<PAGE>
As filed with the Securities and Exchange Commission on February 26,1998
Registration No. 333-36515
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
SEPARATE ACCOUNT D OF PARAGON LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PARAGON LIFE INSURANCE COMPANY
(Name of Depositor)
100 South Brentwood Boulevard
St. Louis, MO 63105
(Address of Depositor's Principal Executive Office)
Matthew P. McCauley, Esquire
Paragon Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
Approximate date of proposed public offering: As soon as practical after the
effective date of this Registration Statement.
Securities Being Offered: Flexible Premium Variable Life Insurance Contracts.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
Item No. of
Form N-8B-2 Caption in Prospectus
1. Introductory Page 1
2. Introductory Page 1
3. Not Applicable
4. Distribution of the Policies
5. The Company and the Separate Account
6. The Separate Account
7. Not Required
8. Not Required
9. Legal Proceedings
10. Summary; Policy Benefits; Policy Rights
and Privileges; Charges and Deductions
Voting Rights; General Matters Relating
to the Policy
11. Summary; Policy Benefits; Policy Rights
and Privileges
12. Summary; The Company and the Separate
Account
13. Summary; Charges and Deductions
14. Summary; Payment and Allocation of
Premiums
15. Payment and Allocation of Premiums
16. Payment and Allocation of Premiums
17. Summary; Policy Rights and Privileges;
Charges and Deductions
18. Payment and Allocation of Premiums
19. General Matters Relating to the Policy;
Voting Rights
20. Not Applicable
21. Policy Rights and Privileges; General
Matters Relating to the Policy
22. Not Applicable
23. Safekeeping of the Separate Account's
Assets
24. General Matters Relating to the Policy
25. The Company and the Separate Account
26. Not Applicable
27. The Company and the Separate Account
28. Management of the Company
-i-
<PAGE>
Item No. of
Form N-8B-2 Caption in Prospectus
29. The Company and the Separate Account
30. The Company and the Separate Account
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Company and the Separate Account
36. Not Required
37. Not Applicable
38. Summary; Distribution of the Policies
39. Summary; Distribution of the Policies
40. Distribution of the Policies
41.(a) Distribution of the Policies
41.(b) Not required
41.(c) Not required
42. Not Applicable
43. Not Applicable
44. Payment and Allocation of Premiums
45. Not Applicable
46. Policy Rights and Privileges
47. Payment and Allocation of Premiums
48. Not Applicable
49. Not Applicable
50. The Separate Account
51. Introductory Page 1; Summary, Payment and
Allocation of Premiums; Policy Benefits;
Policy Rights and Privileges; Charges
and Deductions
52. The Company and Separate Account
53. Federal Tax Matters
54. Not Applicable
55. Not Applicable
56. Not Required
57. Not Required
58. Not Required
59. Not Required
- ii -
<PAGE>
PART I
Information Required in Prospectus
<PAGE>
Underlying Funds Through:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
MFS VARIABLE INSURANCE TRUST
PUTNAM VARIABLE TRUST
SCUDDER VARIABLE LIFE INVESTMENT FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
[LOGO OF PARAGON LIFE INSURANCE COMPANY]
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
Prospectus dated , 1998
50414
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes an individual flexible premium variable life
insurance Policy (the "Policy") offered by Paragon Life Insurance Company (the
"Company"), Internal Revenue Service Employer Identification Number 43-
1235869. The Policy is designed to provide lifetime insurance protection to
age 100 and at the same time provide flexibility to vary premium payments and
change the level of death benefits payable under the Policy. This flexibility
allows an Owner to provide for changing insurance needs under a single
insurance policy. An Owner also has the opportunity to allocate net premiums
among several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount
of the Policy. The insurance under a Policy will remain in force so long as
its Cash Surrender Value is sufficient to pay certain monthly charges imposed
in connection with the Policy.
At the end of the "Right to Examine Policy" period, the Owner may allocate
net premiums to one or more of the Divisions of the Separate Account D (the
"Separate Account"). The duration of the Policy and the amount of the Cash
Value will vary to reflect the investment performance of the Divisions of the
Separate Account selected by the Owner, and, depending on the death benefit
option elected, the amount of the death benefit above the minimum may also
vary with that investment performance. Thus, the Owner bears the entire
investment risk under the Policy; there is no minimum guaranteed Cash Value.
Each Division of the Separate Account will invest in the following
corresponding investment company portfolios ("Funds"):
FIDELITY VARIABLE INSURANCE PRODUCTS FUND OR
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
MANAGER
Growth Portfolio Fidelity Management & Research
Index 500 Portfolio Company
Equity-Income Portfolio
Contrafund Portfolio
MFS VARIABLE INSURANCE TRUST MANAGER
MFS Emerging Growth Series Massachusetts Financial Services
Company
PUTNAM VARIABLE TRUST MANAGER
Putnam VT High Yield Fund Putnam Investment Management,
Putnam VT New Opportunities Fund Inc.
Putnam VT U.S. Government and High Quality Bond Fund
Putnam VT Voyager Fund
SCUDDER VARIABLE LIFE INVESTMENT FUND MANAGER
Money Market Portfolio Scudder, Stevens & Clark, Inc.
International Portfolio
T. ROWE PRICE EQUITY SERIES, INC. AND
T. ROWE PRICE FIXED INCOME SERIES, INC. MANAGER
New America Growth Portfolio T. Rowe Price Associates, Inc.
Personal Strategy Balanced Portfolio
Limited-Term Bond Portfolio
The date of this prospectus is , 1998.
The Policy is not available in all states.
1
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A full description of the Funds, including the investment policies,
restrictions, risks, and charges is contained in the prospectus of each Fund.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
the underlying Funds.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING
THE LOSS OF PREMIUM PAYMENTS (PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions.............................................................. 4
Summary.................................................................. 5
The Company and the Separate Account..................................... 10
The Company
The Separate Account
The Underlying Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 15
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 17
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 22
Exercising Rights and Privileges Under the Policies
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 26
Sales Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 29
Distribution of the Policies............................................. 32
Federal Tax Matters...................................................... 32
Unisex Requirements Under Montana Law.................................... 36
Safekeeping of the Separate Account's Assets............................. 36
Voting Rights............................................................ 36
State Regulation of the Company.......................................... 37
Management of the Company................................................ 38
Legal Matters............................................................ 39
Legal Proceedings........................................................ 39
Experts.................................................................. 39
Additional Information................................................... 39
Financial Statements..................................................... 39
Appendix A............................................................... A-1
</TABLE>
THE POLICY IS NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
3
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Beneficiary--The person(s) named in an application for this insurance Policy
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in an available underlying Fund.
Effective Date--The date as of which insurance coverage begins under a
Policy.
Face Amount--The minimum death benefit under the Policy so long as the
Policy remains in force.
Fund--A separate investment portfolio of Fidelity Variable Insurance
Products Fund, Fidelity Variable Insurance Products Fund II, MFS Variable
Insurance Trust, Putnam Variable Trust, Scudder Variable Life Insurance Fund,
or two T. Rowe Price Funds, mutual funds in which the Separate Account's
assets are invested. Although sometimes referred to elsewhere as "Portfolios,"
they are referred to herein as "Funds," except where "Portfolio" is a part of
the name.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest
charged on loans.
Initial Premium--The premium required to be paid for the Policy to become
effective.
Insured--The person whose life is insured under a Policy.
Investment Start Date--The date the initial premium is applied to the Money
Market Division of the Separate Account. This date is the later of the Issue
Date or the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The Issue Date is the date from which Policy Anniversaries,
Policy Years, and Policy Months are measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Subaccount--A Loan Subaccount exists for each Division of the Separate
Account. Any Cash Value transferred to the Loan Account will be allocated to
the appropriate Loan Subaccount to reflect the origin of the Cash Value. At
any point in time, the Loan Account will equal the sum of all the Loan
Subaccounts.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 100.
Monthly Anniversary--The same date in each succeeding month as the Issue
Date except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the
4
<PAGE>
next Valuation Date. If any Monthly Anniversary would be the 29th, 30th, or
31st day of a month that does not have that number of days, then the Monthly
Anniversary will be the last day of that month.
Net Premium--The premium less any premium expense charge and the charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--The flexible premium variable life insurance Policy offered by the
Company and described in this Prospectus.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the
day immediately preceding the next Policy Anniversary.
Portfolio--See Fund.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy and allocated by the Owner to provide variable benefits.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the
close of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in
conjunction with the detailed information appearing elsewhere in this
Prospectus. Unless otherwise indicated, the description of the Policies
contained in this Prospectus assumes that a Policy is in effect and that there
is no outstanding Indebtedness.
The Policy. The flexible premium variable life insurance Policy described in
this Prospectus allows the Owner, subject to certain limitations, to make
premium payments in any amount and at any frequency. The Policy is a life
insurance contract with death benefits, Cash Value, surrender rights, Policy
Loan privileges, and other features traditionally associated with life
insurance. It is a "flexible premium" Policy because, unlike a traditional
insurance policy, there is no fixed schedule for premium payments. Although
the Owner may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause a Policy to lapse, nor will making the planned premium payments
guarantee that a Policy will remain in force. In the first Policy year,
however, the planned annual premium must be paid in full. (See "Summary--
Premiums.") Thus, an Owner may, but is not required to, pay additional
premiums. This flexibility permits an Owner to provide for changing insurance
needs within a single insurance Policy.
The Policy is a "variable" Policy because, unlike the fixed benefits under
an ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so
long as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the
Policy, less any outstanding Indebtedness. (See "General Matters Relating to
the Policy--Additional Insurance Benefits.")
5
<PAGE>
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. Assets of each Division are invested at net
asset value in shares of a corresponding Fund. See "The Company and the
Separate Account" for a complete description of the available Funds. An Owner
may change future allocations of net premiums at any time by notifying the
Company directly.
Until the end of the "Right to Examine Policy" period (see "Right to Examine
Policy,") all Net Premiums automatically will be allocated to the Division
that invests in the Money Market Fund. (See "Payment and Allocation of
Premiums--Allocation of Net Premiums and Cash Value.")
To the extent Net Premiums are allocated to the Divisions of the Separate
Account, the Cash Value will, and the death benefit may, vary with the
investment performance of the chosen Division. Thus, depending upon the
allocation of Net Premiums, investment risk over the life of a Policy may be
borne by the Owner, by the Company, or by both.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to revoke or modify the transfer
privilege. (See "Policy Rights and Privileges--Transfers.")
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the
planned annual premium set forth in the specifications page of a Policy is
necessary to place a Policy in force. The planned annual premium is an amount
specified for each Policy based on the requested initial Face Amount and
certain other factors. In the first Policy year, the planned annual premium
must be paid in full. However, as is discussed below, planned premiums need
not be paid after the first Policy year so long as there is sufficient Cash
Surrender Value to keep the Policy in force. Subject to certain limitations,
additional premium payments in any amount and at any frequency may be made
directly by the Owner. (See "Payment and Allocation of Premiums--Issuance of a
Policy--Premiums.")
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement"). The
Policies, therefore, differ in two important respects from conventional life
insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, if poorer than expected investment experience or other factors have
caused Cash Surrender Value to be insufficient to pay the next monthly
deduction and, as discussed above, the grace period expires without an
adequate payment being made, a Policy can lapse even if planned premiums have
been paid. Thus, the payment of premiums in any amount does not guarantee that
the Policy will remain in force until the Maturity Date. (See "Payment and
Allocation of Premiums--Policy Lapse and Reinstatement.")
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits.") Two death benefit options are available.
Under the "Level Type" death benefit, the death benefit is the Face Amount of
the Policy or, if greater, the applicable percentage of Cash Value. Under the
"Increasing Type" death benefit, the death benefit is the Face Amount of the
Policy plus the Cash Value or, if greater, the applicable percentage of Cash
Value. So long as a Policy remains in force, the minimum death benefit under
either option will be at least equal to the current Face Amount. The death
benefit proceeds will be increased by the amount of the cost of insurance for
the portion of the month from the date of death to the end of the month, and
reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit.")
There will be a minimum Face Amount established by the Company which will
vary by age at issue. The Owner may generally change the Face Amount (subject
to the minimum and maximum amounts applicable to his or her policy) and the
death benefit option, but in certain cases evidence of insurability may be
required. (See "Policy Benefits--Death Benefit.")
6
<PAGE>
Additional insurance benefits offered under the Policy by rider may include
an accelerated death benefit settlement option rider and a waiver of monthly
deductions rider. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") The cost of these additional insurance benefits will be
deducted from Cash Value as part of the monthly deduction. (See "Charges and
Deductions--Monthly Deduction.")
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See
"Policy Benefits--Death Benefit" and "Policy Rights and Privileges--Payment of
Policy Benefits.")
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
net premium payments, the investment performance of any selected Divisions of
the Separate Account transfers, any Policy Loans, loan account interest rate
credited, any partial withdrawals, and the charges imposed in connection with
the Policy. (See "Policy Benefits--Cash Value.") There is no minimum
guaranteed Cash Value.
Charges and Deductions. A charge of 1.25 percent of premiums will be
deducted from each premium paid for policy years one through ten ("premium
expense charge").
A charge of 2.25 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge.")
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be
set forth in the specification pages of the Policy. The charge is $3.50 per
month.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance.") Monthly cost
of insurance rates will be determined by the Company based upon its
expectations as to future mortality experience. For a discussion of the
factors affecting the rate class of the Insured, see "Charges and Deductions--
Monthly Deduction--Cost of Insurance."
Cost of insurance rates are guaranteed not to exceed 100 percent of the
maximum rates that could be charged based on the male/female smoker/nonsmoker
1980 Commissioners Standard Ordinary Mortality Tables (1980 CSO Table SA, 1980
CSO Table NA, 1980 CSO Table SG, and 1980 CSO Table NG), age last birthday.
A daily charge equal to .0020471% (an annual rate of .75%) of the net assets
of each Division of the Separate Account will be imposed for the Company's
assumption of certain mortality and expense risks incurred in connection with
the Policy. (See "Charges and Deductions--Separate Account Charges.")
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes or to pay any economic burden resulting from the application of the tax
laws that the Company determines to be properly attributable to the Separate
Account or the Policy. (See "Federal Tax Matters.")
The value of the assets of the Divisions of the Separate Account will
reflect the investment advisory fee and other expenses incurred by the Funds.
(See "The Company and the Separate Account.") The total annual investment
advisory fee and fund expenses for the funds available during the last fiscal
year as a percentage of net assets are as follows: Fidelity Variable Insurance
Products Fund--Growth Portfolio .67% and Equity-Income Portfolio .57%;
Fidelity Variable Insurance Products Fund II--Index 500 Portfolio .28% and
Contrafund Portfolio .68%; MFS Variable Insurance Trust--Emerging Growth
Series .90%; Putnam Variable Trust--Putnam VT High Yield Fund .72%, Putnam VT
New Opportunities Fund .63%, Putnam VT U.S. Government
7
<PAGE>
and High Quality Bond Fund .69%, and Putnam VT Voyager Fund .59%; Scudder
Variable Life Investment Fund--Money Market Portfolio .46%, and International
Portfolio 1.00%; T. Rowe Price Equity Series, Inc.--New America Growth
Portfolio .85% and Personal Strategy Balanced Portfolio .90%; and T. Rowe
Price Fixed Income Series, Inc.--Limited-Term Bond Portfolio .70%. Fidelity
Management & Research Company ("FMR") agreed to reimburse a portion of Index
500 Portfolio's expenses during the period. Without this reimbursement, the
fund's total expenses would have been .40%. A portion of the brokerage
commissions that certain funds pay was used to reduce funds' expenses. In
addition, certain funds have entered into arrangements with their custodian
whereby credits realized, as a result of uninvested cash balances were used to
reduce custodian expenses. Without these reductions, the total operating
expenses as a percentage of net assets would have been as follows: Fidelity
Insurance Products Fund--Growth Portfolio .69% and Equity-Income Portfolio
.58%; Fidelity Variable Insurance Products Fund II--Contrafund Portfolio .71%.
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net
Premiums and Cash Value," "Policy Rights and Privileges--Surrender and Partial
Withdrawals--Transfers," and "Charges and Deductions--Partial Withdrawal
Transaction Charge.")
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the loan request is
received and (b) is any outstanding Indebtedness. Loan interest is due and
payable in arrears on each Policy Anniversary or on a pro rata basis for such
shorter period as the Policy Loan may exist. All outstanding Indebtedness will
be deducted from proceeds payable at the Insured's death, upon maturity, or
upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid
in whole or in part at any time while the Policy is in force. (See "Policy
Rights and Privileges--Loans," page 21.) Loans taken from, or secured by, a
Policy may in certain circumstances be treated as taxable distributions from
the Policy. Moreover, with certain exceptions, a ten percent additional income
tax would be imposed on the portion of any loan that is included in income.
(See "Federal Tax Matters.")
Surrender and Partial Withdrawals. At any time that a Policy is in effect,
an Owner may elect to surrender the Policy and receive its Cash Surrender
Value. After the first year, an Owner may also request a partial withdrawal of
the Cash Value of the Policy. When the death benefit under either death
benefit option is not based on an applicable percentage of the Cash Value, a
partial withdrawal reduces the death benefit payable under the Policy by an
amount equal to the reduction in the Policy's Cash Value. (See "Policy Rights
and Privileges--Surrender and Partial Withdrawals.") Surrenders and partial
withdrawals may have federal income tax consequences. (See "Federal Tax
Matters.")
Right to Examine Policy. The Owner has a limited right to return a Policy
for cancellation within 10 days after receiving it or such longer period
required by state law. If a Policy is cancelled within this time period, a
refund will be paid which will equal all premiums paid under the Policy or any
different amount required by state law. The Owner also has a right to cancel a
requested increase in Face Amount. Upon cancellation of an increase, the Owner
may request that the Company refund the amount of the additional charges
deducted in connection with the increase, or have the amount of the additional
charges added to the Cash Value. (See "Policy Rights and Privileges--Right to
Examine Policy.")
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-7 in Appendix A show how death benefits and Cash Values may
vary based on certain hypothetical rate of return assumptions as well as
assumptions pertaining to the level of the administrative charge and the level
of the sales charges.
8
<PAGE>
These illustrations also show how these benefits compare with amounts which
would accumulate if premiums were invested to earn interest (after taxes) at
5% compounded annually. If a Policy is surrendered in the early Policy Years,
the Cash Surrender Value payable will be low as compared with premiums
accumulated with interest, and consequently the insurance protection provided
prior to surrender will be costly. You may make a written request for a
projection of illustrated future cash values and death benefits for a nominal
fee.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy Owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits
payable under a Policy should be completely excludable from the gross income
of the Beneficiary. As a result, the Beneficiary generally should not be taxed
on these proceeds.
Under certain circumstances, a Policy may be treated as a "modified
endowment contract." If the Policy is a modified endowment contract, then all
pre-death distributions, including Policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59 1/2 any such distributions
generally will be subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as distributions.
Neither distributions nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters.")
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of Cash Value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing
the Policy in part for such purposes entails certain risks. For example, if
the investment performance of Divisions to which Cash Value is allocated is
poorer than expected or if sufficient premiums are not paid, the Policy may
lapse or may not accumulate sufficient Cash Value to fund the purpose for
which the Policy was purchased. Partial withdrawals and Policy loans may
significantly affect current and future Cash Value, Cash Surrender Value, or
death benefit proceeds. Depending upon Division investment performance and the
amount of a Policy loan, the loan may cause a Policy to lapse. Because the
Policy is designed to provide benefits on a long-term basis, before purchasing
a Policy for a specialized purpose a purchaser should consider whether the
long-term nature of the Policy is consistent with the purpose for which it is
being considered. Using a Policy for a specialized purpose may have tax
consequences. (See "Federal Tax Matters.")
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THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection
with the name change. The Company is principally engaged in writing individual
and group life insurance policies and annuity contracts. As of December 31,
1997, it had assets in excess of $240 million. The Company is admitted to do
business in 49 states and the District of Columbia. The principal offices of
the Company are at 100 South Brentwood, St. Louis, Missouri 63105 ("Home
Office").
The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a Missouri life insurance company. The Parent
Company is wholly owned by GenAmerica Corporation, a Missouri general business
corporation, which is wholly owned by General American Mutual Holding Company,
a Missouri mutual insurance holding company. The Parent Company has agreed
that until March 23, 1999, it will maintain capital and surplus within the
Company sufficient to satisfy the capital requirements of the states in which
the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
The Company may from time to time publish in advertisements, sales
literature, and reports to Owners or Contractholders, the ratings and other
information assigned to it by one or more independent rating organizations
such as A. M. Best Company, Standard & Poor's, and Duff & Phelps. The purpose
of the ratings is to reflect the financial strength and/or claims paying
ability of the Company and should not be considered as bearing on the
investment performance of assets held in the Separate Account. Each year the
A. M. Best Company reviews the financial status of thousands of insurers,
culminating in the assignment of Best's ratings. These ratings reflect Best's
current opinion of the relative financial strength and operating performance
of an insurance company in comparison to the norms of the life/health
insurance industry. In addition, the claims paying ability of the Company as
measured by Standard & Poor's Insurance Ratings Services or Duff & Phelps may
be referred to in advertisements or sales literature or in reports to Owners
or Contractholders. These ratings are opinions of an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. These ratings do not reflect the investment
performance of the Separate Account or the degree of risk associated with an
investment in the Separate Account.
The Company also may include in advertisements and other literature certain
rankings assigned to the Company by the National Association of Insurance
Commissioners ("NAIC"), and the Company's analyses of statistical information
produced by the NAIC. These rankings and analyses of statistical information
may describe, among other things, the Company's growth, premium income,
investment income, capital gains and losses, policy reserves, policy claims,
and life insurance in force. The Company's use of such rankings and
statistical information is not an endorsement by the NAIC.
Advertisements and literature prepared by the Company also may include
discussions of taxable and tax-deferred investment programs (including
comparisons based on selected tax brackets), alternative investment vehicles,
and general economic conditions.
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THE SEPARATE ACCOUNT
Separate Account D (the "Separate Account") was established by the Company
as a separate investment account on January 3, 1995 under Missouri law. The
Separate Account receives and invests the net premiums paid under the
Policies. In addition, the Separate Account receives and invests net premiums
for other flexible premium variable life insurance policies issued by the
Company.
The Separate Account is divided into Divisions. Each Division of the
Separate Account will invest in the following corresponding portfolios
("Funds") of the investment companies: (1) Fidelity Variable Insurance
Products Fund--Growth Portfolio and Equity-Income Portfolio; (2) Fidelity
Variable Insurance Products Fund II--Index 500 Portfolio and Contrafund
Portfolio; (3) MFS Variable Insurance Trust--Emerging Growth Series; (4)
Putnam Variable Trust--Putnam VT High Yield Fund, Putnam VT New Opportunities
Fund, Putnam VT U.S. Government and High Quality Bond Fund and Putnam VT
Voyager Fund; (5) Scudder Variable Life Investment Fund--Money Market
Portfolio, and Class A Shares of International Portfolio; (6) T. Rowe Price
Equity Series, Inc.--New America Growth Portfolio and Personal Strategy
Balanced Portfolio; and (7) T. Rowe Price Fixed Income Series, Inc.--Limited-
Term Bond Portfolio. Income and both realized and unrealized gains or losses
from the assets of each Division of the Separate Account are credited to or
charged against that Division without regard to income, gains, or losses from
any other Division of the Separate Account or arising out of any other
business the Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
THE UNDERLYING FUNDS
The Separate Account invests in shares of various investment management
companies. These are series-type mutual funds registered with the SEC as open-
end, investment management companies. The assets of each Fund used by the
Policies are held separate from the assets of the other Funds, and each Fund
has investment objectives and policies which are generally different from
those of the other Funds. The income or losses of one Fund generally have no
effect on the investment performance of any other Fund.
The following summarizes the investment policies of each Fund under the
corresponding investment management company:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("VIP") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for VIP. Fidelity
Management & Research Company ("FMR") of Boston, Massachusetts is the manager
of the Funds.
. Growth Portfolio
The investment objective seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments
are not restricted to any one type of security. Capital appreciation
may also be found in other types of securities, including bonds and
preferred stocks.
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. Equity-Income Portfolio
The investment objective seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which exceeds
the composite yield on the securities comprising the Standard & Poor's
500 Composite Stock Price Index.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Variable Insurance Products II Fund ("VIP II") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for VIP II.
Fidelity Management & Research Company ("FMR") of Boston, Massachusetts is the
manager of the Funds.
.Index 500 Portfolio
The investment objective seeks to provide investment results that
correspond to the total return (i.e., the combination of capital change
and income) of common stocks publicly traded in the United States as
represented by the Standard & Poor's 500 Composite Stock Price Index
while keeping transaction costs and other expenses low. The Portfolio
is designed as a long-term investment option.
. Contrafund Portfolio
The investment objective seeks long-term capital appreciation by
investing in companies that are undergoing positive changes but are
currently unpopular, undervalued or overlooked by the market.
MFS VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust ("MFS Trust") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for MFS Trust.
Massachusetts Financial Services Company ("MFS") provides investment advisory
services to MFS Trust for fees in accordance with the terms of the current
prospectus for the Fund.
. Emerging Growth Series
The investment objective seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is
incidental to the Series investment objective of long-term growth of
capital. The Series' policy is to invest primarily (i.e., at least 80%
of its assets under normal circumstances) in common stocks of small and
medium-sized companies that are early in their life cycle but which
have the potential to become major enterprises (emerging growth
companies).
PUTNAM VARIABLE TRUST
Putnam Variable Trust ("Putnam VT") is an open-end diversified management
investment company. Only the Funds described in this section of the prospectus
are currently available as investment choices of the Policies even though
additional Funds may be described in the prospectus for Putnam Variable Trust.
Putnam Investment Management, Inc. ("Putnam Management") provides investment
advisory services to Putnam Variable Trust for fees in accordance with the
terms described in the current Fund prospectus.
. Putnam VT High Yield Fund
Seeks high current income and, consistent with this objective, a
secondary objective of capital growth, by investing primarily in high-
yielding, lower-rated fixed income securities (commonly known as "junk
bonds"), constituting a diversified portfolio which Putnam Management
believes does not involve undue risk to income or principal. See the
special considerations for investments in high yield securities
described in the Putnam Variable Trust prospectus.
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. Putnam VT New Opportunities Fund
Seeks long-term capital appreciation by investing principally in common
stocks of companies in sectors of the economy which Putnam Management
believes possess above-average long-term growth potential.
. Putnam VT U.S. Government and High Quality Bond Fund
Seeks current income consistent with preservation of capital by
investing primarily in securities issued or guaranteed as to principal
and interest by the U.S. Government or by its agencies or
instrumentalities and in other debt obligations rated at least A by a
nationally recognized securities rating agency such as Standard &
Poor's or Moody's Investors Service, Inc. or, if not rated, determined
by Putnam Management to be of comparable quality.
. Putnam VT Voyager Fund
Seeks capital appreciation by investing primarily in common stocks of
companies that Putnam Management believes have potential for capital
appreciation that is significantly greater than that of market
averages.
SCUDDER VARIABLE LIFE INVESTMENT FUND
Scudder Variable Life Investment Fund ("Scudder VLI") is a series-type
mutual fund registered with the SEC as an open-end, diversified management
investment company. Only the Money Market Portfolio and the Class A Shares of
the International Portfolio described herein are currently available as
investment choices of the Policies even though other classes and other Funds
may be described in the prospectus for Scudder VLI. Scudder, Stevens & Clark,
Inc. ("Scudder") provides investment advisory services to Scudder VLI whose
terms and fees are set forth in the Scudder VLI prospectus.
. Money Market Portfolio
The investment objective seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to
provide current income. The Fund seeks to maintain a constant net asset
value of $1.00 per share, although there can be no assurance that this
will be achieved.
. International Portfolio
The investment objective seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
The Fund invests in companies, wherever organized, which do business
primarily outside the United States. The Fund intends to diversify
investments among several countries and to have represented in its
holdings, in substantial portions, business activities in not less than
three different countries. The Fund does not intend to concentrate
investments in any particular industry.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Series, Inc. (referred to as "TRP") is an open-end
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for TRP. T. Rowe
Price Associates, Inc. provides investment advisory services to TRP for fees
in accordance with the terms described in the current Fund prospectus.
.New America Growth Portfolio
The investment objective seeks long-term growth of capital through
investment in common stock of U.S. companies which operate in the
service sector of the economy.
.Personal Strategy Balanced Portfolio
The investment objective seeks the highest total return consistent with
an emphasis on both capital appreciation and income by investing in a
diversified portfolio typically consisting of approximately 60% stocks,
30% bonds, and 10% money market securities.
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T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Fixed Income Series, Inc. (referred to as "TRP") is an open-
end management investment company. Only the Funds described in this section of
the prospectus are currently available as investment choices of the Policies
even though additional Funds may be described in the prospectus for TRP. T.
Rowe Price Associates, Inc. provides investment advisory services to TRP for
fees in accordance with the terms described in the current Fund prospectus.
.Limited-Term Bond Portfolio
The investment objective seeks a high level of current income
consistent with modest price fluctuations by investing primarily in
short-term and intermediate-term investment-grade debt securities.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for the Funds, which must accompany or precede this Prospectus
and which should be read carefully.
The Company has entered into or may enter into arrangements with Funds
pursuant to which the Company receives a fee based upon an annual percentage
of the average net asset amount invested by the Company on behalf of the
Separate Account and other separate accounts of the Company. These
arrangements reflect administrative services provided by the Company.
Resolving Material Conflicts. All of the Funds are also available to
registered separate accounts of other insurance companies offering variable
annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Funds. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Funds, to resolve the
matter.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law,
to make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds and to
substitute shares of another Fund of the existing management investment
companies or of another registered open-end investment company, if the shares
of a Fund are no longer available for investment, or if in the Company's
judgment further investment in any Fund becomes inappropriate in view of the
purposes of the Separate Account. The Company will not substitute any shares
attributable to an Owner's interest in a Division of the Separate Account
without notice to the Owner and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law. Nothing contained in this
Prospectus shall prevent the Separate Account from purchasing other securities
for other series or classes of policies, or from permitting a conversion
between series or classes of policies on the basis of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of the existing
management investment companies, or in shares of another investment company,
with a specified investment objective. New Divisions may be established when,
in the sole discretion of the Company, marketing needs or investment
conditions warrant, and any new Division will be made available to existing
Owners on a basis to be determined by the Company. To the extent approved by
the SEC, the Company may also eliminate or combine one or more Divisions,
substitute one Division for another Division, or transfer assets between
Divisions if, in its sole discretion, marketing, tax, or investment conditions
warrant.
In the event of a substitution or change, the Company may, if it considers
it necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
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If deemed by the Company to be in the best interests of persons having
voting rights under the Policy, and to the extent any necessary SEC approvals
or Owner votes are obtained, the Separate Account may be: (a) operated as a
management company under the 1940 Act; (b) deregistered under that Act in the
event such registration is no longer required; or (c) combined with other
separate accounts of the Company. To the extent permitted by applicable law,
the Company may also transfer the assets of the Separate Account associated
with the Policy to another separate account.
The Company cannot guarantee that the shares of the Funds will always be
available. The Funds sell shares to the Separate Account in accordance with
the terms of a participation agreement between the Fund distributors and the
Company. Should this agreement terminate or should shares become unavailable
for any other reason, the Separate Account will not be able to purchase the
existing Fund shares. Should this occur, the Company will be unable to honor
Owner requests to allocate their cash values or premium payments to the
Divisions of the Separate Account investing in such shares. In the event that
a Fund is no longer available, the Company will, of course, take reasonable
steps to obtain alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy, must complete the appropriate
application for this Individual Insurance Policy and submit it to an
authorized representative of the Company or to the Company's Home Office. The
Company will issue an Individual Policy to each Owner.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
80 who supply evidence of insurability satisfactory to the Company. The
Company may, at its sole discretion, issue Policies to individuals falling
outside those Issue Ages or decline to issue Policies to individuals within
those Issue Ages.
PREMIUMS
The initial premium is due on the Issue Date, and may be paid to an
authorized representative of the Company or to the Company's Home Office. The
Company requires that the initial premium for a Policy be at least equal to
one-twelfth ( 1/12) of the planned annual premium for the Policy set forth in
the specifications pages. The planned annual premium is an amount specified
for each Policy based on the requested initial Face Amount, the Issue Age of
the Insured and the charges under the Policy. (See "Charges and Deductions.")
In the first Policy year, the planned annual premium must be paid in full.
However, the Owner is not required to pay premiums equal to the planned annual
premium after the first Policy year.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Premiums after the
first premium payment must be paid to the Company at its Home Office. The
Owner may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Those offered are annual premiums or monthly
premiums via electronic bank draft. The Owner may skip planned premium
payments. Failure to pay one or more planned premium payments will not cause
the Policy to lapse until such time as the Cash Surrender Value is
insufficient to cover the next Monthly Deduction. (See "Payment and Allocation
of Premiums--Policy Lapse and Reinstatement.")
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters.")
Moreover, as mentioned above, an Owner may also skip planned premium payments.
Therefore, unlike conventional insurance policies, a Policy does not obligate
the Owner to pay premiums in accordance with a rigid and inflexible premium
schedule.
If the Policy is in the intended Owner's possession, but the initial premium
has not been paid, the Policy is not in force. Under these circumstances, the
intended Owner is deemed to have the Policy for inspection only.
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<PAGE>
Premium Limitations. Every premium payment must be at least $20. In no event
may the total of all premiums paid under a Policy in any Policy Year exceed
the current maximum premium limitations for that year established by Federal
tax laws. The maximum premium limitation for a Policy Year is the most premium
that can be paid in that Policy Year such that the sum of the premiums paid
under the Policy will not at any time exceed the guideline premium limitations
referred to in section 7702(c) of the Internal Revenue Code of 1986, or any
successor provision. If at any time a premium is paid which would result in
total premiums exceeding the current maximum premium limitation, the Company
will accept only that portion of the premium which will make total premiums
equal the maximum. Any part of the premium in excess of that amount will be
returned directly to the Owner within 60 days of the end of the Policy Year in
which payment is received or applied as otherwise agreed and no further
premiums will be accepted until allowed by the current maximum premium
limitations prescribed by Federal tax law. See "Federal Tax Matters" for a
further explanation of premium limitations. Section 7702A creates an
additional premium limitation, which, if exceeded, can change the tax status
of a Policy to that of a "modified endowment contract." A modified endowment
contract is a life insurance contract, withdrawals from which are, for tax
purposes, treated first as a distribution of any taxable income under the
contract, and then as a distribution of nontaxable investment in the contract.
Additionally, such withdrawals may be subject to a 10% federal income tax
penalty. The Company has adopted administrative steps designed to notify an
Owner when it is believed that a premium payment will cause a Policy to become
a modified endowment contract. The Company has administrative procedures to
prevent a modified endowment contract by monitoring premium limits. The Owner
will be given a limited amount of time to request that the premium be reversed
in order to avoid the Policy's being classified as a modified endowment
contract. (See "Federal Tax Matters.")
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less the premium tax charge. (See "Charges and Deductions--
Sales Charges.")
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. However, the minimum percentage, other than zero ("0"), that
may be allocated to a Division is 10 percent of the net premium, and
fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums. The initial allocation will be shown on the application
which is attached to the Policy.
During the period from the Issue Date to the end of the Right to Examine
Policy period, Net Premiums will automatically be allocated to the Division
that invests in the Money Market Fund. (See "Right to Examine Policy"). When
this period expires, the Policy's Cash Value in that Division will be
transferred to the Divisions of the Separate Account in accordance with the
allocation requested in the application for the Policy, or any allocation
instructions received subsequent to the receipt of the application. Net
Premiums received after the Right to Examine Policy period will be allocated
according to the allocation instructions most recently received by the Company
unless otherwise instructed for that particular premium receipt.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers.")
The value of amounts allocated to Divisions of the Separate Account will
vary with the investment performance of the chosen Divisions and the Owner
bears the entire investment risk. This will affect the Policy's Cash Value,
and may affect the death benefit as well. Owners should periodically review
their allocations of premiums and values in light of market conditions and
overall financial planning requirements.
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POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy
to lapse. Conversely, a Policy can lapse even if planned premiums have been
paid if the investment experience of the Divisions to which Cash Value is
allocated is poorer than expected and, as a result, sufficient Cash Surrender
Value is not accumulated to pay the monthly deduction. Withdrawals and Policy
Loans can also significantly affect Cash Surrender Value. Lapse will occur
only when the Cash Surrender Value is insufficient to cover the monthly
deduction, and a grace period expires without a sufficient payment being made.
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium
requirements, the amount of the premium required to keep the Policy in force
will be the amount of the current monthly deduction, premium expense charge,
and premium tax charge. (See "Charges and Deductions.") If the Company does
not receive the required amount within the grace period, the Policy will lapse
and terminate without Cash Value. If the Insured dies during the grace period,
any overdue monthly deductions will be deducted from the death benefit
otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written
application any time within five years after the date of lapse and before the
Maturity Date. Reinstatment is subject to the following conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement. The Insured
must be alive on the date the Company approves the application for
reinstatement. If the Insured is not then alive, such approval is void and of
no effect.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits.")
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The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment
of Policy Benefits.") Death benefit proceeds will be paid to the surviving
Beneficiary or Beneficiaries specified in the application or as subsequently
changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long
as the Policy remains in force. (See "Payment and Allocation of Premiums--
Policy Lapse and Reinstatement.") The minimum Face Amount currently varies by
age ranging from $75,000 for ages 65 and older to $275,000 for ages less than
30. The maximum Face Amount is generally $5,000,000.
Option A. Under Option A, the death benefit is the current Face Amount of
the Policy or, if greater, the applicable percentage of Cash Value on the date
of death. The applicable percentage is 250 percent for an Insured Attained Age
40 or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. (See Illustrations of Death Benefits and Cash Values, Appendix
A.) Owners who prefer to have favorable investment performance reflected in
higher Cash Value for the same Face Amount, rather than increased death
benefit, generally should select Option A.
APPLICABLE PERCENTAGE OF CASH VALUE TABLE*
<TABLE>
<CAPTION>
PERCENTAGE
OF
INSURED AGE CASH VALUE
- ----------- ----------
<S> <C>
0 to 40................. 250%
45...................... 215
50...................... 185
55...................... 150
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
OF
INSURED AGE CASH VALUE
- ----------- ----------
<S> <C>
65 120%
70...................... 115
75-90................... 105
95 and older............ 100
</TABLE>
* For ages that are not shown on the table, the applicable percentage
multiples will decrease by a ratable portion for each full year.
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company
reserves the right to alter the applicable percentage to the extent necessary
to comply with changes to Section 7702(d) or any successor provision thereto.
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage
is the same as under Option A: 250 percent for an Insured with an Attained Age
of 40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the
percentage declines as shown in the Applicable Percentage Table above.
Accordingly, under Option B the amount of the death benefit will always vary
as the Cash Value varies (but will never be less than the Face Amount). (See
Illustrations of Death Benefits and Cash Values, Appendix A.) Owners who
prefer to have favorable investment performance reflected in higher death
benefits for the same Face Amount generally should select Option B. All other
factors equal, for the same premium dollar, Option B provides lower initial
Face Amount resulting in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the
Owner may change the death benefit option in effect. The Company reserves the
right to limit the number of changes in death benefit options to one each
Policy Year. A request for change must be made directly to the Company in
writing. The effective date of
18
<PAGE>
such a change will be the Monthly Anniversary on or following the date the
Company receives the change request. A change in death benefit option may have
Federal income tax consequences. (See Federal Tax Matters.)
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than the minimum.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges
will be imposed upon a change from death benefit Option B to Option A.
Changing from Option A to Option B, however, will result in a decrease in the
Face Amount. In addition, if, prior to or accompanying a change in the death
benefit option, there has been an increase in the Face Amount, the cost of
insurance charge may be different for the increased amount. (See "Charges and
Deductions--Monthly Deduction--Cost of Insurance.")
No change in death benefit option will be permitted that results in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Federal tax law. (See "Federal Tax Matters.")
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written
request for a change in the Face Amount must be sent directly to the Company.
A change in Face Amount may affect the cost of insurance rate and the net
amount at risk, both of which affect an Owner's cost of insurance charge. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance.") In addition,
a change in Face Amount may have Federal income tax consequences. (See
"Federal Tax Matters.")
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount. If, following a decrease in Face Amount, the
Policy would not comply with the maximum premium limitations required by
Federal tax law (see "Payment and Allocation of Premiums"), the decrease may
be limited or Cash Value may be returned to the Owner (at the Owner's
election), to the extent necessary to meet these requirements. A decrease in
the Face Amount will reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent
cost of insurance charges (see "Charges and Deductions--Monthly Deduction--
Cost of Insurance").
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. An application for an increase must be
received by the Company. If approved, the increase will become effective on
the Monthly Anniversary on or following receipt of the satisfactory evidence
of insurability. In addition, the Insured must have an Attained Age of not
greater than 80 on the effective date of the increase. The amount of the
increase may not be less than $5,000. The Face Amount may not be increased
more than the maximum Face Amount for that Policy. Although an increase need
not necessarily be accompanied by an
19
<PAGE>
additional premium (unless it is required to meet the next monthly deduction),
the Cash Surrender Value in effect immediately after the increase must be
sufficient to cover the next monthly deduction. To the extent the Cash
Surrender Value is not sufficient, an additional premium must be paid. (See
"Charges and Deductions--Monthly Deduction.") An increase in the Face Amount
may result in certain additional charges. (See "Charges and Deductions.")
An increase in Face Amount may be cancelled within 10 days after receiving
it or such longer period required by state law. Upon cancellation, any
additional charges, which would not have been assessed without the increase,
will be refunded to the Owner if requested. If a request for a refund is not
made, the charges will be restored to the Policy's Cash Value and allocated to
Divisions of the Separate Account in the same manner as they were deducted.
Premiums paid following an increase in Face Amount and prior to the time the
right to cancel the increase expires will become part of the Policy's Cash
Value and will not be subject to refund. (See "Policy Rights and Privileges--
Right to Examine Policy.")
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the
level of premium payments, and, to a lesser extent, making partial withdrawals
from the Policy. Although the consequences of each of these methods will
depend upon the individual circumstances, they may be generally summarized as
follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit"), decrease the
pure insurance protection and the cost of insurance charges under the
Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement.")
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals.") However, it
only affects the amount of pure insurance protection and cost of insurance
charges if the death benefit before or after the withdrawal is based on the
applicable percentage of Cash Value, because otherwise the decrease in the
death benefit is offset by the amount of Cash Value withdrawn. The primary
use of a partial withdrawal is to withdraw Cash Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 30.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased
20
<PAGE>
by the amount of the monthly cost of insurance for the portion of the month
from the date of death to the end of the month, and reduced by any outstanding
Indebtedness. (See "General Matters Relating to the Policy--Additional
Insurance Benefits," and "Charges and Deductions.") The Company will pay
interest on the death benefit from the date of the Insured's death to the date
of payment. Interest will be at an annual rate determined by the Company.
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits.")
An election or change of method of settlement must be in writing. A change
in Beneficiary revokes any previous settlement election. Once payments have
begun, the settlement option may not be changed.
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash
Value in the Separate Account and the Loan Account. The Policy's Cash Value in
the Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, loan account interest rate
credited, and the charges assessed in connection with the Policy. An Owner may
at any time surrender the Policy and receive the Policy's Cash Surrender
Value. (See "Policy Rights and Privileges--Surrender and Partial
Withdrawals.") The Policy's Cash Value in the Separate Account equals the sum
of the Policy's Cash Value in each Division. There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the
Issue Date and the Investment Start Date, this amount may be more than the
amount of one monthly deduction. (See "Payment and Allocation of Premiums.")
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period (including transfers to the Loan Account) plus transfer charges
if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions.")
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
21
<PAGE>
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or other economic
burden resulting from the application of tax laws, determined by the
Company to be properly attributable to the Divisions of the Separate
Account or the Policy, or any amount set aside during the Valuation
Period as a reserve for taxes attributable to the operation or
maintenance of each Division; minus
(5) A charge not to exceed .0020471% of the net assets for each day in the
Valuation Period. This corresponds to 0.75% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date: minus
(2) A reduction based upon a charge not to exceed .0020471% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.75% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The
Loan Value is equal to (a) minus (b), where (a) is 90 percent of the Cash
Value of the Policy on the date the Policy Loan is requested and (b) is the
amount of any outstanding Indebtedness. Loan interest is due and payable in
arrears on each Policy Anniversary or on a pro rata basis for such shorter
period as the loan may exist. The minimum amount that may be borrowed is $500.
The loan may be completely or partially repaid at any time while the Insured
is living. Any amount due to an Owner under a Policy Loan ordinarily will be
paid within seven days after the Company receives the loan request at its Home
Office, although payments may be postponed under certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments.")
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. Unless the Owner
requests a different allocation, amounts will be transferred from the
Divisions of the Separate Account in the same proportion that the Policy's
Cash Value in each Division bears to the Policy's total Cash Value, less the
Cash Value in the Loan Account, at the end
22
<PAGE>
of the Valuation Period during which the request for a Policy Loan is
received. This will reduce the Policy's Cash Value in the Separate Account.
These transactions will not be considered transfers for purposes of the
limitations on transfers between Divisions.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (1) each Policy Anniversary; (2) when a new loan is made; (3) when a
loan is partially or fully repaid; and (4) when an amount is needed to meet a
monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans.") The amount
transferred will be deducted from the Divisions of the Separate Account in the
same proportion that the portion of the Cash Value in each Division bears to
the total Cash Value of the Policy minus the Cash Value in the Loan Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences. (See "Federal Tax Matters.")
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment
performance of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Payment
and Allocation of Premiums--Policy Lapse and Reinstatement.") A sufficient
payment must be made within the later of the grace period of 62 days from the
Monthly Anniversary immediately before the date Indebtedness exceeds the Cash
Value, or 31 days after notice that the Policy will terminate without a
sufficient payment has been mailed, or the Policy will lapse and terminate
without value. A lapsed Policy, however, may later be reinstated. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement.")
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part
at any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as
repayment of Indebtedness. When a loan repayment is made, an amount securing
the Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount. A Loan Subaccount exists for each Division of the Separate
Account. Amounts transferred to the Loan Account to secure Indebtedness are
allocated to the appropriate Loan Subaccount to reflect their origin.
23
<PAGE>
SURRENDER AND PARTIAL WITHDRAWALS
During the lifetime of the Insured and while a Policy is in force, the Owner
may surrender, or make a partial withdrawal under, the Policy by sending a
written request to the Company. Any restrictions are described below. The
amount available upon surrender is the Cash Surrender Value (described below)
at the end of the Valuation Period during which the surrender request is
received at the Company's Home Office. Amounts payable upon surrender or a
partial withdrawal ordinarily will be paid within seven days of receipt of the
written request. (See "General Matters Relating to the Policy--Postponement of
Payments.") Surrenders and partial withdrawals may have Federal income tax
consequences. (See "Federal Tax Matters.")
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The
Cash Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to
one partial withdrawal each Policy Month from the Separate Account. The
minimum amount of a partial withdrawal, net of any transaction charges, is
$500. The minimum amount that can be withdrawn from a Division is $50, or the
Policy's Cash Value in a Division, if smaller. The maximum amount that may be
withdrawn, including the partial withdrawal transaction charge, is the Loan
Value. The partial withdrawal transaction charge is equal to the lesser of $25
or two percent of the amount withdrawn. The Owner may allocate the amount
withdrawn, subject to the above conditions, among the Divisions of the
Separate Account. If no allocation is specified, then the partial withdrawal
will be allocated among the Divisions of the Separate Account in the same
proportion that the Policy's Cash Value in each Division bears to the total
Cash Value of the Policy, less the Cash Value in the Loan Account, on the date
the request for the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals the
applicable percentage of Cash Value (whether Option A or Option B is in
effect), then a partial withdrawal will decrease the Face Amount by the amount
that the partial withdrawal plus the partial withdrawal transaction charge
exceeds the difference between the death benefit and the Face Amount. The
death benefit also will be reduced in this circumstance. If Option B is in
effect and the death benefit equals the Face Amount plus the Cash Value, the
partial withdrawal will not reduce the Face Amount, but it will reduce the
Cash Value and, thus, the death benefit by the amount of the partial
withdrawal plus the partial withdrawal transaction charge. The Face Amount
will be decreased in the following order: (1) the Face Amount at issue; and
(2) any increases in the same order in which they were issued.
Generally, the partial withdrawal transaction charge will be allocated among
the Divisions of the Separate Account in the same proportion as the partial
withdrawal is allocated. If, following a partial withdrawal, insufficient
funds remain in a Division to pay the partial withdrawal transaction charge
allocated to a Division, the unpaid charges will be allocated equally among
the remaining Divisions. In addition, an Owner may request that the partial
withdrawal transaction charge be paid from the Owner's Cash Value in another
Division.
The Face Amount remaining in force after a partial withdrawal may not be
less than $25,000. Any request for a partial withdrawal that would reduce the
Face Amount below this amount will not be executed.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection.")
24
<PAGE>
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account available with the Policy. Requests for transfers from or
among Divisions of the Separate Account must be made in writing directly to
the Company and may be made once each Policy Month. Transfers must be in
amounts of at least $250 or, if smaller, the Policy's Cash Value in a
Division. The Company will effectuate transfers and determine all values in
connection with transfers as of the end of the Valuation Period during which
the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 10 days after receiving it or such
longer period required by state law. If a Policy is cancelled within this time
period, a refund will be paid. Except for Policies sold in Kansas, the refund
will equal all premiums paid under the Policy. For Policies sold in Kansas,
the Company will refund an amount equal to the greater of premiums paid or (1)
plus (2) where (1) is the difference between the premiums paid, including any
policy fees or other charges, and the amounts allocated to the Separate
Account under the Policy and (2) is the value of the amounts allocated to the
Separate Account under the Policy on the date the returned Policy is received
by the Company or its representative.
To cancel the Policy, the Owner should mail or deliver the Policy directly
to the Company. A refund of premiums paid by check may be delayed until the
check has cleared the Owner's bank. (See "General Matters Relating to the
Policy--Postponement of Payments.")
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit") also may be cancelled. The request for cancellation must be made
within the latest of 10 days from the date the Owner received the new Policy
specifications pages for the increase, or such longer period as may be
required by state law.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have
been made absent the increase (see "Charges and Deductions--Monthly
Deduction"). If no request is made, the Company will increase the Policy's
Cash Value by the amount of these additional charges. This amount will be
allocated among the Divisions of the Separate Account in the same manner as it
was deducted.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay
the Cash Surrender Value of the Policy to the Owner on the Maturity Date. An
Owner may elect to have amounts payable on the Maturity Date paid in a single
sum or under a settlement option. (See "Policy Rights and Privileges--Payment
of Policy
25
<PAGE>
Benefits.") Amounts payable on the Maturity Date ordinarily will be paid
within seven days of that date, although payment may be postponed under
certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments.") A Policy will mature if and when the Insured
reaches Attained Age 100.
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
Settlement Options. The Company may offer settlement options that apply to
the payment of death benefit proceeds, as well as to benefits payable at
maturity. Once a settlement option is in effect, there will no longer be value
in the Separate Account.
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits.")
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the
Company for providing the insurance benefits set forth in the Policy and any
additional benefits added by rider, administering the Policy, incurring
expenses in distributing the Policy, and assuming certain risks in connection
with the Policy. The Company may realize a profit on one or more of these
charges, such as the mortality and expense risk charge. We may use any such
profits for any corporate purpose, including, among other things, payments of
sales expenses.
PREMIUM EXPENSE CHARGE
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by any premium expense charge. The
premium expense charge is equal to a percentage of each premium paid and
covers certain administrative expenses and acquisition related costs as set
forth on the specifications pages of the Policy. The charge is 1.25 percent
and is incurred in Policy years one through ten.
The premium payment less the premium expense charge less the premium tax
charge equals the net premium.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes, premium payments will be reduced by a premium tax
charge of 2.25 percent from all Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy
("monthly deduction") to compensate the Company for (a) certain administrative
costs; (b) insurance underwriting and acquisition expenses in connection with
issuing a Policy; (c) the cost of insurance; and (d) the cost of optional
benefits added by rider. The monthly deduction will be deducted on the
Investment Start Date and on each succeeding Monthly Anniversary. It will be
allocated among each Division of the Separate Account in the same proportion
that a Policy's Cash Value in each Division bears to the total Cash Value of
the Policy, less the Cash Value in the Loan Account, on the date the deduction
is made. Because portions of the monthly deduction, such as the cost of
insurance, can vary from month to month, the monthly deduction itself will
vary in amount from month to month.
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping,
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processing death benefit claims, cash surrenders, partial withdrawals, Policy
changes, reporting and overhead costs, processing applications, and
establishing Policy records. As reimbursement for administrative expenses
related to the maintenance of each Policy and the Separate Account, the
Company assesses a monthly administration charge from each Policy. The amount
of this charge is $3.50 per month and is set forth in the specifications pages
of the Policy. These charges, once established at the time a Policy is issued,
are guaranteed not to increase over the life of the Policy.
The Company may administer the Policy itself, or the Company may purchase
administrative services from such sources (including affiliates) as may be
available. Such services will be acquired on a basis which, in the Company's
sole discretion, affords the best services at the lowest cost. The Company
reserves the right to select a company to provide services which the Company
deems, in its sole discretion, is the best able to perform such services in a
satisfactory manner even though the costs for such services may be higher than
would prevail elsewhere.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and sex (except for Policies sold in
Montana, see Unisex Requirements Under Montana Law) of the Insured at issue or
the date of an increase in Face Amount. The cost of insurance rates generally
increase as the Insured's Attained Age increases.
The rate class of an Insured will affect the cost of insurance rate. For the
initial Face Amount, the Company will use the rate class on the Issue Date.
For each increase in Face Amount, other than one caused by a change in the
death benefit option, the Company will use the rate class applicable to that
increase. If the death benefit equals a percentage of Cash Value, an increase
in Cash Value will cause an automatic increase in the death benefit. The rate
class for such increase will be the same as that used for the most recent
increase, excluding any rider, that required proof of insurability.
The Company currently places Insureds into a preferred rate class, a
standard rate class, or into rate classes involving a higher mortality risk.
The degree of underwriting imposed may vary from full underwriting to
simplified issue underwriting.
Actual cost of insurance rates may change, and the actual monthly cost of
insurance rates will be determined by the Company based on its expectations as
to future mortality experience. However, the actual cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in
the Policy. For fully underwritten and simplified issue Policies which are not
in a substandard risk class, the guaranteed cost of insurance rates are equal
to 100% of the rates set forth in the male/female smoker/nonsmoker 1980 CSO
Mortality Tables (1980 CSO Table SA, 1980 CSO Table NA, 1980 CSO Table SG, and
1980 CSO Table NG), age last birthday. Higher rates apply if the Insured is
determined to be in a substandard risk class.
In two otherwise identical Policies, an Insured in the preferred rate class
will have a lower cost of insurance than an Insured in a rate class involving
higher mortality risk. Each rate class is also divided into two categories:
smokers and nonsmokers. Nonsmoker Insureds will generally incur a lower cost
of insurance than similarly situated Insureds who smoke. Policies issued with
simplified underwriting will, in general, incur a higher cost of insurance
than Policies issued under full underwriting.
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The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0032737 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of four
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that
for the initial Face Amount, the net amount at risk will be calculated
separately for each rate class. If Option A is in effect, for purposes of
determining the net amounts at risk for each rate class, Cash Value will first
be considered a part of the initial Face Amount. If the Cash Value is greater
than the initial Face Amount, the excess Cash Value will then be considered a
part of each increase in order, starting with the first increase. If Option B
is in effect, the net amount at risk for each rate class will be determined by
the Face Amount associated with that rate class. In calculating the cost of
insurance charge, the cost of insurance rate for a Face Amount is applied to
the net amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option
A and Option B when more than one rate class is in effect, a change in the
death benefit option may result in a different net amount at risk for each
rate class than would have occurred had the death benefit option not been
changed. Since the cost of insurance is calculated separately for each rate
class, any change in the net amount at risk resulting from a change in the
death benefit option may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," and "Policy Rights and Privileges--Surrender and
Partial Withdrawals.")
Additional Insurance Benefits. The monthly deduction will include charges
for any additional benefits provided by rider. (See "General Matters Relating
to the Policy--Additional Insurance Benefits.")
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the
amount withdrawn will be assessed on each partial withdrawal, to cover
administrative costs incurred in processing the partial withdrawal.
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at a rate not to exceed .0020471% of the net assets
of each Division of the Separate Account, which equals an annual rate of .75%
of those net assets. This deduction is guaranteed not to increase for the
duration of the Policy.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount
of death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters.")
Expenses of the Funds. The value of the net assets of the Separate Account
will reflect the investment advisory fee and other expenses incurred by the
Funds. (See "The Company and the Separate Account--the Underlying Funds.")
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GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) the New York Stock Exchange is
closed other than customary weekend and holiday closings, or trading on the
New York Stock Exchange is restricted as determined by the SEC; (ii) the SEC
by order permits postponement for the protection of Owners; or (iii) an
emergency exists, as determined by the SEC, as a result of which disposal of
securities is not reasonably practicable or it is not reasonably practicable
to determine the value of the Separate Account's net assets.
Payments under the Policy of any amounts derived from premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the
Company. All statements made by the Insured in the application are considered
representations and not warranties, except in the case of fraud. Only
statements in the application and any supplemental applications can be used to
contest a claim or the validity of the Policy. Any change to the Policy must
be approved in writing by the President, a Vice President, or the Secretary of
the Company. No agent has the authority to alter or modify any of the terms,
conditions, or agreements of the Policy or to waive any of its provisions.
CONTROL OF POLICY
The Insured will be considered Owner of the Policy unless another person is
shown as the Owner in the application. Ownership may be changed, however, as
described below. The Owner is entitled to all rights provided by the Policy,
prior to its Maturity Date. After the Maturity Date, the Owner cannot change
the payee nor the mode of payment, unless otherwise provided in the Policy.
Any person whose rights of ownership depend upon some future event will not
possess any present rights of ownership. If there is more than one Owner at a
given time, all must exercise the rights of ownership. If the Owner should
die, and the Owner is not the Insured, the Owner's interest will go to his or
her estate unless otherwise provided.
Unless otherwise provided, the Policy is jointly owned by all Owners named
in the Policy or by the survivors of those joint Owners. Unless otherwise
stated in the Policy, the final Owner is the estate of the last joint Owner to
die. The Company may rely on the written request of any trustee of a trust
which is the Owner of the Policy, and the Company is not responsible for the
proper administration of any such trust.
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living
at the death of the Insured, the proceeds will be payable to the Owner or, if
the Owner is not living, to the Owner's estate. The Policy permits the
designation of various types of trust as Beneficiary(ies), including trusts
for minor beneficiaries, trusts under a will, and trusts under a separate
written agreement. An Owner is also permitted to designate several types of
beneficiaries, including business beneficiaries. For more details about the
use of trusts and specialized types of beneficiaries, refer to the Policy.
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CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The Company will not be liable for any payment made
or action taken before the Company received the written request for change. If
the Owner is also a Beneficiary of the Policy at the time of the Insured's
death, the Owner may, within 60 days of the Insured's death, designate another
person to receive the Policy proceeds. Any change will be subject to any
assignment of the Policy or any other legal restrictions.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or
any applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws. In addition, the Company reserves the right to change the Policy if
it is determined that a change is necessary to cause this Policy to comply
with, or give the Owner the benefit of, any Federal or state statute, rule, or
regulation, including, but not limited to requirements of the Internal Revenue
Code, or its regulations or published rulings.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment
thereunder will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from
the Issue Date during the lifetime of the Insured. An increase in Face Amount
or addition of a rider after the Issue Date is incontestable after such
increase or addition has been in force for two years from its effective date
during the lifetime of the Insured. Any reinstatement of a Policy is
incontestable, except for nonpayment of premiums, only after it has been in
force during the lifetime of the Insured for two years after the effective
date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any
assignee of record. If a claim is based on an assignment, the Company may
require proof of the interest of the claimant. A valid assignment will take
precedence over any claim of a Beneficiary.
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the
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laws of the state in which the Policy was delivered, if less than two years),
the amount payable will be limited to premiums paid, less any partial
withdrawals and outstanding Indebtedness. If the Insured, while sane or
insane, dies by suicide within two years after the effective date of any
increase in Face Amount, the death benefit for that increase will be limited
to the amount of the monthly deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide at
the time of application for the Policy or any increase in Face Amount.
MISSTATEMENT OF AGE OR SEX AND CORRECTIONS
If the age or sex (except under any policies sold in Montana, see Unisex
Requirements Under Montana Law) of the Insured has been misstated in the
application, the amount of the death benefit will be that which the most
recent cost of insurance charge would have purchased for the correct age and
sex.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. Certain riders may not
be available in all states. In addition, should it be determined that the tax
status of a Policy as life insurance is adversely affected by the addition of
any of these riders, the Company will cease offering such riders. The
descriptions below are intended to be general; the terms of the Policy riders
providing the additional benefits may vary from state to state, and the Policy
should be consulted. The cost of any additional insurance benefits will be
deducted as part of the monthly deduction. (See "Charges and Deductions--
Monthly Deduction.")
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill. Under the rider, which is
available at no additional cost, the Owner may make a voluntary election to
completely settle the Policy in return for the Company's accelerated payment
of a reduced death benefit. The Owner may make such an election under the
rider if evidenced, including a certification from a licensed physician, is
provided to the Company that the Insured has a life expectancy of 12 months or
less. Any irrevocable beneficiary and assignees of record must provide written
authorization in order for the Owner to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of terminal illness as discussed above, (less any Indebtedness and
any term insurance added by other riders) plus the product of the applicable
"benefit factor" multiplied by the difference of (a) minus (b), where (a)
equals the Policy's death benefit proceeds, and (b) equals the Policy's cash
surrender value. The "benefit factor", in the case of terminal illness, is
0.85.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, the Company believes that for federal income tax
purposes an accelerated death benefit payment made under the Accelerated Death
Benefit Settlement Option Rider should be fully excludable from the gross
income of the beneficiary, as long as the beneficiary is the Insured under the
Policy. However, you should consult a qualified tax adviser about the
consequences of adding this Rider to a Policy or requesting an accelerated
death benefit payment under this Rider.
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RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the Funds and a
list of the portfolio securities held in each Fund. Receipt of premium
payments directly from the Owner, transfers, partial withdrawals, Policy
Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General American
Holding Company, which is an affiliate of the Company. Walnut Street, a
Missouri corporation formed May 4, 1994, is registered with the SEC under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers. Walnut Street Securities' Internal
Revenue Service Employer Identification Number is 43-1333368. It is a Missouri
Corporation and was formed May 4, 1984.
Broker-dealers may receive a marketing allowance to assist in marketing the
product. This allowance may include an amount up to two thousand dollars per
Policy at issue and an on-going annual percentage up to 0.25 percent of Cash
Value to reimburse the broker-dealer for expenses and due diligence efforts
performed in connection with marketing the product. This allowance will
generally be retained by the broker-dealer in order to offset its expenses.
Generally, no compensation will be paid by the Company, Walnut Street, or the
broker-dealer to the individual directly involved in the sale of the product.
FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's
understanding of the present Federal income tax laws as they are currently
interpreted by the Internal Revenue Service. No representation is made as to
the likelihood of continuation of the present Federal income tax laws or of
the current interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations
and other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is
limited. The Company nonetheless believes that the Policy should meet the
Section 7702 definition of a life insurance contract. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide the tax advantages normally provided by a life
insurance policy. Therefore, if it is subsequently determined that a Policy
does not satisfy section 7702, the Company will take whatever steps are
appropriate and necessary to attempt to cause such Policy to comply with
section 7702, including possibly refunding any premiums paid that exceed the
limitations allowable under section 7702 (together with interest or other
earnings on any such premiums refunded as required by law). For these reasons,
the Company reserves the right to modify the Policy as necessary to attempt to
qualify it as a life insurance contract under section 7702.
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Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated
as a life insurance contract for Federal tax purposes. Although the Company
does not control the investment management companies or their investments, the
investment management companies have represented that they intend to comply
with the diversification requirements prescribed by the Treasury in Reg.
section 1.817-5. Thus, the Company believes that each Division of the Separate
Account will be in compliance with the requirements prescribed by the
Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e.,
the Owner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the
Policy as necessary to attempt to prevent an Owner from being considered the
owner of a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, an exchange, a Policy loan, an unscheduled premium payment, a Policy
lapse with an outstanding loan, a partial withdrawal, a surrender, or an
assignment of the Policy may have Federal income tax consequences depending on
the circumstances. In addition, Federal estate and state and local estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Policy owner or Beneficiary. A
competent tax adviser should be consulted for further information.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, the Company believes that for federal income tax
purposes an accelerated death benefit payment made under the Accelerated Death
Benefit Settlement Option Rider should be fully excludable from the gross
income of the beneficiary, as long as the beneficiary is the Insured under the
Policy. However, you should consult a qualified tax adviser about the
consequences of adding this Rider to a Policy or requesting an acceletrated
death benefit payment under this Rider.
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The Policies may be used in various arrangements, such as nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus
the amount of indebtedness exceeds the total investment in the Policy, the
excess will generally be treated as ordinary income subject to tax.
2. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment
contract may become a modified endowment contract if it is "materially
changed." The determination whether a Policy will be a modified endowment
contract after a material change generally depends upon the relationship of
the death benefit and the cash value at the time of such change and the
additional premiums paid in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a modified endowment
contract are extremely complex. Therefore, a current or prospective Policy
owner is strongly advised to retain and consult with a competent advisor
before purchasing a Policy, making an unscheduled premium payment on an
existing Policy or making any change in an existing Policy, to determine
whether the Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified
endowment contract. Although the Company cannot provide complete assurance at
this time that a Policy will not inadvertently become a modified endowment
contract, it is continuing its efforts to enhance its administrative systems
to monitor potential modified endowment classifications automatically.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any)
of the cash value immediately before the distribution over the investment in
the Policy (described below) at such time. Second, loans taken from, or
secured by, such a Policy (as well as due but unpaid interest that is added to
the loan amount) are treated as distributions from such a Policy and taxed
accordingly. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distributions or loan is
made on or after the Policy owner attains age 59 1/2, is attributable to the
Policy owner's becoming disabled, or is part of a series of substantially
equal periodic payments for the life (or life expectancy) of the Policy owner
or the joint lives (or joint life expectancies) of the Policy owner and the
Policy owner's Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
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4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change,
are generally treated as first recovering the investment in the Policy
(described below) and then, only after the return of all such investment in
the Policy, as distributing taxable income. An exception to this general rule
occurs in the case of a decrease in the Policy's death benefit (e.g., partial
withdrawal or a change from Option B to Option A) or any other change that
reduces benefits under the Policy in the first 15-years after the Policy is
issued and that results in a cash distribution to the Policy owner in order
for the Policy to continue complying with the section 7702 definitional
limits. Such a cash distribution will be taxed in whole or in part as ordinary
income (to the extent of any gain in the Policy) under rules prescribed in
section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified
endowment contract are subject to the 10 percent additional income tax.
If a Policy which is not a Modified Endowment Contract subsequently becomes
a modified endowment contract, then any distribution made from the Policy
within two years prior to the date of such change in status may become
taxable.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan generally will not be tax deductible. An Owner
should consult a competent tax advisor before deducting any Policy Loan
interest.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from gross income of the Policy owner (except that the amount of any loan
from, or secured by, a Policy that is a modified endowment contract, to the
extent such amount is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Owner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by
the Company (or its affiliates) to the same Policy owner during any calendar
year are treated as one modified endowment contract for purposes of
determining the amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
POSSIBLE CHANGES IN TAXATION
The President's 1999 Budget Proposal has recommended legislation in 1998
that, if enacted, would adversely modify the federal taxation of certain
insurance and annuity contracts. For example, one proposal would tax transfers
among investment options and tax exchanges involving variable contracts. A
second proposal would reduce the "investment in the contract" under cash value
life insurance and certain annuity contracts, thereby increasing the amount of
income for purposes of computing gain. Although the likelihood of legislative
35
<PAGE>
changes is uncertain, there is always the possibility that the tax treatment
of the Policy could change by legislation or other means. Moreover, it is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). Owners should consult a tax adviser with respect to
legislative developments and their effect on the Policy.
UNISEX REQUIREMENTS UNDER MONTANA LAW
The State of Montana generally prohibits the use of actuarial tables that
distinguish between men and women in determining premiums and Policy benefits
for policies issued on the lives of their residents. Therefore, all Policies
offered by this Prospectus to insure residents of Montana will have premiums
and benefits which are based on actuarial tables that do not differentiate on
the basis of sex.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of Fund
shares by each of the Divisions. Additional protection for the assets of the
Separate Account is afforded by a blended executive risk insurance program,
including blanket fidelity coverage issued by CNA and Chubb Insurance
Companies with a limit of $25 million, covering all officers and employees of
the Company who have access to the assets of the Separate Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares held in the
Separate Account at regular and special shareholder meetings of the underlying
Funds in accordance with instructions received from persons having voting
interests in the corresponding Divisions of the Separate Account. If, however,
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result the Company determines
that it is permitted to vote shares of the underlying Funds in its own right,
it may elect to do so. No voting privileges apply to the Policy with respect
to Cash Value removed from the Separate Account as a result of a Policy Loan.
The Owners of Policies ordinarily are the persons having a voting interest
in the Divisions of the Separate Account. The number of votes which an Owner
has the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of the underlying Funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the underlying Funds.
Because the Funds serve as investment vehicles for this Policy as well as
for other variable life insurance policies sold by insurers other than the
Company and funded through other separate investment accounts, persons owning
the other policies will enjoy similar voting rights. The Company will vote
Fund shares held in the Separate Account for which no timely voting
instructions are received and Fund shares that it owns as a consequence of
accrued charges under the Policies, in proportion to the voting instructions
which are received with respect to all Policies participating in a Fund. Each
person having a voting interest in a Division will receive proxy material,
reports, and other materials relating to the appropriate Fund.
36
<PAGE>
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of or one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting instructions in favor of changes
initiated by an Owner in the investment policy or by the investment adviser or
sub-adviser of a Fund if the Company reasonably disapproves of such changes. A
proposed change would be disapproved only if the proposed change is contrary
to state law or prohibited by state regulatory authorities, or the Company
determined that the change would have an adverse effect on its general assets
in that the proposed investment policy for a Fund may result in overly
speculative or unsound investments. In the event the Company does disregard
voting instructions, a summary of that action and the reasons for such action
will be included in the next annual report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the
Director of Insurance examines the liabilities and reserves of the Company and
the Separate Account and certifies their adequacy, and a full examination of
the Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
PREPARING FOR YEAR 2000
Like all financial services providers, the Company utilizes systems that may
be affected by Year 2000 transition issues and it relies on service providers,
including the Funds, that also may be affected. The Company has developed, and
is in the process of implementing, a Year 2000 transition plan, and is
confirming that its service providers are also so engaged. The resources that
are being devoted to this effort is substantial. It is difficult to predict
with precision whether the amount of resources ultimately devoted, or the
outcome of these efforts, will have any negative impact on the Company.
However, as of the date of this prospectus, it is not anticipated that Policy
owners will experience negative effects on their investment, or on the
services provided in connection therewith, as a result of Year 2000 transition
implementation. The Company currently anticipates that its systems will be
Year 2000 compliant on or about December 1, 1998, but there can be no
assurance that the Company will be successful, or that interaction with other
service providers will not impair the Company's services at that time.
37
<PAGE>
MANAGEMENT OF THE COMPANY
NAME PRINCIPAL OCCUPATION(S)
DURING PAST FIVE YEARS*
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June,
1986, and Vice President, New Ventures, since June
1986, General American Life Insurance Co., St.
Louis, Mo. (GenAm).
Matthew K. Duffy Vice President and Chief Financial Officer since
July, 1996. Formerly Director of Accounting,
Prudential Insurance Company of America, March,
1987-June, 1996.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October, 1994. Executive
Insurance Company Vice President--Group Pensions, GenAm January,
700 Market Street 1990-October, 1994.
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984. Sec-
General American Life retary since August, 1981. Vice President and Asso-
Insurance Company ciate General Counsel, GenAm, since December 30,
700 Market Street 1995.
St. Louis, MO 63101
Craig K. Nordyke@ Executive Vice President and Chief Actuary since
November, 1996. Vice President and Chief Actuary
August, 1990-November, 1996; Second Vice President
and Chief Actuary, May, 1987-August, 1990.
George E. Phillips Vice President--Operations and System Development
since January, 1995. Formerly, Senior Vice Presi-
dent, Fortis, Inc. July, 1991-August, 1994. Vice
President, Mutual Benefit prior to July, 1991.
DIRECTORS***
Richard A. Liddy Chairman, President, and Chief Executive Officer,
GenAm, since May, 1992. President and Chief Operat-
ing Officer, GenAm, May, 1988-May, 1992.
Leonard M. Rubenstein Chairman and Chief Executive Officer--Conning Cor-
poration and Conning Asset Management Company since
January, 1997. Executive Vice President--Invest-
ments, GenAm, February, 1991-January, 1997.
Warren J. Winer Executive Vice President--Group, GenAm, since Sep-
tember, 1995. Formerly, Managing Director, Wm. M.
Mercer, July, 1993-August, 1995; President, W F
Corroon, September, 1990-July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product Man-
agement, GenAm, May, 1989- November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc.,
since May, 1993, Formerly, Executive Vice Presi-
dent--Reinsurance, GenAm, since January, 1990.
- --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
38
<PAGE>
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring--Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws. All
matters of Missouri law pertaining to the Policies, including the validity of
the Policies and the Company's right to issue the Policies and the Group
Contract under Missouri insurance law, and all legal matters relating to the
Parent Company's resolution concerning policies issued by Paragon have been
passed upon by Matthew P. McCauley, Esquire, General Counsel of Paragon Life
Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996,
and for each of the years in the three-year period ending December 31, 1997,
have been included in this Prospectus and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Executive Vice President and Chief Actuary of the Company,
as stated in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy
offered hereby. Statements contained in this Prospectus as to the contents of
the Policy and other legal instruments are summaries. For a complete statement
of the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company
to meet its obligations under the Policy. They should not be considered as
bearing on the investment performance of the assets held in the Separate
Account. No Financial Statements of the Separate Account are included in this
prospectus because, as of the date of this prospectus, the Separate Account
had not yet commenced operations and had no assets, liabilities, income or
expenses.
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying balance sheets of Paragon Life Insurance
Company as of December 31, 1997 and 1996, and the related statements of
operations, stockholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paragon Life Insurance
Company as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
February 6, 1998
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value............ $ 75,704 65,472
Policy loans................................................... 11,487 9,564
Cash and cash equivalents...................................... 5,733 9,106
-------- -------
Total cash and invested assets............................. 92,924 84,142
Reinsurance recoverables....................................... 1,733 841
Deposits relating to reinsured policyholder account balances... 6,416 6,074
Accrued investment income...................................... 1,377 1,298
Deferred policy acquisition costs.............................. 17,980 15,776
Fixed assets and leasehold improvements, net................... 2,609 1,365
Other assets................................................... 179 143
Separate account assets........................................ 118,051 76,995
-------- -------
Total assets............................................... $241,269 186,634
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholder account balances.................................. 85,152 78,120
Policy and contract claims..................................... 1,085 1,108
Federal income taxes payable................................... 163 811
Other liabilities and accrued expenses......................... 3,486 2,704
Payable to affiliates.......................................... 1,620 2,289
Due to separate account........................................ 61 95
Deferred tax liability......................................... 4,394 2,781
Separate account liabilities................................... 118,051 76,995
-------- -------
Total liabilities.......................................... $214,012 164,903
-------- -------
Stockholder's equity:
Common stock, par value $25; 100,000 shares authorized;
82,000 shares issued and outstanding........................ 2,050 2,050
Additional paid-in capital................................... 17,950 17,950
Net unrealized gain on investments, net...................... 1,958 322
Retained earnings............................................ 5,299 1,409
-------- -------
Total stockholder's equity................................. $ 27,257 21,731
-------- -------
Total liabilities and stockholder's equity................. $241,269 186,634
======== =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Revenues:
Policy contract charges................................ $16,417 13,719 9,931
Net investment income.................................. 6,288 5,663 4,888
Commissions and expense allowances on reinsurance
ceded................................................. 10 114 96
Net realized investment gains.......................... 69 72 1
------- ------ ------
Total revenues....................................... 22,784 19,568 14,916
======= ====== ======
Benefits and expenses:
Policy benefits........................................ 3,876 3,326 2,873
Interest credited to policyholder account balances..... 4,738 4,126 3,833
Commissions, net of capitalized costs.................. 227 79 57
General and administration expenses, net of capitalized
costs................................................. 7,744 6,798 5,528
Amortization of deferred policy acquisition costs...... 424 285 369
------- ------ ------
Total benefits and expenses.......................... 17,009 14,614 12,660
======= ====== ======
Income before federal income tax expense............. 5,775 4,954 2,256
Federal income tax expense............................... 1,885 1,738 781
------- ------ ------
Net income............................................... $ 3,890 3,216 1,475
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL NET UNREALIZED RETAINED TOTAL
COMMON PAID-IN GAIN (LOSS) ON EARNINGS STOCKHOLDER'S
STOCK CAPITAL INVESTMENTS (DEFICIT) EQUITY
------ ---------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $2,050 17,950 (1,824) (3,282) 14,894
Net income............ -- -- -- 1,475 1,475
Change in net
unrealized gain
(loss) on
investments.......... -- -- 3,407 -- 3,407
------ ------ ------ ------ ------
Balance at December 31,
1995................... $2,050 17,950 1,583 (1,807) 19,776
Net income............ -- -- -- 3,216 3,216
Change in net
unrealized gain
(loss) on
investments.......... -- -- (1,261) -- (1,261)
------ ------ ------ ------ ------
Balance at December 31,
1996................... $2,050 17,950 322 1,409 21,731
Net income............ -- -- -- 3,890 3,890
Change in net
unrealized gain
(loss) on
investments.......... -- -- 1,636 -- 1,636
------ ------ ------ ------ ------
Balance at December 31,
1997................... $2,050 17,950 1,958 5,299 27,257
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 3,890 3,216 1,475
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Reinsurance recoverables...................... (892) 407 297
Deposits relating to reinsured policyholder
account balances............................. (342) (378) (139)
Accrued investment income..................... (79) (257) (156)
Federal income tax recoverable/payable........ (648) 811 --
Other assets.................................. (1,280) (1,019) (145)
Policy and contract claims.................... (23) 12 387
Other liabilities and accrued expenses........ 782 741 313
Payable to affiliates......................... (669) 397 526
Due to separate account....................... (34) (108) (14)
Deferred tax expense.............................. 732 615 897
Policy acquisition costs deferred................. (2,972) (2,447) (2,263)
Amortization of deferred policy acquisition costs. 424 285 369
Interest credited to policyholder accounts........ 4,738 4,126 3,833
Net gain on sales and calls of fixed maturities... (69) (72) (1)
-------- ------- ------
Net cash provided by operating activities........... 3,558 6,329 5,379
Cash flows from investing activities:
Purchase of fixed maturities...................... (12,557) (15,290) (8,423)
Sale or maturity of fixed maturities.............. 5,255 6,860 3,082
Increase in policy loans, net..................... (1,923) (2,358) (1,788)
-------- ------- ------
Net cash used in investing activities............... (9,225) (10,788) (7,129)
-------- ------- ------
Cash flows from financing activities:
Net policyholder account deposits................. 2,294 6,509 5,764
-------- ------- ------
Net increase (decrease) in cash and cash
equivalents........................................ (3,373) 2,050 4,014
Cash and cash equivalents at beginning of year...... 9,106 7,056 3,042
-------- ------- ------
Cash and cash equivalents at end of year............ $ 5,733 9,106 7,056
======== ======= ======
Income taxes received (paid)........................ $ (1,801) (198) 93
======== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Paragon Life Insurance Company (Paragon or the Company) is a wholly owned
subsidiary of General American Life Insurance Company (General American or the
Parent). Paragon markets universal life and variable Universal Life Insurance
products through the sponsorship of major companies and organizations. Paragon
is licensed to do business in the District of Columbia and all states except
New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents
a legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
The accompanying financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of financial statements
requires the use of estimates by management which affect the amounts reflected
in the financial statements. Actual results could differ from those estimates.
Accounts that the Company deems to be sensitive to changes in estimates
include deferred policy acquisition costs and contract claims.
The significant accounting policies of the Company are as follows:
(a) Recognition of Policy Revenue and Related Expenses
Revenues for universal life products consist of policy charges for the cost
of insurance, administration and surrender charges during the period. Revenues
for variable universal life products also include policy charges for mortality
and expense risks assumed by Paragon. Policy benefits and expenses include
interest credited to policy account balances on universal life products and
death benefit payments made in excess of policy account balances.
Policy acquisition costs, such as commissions and certain costs of policy
issuance and underwriting, are deferred and amortized in relation to the
present value of expected gross profits over the estimated life of the
policies.
(b) Invested Assets
Investment securities are accounted for at fair value. At December 31, 1997
and 1996, fixed maturity securities are classified as available-for-sale and
are carried at fair value with the unrealized gain or loss, net of taxes,
being reflected as a separate component of stockholder's equity. Policy loans
are valued at aggregate unpaid balances.
Realized gains or losses on the sale of securities are determined on the
basis of specific identification and include the impact of any related
amortization of premiums or accretion of discounts which is generally computed
consistent with the interest method.
Amortization of the premium or discount on mortgage-backed securities is
recognized using a level-yield method which considers the estimated timing and
amount of prepayments of underlying mortgage loans. Actual prepayment
experience is periodically reviewed and effective yields are recalculated when
differences arise between the prepayments originally anticipated and the
actual prepayments received and currently anticipated. When such differences
occur, the net investment in the mortgage-backed security is adjusted to the
amount that would have existed had the new effective yield been applied since
the acquisition of the security with a corresponding charge or credit to
interest income.
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(c) Policyholder Account Balances
Policyholder account balances are equal to the policyholder account value
before deduction of any surrender charges. The policyholder account value
represents an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals. These expense charges are
recognized in income as earned. Certain variable life policies allow
policyholders to exchange accumulated assets from the variable rate separate
accounts to a fixed-interest general account policy. The fixed-interest
general account guaranteed minimum crediting rates of 4% in 1997, 1996 and
1995. The actual crediting rate was 6.5% in 1997, ranged from 6.5% to 7.0% in
1996, and was 7.0% in 1995.
(d) Federal Income Taxes
The Company establishes deferred taxes under the asset and liability method,
and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company files its federal income tax return on a consolidated basis with
its Parent and other subsidiaries. In accordance with a tax allocation
agreement between Paragon and General American, taxes are computed as if
Paragon was filing its own income tax return, and tax expense (benefit) is
paid to, or received from, General American. Paragon recognizes a tax benefit
to the extent that its tax losses are utilized by other members of the General
American consolidated tax group.
(e) Reinsurance
Balances resulting from agreements which transfer funds relating to
policyholder account balances have been accounted for as deposits. Other
reinsurance activities are accounted for consistent with terms of the risk
transfer reinsurance contracts. Premiums for reinsurance ceded to other
companies have been reported as a reduction of policy contract charges.
Amounts applicable to reinsurance ceded for future policy benefits and claim
liabilities have been reported as assets for these items, and commissions and
expense allowances received in connection with reinsurance ceded have been
accounted for in income as earned. Reinsurance does not relieve the Company
from its primary responsibility to meet claim obligations.
(f) Deferred Policy Acquisition Costs
The costs of acquiring new business which vary with, and are primarily
related to, the production of new business have been deferred to the extent
that such costs are deemed recoverable from future gross profits. Such costs
include commissions, premium taxes, as well as certain costs of policy
issuance and underwriting. Deferred policy acquisition costs are adjusted for
the impact on estimated gross margins of net unrealized gains and losses on
investment securities. The estimates of expected gross margins are evaluated
regularly and are revised if actual experience or other evidence indicates
that revision is appropriate. Upon revision, total amortization recorded to
date is adjusted by a charge or credit to income.
(g) Separate Account Business
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding
variable life insurance contracts for the exclusive benefit of variable life
insurance contract holders. The Company charges the separate accounts for
risks it assumes in issuing a policy and retains varying amounts of withdrawal
charges to cover expenses in the event of early withdrawals by contract
holders. The assets and liabilities of the separate account are carried at
fair value.
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(h) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in assumption
could significantly affect the estimates and such estimates should be used
with care. The following assumptions were used to estimate the fair value of
each class of financial instrument for which it was practicable to estimate
fair value:
Fixed maturities--Fixed maturities are valued using quoted market prices,
if available. If quoted market prices are not available, fair value is
estimated using quoted market prices of similar securities.
Policy loans--Policy loans are carried at their unpaid balances which
approximates fair value.
Separate account assets and liabilities--The separate account assets are
carried at fair value as determined by quoted market prices. Accordingly,
the carrying value of separate account liabilities is equal to their fair
value since it represents the contractholders' interest in the separate
account assets.
Cash and cash equivalents--The carrying amount is a reasonable estimate
of fair value.
(i) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents represent
demand deposits and highly liquid short-term investments, which include U.S.
Treasury bills, commercial paper, and repurchase agreements with original or
remaining maturities of 90 days or less when purchased.
(j) Reclassifications
The Company has reclassified the presentation of certain prior period
information to conform to the 1997 presentation.
(2) INVESTMENTS
The amortized cost and estimated fair value of fixed maturities at December
31, 1997 and 1996 are as follows (000's):
<TABLE>
<CAPTION>
1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 4,472 131 -- 4,603
Corporate securities............ 56,973 3,098 (142) 59,929
Mortgage-backed securities...... 9,124 233 (48) 9,309
Asset-backed securities......... 1,762 101 -- 1,863
------- ----- ---- ------
$72,331 3,563 (190) 75,704
======= ===== ==== ======
<CAPTION>
1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 4,410 129 (5) 4,534
Corporate securities............ 51,489 1,161 (844) 51,806
Mortgage-backed securities...... 7,547 137 (110) 7,574
Asset-backed securities......... 1,513 45 -- 1,558
------- ----- ---- ------
$64,959 1,472 (959) 65,472
======= ===== ==== ======
</TABLE>
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of fixed maturities at December
31, 1997, by contractual maturity, are shown below (000's). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due in one year or less......................... $ 3,092 3,124
Due after one year through five years........... 10,443 10,846
Due after five years through ten years.......... 15,444 15,890
Due after ten years through twenty years........ 34,228 36,535
Mortgage-backed securities...................... 9,124 9,309
------- ------
$72,331 75,704
======= ======
</TABLE>
Proceeds from sales of fixed maturities during 1997, 1996 and 1995 were
$1,328,585, $4,129,254 and $264,750 respectively. Gross gains of $68,876,
$71,604 and $1,338 were realized on those sales in 1997, 1996 and 1995,
respectively.
The sources of net investment income follow (000s):
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Fixed Maturities...................................... $ 4,941 4,626 4,109
Short-term investments................................ 608 449 338
Policy loans and other................................ 807 680 480
------- ----- -----
$ 6,356 5,755 4,927
Investment expenses................................... (68) (92) (39)
======= ===== =====
Net investment income............................. $ 6,288 5,663 4,888
======= ===== =====
</TABLE>
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets carried at fair value is as follows (in
000's):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale....................... $3,373 513
Deferred policy acquisition costs......................... (361) (17)
Deferred income taxes....................................... (1,054) (174)
------ ----
Net unrealized appreciation (depreciation).................. $1,958 322
====== ====
</TABLE>
The Company has fixed maturities on deposit with various state insurance
departments with an amortized cost of approximately $3,982,000 and $3,909,000
at December 31, 1997 and 1996, respectively.
(3) REINSURANCE
The Company reinsures certain risks with other insurance companies above a
maximum retention amount (currently $50,000) to help reduce the loss on any
single policy.
Premiums and related reinsurance amounts for the years ended December 31,
1997, 1996 and 1995 as they relate to transactions with affiliates are
summarized as follows (000's):
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Premiums for reinsurance ceded................ $13,001 10,264 8,607
Policy benefits ceded......................... 14,070 6,274 6,881
Commissions and expenses ceded................ 195 114 94
Reinsurance recoverables...................... 1,661 774 1,183
Ceded premiums and benefits to nonaffiliates for 1997, 1996 and 1995 were
insignificant.
(4) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized is as
follows (000's):
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year.................... $15,776 13,006 12,496
Policy acquisition costs deferred............... 2,972 2,447 2,263
Policy acquisition costs amortized.............. (424) (285) (369)
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on investments
available for sale............................. (344) 608 (1,384)
------- ------ ------
Balance at end of year.......................... $17,980 15,776 13,006
======= ====== ======
(5) FEDERAL INCOME TAXES
The Company is taxed as a life insurance company. A summary of Federal income
tax expense is as follows (000s):
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current tax (benefit) expense................... $ 1,153 1,123 (116)
Deferred tax expense............................ 732 615 897
------- ------ ------
Federal income tax expense...................... $ 1,885 1,738 781
======= ====== ======
A reconciliation of the Company's "expected" federal income tax expense,
computed by applying the federal U.S. corporate tax rate of 35% to income from
operations before federal income tax, is as follows (000s):
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense................. $ 2,022 1,734 790
Other, net...................................... (137) 4 (9)
------- ------ ------
Federal income tax expense...................... $ 1,885 1,738 781
======= ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are presented below (000's):
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Deferred tax assets:
Unearned reinsurance allowances........................... $ 217 153
Policy and contract liabilities........................... 1,031 1,305
Tax capitalization of acquisition costs................... 1,755 1,386
Other, net................................................ 76 69
------- -----
Total deferred tax assets............................... $ 3,079 2,913
======= =====
Deferred tax liabilities:
Unrealized gain on investments............................ $ 1,054 174
Deferred policy acquisition costs......................... 6,419 5,520
------- -----
Total gross deferred tax liabilities.................... $ 7,473 5,694
======= =====
Net deferred tax liabilities............................ $ 4,394 2,781
======= =====
</TABLE>
F-10
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax asset is not necessary. In
assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company files a consolidated tax
return with its Parent. Realization of the gross tax asset will not be
dependent solely on the Company's ability to generate its own taxable income.
General American has a proven history of earnings and it appears more likely
than not that the Company's gross deferred tax asset will ultimately be fully
realized.
(6) RELATED-PARTY TRANSACTIONS
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1997, 1996 and
1995 were $1,348,198, $1,250,396 and $1,103,028, respectively. See Note 3 for
reinsurance transactions with affiliates.
(7) PENSION PLAN
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General
American. The benefits are based on years of service and compensation level.
No pension expense was recognized in 1997, 1996 or 1995 due to overfunding of
the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expenses to the company for the incentive plan were
$198,972, $80,434 and $149,747 for 1997, 1996 and 1995, respectively.
Paragon provides for certain health care and life insurance benefits for
retired employees. The Company accounts for these benefits in accordance with
SFAS No. 106--Employer's Accounting for Postretirement Benefits Other Than
Pensions. The amounts involved are not material.
(8) STATUTORY FINANCIAL INFORMATION
The Company is subject to financial statement filing requirements of the
State of Missouri Department of Insurance, its state of domicile, as well as
the states in which it transacts business. Such financial statements,
generally referred to as statutory financial statements, are prepared on a
basis of accounting which varies in some respects from generally accepted
accounting principles (GAAP). Statutory accounting principles include: (1)
charging of policy acquisition costs to income as incurred; (2) establishment
of policy and contract liabilities computed using required valuation standards
which may vary in methodology utilized; (3) nonprovision of deferred federal
income taxes resulting from temporary differences between financial reporting
and tax bases of assets and liabilities; (4) recognition of statutory
liabilities for asset impairments and yield stabilization on fixed maturity
dispositions prior to maturity with asset valuation reserves based on
statutory determined formulae and interest stabilization reserves designed to
level yields over their original purchase maturities; (5) valuation of
investments in fixed maturities at amortized cost; (6) net presentation of
reinsurance balances; and (7) recognition of deposits and withdrawals on
universal life policies as revenues and expenses.
The stockholder's equity (surplus) and net income (loss) of the Company at
December 31, 1997, 1996 and 1995, as determined using statutory accounting
practices, is summarized as follows (000's):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Statutory surplus as reported to regulatory
authorities..................................... $10,848 10,751 10,778
Net income (loss) as reported to regulatory
authorities..................................... $ 1,452 982 (920)
</TABLE>
F-11
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to
the amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1998 without prior
notice or approval is $1,452,000. Paragon did not pay dividends in 1997, 1996
or 1995.
(10) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri, impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where action by the
Company or regulators is required based on the ratio of a company's actual
total adjusted capital to control levels determined by the RBC formula. At
December 31, 1997, the Company's actual total adjusted capital was in excess
of minimum levels which would require action by the Company or regulatory
authorities under the RBC formula.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under
noncancellable leases which expire March 2001. The future minimum lease
obligations under the terms of the leases are summarized as follows (000s):
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31:
1998............................ $ 503
1999............................ 490
2000............................ 486
2001............................ 189
------
$1,668
======
</TABLE>
Rent expense totaled $433,864, $388,976 and $256,631 in 1997, 1996 and 1995,
respectively.
F-12
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over
time if the investment return on the assets held in each Division of the
Separate Account were a uniform, gross, after-tax annual rate of 0%, 6% or
12%. In addition, the Cash Values and Death Benefits would be different from
those shown if the gross annual investment rates of return averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages
for individual Policy years.
The tables illustrate a Policy issued to an Insured Male, age 40, in a
nonsmoker rate class as well as an Insured, age 50, in a nonsmoker rate class.
This assumes the monthly administrative charge of $3.50. If the Insured falls
into a smoker rate class, the Cash Values, and Death Benefits would be lower
than those shown in the tables. In addition, the Cash Values, Cash Surrender
Values, and death benefits would be different from those shown if the gross
annual investment rates of return averaged 0%, 6%, or 12% over a period of
years, but fluctuated above and below those averages for individual Policy
Years.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is the maximum allowed under the 1980 Commissioners Standard Ordinary
Mortality Table C. The "Cash Value" column under the "Current" heading shows
the accumulated value of the premiums paid reflecting deduction of the charges
described above and monthly charges for the cost of insurance. The
illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a
maximum .75% charge for mortality and expense risk, an assumed combined
investment advisory fee (representing the average of the fees incurred by The
Funds in which The Divisions invest) and the Funds' expenses (based on the
average of the actual expenses incurred in fiscal year 1997) of .689%. See the
respective Fund prospectus for details. After deduction for these amounts, the
illustrated gross annual investment rates of return of 0%, 6% and 12%
correspond to approximate net annual rates of (-1.439%, 4.561% and 10.561%),
respectively. An expense reimbursement arrangement exists between the Company
and Scudder VLI as part of the participation agreement with the Company.
However, fund assets are of a sufficient size that no reimbursement is
currently necessary. No other expense reimbursement arrangement exists between
the Company and the other investment Funds. FMR reimbursed expenses in 1996
for the Index 500 Portfolio. MFS reimbursed expenses in 1996 for the Emerging
Growth Series.
The hypothetical values shown in the tables reflect all fees and changes
under the Policy, including the premium expense charge, the premium tax
charge, and all components of the monthly deduction. They do not reflect any
charges for federal income taxes against the Separate Account, since the
Company is not currently making any such charges. However, such charges may be
made in the future and, in that event, the gross annual investment rate of
return of the divisions of the Separate Account would have to exceed 0%, 6%,
or 12% by an amount sufficient to cover the tax charges in order to produce
the Death Benefit and Cash Value illustrated. (See "Federal Tax Matters.")
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred,
and that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, sex, and rate class, the Face Amount and premium
requested and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000.00 AGE: 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $13,500.00
PREMIUM EXPENSE CHARGE: 1.25% (yrs 1-10)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 0.00% (NET RATE @ -1.439%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 11,036 $761,036 $ 11,819 $761,819
2 29,058 21,780 771,780 23,379 773,379
3 44,686 32,227 782,227 34,684 784,684
4 61,096 42,363 792,363 45,738 795,738
5 78,325 52,185 802,185 56,454 806,454
6 96,417 61,670 811,670 66,838 816,838
7 115,412 70,813 820,813 76,896 826,896
8 135,358 79,603 829,603 86,630 836,630
9 156,301 88,027 838,027 96,047 846,047
10 178,291 96,062 846,062 105,150 855,150
11 201,381 103,836 853,836 114,110 864,110
12 225,625 111,152 861,152 122,764 872,764
13 251,081 117,963 867,963 131,027 881,027
14 277,810 124,222 874,222 138,993 888,993
15 305,876 129,875 879,875 146,577 896,577
16 335,344 134,878 884,878 153,786 903,786
17 366,287 139,186 889,186 160,446 910,446
18 398,776 142,774 892,774 166,566 916,566
19 432,890 145,572 895,572 172,243 922,243
20 468,709 147,512 897,512 174,482 927,482
25 676,531 140,695 890,695 196,457 946,457
30 941,770 94,945 844,945 200,313 950,313
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy indebtedness outstanding.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000.00 AGE 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10) $13,500.00
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.561%)
-------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR @5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 11,758 $ 761,758 $ 12,567 $ 762,567
2 29,058 23,916 773,916 25,616 775,616
3 44,686 36,481 786,481 39,169 789,169
4 61,096 49,454 799,454 53,248 803,248
5 78,325 62,844 812,844 67,785 817,785
6 96,417 76,643 826,643 82,801 832,801
7 115,412 90,860 840,860 98,319 848,319
8 135,358 105,497 855,497 114,361 864,361
9 156,301 120,553 870,553 130,951 880,951
10 178,291 136,020 886,020 148,115 898,115
11 201,381 152,048 902,048 166,054 916,054
12 225,625 168,449 918,449 184,628 934,628
13 251,081 185,185 935,185 203,773 953,773
14 277,810 202,216 952,216 223,609 973,609
15 305,876 219,493 969,493 244,074 994,074
16 335,344 236,970 986,970 265,197 1,015,197
17 366,287 254,602 1,004,602 286,826 1,036,826
18 398,776 272,359 1,022,359 308,982 1,058,982
19 432,890 290,165 1,040,165 331,782 1,081,782
20 468,709 307,939 1,057,939 355,255 1,105,255
25 676,531 391,852 1,141,852 482,891 1,232,891
30 941,770 451,423 1,201,423 626,672 1,376,672
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness
outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000 AGE: 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $13,500.00
PREMIUM EXPENSE CHARGE: 1.25% (yrs. 1-10)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.561%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 12,482 $ 762,482 $ 13,316 $ 763,316
2 29,058 26,141 776,141 27,945 777,945
3 44,686 41,092 791,092 44,023 794,023
4 61,096 57,450 807,450 61,705 811,705
5 78,325 75,357 825,357 81,065 831,065
6 96,417 94,946 844,946 102,281 852,281
7 115,412 116,387 866,387 125,547 875,547
8 135,358 139,856 889,856 151,082 901,082
9 156,301 165,548 915,548 179,124 929,124
10 178,291 193,669 943,669 209,939 959,939
11 201,381 224,616 974,616 244,006 994,006
12 225,625 258,463 1,008,463 281,481 1,031,481
13 251,081 295,459 1,045,459 322,631 1,072,631
14 277,810 335,881 1,085,881 367,938 1,117,938
15 305,876 380,023 1,130,023 417,747 1,167,747
16 335,344 428,224 1,178,224 472,534 1,222,534
17 366,287 480,854 1,230,854 532,634 1,282,634
18 398,776 538,345 1,288,345 598,611 1,348,611
19 432,890 601,125 1,351,125 671,178 1,421,178
20 468,709 669,668 1,419,668 751,034 1,501,034
25 676,531 1,117,736 1,867,736 1,288,568 2,038,568
30 941,770 1,806,219 2,556,219 2,158,764 2,908,764
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness
outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10) $28,000.00
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 0.00% (NET RATE @ -
1.439%)
------------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH DEATH CASH DEATH
YR PREM @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 21,510 $1,021,510 $ 23,266 $1,023,266
2 60,270 42,249 1,042,249 45,961 1,045,961
3 92,683 62,156 1,062,156 67,974 1,067,974
4 126,717 81,171 1,081,171 89,433 1,089,433
5 162,453 99,226 1,099,226 110,228 1,110,228
6 199,976 116,261 1,116,261 130,368 1,130,368
7 239,375 132,222 1,132,222 149,625 1,149,625
8 280,743 147,076 1,147,076 168,012 1,168,012
9 324,180 160,732 1,160,732 185,661 1,185,661
10 369,790 173,100 1,173,100 202,582 1,202,582
11 417,679 184,403 1,184,403 219,130 1,219,130
12 467,963 194,180 1,194,180 234,848 1,234,848
13 520,761 202,251 1,202,251 249,747 1,249,747
14 576,199 208,427 1,208,427 263,839 1,263,839
15 634,409 212,535 1,212,535 277,136 1,277,136
16 695,530 214,425 1,214,425 289,768 1,289,768
17 759,706 213,940 1,213,940 301,389 1,301,389
18 827,092 210,960 1,210,960 311,657 1,311,657
19 897,846 205,295 1,205,295 320,593 1,320,593
20 972,139 196,687 1,196,687 328,096 1,328,096
25 1,403,176 94,460 1,094,460 342,266 1,342,266
30 1,953,302 0 0 307,525 1,307,525
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness
outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (yrs. 1-10) $28,000.00
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.561%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- --------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 22,964 $1,022,964 $ 24,778 $ 1,024,778
2 60,270 46,499 1,046,499 50,442 1,050,442
3 92,683 70,557 1,070,557 76,909 1,076,909
4 126,717 95,087 1,095,087 104,338 1,104,338
5 162,453 120,027 1,120,027 132,652 1,132,652
6 199,976 145,320 1,145,320 161,890 1,161,890
7 239,375 170,911 1,170,911 191,850 1,191,850
8 280,743 196,763 1,196,763 222,564 1,222,564
9 324,180 222,779 1,222,779 254,190 1,254,190
10 369,790 248,856 1,248,856 286,770 1,286,770
11 417,679 275,216 1,275,216 320,713 1,320,713
12 467,963 301,372 1,301,372 355,593 1,355,593
13 520,761 327,106 1,327,106 391,452 1,391,452
14 576,199 352,179 1,352,179 428,336 1,428,336
15 634,409 376,354 1,376,354 466,292 1,466,292
16 695,530 399,405 1,399,405 505,492 1,505,492
17 759,706 421,086 1,421,086 545,624 1,545,624
18 827,092 441,176 1,441,176 586,365 1,586,365
19 897,846 459,370 1,459,370 627,742 1,627,742
20 972,139 475,275 1,475,275 669,664 1,669,664
25 1,403,176 498,659 1,498,659 885,557 1,885,557
30 1,953,302 362,662 1,362,662 1,100,357 2,100,357
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness
outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: D ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10) $28,000.00
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.561%)
-----------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- -----------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 24,422 $ 1,024,422 $ 26,291 $ 1,026,291
2 60,270 50,931 1,050,931 55,108 1,055,108
3 92,683 79,671 1,079,671 86,588 1,086,588
4 126,717 110,804 1,110,804 121,142 1,121,142
5 162,453 144,493 1,144,493 158,966 1,158,966
6 199,976 180,932 1,180,932 200,407 1,200,407
7 239,375 220,338 1,220,338 245,594 1,245,594
8 280,743 262,971 1,262,971 294,923 1,294,923
9 324,180 309,061 1,309,061 348,957 1,348,957
10 369,790 358,860 1,358,860 408,195 1,408,195
11 417,679 412,995 1,412,995 473,573 1,473,573
12 467,963 471,398 1,471,398 545,226 1,545,226
13 520,761 534,308 1,534,308 623,818 1,623,818
14 576,199 601,973 1,601,973 710,083 1,710,083
15 634,409 674,684 1,674,684 804,831 1,804,831
16 695,530 752,784 1,752,784 909,084 1,909,084
17 759,706 836,644 1,836,644 1,023,470 2,023,470
18 827,092 926,710 1,926,710 1,148,682 2,148,682
19 897,846 1,023,399 2,023,399 1,285,865 2,285,865
20 972,139 1,127,100 2,127,100 1,436,159 2,436,159
25 1,403,176 1,760,153 2,760,153 2,435,263 3,435,263
30 1,953,302 2,617,261 3,617,261 4,023,315 5,023,315
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the Policy
Owner, and the investment results for the Funds. The Cash Value and Death
Benefit for a Policy would be different from those shown if the actual rates
of return averaged the rate shown above over a period of years, but also
fluctuated above or below that average for individual years. No representation
can be made by the Company, Walnut Street Securities, the investment
management companies, or any representative thereof, that this hypothetical
rate of return can be achieved for any one year, or sustained over any period
of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness
outstanding.
A-7
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article III, Section 13 of the Bylaws of Paragon Life Insurance Company
provides: "The Corporation may indemnify any person who is made a party to any
civil or criminal suit, or made a subject of any administrative or investigative
proceeding by reason of the fact that he is or was a director, officer, or agent
of the Corporation. This indemnity may extend to expenses, including attorney's
fees, judgments, fine, and amounts paid in settlement. The indemnity shall not
be available to persons being sued by or upon the information of the Corporation
nor to persons who are being investigated by the Corporation. The indemnity
shall be discretionary with the Board of Directors and shall not be granted
until the Board of Directors has made a determination that the person who would
be indemnified acted in good faith and in a manner he reasonably believed to be
in the best interest of the Corporation. The Corporation shall have such other
and further powers of indemnification as are not inconsistent with the laws of
Missouri."
Insofar as indemnification for liability arising under the Securities Act
of 1933,(the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the Charter and Articles of Incorporation
of the Company, the By-Laws of the Company, agreement, statute, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
<PAGE>
REPRESENTATION CONCERNING FEES AND CHARGES
Paragon Life Insurance Company (the "Company") hereby represents that the
fees and charges deducted under the terms of the policies described in this
Registration Statement are, in the aggregate, reasonable in relationship to the
services rendered, the expenses expected to be incurred, and the risks assumed
by the Company.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Individual Flexible Premium Variable Life Prospectus consisting of 58
pages.
The undertaking to file reports required by Section 15(d) of the Securities
Exchange Act of 1934.
The undertaking pursuant to Rule 484.
Representations concerning fees and charges.
The signatures.
1. The following exhibits (which correspond in number to the numbers under
paragraph A of the instructions as to exhibits for Form N-8B-2):
(1) Resolution of the Board of Directors of the Company authorizing
establishment of the Separate Account 3
(2) Not applicable.
(3) (a) Form of Underwriting Agreement. 1
(b) Form of Selling Agreement. 1
(c) Not applicable.
(4) Not applicable.
(5) Form of Individual Policy and Policy Riders. 3
(6) (a) Amended Charter and Articles of Incorporation of the Company 2
(b) By-Laws of the Company 2
(7) Not applicable.
(a) Participation Agreement dated September 1, 1993, between Paragon
Life Insurance Company and the Variable Insurance Products Fund
and Fidelity Distributors Corporation. 2
(b) Participation Agreement dated September 1, 1993, between Paragon
Life Insurance Company and the Variable Insurance Products Fund
II and Fidelity Distributors Corporation. 2
II-3
<PAGE>
(c) Participation Agreement dated October 12, 1995, by and among MFS
Variable Insurance Trust and Paragon Life Insurance Company and
Massachusetts Financial Services Company. 5
(d) Participation Agreement dated October 30, 1995, among Putnam
Capital Manager Trust, Putnam Mutual Funds Corp., and Paragon
Life Insurance Company. 6
(e) Participation Agreement dated March 15, 1985, between Scudder
Variable Life Investment Fund, Scudder Investor Services, Inc.,
and Paragon Life Insurance Company. 1
(f) Participation Agreement dated August 1, 1996, by and among
Paragon Life Insurance Company and T. Rowe Price Investment
Services, Inc. 4
(9) Not applicable.
(10) Proposed Form of Application. 4
(11) Memorandum describing the Company's issuance, transfer, and redemption
procedures for the Policies. 3
2. Opinion of Matthew P. McCauley, Esquire, General Counsel of Paragon Life
Insurance Company as to the legality of the securities being offered. 3
3. Consent of Matthew P. McCauley, Equire, General Counsel of Paragon Life
Insurance Company. 4
4. Not applicable
5. Not applicable
6. Not applicable
7. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive Vice
President and Chief Actuary as to actuarial matters pertaining to the
securities being registered. 4
8. (a) The consent of KPMG Peat Marwick, LLP, Independent Certified
Public Accountants. 4
(b) Written consent of Sutherland, Asbill & Brennan. 4
9. Original powers of attorney authorizing Carl H. Anderson,
Matthew P. McCauley, and Craig K. Nordyke, and each of
them singly, to sign this Registration Statement and
Amendments thereto on behalf of the Board of Directors of
Paragon Life Insurance Company. 3
* * *
II-4
<PAGE>
1 Incorporated by reference to the initial Registration Statement on Form S-6
found in File No. 33-58796, filed with the Securities and Exchange
Commission on February 25, 1993.
2 Incorporated by reference to the Registration Statement on Form S-6 found
in File No. 33-67970, filed with the Securities and Exchange Commission on
August 26, 1993.
3 Incorporated by reference to the initial Registration Statement on Form S-6
found in the File No. 333-36515, filed with the Securities and Exchange
Commission on September 26, 1997.
4 Filed herewith.
5 Incorporated by reference to the Post-effective Amendment No. 5 to the
Registration Statement, File No. 33-58796, filed with the Securities and
Exchange Commission on October 27, 1995.
6 Incorporated by reference to the Post-effective Amendment No. 4 to the
Registration Statement, File No. 33-58796, filed with the Securities and
Exchange Commission on October 6, 1995.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Paragon Life
Insurance Company and Separate Account D of Paragon Life Insurance Company have
duly caused this Pre-Effective Amendment No. 1 to be signed on their behalf by
the undersigned thereunto duly authorized, and the seal of Paragon Life
Insurance Company to be hereunto affixed and attested, all in the City of St.
Louis, State of Missouri, on the 26th day of February, 1998.
Separate Account D of Paragon
Life Insurance Company
(Name of Registrant)
(Seal) Paragon Life Insurance Company
(Name of Depositor)
Attest:/s/____________________________ By:/s/___________________________
Matthew P. McCauley, Carl H. Anderson, President
Secretary and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/_____________________ 2/26/98
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/_____________________ 2/26/98
Matthew K. Duffy Vice President and Chief
Financial Officer (Principal
Accounting Officer and
Principal Financial Officer)
________________________
Warren J. Winer* Director
- ------------------------
Richard A. Liddy* Director
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/_____________________ 2/26/98
Matthew P. McCauley Vice President
General Counsel,
Secretary and Director
/s/_____________________ 2/26/98
Craig K. Nordyke Director
- ------------------------
Leonard M. Rubenstein* Director
________________________
E. Thomas Hughes, Jr.* Director and Treasurer
- ------------------------
Bernard H. Wolzenski* Director
- ------------------------
A. Greig Woodring* Director
By:/s/___________________ 2/26/98
Craig K. Nordyke
</TABLE>
*Original powers of attorney authorizing Matthew P. McCauley, Carl H. Anderson,
and Craig K. Nordyke, and each of them singly, to sign this Registration
Statement and Amendments thereto on behalf of the Board of Directors of Paragon
Life Insurance Company was filed with the Securities and Exchange Commission
with the initial S-6 Registration Statement.
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
1. Participation Agreement dated August 1, 1996, by and among Paragon Life
Insurance Company and T. Rowe Price Investment Services, Inc.
2. Proposed Form of Application.
3. Opinion and consent of Matthew P. McCauley, Esquire, Vice President and
General Counsel as to the legality of the securities being offered.
4. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive Vice
President and Chief Actuary as to actuarial matters pertaining to the
securities being registered.
5. (a) The consent of KPMG Peat Marwick, LLP, Independent Certified Public
Accountants.
(b) Written consent of Sutherland, Asbill & Brennan LLP.
<PAGE>
PARTICIPATION AGREEMENT
-----------------------
Among
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE EQUITY SERIES, INC.,
T. ROWE PRICE FIXED INCOME SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.,
and
PARAGON LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 1st day of August, 1996 by
and among Paragon Life Insurance Company (hereinafter, the "Company"), a
Missouri insurance company, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each account hereinafter referred to as the "Account"), and
the undersigned funds, each, a corporation organized under the laws of Maryland
(each hereinafter referred to as the "Fund") and T. Rowe Price Investment
Services, Inc. (hereinafter the "Underwriter"), a Maryland corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exceptions from the
provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940Act") and Rules 6e-2(b)(15) and
63-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, T. Rowe Price Associates, Inc. and Rowe Price-Fleming
International, Inc. (each hereinafter referred to as the "Adviser") are each
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and any applicable state securities laws; and
WHEREAS, the Company has issued or will issue certain variable life
insurance or variable annuity contracts (including any certificates thereunder)
supported wholly or partially by the Account (the
<PAGE>
"Contracts"), and said Contracts are listed in Schedule A hereto, as it may be
amended from time to time by mutual written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios available
for purchase at the applicable net asset value per share by the Company and the
Account on those days on which the Fund calculates its net asset value pursuant
to rules of the SEC, and the Fund shall use its best efforts to calculate such
net asset value on each day the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to sell shares of any Designated Portfolio to any
person, or suspend or terminate the offering of shares of any Designated
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction, or is, in the sole discretion of the Board acting in good faith
and in light of their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the shareholders of such Designated
Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts as
provided under Section 817 (h)(4) of the Internal Revenue Code of 1986, as
amended (the "Code"). No shares of any Designated Portfolios will be sold to the
general public. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I and VII of this Agreement is in effect to
govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any rules thereunder, and in accordance with the procedures and
policies of the Fund as described in the then-current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute
<PAGE>
receipt by the fund; provided that the Company receives the order by 4:00 p.m.
Baltimore time and the Fund receives notice of such order by 9:30 a.m. Baltimore
time on the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange is open for trading and on which the Fund
calculates its net asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then-current prospectus of the fund and in
accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares on the next Business Day after
receipt of an order to purchase Fund shares. Payment shall be in federal funds
transmitted by wire by 4:00 p.m. Baltimore time. If payment in Federal Funds for
any purchase is not received or is received by the Fund after 4:00 p.m.
Baltimore time on such Business Day, the Company shall promptly, upon the Fund's
request, reimburse the Fund for any charges, costs, fees, interest or other
expenses incurred by the Fund in connection with any advances to, or borrowings
or overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a
result of portfolio transactions effected by the Fund based upon such purchase
request. For purposes of Section 2.8 and 2.9 hereof, upon receipt by the Fund of
the federal funds so wired, such funds shall cease to be the responsibility of
the Company and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Designated Portfolios' shares. Any material error
in the income dividend, or capital gain distribution information shall be
reported to the Company promptly upon discovery. The Company hereby elects to
receive all such income, dividends, and capital gain distributions as are
payable on Designated Portfolio shares in additional shares of that Portfolio.
The Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions. The Fund shall use its best efforts to furnish advance notice of
the day such dividends and distributions are expected to be paid.
1.10 The Fund shall make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonable
practical after the net asset value per share is calculated (normally by 6:30
p.m. Baltimore time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Baltimore time.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies (subject to
Section 1.3 and Article VI hereof) and the cash value of the Contracts may be
invested in other investment companies, provided, however, that (a) such other
investment company, or series thereof, has investment objective or policies that
are different from the investment objectives an policies of the Fund; or (b) the
Company gives the Fund and the Underwriter 45 days written notice of its
intention to make such other investment company available as a funding vehicle
for the Contracts; or (c) such other investment company was available as a
funding vehicle for the Contracts prior to the date of this Agreement and the
Company so informs the Fund and Underwriter prior to their signing this
Agreement; or (d) the Fund or Underwriter consents to the use of such other
investment company, such consent not to be unreasonable withheld.
ARTICLE II. Representations and Warranties
------------------------------
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all
<PAGE>
applicable federal and state laws and that the sale of the Contracts shall
comply in all material respects with any state insurance suitability
requirements. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established the Account prior to any issuance or
sale thereof as a segregated asset account under the Missouri insurance laws and
has registered or, prior to any issuance or sale of the Contracts, will register
the Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the state of Missouri and all
applicable federal and state securities laws and that the fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act. The Fund shall
amend the Registration Statement for its shares under the 1933 Act and the 1940
Act from time to time as required in order to effect the continuous offering of
its shares. The Fund shall register and qualify the shares for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by the fund or the Underwriter.
2.3 The fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the fund will undertake to have a
Board, a majority of whom are not interested persons of the Fund, formulate and
approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in compliance with the laws
of the state of Missouri to the extent required to perform this Agreement.
2.5 The Fund represents that it is lawfully organized and validly existing
under the laws of the State of Maryland and that it does and will comply in all
material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Missouri and any applicable state
and federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered under all applicable federal and state securities laws
and that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the State of Missouri and any applicable
state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimum
coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company dealing with the money and/or securities of the Fund are covered by
a blanket fidelity bond or similar coverage in an amount not less than $5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any amounts
received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the
<PAGE>
Fund. The Company agrees to make all reasonable efforts to see that this bond or
another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Underwriter in the event that such coverage no longer
applies. The Company agrees to exercise its best efforts to ensure that other
individuals/entities not employed or controlled by the Company and dealing with
the money and/or securities of the Fund maintain a similar bond or coverage in a
reasonable amount.
ARTICLE III. Prospectuses, Statements of Additional Information, and Proxy
Statements; Voting
-------------------------------------------------------------
3.1 The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus (describing only the
Designated Portfolios listed on Schedule A) as the Company may reasonable
request. If requested by the Company in lieu thereof, the fund shall provide
such documentation (including a final copy of the new prospectus as set in type
at the Fund's expense) and other assistance as is reasonable necessary in order
for the Company (at the Company's expense) once each year (or more frequently if
the prospectus for the fund is amended) to have the prospectus for the Contracts
and the fund's prospectus printed together in one document.
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company (or,
in the fund's discretion, from the Fund), and the Underwriter (or the fund), at
its expense, shall print, or otherwise reproduce, and provide a copy of such SAI
free of charge to the Company for itself and for any owner of a Contract who
requests such SAI.
3.3 The Fund, at its expense, shall provide the Company with copies of its
proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonable require for
distributing to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and semi-
annual reports to shareholders in such quantity as the Company shall reasonable
request for use in connection with offering the Variable Contracts issued by the
Company. If requested by the Company in lieu thereof, the Underwriter shall
provide such documentation (which may include a final copy of the Fund's annual
and semi-annual reports as set in type) and other assistance as is reasonable
necessary in order for the Company (at the Company's expense) to print such
shareholder communications for distribution to Contract owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received in
the same proportion as Fund shares of such Designated Portfolio
for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the extent
permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(C) of the 1940 Act (although the fund
is not one of the trusts described in Section 16(C) of that Act) as well as with
Sections 16(a) and, if an when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's
<PAGE>
interpretation of the requirements of Section 16(a) with respect to periodic
elections of directors or trustees and with whatever rules the SEC may
promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material
that the Company develops or uses and in which the Fund (or a Portfolio thereof)
or the Adviser or the Underwriter is named, at least fifteen calendar days prior
to its use. No such material shall be used if the fund or its designee
reasonable object to such use within fifteen calendar days after receipt of such
material. The Fund or its designee reserves the right to reasonable object to
the continued use of such material, and no such material shall be used if the
Fund or its designee so object.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the Sale of the Contracts other than the information or representations
contained in the registration statement or prospectus or SAI for the Fund
shares, as such registration statement and prospectus or SAI may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the fund or its
designee or by the Underwriter, except with the permission of the fund or the
Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at least
fifteen calendar days prior to its use. No such material shall be used if the
Company reasonable objects to such use within fifteen calendar days after
receipt of such material. The Company reserves the right to reasonable object to
the continued use of such material and no such material shall be used if the
Company so objects.
4.4 The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any or the above, that
relate to the Fund or its shares, contemporaneously with the filing of such
document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, SAIs, reports, solicitations for voting
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Contracts or the Account, contemporaneously with the
filing of such document(s) with the SEC or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund, any affiliate of the Fund, the Company, the
Contracts, or the Account: advertisements (such as material published, or
designed for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures, or other public media), sales literature (i.e., any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, reports, market letters, form letters,
seminar texts, reprints or excerpts of any other advertisement,
<PAGE>
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, SAIs shareholder
reports, proxy materials, and any other communications distributed or made
generally available with regard to the Funds.
ARTICLE V. Fees and Expenses
5.1 The Fund and the Underwriter shall pay no fee or other compensation to
the Company under this Agreement, except that if the fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
Underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing, and such payments will be made out of existing fees otherwise payable
to the Underwriter, past profits of the Underwriter, or other resources
available to the Underwriter. No such payments shall be made directly by the
fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except as otherwise provided herein. The Fund shall
see to it that all its shares are registered and authorized for issuance in
accordance with applicable federal law and, if and to the extent deemed
advisable by the fund, in accordance with applicable state laws prior to their
sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the cost o of printing a prospectus that constitutes
and annual report), the preparation of all statements and notices required by
any federal or state law, and all taxes on the issuance or transfer of the
Fund's shares.
5.3 The Company shall bear the expenses of printing the Fund's prospectus
(in accordance with 3.1) and of distributing the Fund's prospectus, proxy
materials, and reports to Contract owners and prospective Contract owners .
ARTICLE VI. Diversification and Qualification
6.1 Subject to the Company's maintaining the treatment of the Contracts as
life insurance, endowment, or annuity contracts under applicable provisions of
the Code and the regulations issued thereunder (or any successor provisions),
the Fund will invest its assets in such a manner as to ensure that the Contracts
will be treated as annuity, endowment, or life insurance contracts, whichever is
appropriate, under the Code and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the Fund
will comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, and
any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts, and
any amendments or other modifications or successor provisions to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify the Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 817.5.
6.2 The Fund represents that it is or will be qualified as a Regulated
Investment Company under Subchapter M of the Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provisions) and that it will notify the Company immediately upon having
a reasonable basis for believing that it has ceased to so qualify or that it
might not so qualify in the future.
6.3 Subject to the Fund's compliance with Section 817(h) of the Code and
Treasury Regulation 1.817-5, and any Treasury interpretations thereof, relating
to the diversification requirements for variable annuity, endowment, or life
insurance contracts, any amendments or other modifications or successor
provisions to such Sections or Regulations, the Company represents that the
Contracts are currently, and at the time of issuance shall be, treated as life
insurance, endowment contracts, or annuity insurance contracts, under applicable
provisions of the Code, and that it will make every effort to maintain such
treatment, and
<PAGE>
that it will notify the Fund and the Underwriter immediately upon having a
reasonable basis for believing the Contracts have ceased to be so treated or
that they might not be so treated in the future. The Company agrees that any
prospectus offering a contract that is a "modified endowment contract" as that
term is defined in Section 7702A of the Code (or any successor or similar
provision), shall identify such contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonable necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expenses and
to the extent reasonable practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies ) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
Provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Any such withdrawal and
termination must take place within sic (6) months after the Fund gives written
notice that this provision is being implemented, and until the end of that six
month period the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the position of the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the
<PAGE>
foregoing six month period, the Fund shall continue to accept and implement
orders by the company for the purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contract if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict. In the event that the Board determines that any proposed
action does not adequately remedy any irreconcilable material Conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs the Company in writing
of the foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.7 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
63-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement
shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII. Indemnification
8.1 Indemnification by the Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and the Underwriter and each of their officers and directors and each person, if
any, who controls the Fund or the Underwriter within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
Registration Statement, prospectus (which shall include an
offering memorandum, if any), or statement of additional
information for the Contracts or contained in the Contracts or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or arise
out of or are based up0on the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity
with information furnished to the Company by or on behalf of the
Fund for use in the Registration Statement, prospectus or
statement of additional information for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Fund shares; or
(ii)arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or
<PAGE>
other promotional material of the Fund not supplied by the
Company or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control, with
respect to the sale or distribution of the Contracts or Fund
Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus, or sales literature or other promotional material of
the Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional or
in good faith or otherwise, to comply with the qualification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company,
as limited by an in accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties; written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.2 Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the
<PAGE>
Underwriter) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts; and
(i) arise out of or are based upon any untrue statements or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or SAI or sales literature
or other promotional material of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on behalf
of the Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or other
promotional material for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful conduct of
the Fund or Underwriter or persons under their control, with
respect to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus or sales literature or other promotional material
covering the Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification and other
qualification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter.
As limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to
<PAGE>
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate ,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified party
shall bear the fees and expenses of any additional counsel retained by it, and
the Underwriter will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the contracts or the
operation of the Account.
8.3 Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any an all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund) or litigation (including legal
and other expenses) to which the Indemnified Parties may be required to pay or
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) of settlements, are related to the operations of the
Fund and:
i. arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement (including
a failure, whether unintentional or in good faith or otherwise, to
comply with the diversification and other qualification requirements
specified in Article VI of this Agreement); or
ii. arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the expense thereof, with counsel
<PAGE>
satisfactory to the party named in the action and to settle the claim at its own
expense; provided, however, that no such settlement shall, without the
Indemnified Parties' written consent, include any factual stipulation referring
to the Indemnified Parties or their conduct. After notice from the Fund to such
party of the Fund's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Fund will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934,
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, any Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. Termination
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to some or
all Designated Portfolios, by six (6) months' advance written
notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio based upon
the Company's determination that shares of the Fund are not
reasonably available to meet the requirements of the Contracts;
provided that such termination shall apply only to the Designated
Portfolio not reasonable available; or
(c) termination by the Company by written notice to the Fund and the
Underwriter in the event any of the Designated Portfolio's shares
are not registered, issued or sold in accordance with applicable
state and/or federal law or such law precludes the use of such
shares as the underlying investment media of the Contracts issued
or to be issued by the Company; or
(d) termination by the Fund or Underwriter in the event that formal
administrative proceedings are instituted against the Company by
the NASD, the SEC, the Insurance Commissioner or like official of
any state or any other regulatory body regarding the Company's
duties under this Agreement or related to the sale of the
Contracts, the operation of any Account, or the purchase of the
Fund shares, provided, however, that the Fund or Underwriter
determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its obligations
under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, provided,
however, that the
<PAGE>
Company determines in its sole judgment exercised in good faith,
that any such administrative proceedings will have a material
adverse effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio in the event
that such Designated Portfolio ceases to qualify as a regulated
Investment Company under Subchapter M or fails to comply with the
Section 817(h) diversification requirements specified in Article
VI hereof, or if the Company reasonable believes that such
Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice to the
Company in the event that the Contracts fail to meet the
qualifications specified in Article VI hereof; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, M if either one or both of the Fund or the
Underwriter respectively, shall determine, tin their sole
judgment exercised in good faith, that the Company has suffered a
material adverse change in its business, operations, financial
condition, or prospects since the date of this Agreement or is
the subject of material adverse publicity; or
(i) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement
or is the subject of material adverse publicity; or
(j) termination by the fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter
the written notice specified in Section 1.11 hereof and at the
time such notice was given there was no notice of termination
outstanding under any other provision of this Agreement;
provided, however, any termination under this Section 10.1(j)
shall be effective sixty days after the notice specified in
Section 1.11 was given.
10.2 Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may be permitted
to reallocate investments in the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The parties agree that this Section 10.2 shall not apply to
any termination under Article VII and the effect of such Article VII termination
shall be governed by Article Vii of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section 10.1(g)
of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the Contracts
(as opposed to Fund shares attributable to the Company's assets held in the
Account) except (I) as necessary to implement Contract Owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter refereed to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonable
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
<PAGE>
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement, each Party's
obligation under Article VIII to indemnify the other parties shall survive.
10.5 Any successor by law of the parties hereto shall be entitled to the
benefits of the indemnification provision contained in Article VIII.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
Paragon Life Insurance Company
100 South Brentwood
St. Louis, Missouri 63105
Attention: Carl H. Anderson, President and CEO
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the property of
such Fund, and in the case of a series company, the respective Designated
Portfolio listed on Schedule A hereto as though such Designated Portfolio had
separately contracted with the Company and the Underwriter for the enforcement
of any claims against the Fund. The parties agree that neither the Board,
officers, agents or shareholders assume any personal liability or responsibility
for obligations entered into by or on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonable identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information may come into the
public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
<PAGE>
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
no be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Missouri Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity or
life operations of the Company are being conducted in a manner consistent with
Missouri variable annuity or life laws and regulations and any other applicable
law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
COMPANY: PARAGON LIFE INSURANCE COMPANY
By its authorized officer
By: /s/
------------------------------
Craig K. Nordyke
Title: Vice President & Chief Actuary
------------------------------
Date: June 21, 1996
------------------------------
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: /s/
------------------------------
Henry H. Hopkins
Title: Vice President
------------------------------
Date: June 20, 1996
------------------------------
<PAGE>
FUND: T. ROWE PRICE EQUITY SERIES, INC.
By its authorized officer
By: /s/
--------------------------------
Henry H. Hopkins
Title: Vice President
--------------------------------
Date: June 20, 1996
--------------------------------
FUND: T. ROWE PRICE FIXED INCOME SERIES, INC.
By its authorized officer
By: /s/
--------------------------------
Henry H. Hopkins
Title: Vice President
--------------------------------
Date: June 20, 1996
--------------------------------
FUND: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: /s/
--------------------------------
Nancy M. Morris
Title: Vice President
--------------------------------
Date: June 20, 1996
--------------------------------
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of Separate Account and Contracts Funded by
Date Established by Board of Directors Separate Account Designated Portfolios
- -------------------------------------- ---------------- ---------------------
<S> <C> <C>
Separate Account B Group and Individual T. Rowe Price International Series Inc.
Established January 4, 1993 Flexible Premium Variable ---------------------------------------
Life Insurance . T. Rowe Price International Stock
Portfolio
T. Rowe Price Equity Series, Inc.
---------------------------------
. T. Rowe Price New America Growth
Portfolio
. T. Rowe Price Equity Income Portfolio
. T. Rowe Price Personal Strategy
Balanced Portfolio
T. Rowe Price Fixed Income Series, Inc.
---------------------------------------
. T. Rowe Price Limited-Term Bond
Portfolio
</TABLE>
<PAGE>
Life Application
Use Dark Ink Only
PARAGON
LIFE INSURANCE COMPANY
100 South Brentwood
St. Louis, MO 63105
1. PROPOSED INSURED
- ---------------------------------------------------------
First Name Initial Last Name
_________________________________________________________
Date of Birth State of Birth Sex
/ / [_] Male [_] Female
_________________________________________________________
Day Phone Number Evening Phone Number
( ) - ( ) -
_________________________________________________________
Social Security Number
- -
_________________________________________________________
Best days and time to call
Days:____________ ________ [_]a.m. [_]p.m.
Time
_________________________________________________________
Home Address (Number, Street and Apt. #)
_________________________________________________________
_________________________________________________________
City State Zip
_________________________________________________________
Occupation Earned Income Net Worth
- ---------------------------------------------------------
2. REPLACEMENT
- ---------------------------------------------------------
Will this application replace or change any existing life
insurance or annuity? Yes [_] No [_]
_________________________________________________________
Is this to be considered for a "Section 1035 Exchange?"
Yes [_] No[_]
- ---------------------------------------------------------
3. BENEFICIARY
- ---------------------------------------------------------
Primary Date of Birth Relationship % Share
/ /
_________________________________________________________
Primary Date of Birth Relationship % Share
/ /
_________________________________________________________
Primary Date of Birth Relationship % Share
/ /
_________________________________________________________
- ---------------------------------------------------------
Contingent Date of Birth Relationship % Share
/ /
_________________________________________________________
Contingent Date of Birth Relationship % Share
/ /
_________________________________________________________
- ---------------------------------------------------------
4. HEALTH STATUS
- ---------------------------------------------------------
Have you been hospitalized within the previous 90 days?
[_] Yes [_] No
Have you used tobacco in any form within the last 12 months?
[_] Yes [_] No
- ---------------------------------------------------------
5. OWNERS
If different than Proposed Insured
_________________________________________________________
Owner's First Name Initial Last Name
_________________________________________________________
Owner's Relationship to Proposed Insured
_________________________________________________________
Owner's Address (Number, Street and Apt. #)
_________________________________________________________
CityState Zip Telephone Number
_________________________________________________________
Owner's Social Security Number or Tax ID Number
_________________________________________________________
- ---------------------------------------------------------
6. PLAN, BENEFITS & RIDERS
- ---------------------------------------------------------
Plan Name Desired Policy Date
_________________________________________________________
Face Amount Proposed Effective Date
_________________________________________________________
Benefit Riders (If available on plan selected)
Accelerated Death Benefit Settlement Option Rider [_]
Waiver of Deductions [_]
- ---------------------------------------------------------
- ---------------------------------------------------------
Method of Payment (check one)
[_] One Payment
[_] Annual
[_] Monthly (Available only through electronic ACH
requires premium charge authorization)
- ---------------------------------------------------------
- ---------------------------------------------------------
Policy Option
[_] Option A (Level) [_] Option B (Increasing)
default for One Payment default for Annual or Monthly
- ---------------------------------------------------------
33117
(10/97)
<PAGE>
PARAGON
LIFE INSURANCE COMPANY
100 South Brentwood
St. Louis, MO 63105
<TABLE>
<CAPTION>
7. VARIABLE LIFE INFORMATION
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Suitability Information:
a. Have you received the Paragon prospectus for the policy applied for? [_] Yes [_] No
Date of Prospectus: / /
___________
Date of any supplement: / /
____________
b. Have you received a prospectus for the underlying funds of the policy applied for? [_] Yes [_] No
c. Do you understand that:
(i) the death benefit and cash surrender value will increase or decrease
depending on investment experience, and
(ii) there is no guaranteed cash surrender value? [_] Yes [_] No
d. Do you believe that the policy applied for meets your insurance objectives and your
anticipated financial needs? [_] Yes [_] No
2. Net Premium Allocation (0 or minimum of 10%. Percentages must be in whole
numbers and total 100%); Default is 100% Money Market Portfolio:
[Fidelity - Contrafund Portfolio]..........................................._______________%
[Fidelity - Equity-Income Portfolio]........................................_______________%
[Fidelity - Growth Portfolio]..............................................._______________%
[Fidelity - Index 500 Portfolio]............................................_______________%
[MFS - Emerging Growth]....................................................._______________%
[Putnam - PVT High Yield Portfolio]........................................._______________%
[Putnam - PVT New Opportunities Portfolio].................................._______________%
[Putnam - PVT U.S. Government and High Quality Bond Portfolio].............._______________%
[Putnam - PVT Voyager Portfolio]............................................_______________%
[Scudder - International Portfolio]........................................._______________%
[Scudder - Money Market Portfolio].........................................._______________%
[T. Rowe Price - Limited-Term Bond Portfolio]..............................._______________%
[T. Rowe Price - New America Growth Portfolio].............................._______________%
[T. Rowe Price - Personal Strategy Balanced Portfolio]......................_______________%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Endorsement/Remarks (Not applicable in Pennsylvania):
- --------------------------------------------------------------------------------
I represent that the answers and statements in this application consisting of
all Parts, and any amendments, are true, complete and correctly recorded. I
acknowledge that the Company will rely on these answers and statements in
determining whether, and on what terms, to issue a policy. I understand if any
answers and/or statements are false, incomplete or incorrectly recorded, any
policy issued may be void. I agree any policy based on this application shall
not take effect unless and until: a) the policy is issued during the lifetime of
the Proposed Insured and b) the first full premium is received by the Company
during the lifetime of the Proposed Insured. I understand that no agent or
broker is authorized to accept risks or pass upon insurability, to make or
modify contracts or to waive any of the Company's rights or requirements. I
understand that no waiver or modification shall be binding upon the Company
unless in writing and signed by the president or vice president.
X
-----------------------------------------------------------------
Agent's Name (please print)
X
-----------------------------------------------------------------
Signature of Agent Agent No.
X
-----------------------------------------------------------------
State Where Signed
I authorize any physician, medical practitioner, hospital or medically related
facility, insurance company, the Medical Information Bureau ("MIB") or any other
institution or person having any records or knowledge of me or of my health, to
give such information to Paragon Life, if they choose to request such
information, or its reinsurers to determine eligibility for insurance. I
understand information obtained will only be released to reinsurers, the MIB,
persons performing services in connection with my application or claim or as
lawfully required. I agree that this authorization is valid for 26 months, that
a photocopy of it is as valid as the original and that I may request a copy of
this authorization. I understand and agree that the Company is under no
obligation to pay a claim under the policy applied for unless my beneficiaries
provide the Company with this same authorization in the event of a claim.
X
-----------------------------------------------------------------
Signature of Proposed Insured Date
X
-----------------------------------------------------------------
Signature of Owner
X
-----------------------------------------------------------------
Signature of Parent or Guardian (if necessary)
X
-----------------------------------------------------------------
Signature of Applicant (if other than Proposed Insured or Owner)
<PAGE>
Exhibit 3
General American Life
Insurance Company
Law Division
700 Market Street
P.O. Box 396
St. Louis, MO 63166
Phone: (314)444-0647
Fax: (314)444-0510
26 February 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Sir or Madam:
I hereby consent to the use of my name in the prospectus contained in Pre-
Effective Amendment No. 1 to the Registration Statement of Paragon Separate
Account D (File No. 333-36515) filed on Form S-6 with the Securities and
Exchange Commission under the Securities Act of 1933.
Very truly yours,
Matthew P. McCauley
Vice President,
General Counsel, and Secretary
MPMcC:vqpac022098
<PAGE>
Exhibit 4
OPINION AND CONSENT OF CRAIG K. NORDYKE, F.S.A., M.A.A.A.,
EXECUTIVE VICE PRESIDENT AND CHIEF ACTUARY
RE: 333-36515
Prospectus (Individual VUL)
February 26, 1998
Gentlemen:
In my capacity as Executive Vice President and Chief Actuary for Paragon Life
Insurance Company, I have provided actuarial advice concerning: (a) the
preparation of a registration statement for Separate Account D filed on Form S-6
with the Securities and Exchange Commission under the Securities Act of 1933
(the "Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The illustrations of cash values, death benefits, and accumulated premiums
in the Appendix to the prospectuses contained in the Registration
Statement, are based on the assumptions stated in the illustration, and
are consistent with the provisions of the Policies. The rate structure of
the Policies has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear to be more
favorable to prospective purchasers of Policies aged 40 and 50 in the rate
class illustrated than to prospective purchasers of Policies at other
ages.
2. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the heading "Experts" in the
prospectus.
/s/ Craig K. Nordyke
Craig K. Nordyke, FSA, MAAA
Executive Vice President and Chief Actuary
<PAGE>
Exhibit 5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Independent Auditors' Consent
The Board of Directors
Paragon Life Insurance Company
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Registration Statement and Prospectus
of Separate Account D of Paragon Life Insurance Company.
/s/ KPMG Peat Marwick, LLP
St. Louis, Missouri
February 26, 1998
<PAGE>
Exhibit 6
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
February 26, 1998
Paragon Life Insurance Company
100 South Brentwood Boulevard
St. Louis, MO 63105
Re: Paragon Life Insurance Company Separate Account D
File No. 333-36515
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus filed as part of Pre-Effective Amendment No. 1 to
Form S-6 for Paragon Life Insurance Company Separate Account D, which prospectus
describes certain individual flexible premium variable life insurance contracts.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
