal to the change in amortization that would have
occurred if such securities had been sold at their stated aggregate market
value and the proceeds reinvested at current yields. The change in this
adjustment is included with the change in market value of investments, net
of tax, on fixed maturities and equity securities available for sale that
is credited or charged directly to stockholder's equity. Deferred
acquisition costs have been decreased by $383.6 million and $188.1 million
at December 31, 1997 and 1996, respectively, to reflect this change.
Value of Acquired Insurance in-Force
The value of acquired insurance in-force at acquisition date represents the
present value of anticipated profits of the business in-force on November
25, 1986 (the date the Company was acquired by Prudential) net of
amortization. The value of acquired insurance in-force is amortized in
proportion to anticipated premium revenues for traditional life insurance
contracts and estimated gross profits for annuities and interest-sensitive
life products over a period of 20 years.
Federal Income Taxes
The Company provides deferred income taxes on the temporary differences
between the tax and financial statement basis of assets and liabilities.
JNL files a consolidated federal income tax return with Brooke Life. The
non-life insurance company subsidiaries and Jackson National Life Insurance
Company of New York file separate federal income tax returns. Income tax
expense is calculated on a separate company basis.
Policy Reserves and Liabilities
Reserves for future policy benefits:
For traditional life insurance contracts, reserves for future policy
benefits are determined using the net level premium method and assumptions
as of the issue date as to mortality, interest, policy lapsation and
expenses plus provisions for adverse deviations. Mortality assumptions
range from 59% to 90% of the 1975-1980 Basic Select and Ultimate tables
depending on underwriting classification and policy duration. Interest rate
assumptions range from 6.0% to 9.5%. Lapse and expense assumptions are
based on Company experience.
Deposits on investment contracts:
For the Company's interest-sensitive life contracts, reserves approximate
the policyholder's accumulation account. For deferred annuity, variable
annuity, guaranteed investment contracts and other investment contracts,
the reserve is the policyholder's account value.
Variable Annuity Assets and Liabilities
The assets and liabilities resulting from individual variable annuity
contracts which aggregated $1,082.7 million and $369.6 million at December
31, 1997 and 1996, respectively, are segregated in a separate account. The
Company receives administrative fees for managing the funds and other fees
for assuming mortality and certain expense risks. Such fees are recorded as
earned and included in variable annuity fees and net asset management fees
in the consolidated income statement.
In April 1997, the Company issued a group variable annuity contract
designed for use in connection with and issued to the Company's Defined
Contribution Retirement Plan. These deposits are allocated to the
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Jackson National Separate Account - II and aggregated $39.5 million at
December 31, 1997. The Company receives administrative fees for managing
the funds and these fees are recorded as earned and included in net asset
management fees in the consolidated income statement.
Revenue and Expense Recognition
Premiums for traditional life insurance are reported as revenues when due.
Benefits, claims and expenses are associated with earned revenues in order
to recognize profit over the lives of the contracts. This association is
accomplished by provisions for future policy benefits and the deferral and
amortization of acquisition costs.
Deposits on interest-sensitive life products and investment contracts,
principally deferred annuities and guaranteed investment contracts, are
treated as policyholder deposits and excluded from revenue. Revenues
consist primarily of the investment income and charges assessed against the
policyholder's account value for mortality charges, surrenders and
administrative expenses. Fee income also includes revenues related to asset
management fees and net retained commissions. Surrender benefits are
treated as repayments of the policyholder account. Annuity benefit payments
are treated as reductions to the policyholder account. Death benefits in
excess of the policyholder account are recognized as an expense when
incurred. Expenses consist primarily of the interest credited to the
policyholder deposit. Underwriting expenses are associated with gross
profit in order to recognize profit over the life of the business. This is
accomplished by deferral and amortization of acquisition costs.
3. Fair Value of Financial Instruments
The following summarizes the basis used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Short-Term Investments:
Carrying value is considered to be a reasonable estimate of fair value.
Fixed Maturities and Equity Securities:
Fair values are based principally on quoted market prices, if available.
For securities that are not actively traded, fair values are estimated
using independent pricing services or analytically determined values.
Mortgage Loans:
Fair values are determined by discounting the future cash flows to the
present at current market rates. The fair value of mortgages approximated
$1,655.6 million and $846.6 million at December 31, 1997 and 1996,
respectively.
Policy Loans:
The carrying value approximates fair value since policy loans reduce the
amount payable at death or surrender of the contract.
Derivatives:
The fair value of derivatives is based on quoted market prices or estimates
received from financial institutions.
Variable Annuity Assets:
Variable annuity assets are carried at the market value of the underlying
securities.
Annuity Reserves:
Fair values for immediate and deferred annuities, without mortality
features, are derived by discounting the future estimated cash flows using
current interest rates with similar maturities. The carrying value and fair
value of such annuities approximated $21.2 billion and $20.1 billion,
respectively, at December 31, 1997, and $19.5 billion and $18.5 billion,
respectively, at December 31, 1996.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
3. Fair Value of Financial Instruments (continued)
Reserves for Guaranteed Investment Contracts:
Fair value is based on the present value of future cash flows at current
pricing rates. The fair value approximated $2.8 billion, at December 31,
1997, and $1.5 billion at December 31, 1996.
Variable Annuity Liabilities:
Fair value of contracts in the accumulation phase is based on account value
less surrender charges. Fair values of contracts in the payout phase are
based on the present value of future cash flows at assumed investment
rates. The fair value approximated $1,056.8 million and $345 million at
December 31, 1997 and December 31, 1996, respectively.
Indebtedness
Fair value is based on the present value of future cash flows at current
interest rates. The fair value of surplus notes approximated $276.2 million
at December 31, 1997. The carrying value of reverse repurchase and dollar
roll repurchase agreements approximates fair value.
4. Investments
Investments are comprised primarily of fixed-interest securities, primarily
publicly-traded industrial, mortgage-backed, utility and government bonds.
The Company generates the vast majority of its deposits from
interest-sensitive individual annuity and life insurance products, on which
it has committed to pay a declared rate of interest. The Company's strategy
of investing in fixed-income securities aims to ensure matching of the
asset yield with the interest-sensitive insurance liabilities and to earn a
stable return on its investments.
Debt Securities
The following table sets forth fixed maturity investments at December 31,
1997, classified by rating categories as assigned by nationally recognized
statistical rating organizations, the National Association of Insurance
Commissioners ("NAIC"), or if not rated by such organizations, the
Company's investment advisor. At December 31, 1997, investments rated by
the Company's investment advisor totaled $1.5 billion. For purposes of the
table, if not otherwise rated higher by a nationally recognized statistical
rating organization, NAIC Class 1 investments are included in the A rating;
Class 2 in BBB; Class 3 in BB and Classes 4 through 6 in B and below.
Percent of Total
Investment Rating Assets
---------------------
AAA .................................... 29.9%
AA ..................................... 1.4
A ...................................... 19.7
BBB .................................... 17.7
-----
Investment grade ................... 68.7
-----
BB ..................................... 5.1
B and below ............................ 2.4
-----
Below investment grade ............. 7.5
-----
Total fixed maturities ............. 76.2
-----
Other assets ........................... 23.8
=====
Total assets ....................... 100.0%
=====
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and estimated market value of fixed maturity investments
held to maturity were as follows at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Corporate securities $ 886,250 $ 7,931 $ 7,766 $ 886,415
Mortgage-backed securities 3,282,027 32,945 40,902 3,274,070
==================== ================== =======================================
Total $ 4,168,277 $ 40,876 $ 48,668 $ 4,160,485
==================== ================== =================== ===================
</TABLE>
In 1997, fixed maturities previously classified as held to maturity with an
aggregate amortized cost of $4,022.9 million and net unrealized losses of
$35.3 million were reclassified to available for sale.
The amortized cost and estimated market value of fixed maturity investments
available for sale were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 510,107 $ 9,040 $ 935 $ 518,212
U.S. Government agencies
and foreign governments 216,167 15,292 1,890 229,569
Public utilities 744,464 26,370 3,462 767,372
Corporate securities 11,617,384 629,123 28,971 12,217,536
Mortgage-backed securities 12,534,298 356,238 18,247 12,872,289
-------------------- ------------------ ------------------- -------------------
Total $ 25,622,420 $ 1,036,063 $ 53,505 $ 26,604,978
==================== ================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,461 $ 118 $ - $ 5,579
U.S. Government agencies
and foreign governments 227,307 14,109 241,325
91
Public utilities 748,841 26,708 13,710 761,839
Corporate securities 9,902,242 435,905 59,060 10,279,087
Mortgage-backed securities 8,912,213 150,619 125,155 8,937,677
-------------------- ------------------ ------------------- -------------------
Total $ 19,796,064 $ 627,459 $ 198,016 $ 20,225,507
==================== ================== =================== ===================
</TABLE>
Gross unrealized gains pertaining to equity securities at December 31, 1997
and 1996 were $102.7 million and $48.2 million, respectively. Gross
unrealized losses at December 31, 1997 and 1996 were $7.7 million and $2.5
million, respectively.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and estimated market value of fixed maturities at
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 early
redemption penalties.
Fixed maturities available for sale (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------------- ----------------------
<S> <C> <C> <C>
Due in 1 year or less $ 372,700 $ 378,061
Due after 1 year through 5 years 2,525,003 2,599,778
Due after 5 years through 10 years 5,393,521 5,572,869
Due after 10 years through 20 years 1,626,216 1,784,754
Due after 20 years 3,170,682 3,397,227
Mortgage-backed securities 12,534,298 12,872,289
==================== ======================
Total $ 25,622,420 $ 26,604,978
==================== ======================
</TABLE>
Discounts and premiums on collateralized mortgage obligations are amortized
over the estimated redemption period using the effective interest method.
Yields which are used to calculate premium/discount amortization are
adjusted periodically for prepayments.
Fixed maturities with a carrying value of $6.6 million and $4.7 million
were on deposit with regulatory authorities at December 31, 1997 and 1996,
respectively, as required by law in various states in which the insurance
operations conduct business.
Mortgage Loans
Mortgage loans were as follows (in thousands):
December 31,
1997 1996
------------------ ----------------
Single Family $ 1,596 $ 1,057
Commercial 1,595,627 842,803
================== ================
Total $ 1,597,223 $ 843,860
================== ================
At December 31, 1997, mortgage loans were collateralized by properties
located in 31 states and Canada. Approximately 13% of the aggregate
carrying value of the portfolio is secured by properties located in Texas.
Other Invested Assets
Other invested assets consist primarily of investments in limited
partnerships which invest in securities. Limited partnership income
recognized by the Company was $38.9 million and $3.3 million in 1997 and
1996, respectively.
Derivatives
The fair value of derivatives reflects the estimated amounts that the
Company would receive or pay upon termination of the contracts at the
reporting date. With respect to swaps and put-swaptions, the notional
amount represents the stated principal balance used as a basis for
calculating payments. With respect to futures and options, the contractual
amount represents the market exposure of outstanding positions.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
4. Investments (continued)
A summary of the aggregate contractual or notional amounts, estimated fair
values and gain/(loss) for derivative financial instruments outstanding
were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------------------------- ------------------------------------------
Contractual/ Contractual/
Notional Fair Gain/ Notional Fair Gain/
Amount Value (Loss) Amount Value (Loss)
------------------- ------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps $ 3,138,000 $ (9,257) $ (9,257) $1,255,000 $ 39,111 $ 39,111
Index swaps 1,000,000 - 11,196 - - -
Put-swaptions 37,000,000 3,531 (16,273) 24,500,000 11,245 (9,439)
Futures 32,435 - 282 16,318 - (83)
Call options owned 385,797 114,161 42,415 - - -
</TABLE>
During 1997 and 1996, the Company recorded $35.8 million and $24.3 million,
respectively, in net investment income from derivative instruments,
including $36.3 million and $12.6 million, respectively, from investment
activity. The average notional amount of swaps outstanding was $3.3 billion
and $1.3 billion in 1997 and 1996, respectively. Included in the average
outstanding amount were high yield and equity index swaps of $461.7 million
and $255.0 million in 1997 and 1996, respectively.
Securities Lending
The Company has entered into a securities lending agreement whereby blocks
of securities are loaned to third parties, primarily major brokerage firms.
As of December 31, 1997 and December 31, 1996, the estimated fair value of
loaned securities was $674.4 million and $287.0 million, respectively. The
agreement requires a minimum of 102 percent of the fair value of the loaned
securities as collateral, calculated on a daily basis. To further minimize
the credit risks related to this program, the financial condition of
counterparties is monitored on a regular basis.
5. Investment Income and Realized Gains and Losses
The sources of net investment income by major category were as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
----------------- ------------------ ------------------
<S> <C> <C> <C>
Fixed maturities $ 2,003,256 $ 1,872,820 $ 1,766,654
Other investment income 268,540 140,717 82,614
----------------- ------------------ ------------------
Total investment income 2,271,796 2,013,537 1,849,268
Less investment expenses (29,695) (16,505) (12,896)
----------------- ------------------ ------------------
Net investment income $ 2,242,101 $ 1,997,032 $ 1,836,372
================= ================== ==================
</TABLE>
Net realized investment gains and losses were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
----------------- ------------------ ------------------
<S> <C> <C> <C>
Sales of fixed maturities
Gross gains $ 121,916 $ 78,099 $ 101,682
Gross losses (46,009) (36,624) (27,897)
Sales of equity securities
Gross gains 50,643 20,886 47,883
Gross losses (783) (5,329) (1,576)
Impairment losses (39,415) (29,500) (29,824)
Other invested assets, net (6,017) (8,959) (5,642)
----------------- ------------------ ------------------
Total $ 80,335 $ 18,573 $ 84,626
================= ================== ==================
</TABLE>
6. Value of Acquired Insurance in-Force
The value of acquired insurance in-force was determined by using
assumptions as to interest, persistency and mortality. Profits were then
discounted to arrive at the value of the insurance in-force.
The amortization of acquired insurance in-force was (in thousands):
Years ended December 31,
1997 1996
---------------- ----------------
Balance, beginning of year $ 183,284 $ 196,563
Amortization, net of interest (14,039) (13,279)
---------------- ----------------
Balance, end of year $ 169,245 $ 183,284
================ ================
The value of acquired insurance in-force estimated amortization is as
follows (in thousands):
1998 $ 15,000
1999 16,000
2000 17,000
2001 18,000
Thereafter 103,245
-----------------
Total $ 169,245
=================
7. Indebtedness
Surplus Notes
On March 15, 1997, the Company issued 8.15% Notes (the "Notes") in the
principal amount of $250 million due March 15, 2027. The Notes were issued
pursuant to Rule 144A under the Securities Act of 1933 and are unsecured
and subordinated to all present and future indebtedness, policy claims and
other creditor claims.
Under Michigan State Insurance law, the Notes are not part of the legal
liabilities of the Company and are considered capital and surplus for
statutory reporting purposes. Payments of interest or principal may only be
made with the prior approval of the Commissioner of Insurance of the State
of Michigan and only out of surplus earnings which the Commissioner
determines to be available for such payments under Michigan State Insurance
law. The Notes may not be redeemed at the option of the Company or any
holder prior to maturity.
Interest is payable semi-annually on March 15 and September 15 of each
year. Interest expense on the Notes was $16.3 million in 1997.
Reverse Repurchase and Dollar Roll Repurchase Agreements
During 1997, the Company entered into reverse repurchase and dollar roll
repurchase agreements whereby the Company agreed to sell and repurchase
securities. These activities have been accounted for as financing
transactions, with the assets and associated liabilities included in the
consolidated balance sheet. Short-term borrowings under such agreements
averaged $1.8 billion at a weighted average interest rate of 5.39% during
1997. The highest level of short-term borrowings at any month end was $3.8
billion.
8. Reinsurance
The Company assumes and cedes reinsurance from and to other insurance
companies in order to limit losses from large exposures; however, if the
reinsurer is unable to meet its obligations, the originating issuer of the
coverage assumes the liability. The maximum amount of life insurance risk
retained by the
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
8. Reinsurance (continued)
Company on any one life is generally $1.5 million. Amounts not retained are
ceded to other companies on a yearly renewable-term or a coinsurance basis.
The effect of reinsurance on premiums was as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Direct premiums $ 352,256 $ 358,533 $ 367,937
Assumed premiums 5,354 10,961 4,763
Less reinsurance ceded (81,759) (77,046) (62,469)
================== ================== =================
Total net premiums $ 275,85 $ 292,448 $ 310,231
================== ================== =================
</TABLE>
Components of the reinsurance recoverable asset as of December 31 were as
follows (in thousands):
Years ended December 31,
1997 1996
------------------ -----------------
Ceded reserves $ 202,385 $ 139,998
Ceded claims liability 11,369 9,192
Ceded - other 12,465 6,261
================== =================
Total $ 226,219 $ 155,451
================== =================
Reserves reinsured through Brooke Life were $83.4 million and $87.4 million
at December 31, 1997 and 1996, respectively.
9. Federal Income Taxes
The components of the provision for federal income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------------- ---------------- --------------
<S> <C> <C> <C>
Current tax expense $ 181,800 $ 119,500 $ 152,480
Deferred tax expense (benefit) 34,500 44,600 (12,480)
--------------- ---------------- --------------
Provision for income taxes $ 216,300 $ 164,100 $ 140,000
=============== ================ ==============
</TABLE>
The federal income tax provisions differ from the amounts determined by
multiplying pretax income by the statutory federal income tax rate of 35%
for 1997, 1996, and 1995 as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Income taxes at statutory rate $ 216,263 $ 164,069 $ 138,809
Other 37 31 1,191
--------------- --------------- ---------------
Provision for income taxes $ 216,300 $ 164,100 $ 140,000
=============== =============== ===============
Effective tax rate 35.0% 35.0% 35.3%
=============== =============== ===============
</TABLE>
Federal income taxes paid in 1997, 1996 and 1995 were $178.9 million, $81.2
million, and $116.1 million, respectively.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
9. Federal Income Taxes (continued)
The tax effects of significant temporary differences that give rise to
deferred tax assets and liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Gross deferred tax asset
Policy reserves and other insurance items $ 615,877 $ 643,237
Difference between financial reporting and the tax basis of:
Assets acquired 9,309 12,444
Insolvency fund assessments 30,020 30,970
Other, net 29,959 14,481
------------------ ------------------
Total deferred tax asset 685,165 701,132
------------------ ------------------
Gross deferred tax liability
Deferred acquisition costs (278,049) (324,157)
Difference between financial reporting and the tax basis of
value of the insurance in-force (59,236) (64,149)
Difference between financial reporting and the tax basis of
other assets (3,555) (5,546)
Net unrealized gains on available for sale securities (371,466) (162,989)
Other, net (15,945) (12,821)
------------------ ------------------
Total deferred tax liability (728,251) (569,662)
------------------ ------------------
Net deferred tax asset (liability) $ (43,086) $ 131,470
================== ==================
</TABLE>
10. Contingencies
The Company and its subsidiaries are involved in litigation arising in the
ordinary course of business including litigation relating to allegations of
improper sales practices. It is the opinion of management that the ultimate
disposition of such litigation will not have a material adverse affect on
the Company's financial condition or results of operations.
State guaranty funds provide payments for policyholders of insolvent life
insurance companies. These guaranty funds are financed by assessments to
solvent insurance companies based on location, volume, and types of
business. The Company estimated its reserve for future state guaranty fund
assessments based on data received from the National Organization of Life
and Health Insurance Guaranty Associations. Based on data received at the
end of 1997, the Company's reserve for future state guaranty fund
assessments was $81.8 million. The Company believes the reserve is adequate
for all anticipated payments for known insolvencies.
The Company offers synthetic GIC contracts to group customers including
pension funds and other institutional organizations. The synthetic GIC
contract is an off-balance-sheet fee based product where the customer
retains ownership of the assets related to these contracts and JNL
guarantees the customer's obligation to meet withdrawal requirements. The
value of off-balance-sheet guarantees were $675 million and $122 million at
December 31, 1997 and 1996, respectively.
<PAGE>
Jackson National Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
11. Stockholder's Equity
Under Michigan State Insurance Law, dividends on capital stock can only be
distributed out of earned surplus. Furthermore, without the prior approval
of the Commissioner, dividends cannot be declared or distributed which
exceed the greater of 10% of the Company's statutory surplus or statutory
net gain from operations for the prior year. On January 1, 1998 the maximum
amount of dividends that can be paid by the Company without prior approval
of the Commissioner under this limitation approximated $237.4 million.
The Company received capital contributions from its parent of $184.0
million and $45.0 million in 1997 and 1996, respectively. Dividend payments
were $244.5 million in 1997 and $19.5 million in 1996 and 1995,
respectively.
Statutory capital and surplus of the Company was $1,942.1 million and
$1,501.0 million at December 31, 1997 and 1996, respectively. Statutory net
income of the Company was $237.4 million, $272.2 million and $156.6 million
in 1997, 1996 and 1995, respectively.
12. Related Party Transactions
The Company's investment portfolio is managed by PPM America, Inc. ("PPM"),
a registered investment advisor and a wholly owned subsidiary of
Prudential. The Company paid $20.1 million, $8.7 million and $6.8 million
to PPM for investment advisory services during 1997, 1996, and 1995,
respectively.
On October 31, 1991, Brooke Life issued $200 million of 9.75% notes due
October 31, 2001 to Prudential Finance BV, a Prudential subsidiary. On
November 8, 1996, Brooke Life issued $388 million of 8.50% notes due
December 31, 2006 to Brooke Finance, Inc. ("Brooke Finance"), a wholly
owned subsidiary of Brooke Holdings, Inc., ultimately a wholly owned
subsidiary of Prudential. On December 31, 1996, Brooke Life issued $45
million of 8.51% notes due December 31, 2006 to Brooke Finance. At December
31, 1997, the aggregate amount outstanding on the Brooke Life notes was as
follows (in thousands):
Principal $ 633,000
Accrued interest 4,105
---------------------
Total $ 637,105
=====================
On December 18, 1996, the Company established the Hermitage CBO Limited
Liability Corporation ("Hermitage") for the purpose of securitizing certain
of its holdings in below investment grade bonds. The Company contributed
$657.4 million of non-investment grade securities to Hermitage and in
exchange received $616.2 million of senior and subordinated notes, $13.0
million in cash, and 46.4% of the equity in Hermitage. The Company's
ultimate parent, Prudential, obtained the remaining 53.6% equity interest
in Hermitage in exchange for $19.9 million in cash. In September 1997,
Hermitage was liquidated and the assets, consisting of $634.4 million of
below investment grade bonds and $28.8 million in cash, were transferred
back to the Company after it acquired the equity interest of Prudential.
13. Benefit Plans
The Company has a defined contribution retirement plan covering
substantially all employees. To be eligible, an employee must have attained
the age of 21 and completed at least 1,000 hours of service in a 12-month
period. The Company's annual contributions, as declared by the board of
directors, are based on a percentage of covered compensation paid to
participating employees during the year. The Company's expense related to
this plan was $4.3 million in 1997, $2.4 million in 1996 and $2.3 million
in 1995.
