<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 333-36515
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-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
It is proposed that this filing will become effetive (check appropriate space)
[ ] immediately upon filing pursuant to paragraph (b), of Rule 485
[X] 1 May 1999 pursuant to paragraph (b) of Rule 485
[ ] 6 days after filing pursuant to paragraph (a) (1) of Rule 485
[ ] on (date), pursuant to paragraph (a) (1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2) of Rule 485
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485
Title of securities being registered: Group and Individual Flexible Premium
Variable Life Insurance Policies.
<PAGE>
[Paragon - VUL Logo Appears Here]
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.
. FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
[Paragon Logo Appears Here]
Prospectus dated May 1, 1999
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," "we," or "us").
The Policy is designed to provide lifetime insurance protection to age 100 and
provide flexibility to vary premium payments and change the level of death
benefits payable under the Policy. Flexibility allows an Owner to provide for
changing insurance needs under a single insurance policy. An Owner can allocate
net premiums among several investment portfolios ("Funds") with different
investment objectives.
The Policy provides for: (1) a value upon surrendering the Policy; (2) loans;
and (3) a death benefit payable on the Insured's death. As long as the Policy
remains in force, the death benefit payable on the Insured's death will not be
less than the Face Amount of the Policy. The Policy will remain in force so
long as there is enough value to pay certain monthly charges.
The Owner may allocate net premiums to one or more of the Divisions of Separate
Account D (the "Separate Account"). The Policy value will vary to reflect the
investment experience of the Divisions selected by the Owner. Depending on the
death benefit option elected, portions of the death benefit may also vary. The
Owner bears the entire investment risk under the Policy; there is no minimum
guaranteed value.
Each of the 14 Divisions of the Separate Account will invest in one of the
following corresponding Funds:
<TABLE>
<CAPTION>
FUND MANAGER
- -----------------------------------------------------------------------------
<S> <C>
Fidelity Variable Insurance Fidelity Management & Research Company
Products Fund or
Fidelity Variable Insurance
Products Fund II
VIP Growth Portfolio
VIP Equity-Income Portfolio
VIP II Index 500 Portfolio
VIP II Contrafund Portfolio
- -----------------------------------------------------------------------------
MFS Variable Insurance Trust Massachusetts Financial Services Company
MFS Emerging Growth Series
- -----------------------------------------------------------------------------
Putnam Variable Trust Putnam Investment Management, Inc.
Putnam VT High Yield Fund ("Putnam Management")
Putnam VT New Opportunities Fund
Putnam VT Income
Putnam VT Voyager Fund
- -----------------------------------------------------------------------------
Scudder Variable Life Investment Scudder, Kemper Investments
Fund
Money Market Portfolio
International Portfolio
- -----------------------------------------------------------------------------
T. Rowe Price Equity Series, Inc. T. Rowe Price Associates, Inc.
and
T. Rowe Price Fixed Income
Series, Inc.
New America Growth Portfolio
Personal Strategy Balanced
Portfolio
Limited-Term Bond Portfolio
</TABLE>
The date of this Prospectus is May 1, 1999.
1
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Please read this Prospectus carefully and keep it. A full description of the
Funds is contained in the prospectus for each Fund, which must accompany this
Prospectus.
It may not be a good decision 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.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
The Company and the Separate Account..................................... 9
The Company
The Separate Account
The Underlying Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 14
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 19
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 22
Exercising Rights and Privileges Under the Policy
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Conversion Right to a Fixed Benefit Policy
Eligibility Change Conversion
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 25
Sales Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 28
Distribution of the Policies............................................. 31
General Provisions of the Group Contract................................. 36
Federal Tax Matters...................................................... 37
Safekeeping of the Separate Account's Assets............................. 35
Voting Rights............................................................ 35
State Regulation of the Company.......................................... 36
Management of the Company................................................ 37
Legal Matters............................................................ 39
Legal Proceedings........................................................ 39
Experts.................................................................. 39
Additional Information................................................... 39
Definitions.............................................................. 39
Financial Statements..................................................... F-1
Appendix A............................................................... A-1
</TABLE>
The Policy is not available in all states.
3
<PAGE>
SUMMARY OF THE POLICY
The following summary of Prospectus information should be read with the
detailed information which follows in this Prospectus. Unless we provide
otherwise, the description of the Policy contained in this Prospectus assumes
that a Policy is in effect and that there is no outstanding Indebtedness.
The Policy
The Policy described in this Prospectus is designed for as a flexible premium
variable life insurance Policy.
The Policy is a "variable" policy because, unlike the fixed benefits under
other types of life insurance contracts, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment experience of the Funds underlying the Divisions
to which the Owner has allocated net premium payments. 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. (See "General
Matters Relating to the Policy--Additional Insurance Benefits.")
Right to Examine Policy
The Owner has a limited right to return a Policy for cancellation within 20
days after the delivery of the Policy to the Owner, within 45 days after the
Owner signs the application, or within 10 days after the Company mails a notice
of this cancellation right to the Owner whichever is latest. 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.")
The Separate Account
The Owner may allocate the net premiums to one or more Divisions. (See "The
Company, The Separate Account and the Funds" 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 Money Market
division.
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 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 start
a Policy. The planned annual premium is an amount specified for each Policy
based on the requested initial Face Amount and certain other factors.
However, as discussed below, planned premiums need not be paid 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
4
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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 not enough 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.")
Death Benefit
Death benefit proceeds are payable to the Beneficiary when the Insured dies or
to the Owner, prior to the Insured's death under circumstances described in
available riders. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") Two death benefit options are available, as follows:
. 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; and
. 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. (See "Policy
Benefits--Death Benefit.")
There will be a minimum initial 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.")
Riders
Additional insurance benefits offered under the Policy by rider may an
accelerated death benefit settlement option rider and a waiver of monthly
deductions rider (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") We will deduct the cost of these additional insurance
benefits from Cash Value as part of the monthly deduction. (See "Charges and
Deductions--Monthly Deduction.")
Cash Value
The Policy provides 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 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
Premium Expense Charges. We deduct a charge of 1.25% for policy years one
through ten from premiums paid.
Premium Tax Charge. We deduct a charge of 2.25% to cover state premium taxes
from premiums paid. (See "Charges and Deductions--Premium Tax Charge.")
Monthly Deduction. We make a monthly deduction from the Policy's Cash Value in
the Separate Account. The monthly deduction includes the following:
. Administrative Charge. We deduct an administrative charge (see the
specification pages of the Policy. The charge is $3.50 per month.
5
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. Cost of Insurance Charge. We deduct a cost of insurance charge calculated
on each Monthly Anniversary. We determine monthly cost of insurance rates
based upon 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."
. A charge for any additional insurance benefits provided by a rider.
Separate Account Charges.
. Mortality and Expense Risk Charge. We deduct a daily charge not to exceed
.0020471% (an annual rate of .75%) of the net assets of each Division for
the Company's assumption of certain mortality and expense risks incurred
in connection with the Policy. (See "Charges and Deductions--Separate
Account Charges.")
. Federal Taxes. No charges are currently made for federal or state income
taxes. (See "Federal Tax Matters.")
. Annual Expenses of the Funds (after fee waiver and reimbursement as
applicable). The value of the assets of the Divisions will reflect the
management fee and other expenses incurred by the Funds. The following
table describes the Fund fees and expenses during the time that the Owner
owns the Policy. These fees and expenses are shown as a percentage of net
assets for the year ended December 31, 1998. The prospectus for each Fund
contains more detail concerning a Fund's fees and expenses. (See "The
Company, The Separate Account and The Funds.")
<TABLE>
<CAPTION>
Management Fees Other Expenses
(after fee (after Total
waiver as reimbursement as Annual
Fund applicable) applicable) Expenses
<S> <C> <C> <C>
Fidelity Variable Insurance
Products Fund(/1/)
VIP Growth Portfolio .59% .07% .66%
VIP Equity-Income Portfolio .49% .08% .57%
Fidelity Variable Insurance
Products Fund II(/1/)
VIP II Index 500 Portfolio .24% .04% .28%
VIP II Contrafund Portfolio .59% .07% .66%
MFS Variable Insurance Trust
Emerging Growth Series .75% .10% .85%
Putnam Variable Trust
Putnam VT High Yield Fund .64% .07% .71%
Putnam VT New Opportunities
Fund .56% .05% .61%
Putnam VT Income Fund .60% .07% .67%
Putnam VT Voyager Fund .54% .04% .58%
Scudder Variable Life
Investment Fund
Money Market Portfolio .37% .07% .44%
International Portfolio .87% .18% 1.05%
T. Rowe Price Equity Series,
Inc.
New America Growth Portfolio .85% (/2/) .85%
Personal Strategy Balanced
Portfolio .90% (/2/) .90%
T. Rowe Price Income Series,
Inc.
Limited-Term Bond Portfolio .70% (/2/) .70%
</TABLE>
The expense information regarding the Funds was provided by those Funds. We
have not independently verified this information. We cannot guarantee that
the reimbursements provided by certain Funds will continue.
6
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(/1/)Fidelity Management & Research Company ("FMR") agreed to reimburse a
portion of VIP II Index 500 Portfolio's expenses during the period. Without
this reimbursement, the Fund's total expenses would have been %. 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 Variable Insurance Products
Fund--VIP Growth Portfolio .68% and VIP Equity-Income Portfolio .58%;
Fidelity Variable Insurance Products Fund II--VIP II Index 500 Portfolio
.35%; and VIP II Contrafund Portfolio .70%.
(/2/)T. Rowe Price Associates, Inc. does not provide separate Management
Fees and Other Expenses Fees, rather Management Fees include Operating
Expenses.
Partial Withdrawal Transaction Charge. We deduct a transaction charge equal to
the lesser of $25 or 2% of the amount withdrawn on each partial withdrawal of
amounts from the Separate Account. Currently, there are no transaction charges
imposed for transfers of amounts between Divisions. 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. All outstanding Indebtedness will be deducted from proceeds
payable at the Insured's death, upon maturity, or upon surrender. We transfer a
portion of the Policy's Cash Value in each Division of the Separate Account to
which the loan is allocated 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.")
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 10% 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. An Owner may also request a
partial withdrawal of the Cash Value of the Policy. A partial withdrawal may
reduce the Face Amount and 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.")
Illustrations
Illustrations in Appendix A show how death benefits and Cash Surrender Values
may vary based on certain hypothetical rate of return assumptions as well as
assumptions pertaining to the level of the charges. These rates are not
guaranteed. They are illustrative only and do not show past or future
performance. If a Policy is surrendered in the early Policy Years, the Cash
Surrender Value payable will be low compared to premiums accumulated with
interest, and consequently the insurance protection provided prior to surrender
will be costly.
Policy Tax Compliance
We intend for the Policy to satisfy the definition of a life insurance contract
under Section 7702 of the Internal Revenue Code (the "Code"). Assuming that a
Policy qualifies as a life insurance contract under the Code, a
7
<PAGE>
Policy Owner should not be taxed for receiving value from the Policy, until
there is a distribution from the Policy. Also, death benefits payable under a
Policy should be excludable from the gross income of the Beneficiary.
A Policy may be treated as a "modified endowment contract." If the Policy is a
modified endowment contract, it will affect the tax advantages offered under
the Policy. (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.")
Questions
If you have any questions, you may write or call the Company at 100 South
Brentwood, St. Louis, MO 63105, (314) 862-2211.
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THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
The Company
Paragon Life Insurance Company is a stock life insurance company incorporated
under the laws of Missouri. We were organized in 1981 as General American
Insurance Company and on December 31, 1987, our name was changed. No change in
operations or ownership took place in connection with the name change. Our main
business is writing individual and group life insurance policies and annuity
contracts. As of December 31, 1998, it had assets in excess of $300 million. We
are admitted to do business in 49 states and the District of Columbia. Our
principal offices are at 100 South Brentwood, St. Louis, Missouri 63105 ("Home
Office"). Our Internal Revenue Service Employer Identification Number is 43-
1235869.
We are 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.
Guarantee. In addition, the Parent Company agrees to guarantee that we will
have sufficient funds to meet all of our 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 end 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
that this guarantee to cover the investment experience or Cash Values of the
Policy.
Ratings. We may from time to time publish in advertisements, sales literature,
and reports to Owners or Contractholders, the ratings and other information
assigned to us 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 our financial strength and/or claims paying ability 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.
Advertisements. We also may include in advertisements and other literature
certain rankings assigned to us by the National Association of Insurance
Commissioners ("NAIC"), and our analyses of statistical information produced by
the NAIC. These rankings and analyses of statistical information may describe,
among other things, our growth, premium income, investment income, capital
gains and losses, policy reserves, policy claims, and life insurance in force.
Our 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.
9
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The Separate Account
We established Separate Account D (the "Separate Account") 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 us.
The Separate Account is divided into Divisions. Each Division will invest in
Funds as shown on the cover page of this Prospectus. 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 we 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 we 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 Policy liabilities. From time to
time, these excess assets may be transferred from the Separate Account and
included in the Company's general assets. Before making any such transfers, we
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 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 investment objectives and policies of certain Funds are similar to the
investment objectives and policies of other portfolios that may be managed by
the same investment adviser or manager. The investment results of the Funds may
differ from the results of these other portfolios. There can be no guarantee,
and no representation is made, that the investment results of any of the Funds
will be comparable to the investment results of any other portfolio, even if
the other portfolio has the same investment adviser or manager.
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.
. VIP Growth Portfolio
The investment objective seeks to achieve long-term capital appreciation
by investing primarily in common stocks.
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. VIP 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.
. VIP II 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 money-market option.
. VIP II Contrafund Portfolio
The investment objective seeks long-term capital appreciation by
investing in securities of companies whose value FMR believes is not
fully recognized by the public.
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 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 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, when 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 portfolio that 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.
11
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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 that Putnam Management
believes possess above-average long-term growth potential.
. Putnam VT Income Fund
Please note: This fund was previously named 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 Kemper Investments
("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.
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<PAGE>
. 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.
T. Rowe Price 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. Please also refer to the "Annual Expenses of
the Funds" information of this Prospectus for a list of the Funds' annual
expenses.
Agreements. We have has entered into or may enter into arrangements with Funds
pursuant to which we receive a fee based upon an annual percentage of the
average net asset amount invested by us on behalf of the Separate Account and
other separate accounts of the Company. These arrangements are entered into
because of 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. We reserve the right,
subject to compliance with applicable law, to make additions to, deletions
from, or substitutions for the shares of the Funds that are held by the
Separate Account or that the Separate Account may purchase. We reserve the
right to (1) eliminate the shares of any of the Funds and (2) substitute shares
of another fund if the shares of a Fund are no longer available for investment,
or further investment in any Fund becomes inappropriate in view of the purposes
of the Separate Account. We will not substitute any shares without notice to
the Owner and prior approval of the SEC, to the extent required by the 1940 Act
or other applicable law, as required
We also reserve the right to establish additional Divisions of the Separate
Account. We will establish new Divisions when marketing needs or investment
confitions warrant. 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,
we may also:
. Eliminate or combine one or more Divisions;
.Substitute one Division for another Division; or
.Transfer assets between Divisions if marketing, tax, or investment
conditions warrant.
We may make changes in the Policy by appropriate endorsement in the event of a
substitution or change. We will notify all Owners of any such changes.
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<PAGE>
If we deem it 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, we may transfer the assets of the
Separate Account associated with the Policy to another separate account.
We cannot guarantee that the shares of the Funds will always be available. The
Funds each sell shares to the Separate Account in accordance with the terms of
a participation agreement between the Fund distributors and us. 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, we will be unable to honor Owner requests to allocate 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, we will 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 our
authorized representative or to us at our Home Office. We will issue an
Individual Policy to give to each Owner.
Issue Ages. A Policy generally will be issued only to Insureds of Issue Ages 17
through 80 who supply satisfactory evidence of insurability. We may issue
Policies to individuals falling outside the Issue Ages or decline to issue
Policies to individuals within the 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 us at our 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. The
Owner is not required to pay premiums equal to the planned annual premium after
the first Policy year.
Planned Premium Payments. After the initial premium and 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 us at our
Home Office. The Owner may establish a schedule of planned premiums which we
will bill 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 always
cause the Policy to lapse. The Policy will lapse if the Cash Surrender Value is
insufficient to cover the next Monthly Deduction. (See "Payment and Allocation
of Premiums--Policy Lapse and Reinstatement.")
Unscheduled Premiums. 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.") 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.
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<PAGE>
If the Policy is in the intended Owner's possessions, 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.
Premium Limitations. Every premium payment paid must be at least $20. Total
premiums paid under a Policy may not exceed the current maximum premium
limitations established by federal tax laws in any Policy Year. The maximum
premium limitation for a Policy Year is the sum of the premiums paid under the
Policy that will not at any time exceed the guideline premium limitations
referred to in Section 7702(c) of the Internal Revenue Code of 1986. If at any
time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, we will accept only that portion of the
premium which will make total premiums equal the maximum. Any part of the
premium in excess of the maximum premiums will be returned directly to the
Owner within 60 days of the end of the Policy Year in which payment is received
(unless we agree) 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, from which
withdrawals are treated (for tax purposes) (1) as a distribution of any taxable
income under the contract, and (2) as a distribution of nontaxable investment
in the contract. Also, such withdrawals may be subject to a 10% federal income
tax penalty. We have adopted administrative steps designed to notify an Owner
when we believe that a premium payment will cause a Policy to become a modified
endowment contract. Owner will be given a limited amount of time to request
that the premium be reversed in order to avoid the Policy's classification as a
modified endowment contract. (See "Federal Tax Matters.")
Allocation of Net Premiums and Cash Value
Net Premiums. The net premium equals:
(1) the premium paid; less
(2) the premium expense charge;
(3) 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 14 Divisions of the
Separate Account. However, the minimum percentage that may be allocated to a
Division is 10% 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 us. Any change in allocation
will take effect immediately upon our receipt 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 us 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 the Divisions will vary with the investment
performance of the funds underlying the Divisions. The Owner bears the entire
investment risk. Investment performance 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.
15
<PAGE>
Policy Lapse and Reinstatement
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium payment will not itself cause a
Policy to lapse. However, a Policy can lapse even if planned premiums have been
paid. 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. (See also "General Provisions of the Group Contract--Grace
Period--Termination.") Thus, the payment of premiums in any amount does not
guarantee that the Policy will remain in force until the Maturity Date.
The grace period, which is 62 days, begins on the Monthly Anniversary on which
the Cash Surrender Value is not enough to cover the next monthly deduction,
premium expense charge, and premium tax charge. We will notify the Owner at the
beginning of the grace period by mail. 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.
(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 payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
at any time within five years after the date of lapse and before the Maturity
Date. Reinstatement is subject to the following conditions:
. 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).
. 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.
. 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.
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 our approval 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, we 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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<PAGE>
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 $100,000 for ages 65 and older to $275,000 for ages less than 35.
The maximum Face Amount is generally $5,000,000.
Option A. Under Option A, the death benefit is:
(1) the current Face Amount of the Policy or, if greater,
(2) the applicable percentage of Cash Value on the date of death.
The applicable percentage is 250% 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. 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. 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 TABLE*
<TABLE>
<CAPTION>
Percentage
Of
Insured Age Cash Value
----------- ----------
<S> <C>
0 to 40....................... 250%
45............................ 215
50............................ 185
60............................ 130
65............................ 120
70............................ 115
75 to 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:
(1) the current Face Amount plus the Cash Value of the Policy or, if
greater,
(2) the applicable percentage of the Cash Value on the date of death. The
applicable percentage is the same as under Option A.
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<PAGE>
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).
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. We reserve the right to limit the number
of changes in death benefit options to one each Policy Year. A request for a
change must be made directly to us in writing. The effective date of such a
change will be the Monthly Anniversary on or following the date we receive the
change request.
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 us 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 $25,000.
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 because the federal tax
law requirements are not satisfied. (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 us. 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.")
Face Amount Decreases. Any decrease in the Face Amount will become effective on
the Monthly Anniversary on or following our receipt of the written request. 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, generally $25,000. 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 those requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(1) The Face Amount provided by the most recent increase;
(2) The next most recent increases successively; and
(3) 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").
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<PAGE>
Face Amount Increases. For an increase in the Face Amount, we require that
satisfactory evidence of insurability be submitted. 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 80 or less 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, generally $500,000. Although
an increase need not necessarily be accompanied by additional premium, the Cash
Surrender Value in effect immediately after the increase must be sufficient to
cover the next monthly deduction. (See "Charges and Deductions--Monthly
Deduction.") An increase in the Face Amount may result in certain additional
charges. (See "Charges and Deductions.")
Cancellation of an Increase. An increase in Face Amount may be cancelled within
the later of:
. 20 days from the date the Owner received the new Policy specifications
page for the increase;
. within 10 days of mailing the right to cancellation notice to the Owner;
or
. within 45 days after the application for an increase was signed.
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 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.
Examples 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.
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<PAGE>
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after we receive all documentation
required. Payment may, however, be postponed in certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments.") 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 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.")
When no election for an optional method of settlement is in force when the
Insured dies, 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;
. 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.") 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 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
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<PAGE>
(6) Any amounts transferred from the Division during the current Valuation
Period 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.
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 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 .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% 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 .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% 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.
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POLICY RIGHTS AND PRIVILEGES
Loans
Loan Privileges. After the first Policy Anniversary, the Owner may, by written
request directly to us, 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% 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 we receive
the loan request at our 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, (not including the Cash
Value in the Loan Account,) at the end 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 5%. The rate is declared by action of our management as authorized by our
Board of Directors. The Loan Account interest credited will be transferred to
the Divisions: (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 8%. Interest charged will be due and payable annually in arrears
on each Policy Anniversary or for the duration of the Policy Loan, if shorter.
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 "Policy Rights and Privileges--Loans--Effect of Policy Loans.") The amount
transferred will be deducted from the Divisions in the same proportion that the
portion of the Cash Value in each Division bears to the total Cash Value of the
Policy (not including 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.
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 "Charges and
Deductions.") A sufficient payment must be made within the later of:
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(1) the grace period of 62 days from the Monthly Anniversary immediately
before the date Indebtedness exceeds the Cash Value; or
(2) 31 days after notice that the Policy will terminate without a
sufficient payment has been mailed.
If a sufficient payment is not received, the Policy will lapse and terminate
without value. A lapsed Policy 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 us. Amounts paid while a
Policy Loan is outstanding will be treated as premiums unless the Owner
requests in writing that the payments 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 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. Amounts
transferred to the Loan Account to secure Indebtedness are allocated to the
appropriate Loan Subaccount to reflect their origin.
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 of the Policy by sending a written
request to us. 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 by us. 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 must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
lost Policy. Upon request, we can provide a lost Policy Certificate. Upon
surrender, we 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 2% of
the amount withdrawn. The Owner may allocate the amount withdrawn, subject to
the above conditions, among the Divisions. If no allocation is specified, then
the partial withdrawal will be allocated among the Divisions in the same
proportion that the Policy's Cash Value in each Division bears to the total
Cash Value of the Policy, (not including 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 a 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
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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 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 approved.
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.")
Transfers
Under the Company's current rules, a Policy's Cash Value, (not including
amounts credited to the Loan Account,) may be transferred among the Divisions
available with the Policy. Requests for transfers from or among Divisions must
be made in writing directly to us 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. We will make 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, we will make 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 we currently intend to continue to permit transfers for the
foreseeable future, the Policy provides that we 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 we may determine.
Right to Examine Policy
The Owner may cancel a Policy within 10 days of after receiving it or such
longer period if required by state law. If a Policy is cancelled within this
time period, a refund will be paid. The refund will equal all premiums paid
under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
us. 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.")
As noted above, 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:
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. 20 days from the date the Owner received the new Policy specifications
pages for the increase;
. 10 days of mailing the right to cancellation notice to the Owner; or
. 45 days after the Owner signed the application for the increase.
Upon cancellation of an increase, the Owner may request that we refund the
amount of the additional charges deducted in connection with the increase. This
amount 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, we will increase the Policy's Cash Value by the amount of
these additional charges. This amount will be allocated among the Divisions 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 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 our written agreement.
Settlement Options. We 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. We offer 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
We will deduct charges in connection with the Policies to compensate us for
providing the insurance benefits set forth in the Policies and any additional
benefits added by rider, administering the Policies, incurring expenses in
distributing the Policies, and assuming certain risks in connection with the
Policies. We may realize a profit on one or more of these charges. We may use
any such profit for any corporate purpose, including, among other things,
payments of sales and distribution expenses.
Premium Expense Charges
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by a premium expense charge equal to
1.25 percent of the premium paid for years one through ten.
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% from all Policies.
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Monthly Deduction
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate us 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 in the same proportion that a Policy's Cash Value in each Division
bears to the total Cash Value of the Policy (not including 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. We are responsible for the administration of the
Policies and the Separate Account. Administrative expenses include premium
billing and collection, recordkeeping, processing death benefit claims, cash
surrenders, partial withdrawals, Policy changes, reporting and overhead costs,
processing applications, and establishing Policy records. We assess a monthly
administration charge of $3.50 per month from each Policy as 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.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the next 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
increases in Face Amount. We 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.
Cost of Insurance Rates. 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. We will determine the current cost of insurance rates based on our
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 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, we 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, we 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.
We currently place 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 us based on our 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
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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.
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, less (b) the Cash Value at
the beginning of the Policy Month. Dividing the death benefit by 1.0032737
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
4%.
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, we will calculate the net amount at risk separately for
each rate class. When we determine the net amounts at risk for each rate
class,when Option A is in effect, we will consider the Cash Value first to be a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, we will consider the excess Cash Value as part of each increase in
order, starting with the first increase. If Option B is in effect, we will
determine the net amount at risk for each rate class 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. 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 2% 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 the rate not to exceed .0020471% of the net assets of
each Division of the Separate Account. This equals an annual rate of .75% of
those net assets. This deduction is guaranteed not to increase for the duration
of the Policy. We may realize a profit from this charge and may use this profit
to finance distribution expenses.
The mortality risk we assume is that an Insured may die sooner than anticipated
and that we 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 incurred by the Separate Account. We may make such a
charge in the future. Charges for other taxes incurred by the Account may also
be made. (See "Federal Tax Matters.")
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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 "Summary of the Policy Separate Account Charges-- Annual Expenses of the
Funds" and "The Company, the Separate Accounts and The Funds--The Funds.")
GENERAL MATTERS RELATING TO THE POLICY
Postponement of Payments
Payment of any amount due from the Separate Account because of 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:
(1) 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;
(2) the SEC by order permits postponement for the protection of Owners; or
(3) 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 together
make the entire contract between the Owner and us. 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 Owner of the Policy unless another person is shown as the
Owner in the application. Ownership may be changed 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
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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.
Change of Owner or Beneficiary
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to us 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 by us. We
will not be liable for any payment made or action taken before we receive 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
We reserve 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.
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
We 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 us at our Home
Office; and (c) we send an acknowledged copy to the Owner. We are 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, we may require proof of the interest of the claimant. A
valid assignment will take precedence over any claim of a Beneficiary.
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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 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 and Corrections
If the age or sex 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 we make in good faith, relying on our records or
evidence supplied with respect to such payment, will fully discharge our duty.
We reserve 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, we 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 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 us that the Insured has
a life expectancy of 12 months. 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 we receive satisfactory evidence
of terminal illness as discussed above, (less any Indebtedness and any term
insurance added by other riders) plus the product of the "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" is 0.85.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, we believe 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 advisor about the consequences of
adding this Rider to a Policy or requesting an accelerated death benefit
payment under this Rider.
30
<PAGE>
Records and Reports
We 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 us
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 us. Walnut Street is
a wholly-owned subsidiary of GenAmerica Corporation. Walnut Street 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's Internal Revenue Service employer identification No. is 43-
1333368. It is a Missouri corporation formed May 4, 1984. Walnut Street's
address is 400 South 4th Street, Suite 1000, St. Louis, MO. 63102. The Policies
will be sold by broker-dealers who have entered into written sales agreements
with Walnut Street. Sales of the Policies may take place in all states (except
New York) and the District of Columbia.
Broker-dealers may receive marketing allowance to assist in marketing the
product. This allowance may include an amount up to $3,000 per Policy at issue
and is an on-going annual percentage up to 0.25% 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 advisors 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 (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) 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
31
<PAGE>
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, we 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,
we reserve the right to modify the Policy as necessary to attempt to qualify it
as a life insurance contract under Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division to be "adequately
diversified" in order for the Policy to be treated as a life insurance contract
for federal tax purposes. Although we do 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 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, we do
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. We
therefore reserve 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, a
conversion to a fixed policy, 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 advisor should be consulted for further
information.
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<PAGE>
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 advisor about the
consequences of adding this Rider to a Policy or requesting an accelerated
death benefit payment under this Rider.
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. In recent years, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a new
Policy or a change in an existing Policy should consult a tax advisor.
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 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 Policy Owner
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
33
<PAGE>
(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%
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.
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% additional income tax.
5. Policy loan interest. If there is any borrowing against a Policy, the
interest paid on the loan generally will not be tax deductible. A Policy Owner
should consult a qualified tax adviser before deducting interest on a Policy
loan.
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 us
(or our 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 we incur that may be attributable to the
Separate Account or to the Policies. We reserve 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 we determine to be properly attributable to
the Separate Account or to the Policies.
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<PAGE>
Possible Changes in Taxation
Although the likelihood of legislative changes is uncertain, there is always
the possibility that the tax treatment of the Policy could change by
legislation or otherwise. For instance, the President's 1999 Budget Proposal
recommended legislation, that, if enacted, would adversely modify the federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the date of the change). A
tax advisor should be consulted with respect to legislative developments and
their effect on the Policy.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from our general assets. We
maintain 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.
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. We will vote Fund shares held in the
Separate Account for which no timely voting instructions are received and Fund
shares that we own 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.
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 we determine
35
<PAGE>
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 we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
STATE REGULATION OF THE COMPANY
We are a stock life insurance company organized under the laws of Missouri and
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 our liabilities and reserves and the liabilities and
reserves of the Separate Account and certifies their adequacy. 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, we are 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 service providers, we utilize systems that may be affected
by Year 2000 transition issues and rely on service providers, including the
Funds, that also may be affected. We have developed and implemented a Year 2000
transition plan, and sought disclosure from our service providers that they are
also so engaged. The resources devoted to this effort have been, and continue
to be, 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. 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. We have examined our systems and made the
necessary changes to ensure proper Year 2000 transition, and put in place the
proper processes to ensure continued Year 2000 transition success. The results
of that examination have been independently reviewed, but there can be no
assurance that we will be completely successful, or that interaction with other
service providers will not impair our services at that time.
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<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
Name Principal Occupation(s) During Past Five Years(1)
---- -----------------------------------------------------
<C> <S>
Executive Officers(2)
Carl H. Anderson(4) President and Chief Executive Officer since June,
1986. 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.(4) Treasurer since December, 1994. Corporate Actuary and
General American Life Treasurer, GenAm since October, 1994. Executive Vice
Insurance Company President--Group Pensions, GenAm January, 1990--
700 Market Street October, 1994.
St. Louis, MO 63101
Matthew P. McCauley(4) Vice President and General Counsel since 1984.
General American Life Secretary since August, 1981. Vice President and
Insurance Company Associate General Counsel, GenAm, since December 30,
700 Market Street 1995.
St. Louis, MO 63101
Craig K. Nordyke(4) 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.
John R. Tremmel Vice President--Operations and System Development
since January 1999. Formerly Chief Operating Officer,
ISP Alliance, April 1998--December 1998. Vice
President and General Manager of National Operations
Centers, Norell Corporation, January 1995--March
1998. Senior Vice President, Citicorp Insurance
Group, September 1986--December 1995.
Directors(3)
Richard A. Liddy Chairman, President, and Chief Executive Officer,
GenAm, since May, 1992. President and Chief Operating
Officer, GenAm, May, 1988--May, 1992.
Leonard M. Rubenstein Chairman and Chief Executive Officer--Conning
Corporation and Conning Asset Management Company
since January, 1997. Executive Vice President--
Investments, GenAm, February, 1991--January, 1997.
Warren J. Winer Executive Vice President--Group, GenAm, since
September, 1995. Formerly, Managing Director, Wm. M.
Mercer, July, 1993--August, 1995; President, WF
Corroon, September, 1990--July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product
Management, GenAm, May, 1989--November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc., since
May, 1993, and Executive Vice President--Reinsurance,
GenAm, since January, 1990.
</TABLE>
- --------
(1) All positions listed are with the Company unless otherwise indicated.
(2) The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, MO 63105 unless
otherwise noted.
(3) 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.
(4) Indicates Executive Officers who are also Directors.
37
<PAGE>
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 and the Separate Account included in
this Prospectus and in the registration statement have been included in
reliance upon the reports of KPMG 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 distinguished from the financial statements for the Separate Account
included in this Prospectus, and 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.
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<PAGE>
[KPMG LOGO]
10 South Broadway
Suite 900
St. Louis, MO 63102-1761
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, 1998 and 1997, and the related statements of
operations and comprehensive income, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
[LOGO SIGNATURE OF KPMG LLP]
February 3, 1999
F-1
[LOGO OF FOUR BOXES]
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Assets
Fixed maturities, available for sale....................... $ 83,384 75,704
Policy loans............................................... 14,135 11,487
Cash and cash equivalents.................................. 7,439 5,733
--------- -------
Total cash and invested assets......................... 104,958 92,924
Reinsurance recoverables................................... 1,170 1,733
Deposits relating to reinsured policyholder account
balances.................................................. 6,688 6,416
Accrued investment income.................................. 1,545 1,377
Deferred policy acquisition costs.......................... 20,602 17,980
Fixed assets and leasehold improvements, net............... 4,504 2,609
Other assets............................................... 105 179
Separate account assets.................................... 168,222 118,051
--------- -------
Total assets........................................... $ 307,794 241,269
========= =======
Liabilities and Stockholder's Equity
Policyholder account balances.............................. 93,334 85,152
Policy and contract claims................................. 1,672 1,085
Federal income taxes payable............................... 281 163
Other liabilities and accrued expenses..................... 3,943 3,486
Payable to affiliates...................................... 2,062 1,620
Due to separate account.................................... 183 61
Deferred tax liability..................................... 5,591 4,394
Separate account liabilities............................... 168,222 118,051
--------- -------
Total liabilities...................................... $ 275,288 214,012
--------- -------
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
Accumulated other comprehensive income................... 2,809 1,958
Retained earnings........................................ 9,697 5,299
--------- -------
Total stockholder's equity............................. $ 32,506 27,257
--------- -------
Total liabilities and stockholder's equity............. $ 307,794 241,269
========= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Revenues:
Policy contract charges............................... $20,437 16,417 13,719
Net investment income................................. 6,983 6,288 5,663
Commissions and expense allowances on reinsurance
ceded................................................ 124 10 114
Net realized investment gains......................... 53 69 72
------- ------ ------
Total revenues...................................... 27,597 22,784 19,568
======= ====== ======
Benefits and expenses:
Policy benefits....................................... 4,774 3,876 3,326
Interest credited to policyholder account balances.... 5,228 4,738 4,126
Commissions, net of capitalized costs................. 167 227 79
General and administration expenses, net of
capitalized costs.................................... 9,512 7,743 6,798
Amortization of deferred policy acquisition costs..... 1,150 424 285
------- ------ ------
Total benefits and expenses......................... 20,831 17,008 14,614
======= ====== ======
Income before federal income tax expense............ 6,766 5,775 4,954
Federal income tax expense.............................. 2,368 1,885 1,738
------- ------ ------
Net income.............................................. $ 4,398 3,890 3,216
Other comprehensive income (loss)....................... 851 1,636 (1,261)
------- ------ ------
Comprehensive income.................................... $ 5,249 5,526 1,955
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Additional other Retained Total
Common paid-in comprehensive earnings stockholder's
Stock capital income (deficit) equity
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $2,050 17,950 1,583 (1,807) 19,776
Net income............ -- -- -- 3,216 3,216
Other comprehensive
income............... -- -- (1,261) -- (1,261)
------ ------ ------ ------ ------
Balance at December 31,
1996................... $2,050 17,950 322 1,409 21,731
Net income............ -- -- -- 3,890 3,890
Other comprehensive
income............... -- -- 1,636 -- 1,636
------ ------ ------ ------ ------
Balance at December 31,
1997................... $2,050 17,950 1,958 5,299 27,257
Net income............ -- -- -- 4,398 4,398
Other comprehensive
income............... -- -- 851 -- 851
------ ------ ------ ------ ------
Balance at December 31,
1998................... $2,050 17,950 2,809 9,697 32,506
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,398 3,890 3,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Reinsurance recoverables..................... 563 (892) 407
Deposits relating to reinsured policyholder
account balances............................ (272) (342) (378)
Accrued investment income.................... (168) (79) (257)
Federal income tax payable................... 118 (648) 811
Other assets................................. (1,821) (1,280) (1,019)
Policy and contract claims................... 587 (23) 12
Other liabilities and accrued expenses....... 457 782 741
Payable to affiliates........................ 442 (669) 397
Due to separate account...................... 122 (34) (108)
Deferred tax expense........................... 740 732 615
Policy acquisition costs deferred.............. (3,808) (2,972) (2,447)
Amortization of deferred policy acquisition
costs......................................... 1,150 424 285
Interest credited to policyholder accounts..... 5,228 4,738 4,126
Net gain on sales and calls of fixed
maturities.................................... (53) (69) (72)
-------- ------- -------
Net cash provided by operating activities.......... 7,683 3,558 6,329
-------- ------- -------
Cash flows from investing activities:
Purchase of fixed maturities..................... (14,915) (12,557) (15,290)
Sale or maturity of fixed maturities............. 8,632 5,255 6,860
Increase in policy loans, net.................... (2,648) (1,923) (2,358)
-------- ------- -------
Net cash used in investing activities.............. (8,931) (9,225) (10,788)
-------- ------- -------
Cash flows from financing activities:
Net policyholder account deposits................ 2,954 2,294 6,509
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 1,706 (3,373) 2,050
Cash and cash equivalents at beginning of year..... 5,733 9,106 7,056
-------- ------- -------
Cash and cash equivalents at end of year........... $ 7,439 5,733 9,106
======== ======= =======
Income taxes paid.................................. $ (1,460) (1,801) (198)
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(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, 1998
and 1997, 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 accumulated other comprehensive income, 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 1998, 1997 and
1996. The actual crediting rate was 6.5% in 1998 and 1997, and ranged from
6.5% to 7.0% in 1996.
(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 1998 presentation.
(2) Investments
The amortized cost and estimated fair value of fixed maturities at December
31, 1998 and 1997 are as follows (000's):
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 6,705 267 -- 6,972
Corporate securities............ 64,607 4,481 (208) 68,881
Mortgage-backed securities...... 6,854 192 (25) 7,021
Asset-backed securities......... 500 10 -- 510
------- ----- ---- ------
$78,666 4,950 (233) 83,384
======= ===== ==== ======
<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
======= ===== ==== ======
</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, 1998, 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 fair
cost value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 605 616
Due after one year through five years................. 20,733 21,528
Due after five years through ten years................ 12,600 13,338
Due after ten years through twenty years.............. 37,873 40,881
Mortgage-backed securities............................ 6,855 7,021
------- ------
$78,666 83,384
======= ======
</TABLE>
Proceeds from sales of fixed maturities during 1998, 1997 and 1996 were
$4,069,000, $1,328,585 and $4,129,254 respectively. Gross gains of $53,180,
$68,876 and $71,604 were realized on those sales in 1998, 1997 and 1996,
respectively.
The sources of net investment income follow (000s):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Fixed Maturities.................................... $5,603 4,941 4,626
Short-term investments.............................. 535 608 449
Policy loans and other.............................. 924 807 680
------ ----- -----
$7,062 6,356 5,755
Investment expenses................................. (79) (68) (92)
------ ----- -----
Net investment income........................... $6,983 6,288 5,663
====== ===== =====
</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>
1998 1997 1996
------- ------ ----
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale.............. $ 4,717 3,373 513
Deferred policy acquisition costs................ (396) (361) (17)
Deferred income taxes.............................. (1,512) (1,054) (174)
------- ------ ----
Net unrealized appreciation (depreciation)......... $ 2,809 1,958 322
======= ====== ====
</TABLE>
The Company has fixed maturities on deposit with various state insurance
departments with an amortized cost of approximately $4,121,000 and $3,982,000
at December 31, 1998 and 1997, 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.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
Premiums and related reinsurance amounts for the years ended December 31,
1998, 1997 and 1996 as they relate to transactions with affiliates are
summarized as follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Premiums for reinsurance ceded.................... $14,723 13,001 10,264
Policy benefits ceded............................. 17,071 14,070 6,274
Commissions and expenses ceded.................... 123 195 114
Reinsurance recoverables.......................... 1,109 1,661 774
</TABLE>
Ceded premiums and benefits to nonaffiliates for 1998, 1997 and 1996 were
insignificant.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized is as
follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year.................... $17,980 15,776 13,006
Policy acquisition costs deferred............... 3,808 2,972 2,447
Policy acquisition costs amortized.............. (1,150) (424) (285)
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on investments
available for sale............................. (36) (344) 608
------- ------ ------
Balance at end of year.......................... $20,602 17,980 15,776
======= ====== ======
</TABLE>
(5) Federal Income Taxes
The Company is taxed as a life insurance company. A summary of Federal
income tax expense is as follows (000s):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Current tax (benefit) expense.......................... $1,628 1,153 1,123
Deferred tax expense................................... 740 732 615
------ ----- -----
Federal income tax expense............................. $2,368 1,885 1,738
====== ===== =====
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense....................... $2,368 2,022 1,734
Other, net............................................ 0 (137) 4
------ ----- -----
Federal income tax expense............................ $2,368 1,885 1,738
====== ===== =====
</TABLE>
F-10
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1998 and 1997
are presented below (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Unearned reinsurance allowances...................... $ 218 217 153
Policy and contract liabilities...................... 709 1,031 1,305
Tax capitalization of acquisition costs.............. 2,147 1,755 1,386
Other, net........................................... 58 76 69
------ ----- -----
Total deferred tax assets.......................... $3,132 3,079 2,913
====== ===== =====
Deferred tax liabilities:
Unrealized gain on investments....................... $1,512 1,054 174
Deferred policy acquisition costs.................... 7,211 6,419 5,520
------ ----- -----
Total gross deferred tax liabilities............... $8,723 7,473 5,694
------ ----- -----
Net deferred tax liabilities....................... $5,591 4,394 2,781
====== ===== =====
</TABLE>
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 1998, 1997 and
1996 were $1,513,433, $1,348,198 and $1,250,396, 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 1998, 1997 or 1996 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
$188,316, $198,972 and $80,434 for 1998, 1997 and 1996, 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
F-11
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
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, 1998, 1997 and 1996, as determined using statutory accounting
practices, is summarized as follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Statutory surplus as reported to regulatory
authorities...................................... $10,500 10,725 10,751
Net income (loss) as reported to regulatory
authorities...................................... $ 1,596 1,397 982
</TABLE>
(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 $1,596,000. Paragon did not pay dividends in 1998, 1997
or 1996.
(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, 1998, 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 the majority of which expires 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:
1999............................................................. $ 626
2000............................................................. 598
2001............................................................. 256
2002............................................................. 53
------
$1,533
======
</TABLE>
Rent expense totaled $489,999, $433,864 and $388,976 in 1998, 1997 and 1996,
respectively.
F-12
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Concluded)
(12) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The most significant items of
comprehensive income are net income and changes in unrealized gains and losses
on securities. The adoption of SFAS No. 130 does not affect results of
operations or financial position, but affects their presentation and
disclosure. The Company has adopted SFAS No. 130 as of January 1, 1998, and
the following summaries present the components of the Company's comprehensive
income, other than net income, for the periods ending December 31, 1998, 1997
and 1996 (000s):
<TABLE>
<CAPTION>
1998
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $ 1,361 (476) 885
Less: reclassification adjustment for gains
realized in net income....................... (53) 19 (34)
------- ---- ------
Other comprehensive income.................... 1,308 (457) 851
------- ---- ------
<CAPTION>
1997
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $ 2,585 (904) 1,681
Less: reclassification adjustment for gains
realized in net income....................... (69) 24 (45)
------- ---- ------
Other comprehensive income.................... 2,516 (880) 1,636
------- ---- ------
<CAPTION>
1996
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $(1,868) 654 (1,214)
Less: reclassification adjustment for gains
realized in net income....................... (72) 25 (47)
------- ---- ------
Other comprehensive income (loss)............. (1,940) 679 (1,261)
------- ---- ------
</TABLE>
F-13
<PAGE>
[LETTERHEAD OF KPMG APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company and
Policyholders of Separate Account D's Individual Variable Universal Life
Divisions:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Scudder Money Market, Scudder International,
Fidelity VIP Growth, Fidelity VIP Index 500, Putnam VT New Opportunities, and
MFS Emerging Growth Divisions of Paragon Separate Account D as of December 31,
1998 and the related statements of operations and changes in net assets for
the periods presented. These financial statements are the responsibility of
Paragon Separate Account D'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. Our
procedures included confirmation of investments owned at December 31, 1998 by
correspondence with the Scudder Variable Life Investment Fund, the Fidelity
Variable Insurance Products Fund, the Fidelity Variable Insurance Products
Fund II, the Putnam Variable Trust, and the MSF Variable Insurance Trust. 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 the Scudder Money Market,
Scudder International, Fidelity Growth, Fidelity Index 500, Putnam VT New
Opportunities, and MFS Emerging Growth Divisions of Paragon Separate Account D
as of December 31, 1998, and the results of their operations and changes in
their net assets for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG LLP
April 2, 1999
[BARS APPEARS HERE]
F-14
<PAGE>
PARAGON SEPARATE ACCOUNT D
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
Fidelity MFS
Scudder Scudder Fidelity Index Putnam New Emerging
Money Market International Growth 500 Opportunities Growth
Division Division Division Division Division Division
------------ ------------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Assets:
Investments in multiple
fund investments, at
Market Value
(See Schedule of
Investments)........... $ -- $14,924 12,283 32,459 12,930 20,805
Receivable from Paragon
Life Insurance Company. -- -- -- -- -- --
------- ------- ------ ------ ------ ------
Total Net Assets....... -- 14,924 12,283 32,459 12,930 20,805
======= ======= ====== ====== ====== ======
Group Variable Universal
Life Cash Value
Invested in Separate
Account................ -- 14,924 12,283 32,459 12,930 20,805
------- ------- ------ ------ ------ ------
-- $14,924 12,283 32,459 12,930 20,805
======= ======= ====== ====== ====== ======
Total Units Held........ -- 1,025 274 230 496 969
Net Asset Value Per
Unit................... -- $ 14.56 44.87 141.25 26.06 21.47
Cost of Investments..... -- 14,200 11,005 30,395 11,005 17,394
======= ======= ====== ====== ====== ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT D
STATEMENTS OF OPERATIONS
For the Period from May 1, 1998 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Scudder MFS
Money Scudder Fidelity Fidelity Putnam New Emerging
Market International Growth Index 500 Opportunities Growth
Division Division Division Division Division Division
-------- ------------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income........ $ 74 -- -- -- -- --
------- --- ----- ----- ----- -----
Net Investment
Income............... 74 -- -- -- -- --
Net Realized Gain (Loss)
from Sales of
Investments:
Proceeds from Sales.... 88,199 40 42 1,302 43 43
Cost of Investments
Sold................... 88,199 39 39 1,358 39 39
------- --- ----- ----- ----- -----
Net Realized
Gain(Loss) from Sales
of Investments....... -- 1 3 (56) 4 4
Net Unrealized Gain
(Loss) on Investment.... -- 724 1,278 2,064 1,925 3,411
------- --- ----- ----- ----- -----
Net Gain (Loss) on
Investments.......... -- 725 1,281 2,008 1,929 3,415
Increase (Decrease) in
Assets Resulting from
Operations.............. $ 74 725 1,281 2,008 1,929 3,415
======= === ===== ===== ===== =====
</TABLE>
See Accompanying Notes to Financial Statements
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT D
STATEMENTS OF CHANGES IN NET ASSETS
For the Period from May 1, 1998 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Scudder Fidelity MFS
Money Scudder Fidelity Index Putnam New Emerging
Market International Growth 500 Opportunities Growth
Division Division Division Division Division Division
-------- ------------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income.. $ 74 -- -- -- -- --
Net Realized Gain
(Loss) on Investments. -- 1 3 (56) 4 4
Net Unrealized Gain on
Investments........... -- 724 1,278 2,064 1,925 3,411
---- ------ ------ ------ ------ ------
Increase (Decrease) in
Net Assets Resulting
from Operations....... 74 725 1,281 2,008 1,929 3,415
Net Deposits into
(from) Separate
Account............... (74) 14,199 11,002 30,451 11,001 17,390
---- ------ ------ ------ ------ ------
Increase in Net Assets. -- 14,924 12,283 32,459 12,930 20,805
Net Assets, Beginning of
Year................... -- -- -- -- -- --
---- ------ ------ ------ ------ ------
Net Assets, End of Year. $-- 14,924 12,283 32,459 12,930 20,805
==== ====== ====== ====== ====== ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT D
Notes to Financial Statements
December 31, 1998
(1) Organization
Paragon Life Insurance Company (Paragon) established Paragon Separate
Account D on January 3, 1995. Paragon Separate Account D (the Separate
Account) commenced operations on May 1, 1998 and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Separate
Account receives and invests net premiums for flexible premium individual
variable life insurance policies that are issued by Paragon. The Separate
Account is divided into six divisions which invest exclusively in shares of
Scudder Variable Life Investment Fund (Scudder), Fidelity Variable Insurance
Products Fund (Fidelity VIP), Fidelity Variable Insurance Products Fund II
(Fidelity VIP II), Putnam Variable Trust (Putnam), and MFS Variable Insurance
Trust (MFS), open-end, diversified management investment companies. These
funds are the Scudder Money Market Fund, Scudder International Fund, Fidelity
Index 500 Fund, Putnam New Opportunities Fund, and MFS Emerging Growth Fund
(the Divisions). Policyholders have the option of directing their premium
payments into any or all of the Divisions.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Separate Account in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
Investments
The Separate Account's investments in the Funds of Scudder, Fidelity VIP.
Fidelity VIP II, Putnam, and MFS are valued daily based on the net asset
values of the respective fund shares held. The average cost method is used in
determining the cost of shares sold on withdrawals by the Separate Account.
Share transactions are recorded consistent with trade date accounting. All
dividends received are immediately reinvested on the ex-dividend date.
Federal Income Taxes
The operations of the Separate Account are treated as part of Paragon for
income tax purposes. Under existing Federal income tax law, capital gains from
sales of investments of the Separate Account are not taxable. Therefore, no
Federal income tax has been provided.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions with respect to amounts reported in the financial
statements. Actual results could differ from those estimates.
(3) Policy Charges
Charges are deducted from the policies and the Separate Account to
compensate Paragon for providing the insurance benefits set forth in the
contracts and any additional benefits added by rider, administering the
policies, incurring expenses in distributing the policies, and assuming
certain risks in connection with the policy.
Premium Expense Charge
Certain policies include a provision that premium payments may be reduced by
a premium expense charge. The premium expense charge is determined by the
costs associated with distributing the policy and, if applicable,
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements--(Continued)
is equal to 1.25% of the premium paid. The premium expense charge compensates
Paragon for providing the insurance benefits set forth in the policies,
incurring expenses of distributing the policies, and assuming certain risks in
connection with the policies. In addition, policies have a premium tax
assessment equal to 2% or 2.25% to reimburse Paragon for premium taxes
incurred. The premium payment less premium expense and premium tax charges
equals the net premium that is invested in the underlying separate account.
Monthly Expense Charge
Paragon has responsibility for the administration of the policies and the
Separate Account. As reimbursement for expenses related to the acquisition and
maintenance of each policy and the Separate Account, Paragon assesses a
monthly administration charge to each policy. This charge, which varies due to
the size of the group, has a maximum of $6.00 per month during the first 12
policy months and $3.50 per month thereafter.
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 varies for each policy month. The cost of insurance is
determined separately for the initial face amount and for any subsequent
increase in face amount. Paragon determines 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.
Optional Rider Benefits Charge
The monthly deduction charge for any additional benefits provided by rider.
Surrender or Contingent Deferred Sales Charge
During the first policy years, certain policies include a provision for a
charge upon surrender or lapse of the policy, a requested decrease in face
amount, or a partial withdrawal that causes the face amount to decrease. The
amount assessed under the policy terms, if any, depends upon the cost
associated with distributing the particular policies. The amount of any charge
depends on a number of factors, including whether the event is a full
surrender or lapse or only a decrease in face amount, the amount of premiums
received by Paragon, and the policy year in which the surrender or other event
takes place.
Mortality and Expense Charge
In addition to the above, the contract authorizes a daily charge against the
operations of each division made for the mortality and expense risks assumed
by Paragon. Paragon is authorized to deduct a daily charge from the Separate
Account at the rate of .0000206% of the net assets of each division of the
Separate Account which equals an annual rate of .75% of those net assets. The
mortality risk assumed by Paragon is that insureds may die sooner than
anticipated and that, therefore, Paragon 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.
Due to minimal sales volume, Paragon did not charge the Separate Account D
Divisions for Mortality and Expense during 1998.
F-19
<PAGE>
PARAGON SEPARATE ACCOUNT D
Notes to Financial Statements (Continued)
(4) Purchases and Sales of Putnam Variable Trust Shares
During the period from May 1, 1998 (Inception) to December 31, 1998
purchases and proceeds from the sales of the Divisions were as follows:
<TABLE>
<CAPTION>
Scudder MFS
Money Scudder Fidelity Fidelity Putnam New Emerging
Market International Growth Index 500 Opportunities Growth
Division Division Division Division Division Division
-------- ------------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Purchases..... $88,125 14,238 11,044 31,754 11,044 17,433
Sales......... $88,199 40 42 1,302 43 43
======= ====== ====== ====== ====== ======
</TABLE>
The Purchases above do not included dividends and realized gains from
distributions that have been reinvested into the respective divisions
F-20
<PAGE>
PARAGON SEPARATE ACCOUNT D
Notes to Financial Statements (Continued)
(5) Accumulation of Unit Activity
The following is a reconciliation of the accumulation of unit activity for
the period from May 1, 1998 (Inception) to December 31, 1998:
<TABLE>
<CAPTION>
Scudder MFS
Money Scudder Fidelity Fidelity Putnam New Emerging
Market International Growth Index 500 Opportunities Growth
Division Division Division Division Division Division
-------- ------------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............... 88,199 1,028 275 240 498 971
Withdrawals............ 88,199 3 1 10 2 2
------ ----- --- --- --- ---
Outstanding Units, End
of Year................. -- 1,025 274 230 496 969
====== ===== === === === ===
</TABLE>
F-21
<PAGE>
PARAGON SEPARATE ACCOUNT D
Notes to Financial Statements--(Continued)
(6) Reconciliation of Gross and Net Deposits into the Separate Account
Deposits into the Separate Account purchase shares of various funds. Net
deposits represent the amount available for investment in such shares after
deduction of premium expense charges, monthly expense charges, cost of
insurance and the cost of optional benefits added by rider. The following is a
summary of net deposits made for the period from May 1, 1998 (Inception) to
December 31, 1998:
<TABLE>
<CAPTION>
Scudder MFS
Money Scudder Fidelity Fidelity Putnam New Emerging
Market International Growth Index 500 Opportunities Growth
Division Division Division Division Division Division
-------- ------------- -------- --------- ------------- --------
1998 1998 1998 1998 1998 1998
-------- ------------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Gross Deposits.... $ 88,646 -- -- -- -- --
Transfers Between Funds
and General Account..... (85,301) 14,239 11,044 31,758 11,044 17,433
-------- ------ ------ ------ ------ ------
Total Gross Deposits
net of Surrenders,
Withdrawals, and
Transfers............ 3,345 14,239 11,044 31,758 11,044 17,433
Deductions:
Premium Expense
Charges................ 3,103 -- -- -- -- --
Monthly Expense
Charges................ 11 3 3 24 3 3
Cost of Insurance and
Optional Benefits...... 305 37 39 1,283 40 40
-------- ------ ------ ------ ------ ------
Total Deductions..... 3,419 40 42 1,307 43 43
-------- ------ ------ ------ ------ ------
Net Deposits from
Policyholders........... $ (74) 14,199 11,002 30,451 11,001 17,390
======== ====== ====== ====== ====== ======
</TABLE>
F-22
<PAGE>
PARAGON SEPARATE ACCOUNT A
SCHEDULE OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Number Market
of Shares Value Cost
--------- ------ ------
<S> <C> <C> <C>
Scudder Variable Life Investment Fund:
Scudder Money Market Division......................... -- -- --
Scudder International Division........................ 1,025 14,924 14,200
Fidelity Variable Insurance Products Fund:
Fidelity Growth Division.............................. 274 12,283 11,005
Fidelity Variable Insurance Products Fund II:
Fidelity Index 500 Division........................... 230 32,459 30,395
Putnam Variable Trust:
Putnam New Opportunities Division..................... 496 12,930 11,005
MFS Variable Insurance Trust:
MFS Emerging Growth Division.......................... 969 20,805 17,394
</TABLE>
See Accompanying Independent Auditors' Report.
F-23
<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 with Death Benefit Option B 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 below
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 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 1998) of .681%. These
charges take into account expense reimbursement arrangements expected to be in
place for 1999 for some of the Funds. In the absence of the reimbursement
arrangements for some of the Funds, the charges would have totaled an average
of .691%. 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 (-1.431%, 4.569% and
10.569%), respectively.
The hypothetical values shown in the tables reflect all fees and charges
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 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 AT 0.00% (NET RATE AT - 1.431%)
-----------------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------- ---------------------------
PREM AT CASH DEATH CASH DEATH
YR 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 11,037 $761,037 $ 11,998 $761,998
2 29,058 21,782 771,782 23,825 773,825
3 44,686 32,232 782,232 35,393 785,393
4 61,096 42,372 792,372 46,707 796,707
5 78,325 52,198 802,198 57,770 807,770
6 96,417 61,688 811,688 68,497 818,497
7 115,412 70,837 820,837 78,893 828,893
8 135,358 79,633 829,633 89,051 839,051
9 156,301 88,063 838,063 98,885 848,885
10 178,291 96,106 846,106 108,490 858,490
11 201,381 103,888 853,888 117,946 867,946
12 225,625 111,213 861,213 127,089 877,089
13 251,081 118,032 868,032 135,923 885,923
14 277,810 124,301 874,301 144,453 894,453
15 305,876 129,963 879,963 152,684 902,684
16 335,344 134,976 884,976 160,529 910,529
17 366,287 139,294 889,294 167,996 917,996
18 398,776 142,892 892,892 175,000 925,000
19 432,890 145,701 895,701 181,637 931,637
20 468,709 147,651 897,651 187,824 937,824
25 676,531 140,885 890,885 212,652 962,652
30 941,770 95,171 845,171 222,546 972,546
</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 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 AT 6.00% (NET RATE AT 4.569%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------- ---------------------------
PREM AT CASH DEATH CASH DEATH
YR 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 11,759 $ 761,759 $ 12,752 $ 762,752
2 29,058 23,919 773,919 26,087 776,087
3 44,686 36,487 786,487 39,940 789,940
4 61,096 49,464 799,464 54,334 804,334
5 78,325 62,860 812,860 69,293 819,293
6 96,417 76,665 826,665 84,753 834,753
7 115,412 90,891 840,891 100,735 850,735
8 135,358 105,536 855,536 117,356 867,356
9 156,301 120,603 870,603 134,552 884,552
10 178,291 136,083 886,083 152,442 902,442
11 201,381 152,126 902,126 171,143 921,143
12 225,625 168,544 918,544 190,515 940,515
13 251,081 185,299 935,299 210,588 960,588
14 277,810 202,351 952,351 231,395 981,395
15 305,876 219,650 969,650 252,969 1,002,969
16 335,344 237,153 987,153 275,254 1,025,254
17 366,287 254,813 1,004,813 298,282 1,048,282
18 398,776 272,601 1,022,601 321,995 1,071,995
19 432,890 290,440 1,040,440 346,517 1,096,517
20 468,709 308,251 1,058,251 371,793 1,121,793
25 676,531 392,395 1,142,395 511,245 1,261,245
30 941,770 452,286 1,202,286 670,629 1,420,629
</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 AT 12.00% (NET RATE AT 10.569%)
-------------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------- ---------------------------
PREM CASH DEATH CASH DEATH
YR AT 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 14,175 $ 12,482 $ 762,483 $ 13,507 $ 763,507
2 29,058 26,145 776,145 28,442 778,442
3 44,686 41,098 791,098 44,860 794,860
4 61,096 57,462 807,462 62,919 812,919
5 78,325 75,375 825,375 82,793 832,793
6 96,417 94,973 844,973 104,577 854,577
7 115,412 116,425 866,425 128,474 878,474
8 135,358 139,908 889,908 154,803 904,803
9 156,301 165,618 915,618 183,725 933,725
10 178,291 193,761 943,761 215,609 965,609
11 201,381 224,734 974,734 250,861 1,000,861
12 225,625 258,612 1,008,612 289,650 1,039,650
13 251,081 295,646 1,045,646 332,349 1,082,349
14 277,810 336,111 1,086,111 379,372 1,129,372
15 305,876 380,306 1,130,306 431,177 1,181,177
16 335,344 428,568 1,178,568 488,174 1,238,174
17 366,287 481,269 1,231,269 550,912 1,300,912
18 398,776 538,843 1,288,843 619,904 1,369,904
19 432,890 601,719 1,351,719 695,905 1,445,905
20 468,709 670,374 1,420,374 779,562 1,529,562
25 676,531 1,119,310 1,869,310 1,344,804 2,094,804
30 941,770 1,809,487 2,559,487 2,262,080 3,012,080
</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 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 AT 0.00% (NET RATE AT - 1.431%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------- ---------------------------
PREM AT CASH DEATH CASH DEATH
YR 5.00% VALUE BENEFIT VALUE BENEFIT
--- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 21,512 $1,021,512 $ 23,980 $1,023,980
2 60,270 42,254 1,042,254 47,381 1,047,381
3 92,683 62,166 1,062,166 70,210 1,070,210
4 126,717 81,189 1,081,189 92,475 1,092,475
5 162,453 99,251 1,099,251 114,184 1,114,184
6 199,976 116,296 1,116,296 135,227 1,135,227
7 239,375 132,267 1,132,267 155,614 1,155,614
8 280,743 147,133 1,147,133 175,234 1,175,234
9 324,180 160,801 1,160,801 194,218 1,194,218
10 369,790 173,184 1,173,184 212,457 1,212,457
11 417,679 184,501 1,184,501 230,424 1,230,424
12 467,963 194,292 1,194,292 247,660 1,247,660
13 520,761 202,379 1,202,379 264,175 1,264,175
14 576,199 208,571 1,208,571 279,980 1,279,980
15 634,409 212,694 1,212,694 295,085 1,295,085
16 695,530 214,601 1,214,601 309,500 1,309,500
17 759,706 214,132 1,214,132 322,879 1,322,879
18 827,092 211,167 1,211,167 334,882 1,334,882
19 897,846 205,517 1,205,517 345,409 1,345,409
20 972,139 196,923 1,196,923 354,364 1,354,364
25 1,403,176 94,745 1,094,745 372,226 1,372,226
30 1,953,302 0 0 335,549 1,335,549
</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 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 AT 6.00% (NET RATE AT 4.569%)
-----------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------- -----------------------------
PREM CASH DEATH CASH DEATH
YR AT 5.00% VALUE BENEFIT VALUE BENEFIT
--- --------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 22,966 $1,022,966 $ 25,515 $ 1,025,515
2 60,270 46,505 1,046,505 51,952 1,051,952
3 92,683 70,568 1,070,568 79,352 1,079,352
4 126,717 95,107 1,095,107 107,759 1,107,759
5 162,453 120,057 1,120,057 137,219 1,137,219
6 199,976 145,363 1,145,363 167,658 1,167,658
7 239,375 170,969 1,170,969 199,121 1,199,121
8 280,743 196,840 1,196,840 231,532 1,231,532
9 324,180 222,876 1,222,876 265,057 1,265,057
10 369,790 248,977 1,248,977 299,625 1,299,625
11 417,679 275,365 1,275,365 335,772 1,335,772
12 467,963 301,551 1,301,551 373,081 1,373,081
13 520,761 327,319 1,327,319 411,606 1,411,606
14 576,199 352,429 1,352,429 451,403 1,451,403
15 634,409 376,644 1,376,644 492,530 1,492,530
16 695,530 399,740 1,399,740 535,047 1,535,047
17 759,706 421,470 1,421,470 578,652 1,578,652
18 827,092 441,612 1,441,612 623,028 1,623,028
19 897,846 459,862 1,459,862 668,088 1,668,088
20 972,139 475,828 1,475,828 713,741 1,713,741
25 1,403,176 499,567 1,499,567 947,465 1,947,465
30 1,953,302 363,997 1,363,997 1,178,228 2,178,228
</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 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 B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 12.00% (NET RATE AT 10.569%)
--------------------------------------------------------
GUARANTEED* CURRENT**
--------------------------------------------------------
PREM CASH DEATH CASH DEATH
YR AT 5.00% VALUE BENEFIT VALUE BENEFIT
--- ---------- ------------- --------------------------- --------------
<S> <C> <C> <C> <C> <C>
1 $ 29,400 $ 24,424 $ 1,024,424 $ 27,051 $ 1,027,051
2 60,270 50,937 1,050,937 56,710 1,056,710
3 92,683 79,684 1,079,684 89,251 1,089,251
4 126,717 110,826 1,110,826 124,979 1,124,979
5 162,453 144,528 1,144,528 164,231 1,164,231
6 199,976 180,985 1,180,985 207,253 1,207,253
7 239,375 220,412 1,220,412 254,444 1,254,444
8 280,743 263,073 1,263,073 306,118 1,306,118
9 324,180 309,196 1,309,196 362,876 1,362,876
10 369,790 359,035 1,359,035 425,130 1,425,130
11 417,679 413,219 1,413,219 493,972 1,493,972
12 467,963 471,681 1,471,681 569,588 1,569,588
13 520,761 534,659 1,534,659 652,692 1,652,692
14 576,199 602,406 1,602,406 744,078 1,744,078
15 634,409 675,212 1,675,212 844,621 1,844,621
16 695,530 753,424 1,753,424 955,289 1,955,289
17 759,706 837,413 1,837,413 1,076,776 2,076,776
18 827,092 927,628 1,927,628 1,209,848 2,209,848
19 897,846 1,024,490 2,024,490 1,355,605 2,355,605
20 972,139 1,128,389 2,128,389 1,515,264 2,515,264
25 1,403,176 1,762,948 2,762,948 2,574,588 3,574,588
30 1,953,302 2,622,893 3,622,893 4,255,138 5,255,138
</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 70
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. 7
(9) Not applicable.
(10) Proposed Form of Application. 7
(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. 7
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.
7 Incorporated by reference to the Pre-effective Amendment No. 1 to the
Registration Statement, File 333-36515, filed with the Securities and
Exchange Commission on February 26, 1999.
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 30th day of April, 1999.
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/_____________________ 4/30/99
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/_____________________ 4/30/99
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>
EXHIBIT INDEX
Exhibit
1. 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.
2. The consent of KPMG LLP, Independent Certified Public Accountants.
3. Written consent of Sutherland, Asbill & Brennan LLP.
<PAGE>
Exhibit 1
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)
April 30, 1999
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 Post-
Effective Amendment No. 1 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 2
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 LLP
St. Louis, Missouri
April 30, 1999
<PAGE>
Exhibit 3
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
April 30, 1999
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 Post-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
