Registration No. 333-37559
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Cova Variable Life Account Five
(Exact Name of Trust)
B. Cova Financial Life Insurance Company
(Name of Depositor)
C. 4100 Newport Place Drive, Suite 840
Newport Beach, CA 92600
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Lorry J. Stensrud, President
Cova Financial Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 523-1661
Copies to:
Judith A. Hasenauer and Frances S. Cook
Blazzard, Grodd & Hasenauer, P.C. First Vice President and
P.O. Box 5108 Associate Counsel
Westport, CT 06881 Cova Financial Life Insurance
(203) 226-7866 Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
E. Modified Single Premium Variable Life Insurance Policies
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
H. Approximate date of proposed public offering:
As soon as practicable after the effective date of this filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
- ------------ ------------------------------
1 The Variable Insurance Policy
2 Other Information; The Company
3 Not Applicable
4 Other Information
5 The Separate Account
6(a) Not Applicable
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases
11 Investment Options
12 Investment Options
13 Expenses
14 Purchases
15 Purchases
16 Investment Options
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Ownership
25 The Company
26 Expenses
27 The Company
28 The Company
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company; Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Other Information
46 Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 The Company; Purchases
52 Investment Options
53 The Separate Account
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
THE MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
COVA VARIABLE LIFE ACCOUNT FIVE
AND
COVA FINANCIAL LIFE INSURANCE COMPANY
This prospectus describes the Modified Single Premium Variable Life Insurance
Policy (Policy) offered by Cova Financial Life Insurance Company (Cova).
The Policy has been designed to be used for estate and retirement planning and
other insurance needs of individuals.
The Policy offers you twelve (12) investment portfolios listed below. The
investment portfolios are part of Cova Series Trust, Lord Abbett Series Fund,
Inc. and General American Capital Company. When you buy a Policy, you bear the
complete investment risk. Your Account Value and, under certain circumstances,
the death benefit under the Policy may increase or decrease or the duration of
the death benefit may vary depending on the investment experience of the
investment portfolio(s) you select.
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST LORD ABBETT SERIES FUND, INC.
Managed by J.P. Morgan Growth and Income
Investment Management Inc.
Select Equity
Small Cap Stock GENERAL AMERICAN CAPITAL COMPANY
Large Cap Stock Managed by Conning Asset Management
International Equity Company
Quality Bond Money Market
Managed by Lord, Abbett & Co.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
</TABLE>
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Cova Modified Single
Premium Variable Life Insurance Policy.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE PRODUCTS DESCRIBED HEREIN ARE NOT DEPOSITS OF, OR GUARANTEED BY ANY BANK,
NOR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
_____ __, 1997
TABLE OF CONTENTS
PAGE
SPECIAL TERMS
SUMMARY
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
PREMIUMS
APPLICATION FOR A POLICY
ALLOCATION OF PREMIUMS
GRACE PERIOD
ACCUMULATION UNIT VALUES
3. INVESTMENT OPTIONS
COVA SERIES TRUST
LORD ABBETT SERIES FUND, INC.
GENERAL AMERICAN CAPITAL COMPANY
TRANSFERS
DOLLAR COST AVERAGING PROGRAM
AUTOMATIC REBALANCING PROGRAM
APPROVED ASSET ALLOCATION PROGRAM
SUBSTITUTION
4. EXPENSES
INSURANCE CHARGES
MORTALITY AND EXPENSE RISK CHARGE
ADMINISTRATIVE CHARGE
TAX EXPENSE CHARGE
COST OF INSURANCE CHARGE
ANNUAL POLICY MAINTENANCE FEE
ANNUAL WITHDRAWAL AMOUNT
SURRENDER CHARGE
NURSING HOME WAIVER
DEFERRED PREMIUM TAX CHARGE
TRANSFER FEE
TAXES
INVESTMENT PORTFOLIO EXPENSES
5. DEATH BENEFIT
ACCELERATED DEATH BENEFIT
JOINT LIVES
6. TAXES
LIFE INSURANCE IN GENERAL
TAKING MONEY OUT OF YOUR POLICY
DIVERSIFICATION
7. ACCESS TO YOUR MONEY
LOANS
LOAN AMOUNT
LOAN ACCOUNT
LOAN INTEREST
INTEREST CREDITED
PREFERRED LOAN
EFFECT OF LOAN
LOAN REPAYMENTS
TOTAL SURRENDER
PARTIAL SURRENDERS
TERMINATION OF THE POLICY
REINSTATEMENT
8. OTHER INFORMATION
COVA
THE SEPARATE ACCOUNT
DISTRIBUTOR
SUSPENSION OF PAYMENTS OR TRANSFERS
OWNERSHIP
OWNER
JOINT OWNER
BENEFICIARY
ASSIGNMENT
PART II
THE COMPANY
VOTING
DISREGARD OF VOTING INSTRUCTIONS
THE SEPARATE ACCOUNT
LEGAL OPINIONS
REDUCTION OR ELIMINATION OF SURRENDER CHARGE
MISSTATEMENT OF AGE OR SEX
COVA'S RIGHT TO CONTEST
SETTLEMENT OPTIONS
TAX STATUS
INTRODUCTION
DIVERSIFICATION
TAX TREATMENT OF THE POLICY
POLICY PROCEEDS
JOINT LIVES
TAX TREATMENT OF LOANS AND SURRENDERS
MULTIPLE POLICIES
TAX TREATMENT OF ASSIGNMENTS
QUALIFIED PLANS
INCOME TAX WITHHOLDING
REPORTS TO OWNERS
LEGAL PROCEEDINGS
EXPERTS
FINANCIAL STATEMENTS
APPENDIX A
ILLUSTRATION OF POLICY VALUES
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Policy, however, certain technical words or
terms are unavoidable. We have identified some of those words or terms. For
several of these terms we have provided a definition. For the remainder, we
believe that you will find an adequate discussion in the text. For those terms,
we have identified them in the text in italic and the page number that is
indicated here is where we believe you will find the best explanation for the
word or term.
ACCOUNT VALUE - The total value of your policy. It is equal to the sum of the
Policy values allocated to the investment portfolios and the Policy values
allocated to the Loan Account.
ACCUMULATION UNIT - An accounting unit used to calculate Policy values when they
are allocated to the investment portfolios.
CASH VALUE - Your Policy's Account Value less any Surrender Charge and less any
deferred premium tax charge and less any policy maintenance fee.
CASH SURRENDER VALUE - Your Policy's Cash Value less any outstanding loans and
accrued loan interest.
COVERAGE AMOUNT - It is the difference between the death benefit and the Account
Value.
FACE AMOUNT - The amount of coverage that you have chosen (unless later reduced
by a partial surrender) and which will be used to determine the death benefit.
MAXIMUM PREMIUM LIMIT - This is the maximum amount of premium that Cova will
accept under a Policy. We can also refer to this as MPL. Cova's MPL has been
designed not to exceed the maximum premium allowed under the Internal Revenue
Code for a specified face amount of Insurance for a given age.
POLICY DATE, POLICY ANNIVERSARY, POLICY YEAR - The Policy Date is the day your
premium was initially invested in the Money Market Portfolio which may be before
we actually issue the Policy. It is the date from which Policy Anniversaries and
Policy Years are determined.
PAGE
Annual Withdrawal Amount
Beneficiary
Business Day
Death Benefit
Insured
Investment Portfolio
Issue Date
Joint Owner
Loan Account
Monthly Deduction
Owner
Net Death Benefit or Death Proceeds
Premium
Processing Date
Right to Examine Period
Surrender Charge
SUMMARY
The Prospectus is divided into three sections: Summary, Part I and Part II. The
sections in this Summary correspond to sections in Part I of this Prospectus
which discuss the topics in more detail. Even more detailed information is
contained in Part II.
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy offered by Cova is a contract between you,
the owner, and Cova, an insurance company.
The Policy provides for the payment of death proceeds to your selected
beneficiary upon the death of the insured which are free from federal income
taxes. The Policy can be used as part of your estate planning or to save for
retirement. The insured is the person whose life is insured under the Policy.
The insured can be the same as the owner but does not have to be.
You can choose among twelve (12) investment portfolios which are listed in Item
3. The investment portfolios are the investment options available under the
Policy. You can allocate your unloaned Account Value to any or all of the
investment portfolios. You can transfer between investment portfolios up to 12
times a year without charge and without being taxed. If you make more than 12
transfers in a year, we will charge $25 or 2% of the amount transferred,
whichever is less. While the Policy is in force, the Account Value and, under
certain circumstances, the death benefit, will vary, up or down, or the duration
of the death benefit may vary with the investment performance of the investment
portfolios you choose. You are not taxed on the earnings until you surrender or
borrow from your Policy.
2. PURCHASES
You can buy the Policy with a single premium and, under certain conditions, you
can make additional premiums. Your registered representative can help you fill
out the proper forms. The minimum initial premium we will accept is generally
$10,000. There is no minimum required for additional premiums. However, the
total of all premiums paid will be limited to that which is required to qualify
the Policy as life insurance under the Internal Revenue Code. We call this the
Maximum Premium Limit. We may also require additional information. In some
circumstances, the insured may be required to provide us with medical records or
a complete paramedical examination.
3. INVESTMENT OPTIONS
You can put your money in any or all of these investment portfolios which are
described in the prospectuses for the funds:
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
MANAGED BY LORD, ABBETT & CO.
Bond Debenture
Growth and Income
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
MANAGED BY CONNING ASSET MANAGEMENT COMPANY
Money Market
Depending upon market conditions, you can make or lose money in any of these
portfolios.
4. EXPENSES
The Policy has both insurance features and investment features, and there are
costs related to each that reduce the return on your investment.
Each year Cova deducts a $30 policy maintenance fee from your Policy. Cova will
not deduct this charge if the Account Value of your Policy is at least $50,000
at the time the deduction is to be made. If you make a complete surrender of
your Policy, the policy maintenance fee will be deducted, regardless of your
Account Value at that time.
Cova also deducts insurance charges on a monthly basis. For the first ten years,
the total charges are equal, on an annual basis, to 1.70% of the value of your
Policy, with 1/12 of that amount charged monthly. After the tenth year, the
total for insurance charges is 1.15% annually, with 1/12 of that amount charged
monthly.
Each month Cova will also deduct an additional insurance charge to cover the
cost of insurance. This charge will depend upon the sex, age and rating
classification of the insured and whether your initial premium was 100% of the
Maximum Premium Limit.
There are also daily investment charges which apply to the average daily value
of the investment portfolio and vary depending upon the investment portfolio.
These annual charges range from .205% to 1.10%.
If you take out more than the annual withdrawal amount, Cova may assess a
Surrender Charge which ranges from 7.5% of the premium surrendered in the first
year to 0% in the tenth year. Each year you may withdraw up to that sum of the
excess of your Account Value over premiums paid which have not been previously
surrendered; plus 10% of premiums without incurring this surrender charge. We
call this amount the annual withdrawal amount. If you take your money out before
the tenth year, Cova will assess a deferred premium tax charge which declines
from 2.25% of premium surrendered in the first year to 0% in the tenth year.
After the tenth year there is no Surrender Charge or deferred premium tax when
you withdraw your money.
Your Policy could lapse if your Cash Surrender Value is insufficient to cover
any charges due.
5. DEATH BENEFIT/DEATH PROCEEDS
The Policy provides for a Face Amount of insurance. The actual amount payable to
your beneficiary is the death benefit less any loans plus accrued loan interest
under the Policy. This amount is called the death proceeds. It may also be
called the net death benefit.
The death benefit will be the greater of (1) your Face Amount or (2) your
Account Value multiplied by a specified percentage. These percentages vary by
the age of the insured and are shown in your Policy. Therefore, increases in
your Account Value may increase the death benefit. A decrease in Account Value
may decrease the death benefit, but the death benefit will never be less than
the Face Amount (so long as the Policy remains in force). Also, a partial
surrender will reduce the Face Amount in the same proportion as the Account
Value was reduced.
All or part of the death proceeds may be paid in a lump sum or applied under one
of the Settlement Options contained in the Policy.
The Policy is offered on a single life or on a "joint life" basis. Under "joint
life" coverage, death proceeds are paid after the second insured's death.
At the time of application for a Policy, you designate a beneficiary who is the
person or persons who will receive the death proceeds. You can change your
beneficiary unless you have a designated an irrevocable beneficiary. The
beneficiary does not have to be a natural person.
6. TAXES
Your earnings are not taxed until you take them out. In most cases, your Policy
will be a modified endowment contract unless it was exchanged for a contract
issued before June 21, 1988. Money taken out of a modified endowment contract is
considered to come from earnings first and is taxed as income. Also, if you are
younger than 59 1/2 when you take money out, you may be charged a 10% federal
tax penalty on the earnings withdrawn. Death proceeds are paid to your
beneficiary tax free.
7. ACCESS TO YOUR MONEY
Under the Policy you have access to a portion of your Account Value equal to
earnings without charge. You may also withdraw up to 10% of premium each year,
without incurring the Surrender Charge. Premiums withdrawn in excess of this 10%
will incur a Surrender Charge during the first 10 years. However, a Deferred
Premium Tax Charge will be assessed on all premiums surrendered during the first
ten years. The minimum partial surrender that you can make is $500. You can also
borrow some of your Cash Value. The minimum loan amount is $500.
8. OTHER INFORMATION
RIGHT TO EXAMINE
If you cancel your Policy within ten days after you receive it (or whatever
period is required in your state), we will return to you the greater of (1) the
premium(s) you paid or (2) your Account Value on the day we, or the agent
through whom it was purchased, received the returned Policy. Until the end of
the time you are allowed to examine your Policy (10 days or the required period
in your state) plus five days, your premium will remain in the Money Market
Portfolio. After that, we will invest your Account Value as you requested. In
the state of California, if you are 60 years or older on the Policy Date, you
can cancel your Policy within 30 days after you receive it in which case we will
refund your Account Value as of the day we receive your returned Policy.
WHO SHOULD PURCHASE THE POLICY?
The Policy is designed for an individual who wants:
-- to create or conserve his/her estate;
-- to supplement retirement income; and
-- to retain access to cash through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of an insured.
Cova will not issue a Policy on insureds older than 90.
ADDITIONAL FEATURES
-- You can arrange to have a regular amount of money automatically invested
in selected investment portfolios each month, theoretically giving you a lower
average cost per unit over time than a single one time purchase. The amount you
selected will be placed in the Money Market Portfolio and will be transferred to
the selected investment portfolios monthly. We call this feature Dollar Cost
Averaging. There is no additional charge for this feature.
-- You can arrange to automatically readjust your unloaned Account Value
between investment portfolios periodically to keep the allocation you select. We
call this feature Automatic Rebalancing. There is no additional charge for this
feature.
-- In the event the insured is terminally ill, you can request to receive
up to 50% of the death benefit up to a maximum of $500,000. If you have selected
the Joint Life option, the provision will only be available on the second life
after the death of the first. We call this feature the Accelerated Death
Benefit. There is no additional charge for this feature.
-- If you or the joint owner are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins after the first policy
year, you can make a full or partial surrender and we will waive the Surrender
Charge. We call this feature the Nursing Home Waiver. There is no additional
charge for this feature.
-- You can elect to have the death benefit payable upon the death of a
second person. This benefit is written on spouses only. We call this option the
Joint Life Option.
These features may not be suitable for your particular situation.
9. INQUIRIES
If you need more information, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need policy owner service (such as changes in policy information, inquiry
into policy values, or to make a loan), please contact us at:
Cova Financial Life Insurance Company
P.O. Box 10366
Des Moines, IA 50306
515-243-5834
800-343-8496
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
This variable life insurance policy is a contract between you, the owner, and
Cova, an insurance company. This kind of policy is most commonly used for
retirement and/or estate planning.
During the insured's lifetime, you can select among the investment portfolios
offered in the Policy. (There are currently twelve (12) investment portfolios
offered. They are listed in Item 3.) You can transfer between them up to 12
times a year without charge. The Account Value and, under some circumstances,
the death benefit will go up or down or the duration of the death benefit may
vary depending upon the investment experience of the investment portfolio(s) you
select. This gives you the opportunity to capture the upside potential of the
market. It also means you could lose money.
While your money remains in the Policy, you pay no current income taxes on
earnings or gains. This is called tax-deferred accumulation. It helps your money
grow faster. Subject to some limitations, you may take money out at any time
through loans or partial surrenders. Any money you take out, however, is taxed
as earnings until all earnings have been removed from the Policy. If you are
younger than age 59 1/2 when you take money out, you may also incur an
additional 10% federal tax penalty. If you purchased a Policy in exchange for a
policy issued prior to June 21, 1988, different tax rules may apply. (See
Section 6. Taxes. Part II also contains more detailed information regarding
taxes.)
Because this is a life insurance policy, it provides a death benefit, which is
an amount greater than your Account Value. When the insured dies, the death
benefit (minus any loans and any accrued loan interest) is paid to your
beneficiary free from federal income tax. The tax-free death benefit combined
with the ability to use your money while you're alive, makes this an excellent
way to accumulate money you don't think you'll use in your lifetime and a
tax-efficient way to provide for those you leave behind.
2. PURCHASES
PREMIUMS
Premiums are the monies you give us to buy the Policy. The minimum initial
premium we will accept is generally $10,000. When you apply for the Policy, you
request a specific amount of insurance. We call this amount the Face Amount of
the Policy. Your initial premium must be 80%, 90% or 100% of the initial Maximum
Premium Limit (MPL). The Internal Revenue Code (Code) has established certain
criteria which must be met in order for a life insurance policy to qualify as
life insurance under the Code. The MPL satisfies one of the criteria. Cova's MPL
has been designed not to exceed the Maximum Premium Limit allowed under the Code
for a specified Face Amount of insurance for a given age.
You can invest additional premiums up to the MPL. However, if the additional
premium increases the amount of insurance, we will require evidence of the
insurability of the insured. If all of your premiums totaled $1,000,000 or more,
you will need Cova's prior approval before you add premiums. If the additional
premium would cause the Policy to fail to meet the criteria established by the
Code to qualify as life insurance, Cova will send the premium back within 60
days of the anniversary of the Policy Date (Policy Anniversary). The amount and
frequency of additional premiums will affect the Account Value of your Policy
and may affect the amount or duration of your insurance.
APPLICATION FOR A POLICY
In order to purchase a Policy, you must submit an application to Cova which
requests some information regarding the proposed insured. In some cases, we will
ask for additional information. We may request that the insured provide us with
medical records or possibly require other medical tests.
Cova will not issue a Policy if the insured is over age 90.
Cova will review all the information it has about the insured and determine
whether or not the insured meets Cova's standards for issuing the Policy. This
process is called underwriting. If the insured meets all of Cova's underwriting
requirements, we will issue a Policy. There are several underwriting classes
under which the Policy may be issued.
During the underwriting period, which could be up to 60 days or longer from the
time the application is signed, we offer fixed insurance called conditional
insurance. The initial premium must be submitted with the application before the
conditional insurance is provided. The conditional insurance is effective up to
60 days from when the application was signed. For applicants 65 or younger,
conditional insurance will be for the lesser of $500,000 plus the initial
premium paid or the amount of insurance applied for. If the applicant is 66 or
older, the conditional insurance will be the lesser of $200,000 plus the initial
premium paid or the amount of insurance applied for. The conditional insurance
is subject to a number of restrictions and is only applicable if the proposed
insured was an acceptable risk for the insurance applied for.
ALLOCATION OF PREMIUMS
When you purchase a Policy, we will initially invest your money in the Money
Market Portfolio. After 15 days from the issue date (or the period required in
your state plus five days), we will allocate your Account Value to the
investment portfolios as you requested in the application. All allocation
directions must be in whole percentages. If you make additional premiums, we
will allocate them in the same way as your first premium unless you tell us
otherwise.
If you change your mind about owning a Policy, you can cancel it within 10 days
after receiving it (or the period required in your state (Right to Examine
Period)). When you cancel the Policy within this time period, Cova will not
assess a Surrender Charge or a deferred premium tax charge. Cova will give you
back the greater of your premium payment or your Account Value. In the state of
California, if you are 60 years or older on the Policy Date, you can cancel your
Policy within 30 days after you receive it in which case we will refund your
Account Value as of the day we receive your returned Policy.
If your application for the Policy is in good order, Cova will invest your first
premium in the Money Market Portfolio two days after it is received, EVEN IF OUR
UNDERWRITING IS NOT YET COMPLETE AND THE POLICY IS NOT YET ISSUED. The day we
invest your premium in the Money Market Portfolio is called the Policy Date. The
money will stay in the Money Market Portfolio for 15 days after the issue date.
(In some states, the period may be longer.) At the end of that period, we will
re-allocate those funds as you selected in the application.
If as a result of underwriting review, Cova does not issue you a Policy, we will
return to you your premium, plus interest required by your state.
If we do issue a Policy, on the issue date, we will deduct the monthly
deductions for the period from the Policy Date through the next processing date.
GRACE PERIOD
Your Policy will stay in effect as long as your Cash Surrender Value is
sufficient to cover the Monthly Deductions and policy maintenance fee. If the
Cash Surrender Value of your Policy is not enough to cover these deductions to
be made from the Policy, Cova will mail you a notice. You will have 61 days from
the time the notice is mailed to you to send to Cova the required premium
payment. This is called the Grace Period. If the premium is not paid by the end
of the Grace Period, the Policy will terminate without value.
ACCUMULATION UNIT VALUES
The value of your Policy that is invested in the investment portfolios will go
up or down depending upon the investment performance of the investment
portfolio(s) you choose. In order to keep track of the value of your Policy, we
use a unit of measure we call an Accumulation Unit. (An Accumulation Unit works
like a share of a mutual fund.)
Every business day we determine the value of an Accumulation Unit for each of
the investment portfolios. The value of an Accumulation Unit for any given
business day is determined by multiplying a factor we call the net investment
factor times the value of an Accumulation Unit for the previous business day. We
do this for each investment portfolio. The net investment factor is a number
that reflects the change (up or down) in an underlying investment portfolio
share. Our business days are each day that the New York Stock Exchange is open
for business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 P.M. Eastern time.
The value of an Accumulation Unit may go up or down from day to day.
When you make a premium payment, we credit your Policy with Accumulation Units.
The number of Accumulation Units credited is determined by dividing the amount
of premiums allocated to an investment portfolio divided by the value of the
Accumulation Unit for that investment portfolio.
We calculate the value of an Accumulation Unit for each investment portfolio
after the New York Stock Exchange closes each day and then apply it to your
Policy.
When Cova assesses the monthly deductions and for the annual policy maintenance
fee we do so by deducting Accumulation Units from your Policy. When you have
selected more than one investment portfolio, we make the deductions pro rata
from all of the investment portfolios.
3. INVESTMENT OPTIONS
The Policy offers twelve (12) investment portfolios which are listed below.
Additional investment portfolios may be available in the future.
YOU SHOULD READ THE PROSPECTUSES FOR THESE FUNDS CAREFULLY BEFORE INVESTING.
COPIES OF THESE FUND PROSPECTUSES ARE ATTACHED TO THIS PROSPECTUS.
COVA SERIES TRUST
Cova Series Trust is managed by Cova Investment Advisory Corporation, which is
an indirect subsidiary of Cova. Cova Series Trust is a mutual fund with multiple
portfolios. Each investment portfolio has a different investment objective. Cova
Investment Advisory Corporation has engaged subadvisers to provide investment
advice for the individual investment portfolios. The following investment
portfolios are available under the Policy:
J.P. MORGAN INVESTMENT MANAGEMENT INC. IS THE SUB-ADVISER TO THE
FOLLOWING PORTFOLIOS:
Select Equity Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
LORD, ABBETT & CO. IS THE SUB-ADVISER TO THE FOLLOWING PORTFOLIOS:
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a mutual fund with multiple portfolios. Each
portfolio is managed by Lord, Abbett & Co. Only the following portfolio is
available under the Policy:
Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios. Only
the following portfolio is available under the Policy and is managed by Conning
Asset Management Company:
Money Market Fund
TRANSFERS
You can transfer money among the twelve (12) investment portfolios.
You can make 12 transfers every Policy Year without charge while the insured is
alive. If you make more than 12 transfers in a year, there is a transfer fee
deducted. (We measure years from your Policy Date.) The fee is $25 per transfer
or, if less, 2% of the amount transferred. The following apply to any transfer:
1. the minimum amount which you can transfer is $500 or your entire value
in the investment portfolio.
2. your request for transfer must clearly state the amount to be
transferred and which investment portfolios are involved in the transfer.
3. if a transfer fee applies, the charge will be deducted from the amount
transferred.
You can make transfers by telephone. Prior to making a transfer by telephone,
you will need to complete a written pre-authorization form. If you own the
Policy with a joint owner, unless Cova is instructed otherwise, Cova will accept
instructions from either you or the other owner. Cova will use reasonable
procedures to confirm that instructions given to us by telephone are genuine. If
Cova fails to use such procedures, we may be liable for any losses due to
unauthorized or fraudulent instructions. Cova records all telephone
instructions.
We have reserved the right to modify your transfer rights if we decide that the
exercise of this right by you, your authorized agent, or any owner is or would
be disadvantageous to other owners. We have also reserved the right to restrict
transfers to a maximum of 12 per year and to restrict transfers from being made
on consecutive business days.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Fund to any of the other investment
portfolio(s). By allocating amounts on a regular schedule as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations.
You must have at least $5,000 in the Money Market Portfolio (or the amount
required to complete your program, if more) in order to participate in the
Dollar Cost Averaging Program. There is no additional charge for this feature.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
AUTOMATIC REBALANCING PROGRAM
Once your money has been allocated among the investment portfolios, the
performance of each portfolio may cause your allocation to shift. You can direct
us to automatically readjust your non-loaned Account Value between investment
portfolios to keep the blend you selected. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
Policy Date. There is no additional charge for this feature. The transfer date
will be the 1st business day after the end of the period you selected. If you
participate in the Automatic Rebalancing Program, the transfers made under the
program are not taken into account in determining any transfer fee.
You cannot participate in both the Dollar Cost Averaging and Automatic
Rebalancing Programs at the same time.
APPROVED ASSET ALLOCATION PROGRAM
Cova recognizes the value to certain owners of having available, on a continuous
basis, advice for the allocation of your money among the investment portfolios
available under the Policy. Certain providers of these types of services have
agreed to provide such services to owners in accordance with Cova's
administrative rules regarding such programs.
Cova has made no independent investigation of these programs. Cova has only
established that these programs are compatible with our administrative systems
and rules.
Even though Cova permits the use of approved asset allocation programs, the
Policy was not designed for professional market timing organizations. Repeated
patterns of frequent transfers are disruptive to the operations of the
investment portfolios, and should Cova become aware of such disruptive
practices, we may modify the transfer privilege either on an individual or class
basis.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transfer fee.
SUBSTITUTION
Cova may elect to substitute one of the investment portfolios you have selected
with another portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intent to do
this. Cova may also limit further investment in an investment portfolio if it
deems it inappropriate.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. These charges and expenses are:
INSURANCE CHARGES
Each month, Cova will make certain deductions from your Policy on the processing
date. The processing date is the day each month that we deduct certain charges
from your Policy. The first processing date is the issue date. The issue date is
the date on which we issue you a Policy. After that, it is the same day each
month as the Policy Date.
The insurance charges are: (1) mortality and expense risk charge; (2)
administrative charge; (3) tax expense charge; and (4) cost of insurance charge.
Collectively, we refer to these charges as the monthly deduction. When you have
selected more than one investment portfolio, we make the deduction pro rata from
all of the investment portfolios you have selected.
MORTALITY AND EXPENSE RISK CHARGE. For the first ten years, this charge is
equal, on an annual basis, to .90%, 1/12 of which is charged each month, of the
Account Value of your Policy invested in the investment portfolios. For the
eleventh year and after, the charge is .75%, 1/12 of which is charged each
month. This charge cannot be increased.
ADMINISTRATIVE CHARGE. This charge is equal, on an annual basis, to .40%, 1/12
of which is charged each month, of the Account Value of your Policy. This charge
cannot be increased.
TAX EXPENSE CHARGE. This deduction is the sum of the premium tax charge and the
federal tax charge. It is deducted monthly for the first ten years. It is equal,
on an annual basis, to .40% (.15% for federal tax charge and .25% for premium
tax charge), 1/12 of which is charged each month, of the Account Value of your
Policy.
This charge compensates Cova for its expenses incurred for federal taxes
incurred as a result of issuing the Policy. It also compensates Cova for the
state and local premium taxes it incurred as a result of issuing the Policy.
Premium taxes range from 0% to 4%. You will be assessed the premium tax charge
regardless of what the total actual premium tax is in your state or local
jurisdiction. If you surrender all or part of your Policy during the first 10
years, Cova will charge a deferred premium tax charge. See below.
COST OF INSURANCE CHARGE. This charge compensates Cova for insurance coverage
provided during the month.
The guaranteed cost of insurance charge is determined by multiplying the
Coverage Amount by the cost of insurance rate. The Coverage Amount is the
difference between the death benefit and the Account Value. The cost of
insurance rate is based upon the sex, age, rate classification of the insured
and whether you paid 100%, or 90%, or 80% of the MPL. The rate classification of
the insured is determined through our underwriting process.
The Policy provides that for standard risks, the guaranteed cost of insurance
rate is based on the 1980 Commissioners Standard Ordinary Mortality Table, age
last birthday (1980 CSO Table). For substandard risks, the guaranteed cost of
insurance rate will be higher and will be based upon a multiple of the 1980 CSO
Table. The multiple will be based on the insured's substandard rating. Tables
setting forth the guaranteed cost of insurance rates are included in each
Policy.
Cova can use rates that are less than the guaranteed cost of insurance rates
shown in the Policy. Cova refers to these as the current cost of insurance
rates.
If 100% of the MPL is paid, Cova's current cost of insurance rate is a
percentage of the Account Value. The basis and amount of this charge may change
in the future, but can never be more than the guaranteed cost of insurance rates
contained in the Policy. For a better understanding of how the cost of insurance
rate and the other charges affect policy values, you should request personalized
illustrations from your registered representative.
ANNUAL POLICY MAINTENANCE FEE
Every year on the Policy Anniversary, currently Cova deducts $30 as a policy
maintenance fee. This charge cannot be increased once the Policy is issued. Cova
will not deduct this charge, if when the deduction is to be made, your Account
Value is $50,000 or more. Cova may some time in the future discontinue this
practice for new policies issued and deduct the charge. If you make a complete
surrender of your Policy, the policy maintenance fee will be deducted,
regardless of your Account Value at that time. When you have selected more than
one investment portfolio, we make the deduction prorata from all of the
investment portfolios you have selected.
ANNUAL WITHDRAWAL AMOUNT
While the Policy is in force, prior to the death of the insured and after the
expiration of the Right to Examine Period, you can make a total or partial
surrender of the Account Value of your Policy up to the Cash Surrender Value.
A surrender may be subject to a Surrender Charge and a deferred premium tax
charge.
When you request a surrender, we will determine what portion, if any, is part of
your annual withdrawal amount. The annual withdrawal amount is equal to:
1. the excess of the Account Value over premiums paid which have not been
previously surrendered. Neither the Surrender Charge nor deferred premium tax
charge are assessed on this amount; and
2. on a non-cumulative basis, 10% of your premium payments each year. This
portion of the annual withdrawal amount is subject to the deferred premium tax
charge.
SURRENDER CHARGE
During the first 10 years, the Surrender Charge is assessed against any premium
surrendered, which is not part of the annual withdrawal amount. The Surrender
Charge, which is a percent of premiums surrendered, is shown in the table below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Policy Year Surrender Charge Policy Year Surrender Charge
----------- ---------------- ----------- ----------------
1 7.5% 6 4.0%
2 7.5% 7 3.0%
3 7.5% 8 2.0%
4 6.0% 9 1.0%
5 5.0% 10+ 0%
</TABLE>
NURSING HOME WAIVER
If you or the joint owner, if any, are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins during the first ten
years, under the Nursing Home Waiver rider, you can make a full or partial
surrender and we will waive the surrender charge. The Nursing Home Waiver goes
into effect after the first Policy Anniversary. There is no additional charge
for this feature.
DEFERRED PREMIUM TAX CHARGE
When you purchase a Policy there are various premium taxes assessed by state and
local governmental entities that we must pay on the Policy. You are charged a
portion of that each month for the first ten years as part of the tax expense
charge. (See the discussion of the Tax Expense Charge in Section 4 above.) The
deferred premium tax charge enables Cova to collect that portion of the premium
tax charge it has not collected when you surrender all or part of your Policy.
The deferred premium tax charge is assessed only on premiums surrendered from
the Policy during the first ten years. The deferred premium tax charge, which is
a percent of premiums surrendered, is shown in the table below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deferred Premium Deferred Premium
Policy Year Tax Charge Policy Year Tax Charge
----------- ---------------- ----------- -------------
1 2.25% 6 1.00%
2 2.00% 7 .75%
3 1.75% 8 .50%
4 1.50% 9 .25%
5 1.25% 10+ 0%
</TABLE>
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the Policy
Date. If you make more than 12 transfers a year, we will deduct a transfer fee
of $25 or 2% of the amount that is transferred, whichever is less. If we do
assess a transfer fee, it will be deducted from the amount transferred.
If the transfer is part of the Dollar Cost Averaging Program, the Automatic
Rebalancing Program or an Approved Asset Allocation Program, it will not count
in determining the transfer fee.
TAXES
Cova may assess a charge against a Policy for any taxes attributable to the
Separate Account. Cova does not expect to incur such taxes.
INVESTMENT PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the various
investment portfolios, which are summarized below. See the fund prospectuses for
a complete description.
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
Other Expenses
(after expense
reimbursement for
Management 12b-1 certain Portfolios - Total Portfolio
Fees Fees see Note 1 below) Annual Expenses
---- ---- ----------------- ---------------
<S> <C> <C> <C> <C>
COVA SERIES TRUST (1)
Managed by J.P. Morgan
Investment Management Inc.
Select Equity (2) .75% - - .10% .85%
Small Cap Stock (2) .85% - - .10% .95%
Large Cap Stock (2) .65% .10% .75%
International Equity (2) .85% - - .10% .95%
Quality Bond (2) .55% - - .10% .65%
Managed by Lord, Abbett & Co.
Bond Debenture (2) .75% - - .10% .85%
Mid-Cap Value (3) 1.00% - - .10% 1.10%
Large Cap Research (3) 1.00% .10% 1.10%
Developing Growth (3) .90% - - .10% 1.00%
Lord Abbett Growth and Income (3) .65% - - .10% .75%
LORD ABBETT SERIES FUND, INC.
Managed by Lord, Abbett & Co.
Growth and Income (4) .50% .07% .02% .59%
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset Management
Company
Money Market .205% - - .00% .205%
</TABLE>
(1) Since August 20, 1990, Cova has been reimbursing the investment portfolios
of Cova Series Trust for all operating expenses (exclusive of the management
fees) in excess of approximately .10%. Absent the expense reimbursement, the
percentages shown for total portfolio annual expenses (on an annualized basis)
for the period ended December 31, 1996 would have been: 1.70% for the Select
Equity Portfolio; 2.68% for the Small Cap Stock Portfolio; 1.23% for the Large
Cap Stock Portfolio; 3.80% for the International Equity Portfolio; 1.52% for the
Quality Bond Portfolio; and 2.05% for the Bond Debenture Portfolio.
(2) Annualized. The Portfolio commenced regular investment operations on April
2, 1996.
(3) Estimated. The Portfolio has not yet commenced regular investment
operations.
(4) The Growth and Income Portfolio of Lord Abbett Series Fund, Inc. has a 12b-1
plan which provides for payments to Lord, Abbett & Co. for remittance to a life
insurance company for certain distribution expenses (see the Fund Prospectus).
The 12b-1 plan provides that such remittances, in the aggregate, will not exceed
.15% on an annual basis, of the daily net asset value of shares of the Growth
and Income Portfolio. As of the date of this Prospectus no payments had been
made under the 12b-1 plan. For the year ending December 31, 1997, the 12b-1 fees
are estimated to be .07%.
5. DEATH BENEFIT
The primary purpose of the Policy is to provide death benefit protection on the
life of the insured. While the Policy is in force, if the insured dies, the
beneficiary(ies) will receive the death proceeds. The death proceeds equal the
death benefit under the Policy less any loans and accrued loan interest.
The death benefit is the greater of: (1) the Face Amount of the Policy; and (2)
the minimum death benefit. The minimum death benefit is the Account Value
multiplied by a percentage. Cova has included the minimum death benefit in order
to assure that the Policy will continue to qualify as life insurance under the
Internal Revenue Code.
You can choose to have the death proceeds paid in a lump sum or under a
Settlement Option. If you have not made a choice before the insured dies, the
beneficiary will choose the method of payment. If a method of payment has not
been chosen within 90 days after receiving proof of death, Cova may pay the
death proceeds in a lump sum.
The death benefit payable during the grace period is the death benefit in effect
immediately prior to the start of the grace period less any loans, accrued loan
interest and any overdue deductions. See discussion of grace period above.
ACCELERATED DEATH BENEFIT
If the insured is terminally ill, under the Accelerated Death Benefit rider,
Cova will pre-pay a portion of the death benefit. You may elect to have an
Accelerated Death Benefit of up to 50% of the death benefit but no greater than
$500,000.
You can only elect to receive an Accelerated Death Benefit once. The Accelerated
Death Benefit must first be used to repay any outstanding loans and accrued loan
interest. After repayment of the outstanding loans and accrued loan interest,
any remaining amount will be paid as a lump sum or under a payment plan. The
subsequent amount available for loans or surrenders or as a death benefit will
be reduced by the amount of the Accelerated Death Benefit, plus interest
accrued at the Policy loan interest rate.
This benefit may not be available in your state or may have different provisions
in your state.
JOINT LIVES
Cova offers a rider to the Policy that provides that the death benefit will be
paid only upon the death of a second person. This option is only available to
spouses.
The cost of insurance charge reflects the anticipated life expectancy of both
insureds. It also reflects the fact that the death benefit is payable at the
death of the last surviving insured.
If you wish to reinstate a lapsed Policy with a Joint Life rider attached, both
insureds must be alive and provide satisfactory evidence of insurability.
The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both insureds.
If a Joint Life rider is issued in conjunction with the Policy, the Accelerated
Death Benefit will only be payable on the terminal illness of the last surviving
insured.
This benefit may not be available in your state.
6. TAXES
NOTE: COVA HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. COVA HAS
INCLUDED IN PART II AN ADDITIONAL DISCUSSION REGARDING TAXES.
LIFE INSURANCE IN GENERAL
Life insurance, such as the Policy, is a means of providing for death protection
and setting aside money for future needs. Congress recognized the importance of
such planning and provided special rules in the Internal Revenue Code for life
insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance policy until you take the money out. The
beneficiaries are not taxed when they receive the death proceeds upon the death
of the insured.
You, as the owner, will not be taxed on increases in the value of your Policy
until a distribution occurs - either as a surrender or as a loan. When you
receive a distribution, you are taxed on the amount of the withdrawal that is
earnings.
TAKING MONEY OUT OF YOUR POLICY
For tax purposes, your Policy will be treated as a modified endowment contract,
unless under certain circumstances it was exchanged for a policy issued before
June 21, 1988. Consequently if you make a withdrawal or a loan from your Policy,
the Code treats it as first coming from earnings and then from your premiums.
These earnings are included in taxable income.
The Code also provides that any amount received from an insurance policy which
is included in income may be subject to a 10% penalty. The penalty will not
apply if the income received is: (1) paid on or after the taxpayer reaches age
59 1/2; (2) paid if the taxpayer becomes totally disabled (as that term is
defined in the Code); or (3) in a series of substantially equal payments made
annually (or more frequently) for the life or life expectancy of the taxpayer.
If you purchased a Policy in exchange for a policy issued prior to June 21,
1988, different tax rules may apply. See "Tax Status" in Part II for more
details.
DIVERSIFICATION
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. Cova believes that the investment portfolios are being
managed so as to comply with the requirements.
Under current federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not Cova would be considered the owner of the shares of the
investment portfolios. If you are considered the owner of the investments, it
will result in the loss of the favorable tax treatment for the Policy. It is
unknown to what extent owners are permitted to select investment portfolios, to
make transfers among the investment portfolios or the number and type of
investment portfolios owners may select from. If guidance from the Internal
Revenue Service is provided which is considered a new position, then the
guidance would generally be applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the policy, could be treated as the owner of the
investment portfolios. Due to the uncertainty in this area, Cova reserves the
right to modify the Policy in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
The Cash Surrender Value in your Policy is available: (1) by making a surrender
(either a partial or a complete surrender) or (2) by taking a loan from your
Policy.
LOANS
You may borrow money from Cova while the Policy is still in force. The Policy
will be the only security Cova will require for a Policy loan. You cannot borrow
against your Policy until the end of the Right to Examine Period and you cannot
borrow if the Policy is in a grace period. Loans are considered distributions
from the Policy for tax purposes and the portion of the loan that has come from
earnings will be taxable to you and may be subject to a 10% penalty tax. See
"Tax Status" in Part II for more details.
LOAN AMOUNT. The maximum loan amount is equal to: 90% of the Account Value, less
loan interest due on the next Policy Anniversary, the Surrender Charge, the
policy maintenance fee, if any, and the deferred premium tax charge, if any.
The minimum loan amount is $500. If total loans equal or exceed the Cash Value,
the Policy will terminate at the end of the grace period if an appropriate loan
repayment is not received by Cova.
LOAN ACCOUNT. When you make a loan, a portion of your Account Value equal to the
loan will be transferred on a pro rata basis from the investment portfolios to
the loan account. The loan account is a portion of Cova's general account that
contains Account Values attributable to Policy loans.
LOAN INTEREST. Loan interest due on the Policy loan will accrue daily at a
current rate of 6.0% per annum. The loan interest is due each Policy Anniversary
and if not paid will become part of the loan. When that happens, a portion of
the Account Value equal to the loan interest due is transferred, on a pro rata
basis, from the investment portfolios to the loan account.
INTEREST CREDITED. Amounts held in the loan account will be credited daily with
interest, at a current rate of 4.0% per annum.
PREFERRED LOAN. The part of your loan equal to earnings is the Preferred Loan. A
preferred loan will be credited interest daily at a current rate of 6.0% per
annum.
EFFECT OF LOAN. When you make a loan against your Policy, Cova will redeem
Accumulation Units from the investment portfolios equal to the loan request and
transfer that amount to the loan account.
A Policy loan, whether or not repaid, will have a permanent effect on the
Policy. This is because the loan account does not share in the investment
results of the investment portfolio(s). If it is not repaid, the Policy loan and
accrued loan interest will reduce the amount of Cash Value. It will also reduce
the amount payable at death because outstanding loans and accrued loan interest
are deducted from the death benefit.
LOAN REPAYMENTS. You can repay all or part of a loan at any time while your
Policy is in force and the insured is alive. There is no minimum loan repayment
amount. If you want to repay a loan in full, the loan repayment must equal the
loan plus all the accrued loan interest.
When you repay a loan, Cova will transfer the amount held in the loan account to
the investment portfolios according to your most recent instructions.
Unless you tell Cova otherwise, any payment Cova receives from you will go first
to pay any interest due, then to repay any loan, and then will be considered a
premium payment.
TOTAL SURRENDER
You can terminate your Policy by notifying Cova in writing. Cova will pay you
the Cash Surrender Value. When that happens, the Policy will be terminated and
there will be no other benefits. When you make a total surrender there may be
surrender charges and deferred premium tax charges and the policy maintenance
fee will be deducted.
PARTIAL SURRENDERS
You can surrender some of the Cash Surrender Value by making a request in
writing to Cova. The minimum amount you can surrender is $500, unless your Cash
Surrender Value is less. Cova requires that you maintain a minimum Account Value
in your Policy of at least $5,000 after you make a partial surrender. If you do
not, the Policy will terminate and Cova will send you the entire Cash Surrender
Value. When you make a partial surrender, there may be Surrender Charges and
deferred premium tax charges.
When you make a partial surrender, the Face Amount of your Policy will be
reduced. The Face Amount is reduced in the same proportion that the Account
Value is reduced by the partial surrender. When you make a partial surrender,
the amount of the surrender is deducted on a pro rata basis from Account Value
allocated to the investment portfolios, unless you specify otherwise.
TERMINATION OF THE POLICY
Your Policy will terminate if (1) you make a total surrender of the Policy, (2)
the grace period has ended, or (3) the insured has died.
REINSTATEMENT
If your Policy terminates while the insured is still alive you can have it
reinstated provided the Policy did not terminate because you made a total
surrender. You can only reinstate your Policy within 5 years after the end of
the grace period. If there are joint insureds, both insureds must be alive.
When you reinstate your Policy you must provide Cova with satisfactory evidence
of insurability and you must either repay any outstanding loan and accrued
interest or you must reinstate the loan along with any accrued interest. You
must also pay a sufficient premium to (1) cover all the monthly deductions and
any policy maintenance fee that were unpaid during the grace period and (2) be
sufficient to keep the Policy in force for at least 2 months after the date of
reinstatement.
When you reinstate your Policy, the Face Amount of the reinstated Policy will be
the Face Amount of your original Policy at the time the Policy terminated,
unless you direct Cova otherwise. You cannot select a Face Amount that is larger
than that. The Account Value adjusted for the past due charges of your Policy
when you reinstate it will be the Account Value at the time of termination plus
the additional premium paid at the time of reinstatement. The past due monthly
deductions and policy maintenance fee, if any, will be deducted from this
amount. The surrender charge, if any, and the deferred premium tax charge, if
any, are based on the number of policy years from the original Policy Date.
The effective date of the reinstated Policy is the next processing date
following Cova's approval of your application for reinstatement.
8. OTHER INFORMATION
COVA
Cova Financial Life Insurance Company ("Cova") was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation and changed its name to Xerox Financial Life Insurance Company in
1986. On June 1, 1995, a wholly-owned subsidiary of General American Life
Insurance Company purchased Cova which on that date changed its name to Cova
Financial Life Insurance Company.
Cova is presently licensed to do business in the state of California.
THE SEPARATE ACCOUNT
Cova has established a separate account, Cova Variable Life Account Five
(Separate Account), to hold the assets that underlie the Policies.
The assets of the Separate Account are held in Cova's name on behalf of the
Separate Account and legally belong to Cova. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business Cova may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the Policies
and not against any other Policies Cova may issue.
DISTRIBUTOR
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is an affiliate of Cova.
Commissions will be paid to broker-dealers who sell the Policies. Broker-dealers
will be paid commissions up to 5.5% of premiums and a trail commission up to
.25% for years two through nine which increases up to .40% in year 10 and later.
Sometimes, Cova enters into an agreement with the broker-dealer to pay the
broker-dealer persistency bonuses, in addition to the standard commission.
SUSPENSION OF PAYMENTS OR TRANSFERS
Cova may be required to suspend or postpone any payments or transfers for any
period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios not reasonably practicable or Cova cannot reasonably value
the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
OWNERSHIP
OWNER. You, as the owner of the Policy, have all of the rights under the Policy.
If you die while the Policy is still in force and the insured is living,
ownership passes to a successor owner or if none, then your estate becomes the
owner.
JOINT OWNER. The Policy can be owned by joint owners. Authorization of both
joint owners is required for all Policy changes except for telephone transfers.
BENEFICIARY. The beneficiary is the person(s) or entity you name to receive any
death benefit. The beneficiary is named at the time the Policy is issued unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the insured dies. If there is an
irrevocable beneficiary, all Policy changes except premium allocations and
transfers require the consent of the beneficiary.
ASSIGNMENT. You can assign the Policy.
PART II
MORE INFORMATION
THE COMPANY
Cova Financial Life Insurance Company (the "Company") was originally
incorporated on September 6, 1972 as Industrial Indemnity Life Insurance
Company, a California corporation and changed its name on January 1, 1986 to
Xerox Financial Life Insurance Company. The Company presently is licensed to do
business in the state of California. On June 1, 1995, a wholly-owned subsidiary
of General American Life Insurance Company ("General American") purchased Xerox
Financial Services Life Insurance Company ("Xerox Life"), an affiliate of the
Company, from Xerox Financial Services, Inc. The acquisition of Xerox Life
included related companies, including the Company. On June 1, 1995 the Company
changed its name to Cova Financial Life Insurance Company.
General American is a St. Louis-based mutual company with more than $275 billion
of life insurance in force and approximately $19 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
On April 1, 1996, Cova contributed initial capital to the Large Cap Stock and
Quality Bond Portfolios, by making a capital contribution through another
Separate Account. As of December 31, 1996, the capital contributed to the
Quality Bond Portfolio represented approximately 36% of the total assets of such
Portfolio and the capital contributed to the Large Cap Stock Portfolio by Cova
represented approximately 75% of the total assets of such Portfolio. Cova
currently intends to remove these assets from the Portfolios on a pro rata basis
in proportion to money invested in the Portfolios by both variable annuity and
variable life contract owners.
Executive Officers and Directors of Cova
The directors and executive officers of Cova and their principal
occupations for the past five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Name Principal Occupation During the Past Five Years
- --------------------------- -----------------------------------------------
John W. Barber*** Director of Cova-June, 1995 to present; Director of First
Cova Life Insurance Company (FCLIC)-June, 1995 to present;
Director of CFLIC June, 1995 to present; Vice President and
Controller of General American Life Insurance
Company-December, 1984 to present; President and Director of
Equity Intermediary Company- October, 1988 to present.
Jerome P. Darga* Vice President and Assistant Secretary of Cova-1992 to
present; Vice President and Assistant Secretary of
CFLIC-1992 to present; Vice President and Assistant
Secretary of CLMC-1992 to present.
Connie A. Doern**** Vice President of Cova-1997 to Present, prior thereto
Assistant Vice President from 1990 to 1995; Vice President
of CFLIC- 1997 to Present, prior thereto Assistant Vice
President from 1990 to 1995; Vice President of FCLIC-1997 to
Present, prior thereto Assistant Vice President from 1993 to
1995; Vice President of J&H/KVI-1989 to Present.
Judy M. Drew* Vice President of Cova-1988 to present; Vice President of
CFLIC-1988 to present; Vice President of FCLIC-1992 to
present; Senior Vice President of CLMC-1996 to present,
prior thereto Vice President from 1989 to 1996; President,
COO and Director of Cova Life Sales Company (CLSC)-1988 to
present.
Patricia E. Gubbe* Vice President of Cova-1989 to present; Vice President of
CFLIC-1989 to present; Vice President of FCLIC-1992 to
present; First Vice President of CLMC-1996 to present, prior
thereto Vice President from 1989 to 1996; Vice President and
Chief Compliance Officer of CLSC-1989 to present.
Philip A. Haley* Executive Vice President of Cova-May 1997 to present, prior
thereto Vice President from 1990 to 1997 and Assistant Vice
President from 1989 to 1990; Executive Vice President of
FCLIC- May, 1997 to present, prior thereto Vice President
from 1995 to 1997; Executive Vice President of CFLIC-May
1997 to present, prior thereto Vice President from 1990 to
1997 and Assistant Vice President from 1989 to 1990;
Executive Vice President of CLMC from May, 1997 to present,
prior thereto Senior Vice President from 1996 to 1997 and
Vice President from 1990 to 1996 and Assistant Vice
President from 1989 to 1990; Vice President of CLSC from
1991 to present, prior thereto Assistant Vice President from
1989 to 1991.
Christopher S. Harden* Vice President of Cova- 1991 to present; Vice President of
CFLIC-1991 to present; First Vice President of CLMC-1996 to
present, prior thereto Vice President-1991 to 1996.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova-1991 to
present; Vice President, Chief Actuary and Director of
CFLIC-1991 to present; Vice President, Chief Actuary and
Director of FCLIC-1992 to present; Senior Vice President,
Chief Actuary and Director of CLMC-1996 to present, prior
thereto Vice President and Director from 1993 to 1996 and
Vice President from 1991 to 1993.
Thomas E. Hughes, Jr.** Treasurer and Director of Cova-June, 1995 to present;
Treasurer and Director of CFLIC-June, 1995 to present;
Treasurer of FCLIC-June, 1995 to present; Corporate Actuary
and Treasurer of General American Life Insurance Company-
October, 1994 to present. Formerly, Executive Vice
President-Group Pensions General American Life Insurance
Company-March, 1990 to October, 1994. In addition to the
Cova companies, Director of the following General American
subsidiary companies: Paragon Life Insurance Company and RGA
Reinsurance Company-October, 1994 to present. Treasurer of
the following General American subsidiary companies: Paragon
Life Insurance Company, General Life Insurance Company of
America, General Life Insurance Company, General American
Holding Company, Red Oak Realty Company, Gen Mark
Incorporated, Walnut Street Securities, Inc., Walnut Street
Adviser's Inc., White Oak Royalty Company, Walnut Street
Funds, Inc., and RGA Reinsurance Company-October, 1994 to
present.
Lisa O. Kirchner**** Vice President of Cova-1997 to present, prior thereto
Assistant Vice President from 1990 to 1995; Vice President
of CFLIC-1997 to present, prior thereto Assistant Vice
President from 1988 to 1995; Vice President of FCLIC-1997 to
present, prior thereto Assistant Vice President from 1993 to
1995; Vice President of J&H/KVI-1985 to present.
Douglas E. Jacobs* Vice President of Cova- 1985 to present; Vice President of
CFLIC-1985 to present; Vice President of CLMC-1985 to
present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFLIC, FCLIC,
CLMC, Advisory and Allocation- April, 1997 to present;
Chairman of the Board, President and Chief Executive Officer
of General American Life Insurance Company-May, 1992 to
present; Mr. Liddy also holds various positions with the
General American subsidiaries as follows: Chairman of the
Board and President of General American Mutual Holding
Company, GenAmerica Corporation and General American Holding
Company; Chairman of the Board of Security Equity Life
Insurance Company, Conning Corporation, The Walnut Street
Funds, Inc., General American Capital Company, Reinsurance
Group of America, Inc., RGA Life Reinsurance Company of
Canada, and RGA Reinsurance Company.
William C. Mair* Vice President, Controller and Director of Cova since 1995
to present, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and
Director of CFLIC since 1995 to present, prior thereto Vice
President, Controller, Treasurer and Director; Vice
President, Controller and Director of FCLIC- from 1992 to
present; Vice President, Treasurer, Controller and Director
of Advisory-1993 to present; Vice President, Treasurer,
Controller and Director of Allocation-1994 to present;
Director of CLSC-1992 to present; Senior Vice President,
Treasurer, Controller and Director of CLMC-1989 to present;
Vice President, Treasurer, Controller, Chief Financial
Officer, Chief Accounting Officer and Director of Trust-
1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova-June, 1995 to
present; Assistant Secretary and Director of CFLIC-June,
1995 to present; Assistant Secretary and Director of
FCLIC-June, 1995 to present; Associate General Counsel and
Vice President of General American Life Insurance
Company-1973 to present; Also, Director, Vice President,
General Counsel and Secretary for several other General
American subsidiaries; including Equity Intermediary
Company, Red Oak Realty Company, and White Oak Royalty
Company; General American Holding Company and Paragon Life
Insurance Company. General Counsel and Secretary,
Reinsurance Group of America, Incorporated. Director and
Secretary, General American Capital Company. General Counsel
and Secretary, Conning Corporation. General Counsel, Conning
Asset Management Company. Director of RGA Reinsurance
Company, Walnut Street Securities, Inc. Secretary to the
Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President of Cova-May, 1997 to present;
Executive Vice President of CFLIC-May, 1997 to present;
Executive Vice President of CFSLIC-May, 1997 to present;
Executive Vice President and Director of FCLIC-May, 1997 to
present; Executive Vice President of CLMC-May, 1997 to
present; Executive Vice President and Director of Cova
Investment Advisory Corporation-December, 1996 to present;
Executive Vice President and Director of FCLIC - May, 1997
tp present, Executive Vice President and Director of Cova
Investment Allocation Corporation-December, 1996 to present.
Leonard M. Rubenstein** Director of Cova, CFLIC, FCLIC, and CLMC-January, 1996 to
present; Director of Advisory and Allocation from 1995 to
present; Executive Vice President and Director of General
American Life Insurance Company-1992 to present. Mr.
Rubenstein also holds various positions with the General
American subsidiaries as follows: Director and Treasurer of
General American Capital Company; Senior Vice President
Investments, Treasurer and Director of Reinsurance Group of
America, Incorporated; Director of Paragon Life Insurance
Company; Director of General American Holding Company; Chief
Executive Officer, Chairman and Director for Conning
Corporation; Director of the following: General Life
Insurance Company, Security Equity Life Insurance Company,
BHIF America de Vida Seguros S.A. (Chile), Manatial Seguros
de Vida, S.A. (Argentina), Red Oak Realty Company, General
Life Insurance Company of America; RGA Reinsurance Company;
Secretary and Director for RGA Sud America S.A.
Myron H. Sandberg* Vice President of Cova-1985 to present; Vice President of
CFLIC-1985 to present; and CLMC 1989 to present.
John W. Schaus* Vice President of Cova-1988 to present; Vice President of
CFLIC-1988 to present; and CLMC-1989 to present.
Lorry J. Stensrud* President and Director of Cova from June, 1995 to present,
prior thereto Executive Vice President; President and
Director of CFLIC from June, 1995 to present, prior thereto
Executive Vice President; President and Director of FCLIC
from June, 1995 to present, prior thereto Executive Vice
President; President and Director of CLMC from June, 1995 to
present, prior thereto Executive Vice President only;
President and Director of Advisory from 1993 to present;
President and Director of Allocation from 1994 to present.
Director of CLSC from 1989 to present; President, Chief
Executive Officer and Director of Trust-1996 to present.
Peter L. Witkewiz***** Vice President of Cova-1997 to present; Vice President of
CFLIC-1997 to present; Vice President of FCLIC-1997 to
present.
Kent R. Zimmerman** Assistant Treasurer of Cova-May, 1996 to present; Assistant
Treasurer of CFLIC-May, 1996 to present; Assistant Treasurer
of CLMC- 1996 to present. Second Vice President of General
American Life Insurance Company- 1997 to present, prior
thereto Vice President of General American Life Insurance
Company, 1992 to 1997. Mr. Zimmerman holds various positions
with the General American subsidiaries - Assistant
Treasurer, Security Equity Life Insurance Company, Paragon
Life Insurance Company, General Life Insurance Company of
America and RGA Reinsurance Co.
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: J&H/KVI, 1776 West Lakes Parkway, West Des Moines, IA 50266
</TABLE>
VOTING
In accordance with its view of present applicable law, Cova will vote the shares
of the investment portfolios at special meetings of shareholders in accordance
with instructions received from owners having a voting interest. Cova will vote
shares for which it has not received instructions in the same proportion as it
votes shares for which it has received instructions. Cova will vote shares it
owns in the same proportion as it votes shares for which it has received
instructions. The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
Cova determines that it is permitted to vote the shares of the funds in its own
right, it may elect to do so.
The voting interests of the owner in the funds will be determined as follows:
owners may cast one vote for each $100 of Account Value of a Policy which is
allocated to an investment portfolio on the record date. Fractional votes are
counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by Cova not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each owner having such a voting interest will receive periodic reports relating
to the investment portfolios in which he or she has an interest, proxy material
and a form with which to give such voting instructions.
DISREGARD OF VOTING INSTRUCTIONS. Cova may, when required to do so by state
insurance authorities, vote shares of the funds without regard to instructions
from owners if such instructions would require the shares to be voted to cause
an investment portfolio to make, or refrain from making, investments which would
result in changes in the sub-classification or investment objectives of the
investment portfolio. Cova may also disapprove changes in the investment policy
initiated by owners or trustees of the funds, if such disapproval is reasonable
and is based on a good faith determination by Cova that the change would violate
state or federal law or the change would not be consistent with the investment
objectives of the investment portfolios or which varies from the general quality
and nature of investments and investment techniques used by other funds with
similar investment objectives underlying other variable contracts offered by
Cova or of an affiliated company. In the event Cova does disregard voting
instructions, a summary of this action and the reasons for such action will be
included in the next semi-annual report to owners.
THE SEPARATE ACCOUNT
Cova has established the separate account, Cova Variable Life Account Five
(Separate Account), to hold the assets that underlie the Policies. The Board of
Directors of Cova adopted a resolution to establish the Separate Account under
California insurance law on March 24, 1992. The Separate Account has not yet
commenced operations. Cova has registered the Separate Account with the
Securities Exchange Commission as a unit investment trust under the Investment
Company Act of 1940.
The investment program of the Separate Account will not be changed without the
approval by the Insurance Commissioner of the state of California. If required,
the approval process is on file with the Commissioner of the state in which this
Policy is issued.
If the New York Stock Exchange is closed (except for holidays and weekends) or
trading is restricted due to an emergency as defined by the Securities and
Exchange Commission so that Cova cannot value Accumulation Units, Cova may
postpone all procedures which require valuation of the Accumulation Units
until valuation is possible.
LEGAL OPINIONS
Legal matters in connection with the Policies described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE
The amount of the Surrender Charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the Surrender Charge will be determined by Cova after examination
of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than for a
smaller group because of the ability to implement large numbers of Policies with
fewer sales contacts.
2. The total amount of purchase payments to be received will be considered.
Per Policy sales expenses are likely to be less on larger purchase payments than
on smaller ones.
3. Any prior or existing relationship with Cova will be considered. Per
Policy sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Policy with fewer
sales contacts.
4. There may be other circumstances, of which Cova is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, Cova determines that there
will be a reduction in sales expenses, Cova may provide for a reduction or
elimination of the Surrender Charge.
The Surrender Charge may be eliminated when the Policies are issued to an
officer, director or employee of Cova or any of its affiliates. In no event will
any reduction or elimination of the Surrender Charge be permitted where the
reduction or elimination will be unfairly discriminatory to any person.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the insured(s) has been incorrectly stated, the death
benefit will be adjusted to reflect the death benefit that would have been
provided by the last cost of insurance at the correct age and/or sex of the
insured.
COVA'S RIGHT TO CONTEST
Cova cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the insured's lifetime for two years from the
Policy Date. If the Policy is reinstated, the two-year period is measured from
the date of reinstatement. In addition, if the insured commits suicide in the
two-year period, or such period as specified in state law, the benefit payable
will be limited to premiums paid less Debt and less any surrenders.
SETTLEMENT OPTIONS
The Cash Surrender Value or the death proceeds may be paid in a lump sum or may
be applied to one of the Settlement Options. The Settlement Options are:
Option 1: Life Annuity
Option 2: Life Annuity with 5, 10 or 20 years guaranteed
Option 3: Joint and Last Survivor Annuity
Option 4: Payments for a Designated Period
You or the beneficiary can select to have the Settlement Options payable on
either a fixed or variable basis.
TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON COVA'S UNDERSTANDING OF CURRENT
FEDERAL INCOME TAX LAW APPLICABLE TO LIFE INSURANCE IN GENERAL. COVA CANNOT
PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE. PURCHASERS
ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY OF SUCH
CHANGES. SECTION 7702 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE"),
DEFINES THE TERM "LIFE INSURANCE CONTRACT" FOR PURPOSES OF THE CODE. COVA
BELIEVES THAT THE POLICIES TO BE ISSUED WILL QUALIFY AS "LIFE INSURANCE
CONTRACTS" UNDER SECTION 7702. COVA DOES NOT GUARANTEE THE TAX STATUS OF THE
POLICIES. PURCHASERS BEAR THE COMPLETE RISK THAT THE POLICIES MAY NOT BE TREATED
AS "LIFE INSURANCE" UNDER FEDERAL INCOME TAX LAWS. PURCHASERS SHOULD CONSULT
THEIR OWN TAX ADVISERS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS
PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS.
INTRODUCTION. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon Cova's understanding of current
federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
Cova is taxed as a life insurance company under the Code. For federal income tax
purposes, the Separate Account is not a separate entity from Cova and its
operations form a part of Cova.
DIVERSIFICATION. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy. The Code contains a safe harbor
provision which provides that life insurance policies such as the Policies meet
the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated investment
company and no more than fifty-five (55%) percent of the total assets consist of
cash, cash items, U.S. Government securities and securities of other regulated
investment companies. There is an exception for securities issued by the U.S.
Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Policies. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these Regulations, all securities of the same
issuer are treated as a single investment.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer".
Cova intends that each investment portfolio underlying the Policies will be
managed by the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered as the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
TAX TREATMENT OF THE POLICY. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, Cova has relied on the interim guidance provided in
IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While Cova has attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with Cova's interpretations of Section 7702 that were
made in determining such compliance. In the event the Policy is determined not
to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies. Owners should consult their tax advisers with
respect to the tax consequences of purchasing the Policy.
POLICY PROCEEDS. Loan proceeds and/or surrender payments from the Policies are
fully taxable to the extent of income in the Policy and may further be subject
to an additional 10% federal income tax penalty. (See "Tax Treatment of Loans
and Surrenders".) Otherwise, the Policy should receive the same federal income
tax treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under Section
101(a) of the Code and any benefits paid under the Accelerated Death Benefit
Rider shall be excludable from gross income under Section 101(g) of the Code.
Furthermore, the owner is not deemed to be in constructive receipt of the
Account Value or Cash Surrender Value, including increments thereon, under a
Policy until surrender thereof. If the death proceeds are to be paid under one
of the Settlement Options, the payments will be prorated between the amount
attributable to the death benefit which will be excludable from the
beneficiary's income and the amount attributable to interest which will be
includable in the beneficiary's income.
Federal, 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. Owners and beneficiaries should consult their tax
adviser.
JOINT LIVES. The Policy may be issued with a Joint Life Rider providing for the
payment of the death benefit upon the death of the last surviving insured. While
Cova believes that a Policy issued on this basis complies with Section 7702 of
the Code, such circumstances are not directly addressed in either Section 7702
or the regulations issued thereunder. In the absence of regulation or other
guidelines, there is some uncertainty as to whether a Policy with such a joint
life feature meets the requirements of Section 7702 of the Code.
TAX TREATMENT OF LOANS AND SURRENDERS. The Code alters the tax treatment
accorded to loans and certain distributions from life insurance policies which
are deemed to be "modified endowment contracts". The Policy's premium
requirements are such that Policies issued on or after June 21, 1988 will be
treated as modified endowment contracts. A Policy received in exchange for a
modified endowment contract is also a modified endowment contract regardless of
whether it meets the 7-pay test.
However, an exchange under Section 1035 of the code of a life insurance policy
entered into before June 21, 1988 for the Policy will not cause the Policy to be
treated as a modified endowment contract if no additional premiums are paid.
A Policy that was entered into prior to June 21, 1988 may be deemed to be a modi
fied endowment contract if it is materially changed and fails to meet the 7-pay
test. A Policy fails to meet the 7-pay test when the cumulative amount paid
under the Policy at any time during the first 7 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 (7) level
annual premiums. A material change would include any increase in the future
benefits provided under a policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven policy years; or (2) the
crediting of interest or other earnings (including policyholder dividends) with
respect to such premiums.
Assuming that the Policy will be treated as a modified endowment contract,
surrenders and/or loan proceeds are taxable to the extent of income in the
Policy. Such distributions are deemed to be on a last-in, first-out basis, which
means the taxable income is distributed first. Loan proceeds and/or surrender
payments may also be subject to an additional 10% federal income tax penalty
applied to the income portion of such distribution. The penalty shall not apply,
however, to any distribution: (1) made on or after the date on which the
taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer becoming
disabled (within the meaning of Section 72(m)(7) of the Code); or (3) which is
part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
beneficiary. Furthermore, only under limited circumstances will interest paid on
Policy loans be tax deductible.
Policy owners should seek competent tax advice on the tax consequences of taking
loans, making a partial or total surrender or making any material modifications
to their Policies.
MULTIPLE POLICIES. The Code further provides that multiple modified endowment
contracts that are issued within a calendar year period to the same owner by one
company or its affiliates are treated as one modified endowment contract for
purposes of determining the taxable portion of any loans or distributions. Such
treatment may result in adverse tax consequences including more rapid taxation
of the loans or distributed amounts from such combination of contracts. Policy
owners should consult a tax adviser prior to purchasing more than one modified
endowment contract in any calendar year period.
TAX TREATMENT OF ASSIGNMENTS. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. Policy owners should therefore
consult competent tax advisers should they wish to assign or change the owner of
their Policies.
QUALIFIED PLANS. The Policies may be used in conjunction with certain qualified
plans. Because the rules governing such use are complex, a purchaser should not
do so until he has consulted a competent qualified plans consultant.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includable in gross income of
the Policy owner are subject to federal income tax withholding. However, the
Policy owner in most cases may elect not to have taxes withheld. The Policy
owner may be required to pay penalties under the estimated tax rules, if the
Policy owner's withholding and estimated tax payments are insufficient.
REPORTS TO OWNERS
Cova will send to each owner semi-annual and annual reports of the investment
portfolios. Within 30 days after each Policy Anniversary, an annual statement
will be sent to each owner. The statement will show the current amount of death
benefit payable under the Policy, the current Account Value, the current Cash
Surrender Value, current debt and will show all transactions previously
confirmed. The statement will also show premiums paid and all charges deducted
during the Policy Year.
Confirmations will be mailed to Policy owners within seven days of the
transaction of: (a) the receipt of premium; (b) any transfer between investment
portfolios; (c) any loan, interest repayment, or loan repayment; (d) any
surrender; (e) exercise of the free look privilege; and (f) payment of the death
benefit under the Policy. Upon request a Policy owner shall be entitled to a
receipt of premium payment.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. Cova 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 Balance Sheet of the Company as of December 31, 1996 and 1995 and the
related Statements of Income, Shareholder's Equity and Cash Flows for the year
ended December 31, 1996 and the periods from June 1, 1995 through December 31,
1995 and January 1, 1995 through May 31, 1995 and for the year ended December
31, 1994, have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
FINANCIAL STATEMENTS
There are no financial statements for the Separate Account because it has not
yet commenced operations.
COVA FINANCIAL
LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Financial Statements (Unaudited)
June 30, 1997 and 1996
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets (Unaudited)
June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
AS OF AS OF
ASSETS 6/30/97
12/31/96
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $90,833 in 1997 and $71,257 in 1996) $ 90,923 $ 71,263
Policy loans 1,052 1,048
Short-term investments available for sale at market
(cost of $248 in 1996 and $44 in 1996) 246 44
Total investments 92,221 72,355
Cash and cash equivalents - interest bearing 5,080 4,150
Cash - non-interest bearing 2,182 2,485
Accrued investment income 1,364 1,122
Deferred policy acquisition costs 5,405 3,321
Present value of future profits 1,101 1,178
Goodwill 1,979 2,034
Deferred tax asset (net) 1,007 1,115
Receivable from OakRe 81,289 92,238
Reinsurance receivables 0 51
Other assets 69 44
Separate account assets 40,628 18,880
Total Assets $232,325 $198,973
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, (Unaudited) Continued
June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
AS OF AS OF
LIABILITIES AND SHAREHOLDERS EQUITY 6/30/97 12/31/96
<S> <C> <C>
Policyholder deposits $164,741 $154,566
Future policy benefits 4,703 4,561
Payable on purchase of securities 2,010 0
Accounts payable and other liabilities 965 1,794
Future purchase price payable to OakRe 620 683
Federal on a state income taxes payable 12 0
Guaranty assessments 1,585 1,585
Reinsurance payables 15 0
Separate account liabilities 40,628 18,880
Total Liabilities 215,279 182,069
Shareholders equity:
Common stock, $233 par value. (Authorized 30,000
shares; issued and outstanding 12,000 shares in
1997 and 1996) 2,800 2,800
Additional paid-in capital 13,523 13,523
Retained earnings 703 580
Net unrealized appreciation on securities, net of tax 20 1
Total Shareholders Equity 17,046 16,904
Total Liabilities and Shareholders Equity $232,325 $198,973
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income (Unaudited)
Six months ended June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED:
6/30/97
6/30/96
<S> <C> <C>
Revenues:
Premiums $ 304 $ 340
Net investment income 3,004 1,801
Net realized gain (loss) on sale of investments 16 (8)
Separate Account charges 193 39
Other Income 27 6
Total Revenues 3,544 2,178
Benefits and expenses:
Interest on policyholder deposits 2,116 1,044
Current and future policy benefits 451 382
Operating and other expenses 499 306
Amortization of purchased intangibles assets 100 161
Amortization of deferred acquisition costs 155 25
Total Benefits and Expenses 3,321 1,918
Income before income taxes 223 260
Income Taxes:
Current 2 190
Deferred $ 98 (75)
Total income tax expense $ 100 $ 115
Net Income $ 123 $ 145
</TABLE>
See accompanying notes to unaudited financial statements.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity (Unaudited)
June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED:
6/30/97 12/31/96
<S> <C> <C>
Common Stock ($233 par value common stock; authorized 30,000 shares; issued and outstanding
12,000 shares in 1997 and 1996.
Balance at beginning of period $ 2,800 $ 2,800
Balance at end of period 2,800 $ 2,800
Additional paid-in capital:
Balance at beginning of period 13,523 13,523
Balance at end of period 13,523 13,523
Retained earnings:
Balance at beginning of period 580 168
Net income 123 412
Balance at end of period $ 703 $ 580
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity, (Unaudited) Continued
June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION> FOR THE PERIODS ENDED:
6/30/97 12/31/96
<S> <C> <C>
Net unrealized appreciation/(depreciation) of securities:
Balance at beginning of period $ 1 $ 192
Change in unrealized appreciation/(depreciation) of debt and equity securities 81 (840)
Change in deferred federal income taxes (10) 103
Change in deferred acquisition costs attributable to unrealized losses/(gains) 2 (69)
Change in present value of future profits attributable to unrealized losses/(gains)
(54) 615
Balance at end of period 20 1
Total Shareholders Equity $17,046 $16,904
</TABLE>
See accompanying notes to unaudited financial statements.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION> FOR THE PERIODS ENDED:
6/30/97 6/30/96
<S> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 2,812 $ 1,501
Premiums received 313 350
Insurance and annuity benefit payments (307) (287)
Operating disbursements (939) (324)
Taxes on income paid (62) (255)
Commissions and acquisition costs paid (1,761) (1,108)
Other (17) 5
Net cash provided by/(used in) operating
activities 39 (118)
Cash flows from investing activities:
Cash used for the purchase of investment
securities (27,834) (20,927)
Proceeds from investment securities sold 9,035 4,919
and matured
Other (18) (43)
Net cash (used in) investing
activities $(18,817) $(16,051)
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, (Unaudited) (Continued)
Six months ended June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
FOR THE
PERIODS ENDED:
6/30/97 6/30/96
<S> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 37,057 $ 12,996
Transfers from OakRe 7,394 22,795
Transfer to Separate Accounts (17,530) (5,019)
Return of policyholder deposits (7,516) (16,941)
Net cash provided by financing
activities 19,405 13,831
Increase/(decrease) in cash and cash
equivalents 627 (2,338)
Cash and cash equivalents at beginning of 6,635 6,134
period
Cash and cash equivalents at end of period $ 7,262 $ 3,796
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, (Unaudited) Continued
Six months ended June 30, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED:
6/30/97 6/30/96
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 123 $ 145
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in future policy
benefits (net of reinsurance) 142 101
Increase in payables and
accrued liabilities 22 15
Increase in accrued investment
income (242) (330)
Amortization of intangible assets and 254 186
deferred acquisition costs
Amortization and accretion of securities
premiums and discounts 81 25
Net realized (gain)/loss on sale of
investments (16) 8
Interest accumulated on policyholder
deposits 2,116 1,044
Investment expenses paid 55 50
Increase/(decrease) in current and deferred
Federal income taxes 100 (140)
Recapture commissions paid to OakRe (84) (172)
Deferral of acquisition costs (2,268) (821)
Due to/from affiliates 14 36
Other (258) (265)
Net cash provided by operating activities $ 39 $ (118)
=======
</TABLE>
See accompanying notes to Unaudited financial statements.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Unaudited Interim Financial Statements
June 30, 1997 and 1996
(1)
The interim consolidated financial statements for Cova Financial Life
Insurance Company (CFLIC) have been prepared on the basis of generally
accepted accounting principles and, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation or results for such periods. The results of operations and cash
flows for any interim period are not necessarily indicative of results for the
full year. These financial statements should be read in conjunction with the
financial statements as of December 31, 1996 and December 31, 1995, and for
each of the years in the three-year period ended December 31, 1996 and related
notes thereto, presented elsewhere herein. Interim financial data presented
herein are unaudited.
(2) INVESTMENTS
The Company's investments in debt and equity securities are considered
available for sale and carried at estimated fair value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate component
of shareholders equity. The carrying value and amortized cost of investments
at June 30, 1997 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR AMORTIZED
VALUE GAINS LOSSES VALUE COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 100 $ 0 $ 0 $ 100 $ 100
Collateralized mortgage 23,750 138 (63) 23,750 23,675
Corporate, state, municipalities,
and political subdivisions 67,073 411 (396) 67,073 67,058
Total debt securities 90,923 549 (459) 90,923 90,833
Policy loans 1,052 - - 1,052 1,052
Short term investments 246 - (2) 246 248
Total investments $92,221 $549 ($461) $ 9,222 $92,133
------- ---- ------- ------- -------
<FN>
As of June 30, 1997, the company had no impaired investments.
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Unaudited Interim Financial Statements
The amortized cost and estimated market value of debt securities at June 30,
1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
June 30, 1997
Estimated
Amortized Market
Cost Value
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $26,140 $26,151
Due after five years through ten years 34,348 34,350
Due after ten years 6,670 6,672
Mortgage-backed securities 23,675 23,750
Total $90,833 $90,923
<FN>
At June 30, 1997, approximately 92.3% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 7.7% non-investment grade debt securities, 4.8% are rated as BB+, 1.8%
are rated as BB and 1.1% are rated as B.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Unaudited Interim Financial Statements
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses)were as follows:
<TABLE>
<CAPTION> FOR THE PERIODS ENDED:
6/30/97 6/30/96
(in thousands of dollars)
<S> <C> <C>
Income on debt securities $3,007 $1,663
Income on short-term investments 92 138
Income on policy loans (40) 43
Miscellaneous interest - 7
Total investment income 3,059 1,851
Investment expenses 55 50
Net investment income 3,004 1,801
Realized capital gains/(losses) were as
follows:
Debt securities 16 (8)
Net realized gains/(losses) on
investments $ 16 $ (8)
</TABLE>
<TABLE>
<CAPTION> FOR THE PERIODS ENDED:
6/30/97 6/30/96
(In thousands of dollars)
<S> <C> <C>
Unrealized gains/(losses) were as follows: ffollowa
Debt securities 87 (878)
Short-term investments - -
Effects on deferred acquisition costs
amortization 11 -
Effects on present value of future
profits (67) 570
Unrealized gains/(losses) before income tax 31 (308)
Unrealized income tax benefit/(expense) (11) 108
Net unrealized gains (losses) on
investments $ 20 $(200)
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to unaudited Interim Financial Statements
(3) Securities Greater than 10% of Shareholders Equity
As of June 30, 1997 the Company had one individual security which exceeded 10%
of Shareholders equity:
Colonial Realty 7.5%, 07/15/2001 $2,022,220
(4) Statutory Surplus
Statutory capital and surplus as of June 30, 1997 was $10,711,996. Statutory
net losses for CFLIC for the periods ended June 30, 1997 and 1996 were
$(331,478) and $(118,647), respectively.
COVA FINANCIAL
LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors Report Thereon)
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and Shareholder
Cova Financial Life Insurance Company:
We have audited the accompanying balance sheets of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Financial Services Life
Insurance Company) as of December 31, 1996 and 1995 and the related statements
of income, shareholders equity and cash flows for the year ended December 31,
1996 and the period from June 1, 1995 to December 31, 1995 (Successor
periods), and from January 1, 1995 to May 31, 1995, and for the year ended
December 31, 1994 (Predecessor periods). 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
from 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 Cova Financial Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the Successor periods, in conformity with generally
accepted accounting principles. Also, in our opinion, the aforementioned
Predecessor financial statements present fairly, in all material respects, the
results of its operations and its cash flows for the Predecessor periods, in
conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $71,257 in 1996 and $37,242 in 1995) $ 71,263 $ 38,092
Policy loans 1,048 1,063
Short-term investments available for sale at market
(cost of $44 in 1996 and $988 in 1995) 44 984
Total investments 72,355 40,139
Cash and cash equivalents - interest bearing 4,150 5,157
Cash - non-interest bearing 2,485 977
Accrued investment income 1,122 566
Deferred policy acquisition costs 3,321 1,164
Present value of future profits 1,178 576
Goodwill 2,034 2,306
Deferred tax asset (net) 1,115 1,007
Receivable from OakRe 92,238 127,335
Reinsurance receivables 51 458
Other assets 44 44
Separate account assets 18,880 3,451
Total Assets $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $154,566 $154,458
Future policy benefits 4,561 4,369
Accounts payable and other liabilities 1,794 1,116
Future purchase price payable to OakRe 683 1,265
Guaranty assessments 1,585 1,838
Separate account liabilities 18,880 3,451
Total Liabilities 182,069 166,497
Shareholders equity:
Common stock, $233 par value. (Authorized 30,000
shares; issued and outstanding 12,000 shares in
1996 and 1995) 2,800 2,800
Additional paid-in capital 13,523 13,523
Retained earnings 580 168
Net unrealized appreciation on securities, net of tax 1 192
Total Shareholders Equity 16,904 16,683
Total Liabilities and Shareholders Equity $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 488 $ 142 $ 82 $ 1,335
Net investment income 4,176 1,419 5,271 15,101
Net realized gain (loss) on sale of
investments (28) 118 (272) 318
Separate account charges 134 10 -- --
Other income/(expense) 35 (7) 57 138
Total revenues 4,805 1,682 5,138 16,892
Benefits and expenses:
Interest on policyholder deposits 2,563 788 5,034 13,361
Current and future policy benefits 722 115 178 1,452
Operating and other expenses 570 309 814 1,384
Amortization of purchase intangible assets 66 157 -- --
Amortization of deferred acquisition costs 187 5 522 6,979
Total benefits and expenses 4,108 1,374 6,548 23,176
Income/(loss) before income taxes 697 308 (1,410) (6,284)
Income tax:
Current 351 -- (362) (80)
Deferred (66) 140 (201) (2,050)
Total income tax expense/(benefit) 285 140 (563) (2,130)
Net Income/(Loss) $ 412 $ 168 $ (847) $(4,154)
======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($233 par value in 1996 and
12/31/95, $50 par value for 5 mos. ended
5/31/95, 1994 & 1993; authorized 30,000
shares;issued and outstanding 12,000
shares in 1996, 1995 & 1994)
Balance at beginning of period $ 2,800 $ 2,800 $ 600 $ 600
Par value adjustment -- -- 2,200 __
Balance at end of period 2,800 2,800 2,800 600
Additional paid-in capital:
Balance at beginning of period 13,523 18,093 17,200 8,200
Adjustment to reflect purchase acquisition indicated in note 2
-- (7,570) -- --
Par value adjustment -- (2,200)
Capital contribution -- 3,000 3,093 9,000
Balance at end of period 13,523 13,523 18,093 17,200
Retained earnings:
Balance at beginning of period 168 209 4,045 8,199
Adjustment to reflect purchase acquisition indicated in note 2 --
(209) -- --
Net income/(loss) 412 168 (847) (4,154)
Adjustment due to financial reinsurance
transaction with OakRe - (2,989)
Balance at end of period $ 580 $ 168 $ 209 $ 4,045
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation) of
securities:
Balance at beginning of period $ 192 $(3,789) ($11,316) --
Adjustment to reflect purchase acquisition indicated in note 2
-- 3,789 -- --
Implementation of change in accounting for
marketable debt and equity securities, net of
effects of deferred taxes of $735 and
deferred acquisition costs of $1,719 -- -- -- $ 1,366
Change in unrealized appreciation/(depreciation)
of debt and equity securities (840) 846 15,151 (29,570)
Change in deferred Federal income taxes 103 (104) (4,053) 6,829
Change in deferred acquisition costs
attributable to unrealized losses/(gains) (69) -- (3,571) 10,059
Change in present value of future profits
attributable to unrealized losses/(gains) 615 (550) -- --
Balance at end of period 1 192 (3,789) (11,316)
Total Shareholders Equity $16,904 $16,683 $ 17,313 $ 10,529
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 3,676 $ 934 $ 7,283 $ 15,690
Premiums received 509 154 90 1,357
Insurance and annuity benefit payments (580) (339) (252) (552)
Operating disbursements (768) (490) (1,038) (1,482)
Taxes on income refunded (paid) (341) -- 1,975 (856)
Commissions and acquisition costs paid (2,413) (1,169) (542) (1,262)
Other (183) 360 6,299 200
Net cash provided by/(used in) operating (100) (550) 13,815 13,095
activities
Cash flows from investing activities:
Cash used for the purchase of investment (42,655) (52,399) (935) (69,199)
securities
Proceeds from investment securities sold 10,635 14,399 151,204 115,994
and matured
Investment expenses (90) (57) (97) (320)
Net cash provided by/(used in) investing
activities $(32,110) $(38,057) $150,172 $ 46,475
---------
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 38,348 $ 12,442 $ 5,614 $ 11,796
Transfers from/(to) OakRe 36,553 33,579 (171,081) --
Transfer to Separate Accounts (13,669) (3,312) -- --
Return of policyholder deposits (28,521) (26,897) (15,531) (43,377)
Capital contributions received -- 3,000 3,093 2,500
Net cash provided by/(used in) financing
activities 32,711 18,812 (177,905) (29,081)
Increase/(decrease) in cash and cash
equivalents 501 (19,795) (13,918) 30,489
Cash and cash equivalents at beginning of 6,134 25,929 39,847 9,358
period
Cash and cash equivalents at end of period $ 6,635 $ 6,134 $ 25,929 $ 39,847
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss) to net cash provided by operating activities:
Net income/(loss) $ 412 $ 168 $ (847) $(4,154)
Adjustments to reconcile net income/(loss)
to net cash provided by operating
activities:
Increase/(decrease)in future policy
benefits (net of reinsurance) 192 (201) (52) 911
Increase/(decrease) in payables and
accrued liabilities 95 161 (252) 126
Decrease/(increase) in accrued investment
income (556) (525) 1,766 636
Amortization of intangible assets and 254 162 522 6,979
deferred acquisition costs
Amortization and accretion of securities
premiums and discounts 73 (9) 32 (369)
Net realized (gain)/loss on sale of
investments 28 (118) 272 (318)
Interest accumulated on policyholder
deposits 2,563 788 5,034 13,361
Investment expenses paid 90 57 97 320
Increase/(decrease) in current and deferred
Federal income taxes (66) 140 1,412 (2,986)
Recapture commissions paid to OakRe (273) (223) -- --
Deferral of acquisition costs (2,413) (1,169) (542) (1,262)
Due to/from affiliates 44 27 6,470 --
Other (543) 192 (97) (149)
Net cash provided by operating activities $ (100) $ (550) $13,815 $13,095
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company), formerly Xerox Financial
Life Insurance Company (the Predecessor), markets and services single premium
deferred annuities, immediate annuities, variable annuities, and single
premium whole-life insurance policies. The Company is licensed to do business
in the state of California. Most of the policies issued present no
significant mortality nor longevity risk to the Company, but rather represent
investment deposits by the policyholders. Life insurance policies provide
policy beneficiaries with mortality benefits amounting to a multiple, which
declines with age, of the original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 81%, 71% and 47% of the Companys sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated, and Edward Jones
& Company, Incorporated, in 1996, 1995 and 1994, respectively.
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial Services Life
Insurance Company (CFSLIC). On December 31, 1996, Cova Corporation, an
insurance holding company wholly owned by General American Life Insurance
Company (GALIC), transferred 100% of the outstanding shares of the Company to
CFSLIC, an affiliated life insurer domiciled in Missouri. The transfer of
direct ownership had no effect on the operations of the Company as both CFSLIC
and the Company had existed under common management and control prior to the
transfer.
Prior to June 1, 1995 Xerox Financial Services , Inc. (XFSI) owned 100% of the
shares of the Predecessor. XFSI is a wholly owned subsidiary of Xerox
Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation in exchange for approximately $13.3 million
in cash and $1.1 million in future payables. In conjunction with this
Agreement, the Predecessor also entered into a financing reinsurance
transaction that caused OakRe Life Insurance Company(OakRe), an affiliate of
the Predecessor, to assume the economic benefits and risks of the single
premium deferred annuity deposits (SPDAs) which had an aggregate carrying
value at June 1, 1995 of $159.0 million. In exchange, the Predecessor
transferred specifically identified assets to OakRe with a market value at
June 1, 1995 of $162.0 million. Ownership of OakRe was retained by XFSI
subsequent to the sale of the Predecessor and other affiliates. The
Receivable from OakRe to the Company that was created by this transaction will
be liquidated over the remaining crediting rate guaranty periods (which will
be substantially expired by the year 2000) by the transfer of cash in the
amount of the then current account value, less a recapture commission fee to
OakRe on policies retained beyond their 30-day no-fee surrender window by the
Company, upon the next crediting rate reset date of each annuity policy. The
Company may then reinvest that cash for those policies that are retained and
thereafter assume the benefits and risks of those deposits.
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the periods ending December 31, 1996 and 1995.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date.
(2) CHANGE IN ACCOUNTING
Upon closing of the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price of $13.3 million according to the fair values of the acquired
assets and liabilities, including the estimated present value of future
profits. These allocated values were dependent upon policies in force and
market conditions at the time of closing, however, these allocations were not
finalized until 1996. The table below summarizes the final allocation of
purchase price.
<TABLE>
<CAPTION>
(In Millions)
<S> <C>
Assets acquired:
Policy loans $ 0.9
Cash and cash equivalents 25.9
Short term investment 0.1
Present value of future profits 1.1
Goodwill 2.2
Deferred tax benefit 1.5
Reinsurance receivable 156.3
Other assets 0.1
--------
$ 188.1
Liabilities assumed:
Policyholder deposits $ 168.7
Future policy benefits 4.5
Future purchase price payable 1.1
Deferred income taxes 0.2
Other liabilities 0.3
$ 174.8
--------
Adjusted purchase price $ 13.3
========
</TABLE>
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in a reduction in shareholders equity of
approximately $4.0 million in 1995 reflecting the application of push down
purchase accounting. The Companys financial statements subsequent to June 1,
1995 reflect this new basis of accounting.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on Predecessor historical costs. The periods ending on or after
such date are labeled The Company and are based on the new cost basis of the
Company or fair values at June 1, 1995 and the subsequent results of
operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments in all debt securities and short term investments and those equity
securities with readily determinable market values are classified into one of
three categories: held-to-maturity, trading, or available-for-sale.
Classification of investments is based on management's current intent. All
debt securities and short term investments at December 31, 1996 and 1995 were
classified as available-for-sale. Securities available-for-sale are carried at
market value, with unrealized holding gains and losses reported as a separate
component of shareholders equity, net of deferred effects of income tax and
related effects on deferred acquisition costs and present value of future
profits.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income.
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that are
specifically assigned to variable annuity policyholders in the separate
accounts and are not available to other creditors of the Company. The
earnings of separate account investments are also assigned to the
policyholders in the separate accounts, and are not guaranteed or supported by
the other general investments of the Company. The Company earns mortality and
expense risk fees from the separate accounts and assesses withdrawal charges
in the event of early withdrawals. Separate accounts assets are valued at
fair market value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses, interest credited to
accounts, surrender fees, mortality costs, and policy maintenance expenses.
The estimated gross profit streams are periodically reevaluated and the
unamortized balance of deferred acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised estimates been
known and applied from the inception of the policies and contracts. The
amortization and adjustments resulting from unrealized gains and losses is not
recognized currently in income but as an offset to the unrealized gains and
losses reflected as a separate component of equity.
The components of deferred policy acquistion costs are shown below:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In thousands) 1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $1,164 $ 6,167 $ 9,718 $ 7,095
Effects of push down purchase
accounting -- (6,167) -- --
Commissions and expenses deferred 2,413 1,169 542 1,262
Amortization (187) (5) (522) (6,979)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) (69) -- (3,571) 8,340
Deferred policy acquistion costs,
end of period $3,321 $ 1,164 $ 6,167 $ 9,718
======= ========
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
PRESENT VALUE OF FUTURE PROFITS
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted at a pre-tax
rate of 18% (12% net after-tax).
In addition, as the Company has the option of retaining its SPDA policies
after they reach their next interest rate reset date and are recaptured from
OakRe, a component of this asset represents estimates of future profits on
recaptured business. This asset will be amortized in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, interest
credited to accounts, surrender fees, mortality costs, and policy maintenance
(continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
expenses. The estimated gross profit streams are periodically reevaluated and
the unamortized balance of present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. The amortization and
adjustments resulting from unrealized gains and losses is not recognized
currently in income but as an offset to the unrealized gains and losses
reflected as a separate component of equity. The amortization period is the
remaining life of the policies, which is approximately 20 years from the date
of original policy issue.
Based on current assumptions, amortization of the original in-force PVFP
asset, expressed as a percentage of the original in-force asset, is projected
to be 8.4%, 6.2%, 4.8%, 4.0% and 3.4% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill, future payable and deferred taxes.
This final allocation and the resulting impact on inception to date
amortization was recorded, in its entirety, in 1996. No restatement of the
June 1, 1995 opening Balance Sheet was made.
The components of present value of future profits are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period $ 576 $1,233
Interest added 74 56
Gross amortization 4 (163)
Adjustment due to revised push down purchase accounting (91) --
Present value of future profit attributable to
unrealized losses/(gains) 615 (550)
------- -------
Present value of future profits - end of period $1,178 $ 576
</TABLE>
FUTURE PAYABLE
Pursuant to the financial reinsurance agreement, the receivable from OakRe
becomes due in installments when the SPDA policies reach their next crediting
rate reset date. For any recaptured policies that continue in force with
OakRe into the next guarantee period, the Company will pay a commission to
OakRe of 1.75% up to 40% of policy account values originally reinsured and
3.5% thereafter. On policies that are recaptured and subsequently exchanged to
a variable annuity policy, the Company will pay commission to OakRe of 0.50%.
The Company has recorded a future payable that represents the present value of
the anticipated future commission payments payable to OakRe over the remaining
life of the financial reinsurance agreement discounted at an estimated
borrowing rate of 6.5%. This liability represents a contingent purchase price
payable for the policies transferred to OakRe on the purchase date and has
been pushed down to the Company through the financial reinsurance agreement.
The Company expects that this payable will be substantially extinguished by
the year 2000.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of this future payable are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Future payable - beginning of period $1,265 $1,438
Interest added 39 50
Payments to OakRe (273) (223)
Adjustment due to revised push down purchase accounting (348) --
Future payable - end of period $ 683 $1,265
======= =======
</TABLE>
GOODWILL
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period.
The components of Goodwill are shown below:
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 2,306 $ 2,375
Amortization (105) (69)
Adjustment due to revised push down purchase accounting
(167) --
Goodwill - end of period $ 2,034 $ 2,306
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
XFSI and GALIC agreed to file an election to treat the acquisition of the
Company as an asset acquisition under the provisions of Internal Revenue Code
Section 338(h)(10). As a result of that election, the tax basis of the
Companys assets as of the date of acquisition were revalued based upon fair
market values as of June 1, 1995. The principal effect of the election was to
establish a tax asset on the tax-basis balance sheet of approximately $2.9
million for the value of the business acquired that is amortizable for tax
purposes over ten to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
(Continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred as the amounts are not
material to the financial statements.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
Subsequent to June 1, 1995 the Company files its own separate income tax
return, independent from its ultimate parent, GALIC.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. 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 to the period that includes
the enactment date.
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the financial statements are most affected by the
use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of Goodwill
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention and lapses,
the spread between investment earnings and crediting rates, and the level of
maintenance expenses. Changes in circumstances or estimates may cause
retrospective adjustment to the periodic amortization expense and the carrying
value of the asset.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS #121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale" and are carried at fair value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were $537,442 and $104,571, respectively, less
than their stated carrying value. Of the contracts permitting surrender, 90%
provide the option to surrender without fee or adjustment during the 30 days
following reset of guaranteed crediting rates. The Company has not determined
a practical method to determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
REINSURANCE
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). The net assets initially transferred to OakRe were
established as a receivable and then are subsequently increased as interest is
accrued on the underlying liabilities and decreased as funds are transferred
back to the Company when policies reach their crediting rate reset date or
benefits are claimed.
OTHER
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
(4) INVESTMENTS
The Company's investments in debt securities and short term investments are
considered available for sale and carried at estimated fair value, with the
aggregate unrealized appreciation or depreciation being recorded as a separate
component of shareholders equity. The carrying value and amortized cost of
investments at December 31, 1996 and 1995 were as follows:
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
1996
GROSS GROSS
ESTIMATED
CARRYING UNREALIZED UNREALIZED
FAIR AMORTIZED
VALUE GAINS LOSSES
VALUE COST (in
thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 101 $ 1 $ -- $ 101 $ 100
Collateralized mortgage obligations 20,143 81 (119) 20,143 20,181
Corporate, state, municipalities,
and political subdivisions 51,019 433 (390) 51,019 50,976
Total debt securities 71,263 515 (509) 71,263 71,257
Policy loans 1,048 -- -- 1,048 1,048
Short term investments 44 -- -- 44 44
Total investments $72,355 $515 $(509) $72,355 $72,349
</TABLE>
<TABLE>
<CAPTION>
1995
GROSS GROSS
ESTIMATED
CARRYING UNREALIZED UNREALIZED
FAIR AMORTIZED
VALUE GAINS LOSSES
VALUE COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 104 $ 3 $ -- $ 104 $ 101
Collateralized mortgage obligations 13,377 237 $(14) 13,377 13,154
Corporate, state, municipalities, and
political subdivisions 24,611 624 -- 24,611 23,987
Total debt securities 38,092 864 (14) 38,092 37,242
Policy loans 1,063 -- -- 1,063 1,063
Short term investments 984 0 (4) 984 988
Total investments $40,139 $864 $(18) $40,139 $39,293
======= ==== ===== ======= =======
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $20,531 $20,572
Due after five years through ten years 28,019 28,010
Due after ten years 2,527 2,538
Mortgage-backed securities 20,180 20,143
Total $71,257 $71,263
<FN>
At December 31, 1996, approximately 95.3% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 4.7% non-investment grade debt securities, all are rated as BB+ or its
equivalent.
All debt securities were income producing during the years ended December 31,
1996 and 1995. As of December 31, 1996 and 1995 the Company had no impaired
investments.
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses)were as follows:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5
MONTHS
ENDED
ENDED
1996 12/31/95
5/31/95 1994
(in thousands of
dollars)
<S> <C> <C> <C> <C>
Income on debt securities $3,926 $1,166 $ 4,075 $ 15,013
Income on short-term investments 243 257 1,261 349
Income on policy loans 86 46 29 57
Miscellaneous interest 8 -- -- 4
Total investment income 4,263 1,469 5,365 15,423
Investment expenses (87) (50) (94) (322)
Net investment income 4,176 1,419 5,271 15,101
Realized capital gains/(losses) were as
follows:
Debt securities (28) 118 (272) 320
Short-term investments -- -- -- (2)
Net realized gains/(losses) on
investments $ (28) $ 118 $ (272) $ 318
======= ========= =========
Unrealized gains/(losses) were as follows:
Debt securities 6 $ 850 $(10,594) $(25,749)
Short-term investments -- (4) 1 (1)
Effects on deferred acquisition costs
amortization (69) -- 4,767 8,340
Effects on present value of future
profits amortization 65 (550) -- --
Unrealized gains/(losses) before income tax 2 296 (5,826) (17,410)
Unrealized income tax benefit/(expense) (1) (104) 2,037 6,094
Net unrealized gains (losses) on
investments $ 1 $ 192 $ (3,789) $(11,316)
</TABLE>
Proceeds from sales, redemptions and paydowns of investments in debt
securities during 1996 were $10,635,608. Gross gains of $16,757 and gross
losses of $44,311 were realized on those sales. Included in these amounts were
$1,355 of gross gains realized on the sale of non-investment grade securities.
Proceeds from sales, redemptions and paydowns of investments in debt
securities for the Company during 1995 were $14,400,247 and for the
Predecessor were $148,796,033. Gross gains of $136,104 and gross losses of
$17,789 were realized by the Company on its sales. The Predecessor realized
gross gains of $23,293 and gross losses of $295,368 on its sales.
Proceeds from sales, redemptions and paydowns of investments in debt
securities during 1994 were $115,993,655. Gross gains of $1,671,736 and gross
losses of $1,351,406 were realized on those sales.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(844,000), $850,000,
$15,152,000, and $(29,644,000), respectively. Unrealized appreciation/
(depreciation) of debt securities is calculated as the change between the cost
and market values of debt securities for the years then ended.
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- --------------- ----------
Colonial Realty $2,036,540
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- ----------------------- ----------
North American Mortgage $1,954,398
</TABLE>
(6) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 CLMC had no retired
employees nor any employees fully eligible for retirement and had no
disbursements for such benefit commitments. The expense arising from these
obligations is not material.
(7) INCOME TAXES
The Company files its own Federal Income Tax return. Amounts payable or
recoverable related to periods before June 1, 1995 are subject to an
indemnification agreement with XFSI, which has the effect that the Company is
not at risk for any income taxes nor entitled to recoveries related to those
periods.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of
dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 295 $194 $ (561) $(2,241)
Realized investment gains/(losses) (10) (54) (2) 111
Income tax expense/(benefit) included
in the statements of income 285 140 (563) (2,130)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (103) 104 4,053 (6,829)
Total income tax expense/(benefit) $ 182 $244 $3,490 $(8,959)
</TABLE>
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
1995 1995
1996 7 MONTHS 5 MONTHS
1994
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $244 35.0% $108 35.0% $(494) 35.0% $(2,200) 35.0%
Tax-exempt bond interest -- -- -- -- (70) 5.0 -- --
Amortization of intangible assets 37 5.3 25 8.2 -- -- -- --
Other 4 .6 7 2.3 1 (.1) 70 (1.0)
Total $285 40.9% $140 45.5% $(563) 39.9% $(2,130) 34.0%
==== ===== ====== ===== ======== =====
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 733 $1,009
Liability for commission on recapture 239 443
Policy reserves 972 143
DAC Proxy Tax 556 277
Other Deferred tax assets 6 81
Total assets $2,506 $1,953
Deferred tax liabilities:
Unrealized gains in investments $ 1 $ 104
PVFP 219 377
Deferred acquisition costs 1,162 407
Other deferred tax liabilities 9 58
Total liabilities 1,391 946
Net deferred tax asset $1,115 $1,007
======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
consideration of the reversal of existing temporary differences, anticipated
future earnings, and all other available evidence. Accordingly, no valuation
allowance is established.
(8) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and servicing agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporate, which provides
management services and the employees necessary to conduct the activities of
the Company, and General American Investment Management Company, which
provides investment advice. Additionally, a portion of overhead and other
corporate expenses are allocated by the Companys ultimate parent, GALIC. The
unaffiliated companies are Johnson & Higgins, a New Jersey corporation, and
Johnson & Higgins/Kirke Van Orsdel, Inc., a Delaware corporation, which
provide various services for the Company including underwriting, claims and
administrative functions. The affiliated and unaffiliated service providers
are reimbursed for the cost of their services and are paid a service fee.
Expenses and fees paid to affiliated companies in 1996 and the seven months of
1995 for the Company were $303,694 and $375,764, respectively, and by the
Predecessor in 1995 and 1994 were $334,979 and $674,136 respectively.
(9) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the recognition of deferred taxes under GAAP reporting, the
non-recognition of financial reinsurance for GAAP reporting, and the
establishment of an Asset Valuation Reserve as a contingent liability based on
the credit quality of the Company's investment securities and an Interest
Maintenance Reserve as an unearned liability to defer the realized gains and
losses of fixed income investments presumably resulting from changes to
interest rates and amortize them into income over the remaining life of the
investment sold. In addition, SFAS #115 adjustments to record the carrying
values of debt securities and certain equity securities at market are applied
only under GAAP reporting and capital contributions in the form of notes
receivable from an affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their established fair values, and
shareholders equity to the net purchase price. Statutory accounting does not
recognize the purchase method of accounting.
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $11,176 $11,457
Reconciling items:
Statutory Asset Valuation Reserves 825 700
Interest Maintenance Reserve 34 69
GAAP investment adjustments to fair value 6 846
Deferred policy acquisition costs 3,321 1,164
GAAP basis policy reserves (2,101) (215)
Deferred federal income taxes (net) 1,115 1,007
Goodwill 2,034 2,306
Present value of future profits 1,178 576
Future purchase price payable (683) (1,265)
Other (1) 38
GAAP Shareholders Equity $16,904 $16,683
========
</TABLE>
Statutory net income (loss) for the years ended December 31, 1996, 1995 and
1994 were $(113,236), $(2,404,316) and $(13,042,271) respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory surplus or statutory net gain
from operations for the preceding year. Accordingly, the maximum dividend
permissible during 1997 will be $837,581.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $12,001,030 and $1,360,234
respectively. This level of adjusted capital satisfies regulatory
requirements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
(10) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed in
California in an association formed to guarantee benefits to policyholders of
insolvent life insurance companies. Under the state law, as a condition for
maintaining the Companys authority to issue new business, the Company is
contingently liable for its share of claims covered by the guaranty
association for insolvencies incurred through 1996, but for which assessments
have not yet been determined nor assessed, to a maximum generally of 1% of
statutory premiums per annum.
At December 31, 1996, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $1.6 million in
future assessments on insolvencies that occurred before December 31, 1996.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded an additional receivable from OakRe for $1.6 million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments and may retain the
APPENDIX A
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 55 and 70 and a husband and wife age 65. Our
hypothetical insureds are in good health which means the Policy would be issued
with standard rates. The initial premium was $10,000 and is 100% of the Maximum
Premium Limit.
There are three illustrations -- all of which are based on the above. We also
assumed that the underlying investment portfolio had gross rates of return of
0%, 6%, 12%. This means that the underlying investment portfolio would earn
these rates of return before the deduction of the advisory fee and operating
expenses. When these costs are taken into account, the net annual investment
return rates (net of an average of approximately 0.82% for these charges) are
approximately -0.82%, 5.18% and 11.18%
It is important to be aware that this illustration assumes a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Account Value, Cash
Surrender Value and the net death benefit. The net death benefit is the death
benefit minus any outstanding loans and loan interest accrued. We used the
charges we described in the Expenses Section of the Prospectus. These charges
are: (1) mortality and expense risk charge equal to an annual rate of 0.90% of
the Account Value in the investment portfolios for the first ten years and 0.75%
after that; (2) an administrative charge equal to an annual rate of 0.40% of the
Account Value; (3) a tax expense charge equal to an annual rate of 0.40% of the
Account Value for the first 10 years; (4) any Surrender Charges or deferred
premium tax charge which may be applicable in determining the Cash Surrender
Values; and (5) the policy maintenance charge. We also deducted for the cost of
insurance based on both the current charges and the guaranteed charges.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how $10,000 grows if it was invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed insured's age, risk classification, Face Amount, the
proposed initial premium, and reflecting both the current cost of insurance and
the guaranteed cost of insurance.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,658 8,791 27,290 9,532 8,678 27,290
- ------ ----- ----- ------ ----- ----- ------
2 11,025 9,327 8,516 27,290 9,052 8,267 27,290
- ------ ----- ----- ------ ----- ----- ------
3 11,576 9,006 8,248 27,290 8,559 7,843 27,290
- ------ ----- ----- ------ ----- ----- ------
4 12,155 8,695 8,103 27,290 8,051 7,507 27,290
- ------ ----- ----- ------ ----- ----- ------
5 12,763 8,393 7,919 27,290 7,524 7,104 27,290
- ------ ----- ----- ------ ----- ----- ------
6 13,401 8,101 7,736 27,290 6,975 6,666 27,290
- ------ ----- ----- ------ ----- ----- ------
7 14,071 7,819 7,555 27,290 6,399 6,189 27,290
- ------ ----- ----- ------ ----- ----- ------
8 14,775 7,545 7,376 27,290 5,789 5,664 27,290
- ------ ----- ----- ------ ----- ----- ------
9 15,513 7,279 7,198 27,290 5,139 5,085 27,290
- ------ ----- ----- ------ ----- ----- ------
10 16,289 7,022 7,022 27,290 4,443 4,443 27,290
-- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,018 6,018 27,290 57 57 27,290
-- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,137 5,137 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,364 4,364 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
30 43,219 3,686 3,686 27,290 0 0 0
-- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
<S>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,239 9,339 27,290 10,114 9,214 27,290
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,485 9,610 27,290 10,215 9,340 27,290
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,737 9,887 27,290 10,302 9,452 27,290
- - ------ ------ ----- ------ ------ ----- ------
4 12,155 10,996 10,306 27,290 10,374 9,684 27,290
- - ------ ------ ------ ------ ------ ----- ------
5 12,763 11,262 10,687 27,290 10,427 9,852 27,290
- - ------ ------ ------ ------ ------ ----- ------
6 13,401 11,536 11,076 27,290 10,460 10,000 27,290
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 11,816 11,471 27,290 10,467 10,122 27,290
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 12,104 11,874 27,290 10,444 10,214 27,290
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 12,400 12,285 27,290 10,385 10,270 27,290
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 12,704 12,704 27,290 10,286 10,286 27,290
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 14,754 14,754 27,290 9,256 9,256 27,290
- -- ------ ------ ------ ------ ----- ----- ------
20 26,533 17,161 17,161 27,290 5,625 5,625 27,290
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 19,986 19,986 27,290 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 23,303 23,303 27,290 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 55, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $27,290
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,821 9,921 27,290 10,696 9,796 27,290
- ------ ------ ----- ------ ------ ----- ------
2 11,025 11,711 10,836 27,290 11,447 10,572 27,290
- ------ ------ ------ ------ ------ ------ ------
3 11,576 12,677 11,827 27,290 12,260 11,410 27,290
- ------ ------ ------ ------ ------ ------ ------
4 12,155 13,725 13,035 27,290 13,142 12,452 27,290
- ------ ------ ------ ------ ------ ------ ------
5 12,763 14,862 14,287 27,290 14,100 13,525 27,290
- ------ ------ ------ ------ ------ ------ ------
6 13,401 16,097 15,637 27,290 15,145 14,685 27,290
- ------ ------ ------ ------ ------ ------ ------
7 14,071 17,436 17,091 27,290 16,286 15,941 27,290
- ------ ------ ------ ------ ------ ------ ------
8 14,775 18,889 18,659 27,290 17,536 17,306 27,290
- ------ ------ ------ ------ ------ ------ ------
9 15,513 20,465 20,350 27,290 18,910 18,795 27,290
- ------ ------ ------ ------ ------ ------ ------
10 16,289 22,179 22,179 27,290 20,426 20,426 27,290
-- ------ ------ ------ ------ ------ ------ ------
15 20,789 34,241 34,241 39,719 31,446 31,446 36,478
-- ------ ------ ------ ------ ------ ------ ------
20 26,533 53,085 53,085 36,801 48,711 48,711 52,121
-- ------ ------ ------ ------ ------ ------ ------
25 33,864 83,091 83,091 87,246 76,244 76,244 80,056
-- ------ ------ ------ ------ ------ ------ ------
30 43,219 128,800 128,800 135,240 118,068 118,068 123,972
-- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,658 8,791 17,020 9,424 8,580 17,020
- - ------ ----- ----- ------ ----- ----- ------
2 11,025 9,327 8,516 17,020 8,807 8,045 17,020
- - ------ ----- ----- ------ ----- ----- ------
3 11,576 9,006 8,248 17,020 8,137 7,459 17,020
- - ------ ----- ----- ------ ----- ----- ------
4 12,155 8,695 8,103 17,020 7,401 6,906 17,020
- - ------ ----- ----- ------ ----- ----- ------
5 12,763 8,393 7,919 17,020 6,585 6,223 17,020
- - ------ ----- ----- ------ ----- ----- ------
6 13,401 8,101 7,736 17,020 5,671 5,427 17,020
- - ------ ----- ----- ------ ----- ----- ------
7 14,071 7,819 7,555 17,020 4,640 4,496 17,020
- - ------ ----- ----- ------ ----- ----- ------
8 14,775 7,545 7,376 17,020 3,471 3,404 17,020
- - ------ ----- ----- ------ ----- ----- ------
9 15,513 7,279 7,198 17,020 2,134 2,117 17,020
- - ------ ----- ----- ------ ----- ----- ------
10 16,289 7,022 7,022 17,020 593 593 17,020
- -- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,018 6,018 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,137 5,137 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,364 4,364 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
30 43,219 3,686 3,686 17,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,239 9,339 17,020 10,011 9,111 17,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,485 9,610 17,020 9,993 9,119 17,020
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,737 9,887 17,020 9,940 9,096 17,020
- - ------ ------ ----- ------ ----- ----- ------
4 12,155 10,996 10,306 17,020 9,843 9,165 17,020
- - ------ ------ ------ ------ ----- ----- ------
5 12,763 11,262 10,687 17,020 9,694 9,138 17,020
- - ------ ------ ------ ------ ----- ----- ------
6 13,401 11,536 11,076 17,020 9,482 9,048 17,020
- - ------ ------ ------ ------ ----- ----- ------
7 14,071 11,816 11,471 17,020 9,196 8,881 17,020
- - ------ ------ ------ ------ ----- ----- ------
8 14,775 12,104 11,874 17,020 8,821 8,621 17,020
- - ------ ------ ------ ------ ----- ----- ------
9 15,513 12,400 12,285 17,020 8,340 8,246 17,020
- - ------ ------ ------ ------ ----- ----- ------
10 16,289 12,704 12,704 17,020 7,727 7,727 17,020
- -- ------ ------ ------ ------ ----- ----- ------
15 20,789 14,754 14,754 17,020 1,095 1,095 17,020
- -- ------ ------ ------ ------ ----- ----- ------
20 26,533 17,161 17,161 18,019 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 20,072 20,072 20,273 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 23,554 23,554 23,790 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE LIFE OPTION
MALE, ISSUE AGE 70, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $17,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,821 9,921 17,020 10,598 9,698 17,020
------ ------ ----- ------ ------ ----- ------
2 11,025 11,711 10,836 17,020 11,253 10,378 17,020
- - ------ ------ ------ ------ ------ ------ ------
3 11,576 12,677 11,827 17,020 11,973 11,123 17,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 13,725 13,035 17,020 12,774 12,084 17,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 14,862 14,287 17,020 13,675 13,100 17,020
- - ------ ------ ------ ------ ------ ------ ------
6 13,401 16,105 15,645 17,020 14,701 14,241 17,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 17,494 17,149 18,369 15,888 15,543 17,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 18,999 18,769 19,949 17,247 17,017 18,109
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 20,629 20,514 21,661 18,724 18,609 19,660
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 22,393 22,393 23,513 20,322 20,322 21,339
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 34,532 34,532 36,258 31,291 31,291 32,855
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 53,237 53,237 55,899 47,524 47,524 49,900
- -- ------ ------ ------ ------ ------ ------ ------
25 33,864 82,658 82,658 83,484 73,086 73,086 73,817
- -- ------ ------ ------ ------ ------ ------ ------
30 43,219 128,608 128,608 129,894 113,209 113,209 114,341
- -- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 0%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,714 8,842 28,020 9,714 8,842 28,020
- - ------ ----- ----- ------ ----- ----- ------
2 11,025 9,418 8,598 28,020 9,418 8,598 28,020
- - ------ ----- ----- ------ ----- ----- ------
3 11,576 9,126 8,357 28,020 9,108 8,341 28,020
- - ------ ----- ----- ------ ----- ----- ------
4 12,155 8,842 8,239 28,020 8,781 8,183 28,020
- - ------ ----- ----- ------ ----- ----- ------
5 12,763 8,567 8,081 28,020 8,432 7,955 28,020
- - ------ ----- ----- ------ ----- ----- ------
6 13,401 8,298 7,924 28,020 8,053 7,691 28,020
- - ------ ----- ----- ------ ----- ----- ------
7 14,071 8,038 7,766 28,020 7,639 7,382 28,020
- - ------ ----- ----- ------ ----- ----- ------
8 14,775 7,784 7,610 28,020 7,176 7,017 28,020
- - ------ ----- ----- ------ ----- ----- ------
9 15,513 7,538 7,454 28,020 6,652 6,579 28,020
- - ------ ----- ----- ------ ----- ----- ------
10 16,289 7,298 7,298 28,020 6,050 6,050 28,020
- -- ------ ----- ----- ------ ----- ----- ------
15 20,789 6,372 6,372 28,020 1,247 1,247 28,020
- -- ------ ----- ----- ------ ----- ----- ------
20 26,533 5,546 5,546 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
25 33,864 4,808 4,808 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
30 43,219 4,149 4,149 28,020 0 0 0
- -- ------ ----- ----- ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 6%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,299 9,399 28,020 10,299 9,399 28,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 10,591 9,716 28,020 10,591 9,716 28,020
- - ------ ------ ----- ------ ------ ----- ------
3 11,576 10,885 10,035 28,020 10,874 10,024 28,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 11,187 10,497 28,020 11,145 10,455 28,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 11,499 10,924 28,020 11,400 10,825 28,020
- - ------ ------ ------ ------ ------- ------ ------
6 13,401 11,820 11,360 28,020 11,634 11,174 28,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 12,151 11,806 28,020 11,841 11,496 28,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 12,492 12,262 28,020 12,014 11,784 28,020
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 12,843 12,728 28,020 12,141 12,026 28,020
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 13,205 13,205 28,020 12,213 12,213 28,020
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 15,615 15,615 28,020 11,610 11,610 28,020
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 18,495 18,495 28,020 6,040 6,040 28,020
- -- ------ ------ ------ ------ ----- ----- ------
25 33,864 21,935 21,935 28,020 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
30 43,219 26,045 26,045 28,020 0 0 0
- -- ------ ------ ------ ------ ----- ----- ------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
JOINT LIFE OPTION
MALE, ISSUE AGE 65, FEMALE, ISSUE AGE 65, STANDARD RATE CLASS
$10,000 SINGLE PREMIUM FACE AMOUNT OF $28,020
ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF 12%
<TABLE>
<CAPTION>
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Cash Net Cash Net
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C>
1 10,500 10,884 9,984 28,020 10,884 9,984 28,020
- - ------ ------ ----- ------ ------ ----- ------
2 11,025 11,833 10,958 28,020 11,833 10,958 28,020
- - ------ ------ ------ ------ ------ ------ ------
3 11,576 12,855 12,005 28,020 12,853 12,003 28,020
- - ------ ------ ------ ------ ------ ------ ------
4 12,155 13,967 13,277 28,020 13,950 13,260 28,020
- - ------ ------ ------ ------ ------ ------ ------
5 12,763 15,178 14,603 28,020 15,130 14,555 28,020
- - ------ ------ ------ ------ ------ ------ ------
6 13,401 16,497 16,037 28,020 16,402 15,942 28,020
- - ------ ------ ------ ------ ------ ------ ------
7 14,071 17,933 17,588 28,020 17,776 17,431 28,020
- - ------ ------ ------ ------ ------ ------ ------
8 14,775 19,497 19,267 28,020 19,264 19,034 28,020
- - ------ ------ ------ ------ ------ ------ ------
9 15,513 21,199 21,084 28,020 20,881 20,766 28,020
- - ------ ------ ------ ------ ------ ------ ------
10 16,289 23,053 23,053 28,020 22,649 22,649 28,020
- -- ------ ------ ------ ------ ------ ------ ------
15 20,789 36,229 36,229 38,040 35,521 35,521 37,297
- -- ------ ------ ------ ------ ------ ------ ------
20 26,533 56,894 56,894 59,739 55,350 55,350 58,307
- -- ------ ------ ------ ------ ------ ------ ------
25 33,864 89,515 89,515 93,991 85,487 85,487 89,761
- -- ------ ------ ------ ------ ------ ------ ------
30 43,219 140,845 140,845 142,254 131,959 131,959 133,278
- -- ------ ------- ------- ------- ------- ------- -------
<FN>
* These values reflect investment results using current cost of insurance
rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS.
THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities
and 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 confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Cova Financial Life
Insurance Company ("Company") hereby represents that the fees and charges
deducted under the Policy described in the Prospectus, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
INDEMNIFICATION
The Bylaws of the Company (Article V, Section 9) provide that:
This corporation shall indemnify, to the fullest extent allowed by California
law, its present and former directors and officers against expenses, judgements,
fines, settlements, and other amounts incurred in connection with and proceeding
or threatened proceeding brought against such directors or officers in their
capacity as such. Such indemnification shall be made in accordance with
procedures set forth by California Law. Sums for expenses incurred in defending
any such proceeding may also be advanced to any such director or officer to the
extent and under the conditions provided by California law.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling person of the
Company pursuant to the foregoing, or otherwise, the Company 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, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company 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
Company 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.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet
The Prospectus consisting of 58 pages.
Undertakings to file reports.
The signatures.
The following exhibits.
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2.
1. Resolution of the Board of Directors of the Company *
2. Not Applicable
3.a. Form of Principal Underwriter's Agreement
3.b. Selling Agreement
3.c. Schedules of Commissions
4. Not Applicable
5. Modified Single Premium Variable Life Insurance Policy *
6.a. Articles of Incorporation of the Company
6.b. Bylaws of the Company
7. Not Applicable
8. Not Applicable
9. Not Applicable
10. Application Form *
11. Powers of Attorney*
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Consent of Independent Accountants
*Incorporated by reference to Registrant's initial Form S-6 filed electronically
on October 9, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Oakbrook Terrace and State
of Illinois on this 7th day of November, 1997.
COVA VARIABLE LIFE ACCOUNT FIVE
Registrant
By: COVA FINANCIAL LIFE INSURANCE COMPANY
By: /s/LORRY J. STENSRUD
______________________________
COVA FINANCIAL LIFE INSURANCE COMPANY
Attest:
/s/JUDY M. DREW /s/LORRY J. STENSRUD
________________________ By: ______________________________
Senior Vice President
(Signature and Title)
Pursuant to the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board and
- ---------------------- Director -------
Richard A. Liddy Date
/s/LORRY J. STENSRUD President and Director 11/7/97
- ------------------ -------
Lorry J. Stensrud Date
Director
- ---------------------- -------
Leonard M. Rubenstein Date
Director
- ----------------- -------
J. Robert Hopson Date
William C. Mair* Controller and Director 11/7/97
- ----------------------- -------
William C. Mair Date
E. Thomas Hughes, Jr.* 11/7/97
- ---------------------- Treasurer and Director -------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 11/7/97
- ---------------------- -------
Matthew P. McCauley Date
John W. Barber* Director 11/7/97
- ---------------------- -------
John W. Barber Date
</TABLE>
*By: /s/LORRY J. STENSRUD
______________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
A.3.a Form of Principal Underwriter's Agreement
A.3.b Selling Agreement
A.3.c Schedules of Commissions
A.6.a Articles of Incorporation of the Company
A.6.b Bylaws of the Company
B Opinion and Consent of Counsel
C Consent of Actuary
D Consent of Independent Accountants
PRINCIPAL UNDERWRITER'S AGREEMENT
IT IS HEREBY AGREED by and between COVA FINANCIAL LIFE INSURANCE COMPANY
("INSURANCE COMPANY") on behalf of COVA VARIABLE LIFE ACCOUNT FIVE (the
"Variable Account") and COVA LIFE SALES COMPANY ("PRINCIPAL UNDERWRITER") as
follows:
I
INSURANCE COMPANY proposes to issue and sell certain modified single
premium variable life insurance policies (collectively the "Policies") of the
Variable Account to the public through PRINCIPAL UNDERWRITER. The PRINCIPAL
UNDERWRITER agrees to provide sales service subject to the terms and conditions
hereof. The Policies to be sold are more fully described in the registration
statements and prospectuses hereinafter mentioned. Such Policies will be issued
by INSURANCE COMPANY through the Variable Account.
II
INSURANCE COMPANY grants PRINCIPAL UNDERWRITER the exclusive right, during
the term of this Agreement, subject to registration requirements of the
Securities Act of 1933 and the Investment Company Act of 1940 and the provisions
of the Securities Exchange Act of 1934, to be the distributor of the Policies
issued through the Variable Account. PRINCIPAL UNDERWRITER will sell the
Policies under such terms as set by INSURANCE COMPANY and will make such sales
to purchasers permitted to buy such Policies as specified in the prospectus.
III
PRINCIPAL UNDERWRITER shall be compensated for its distribution service in
such amount as to meet all of its obligations to selling broker-dealers with
respect to all Premium Payments accepted by INSURANCE COMPANY on the Policies
covered hereby.
IV
On behalf of the Variable Account, INSURANCE COMPANY shall furnish
PRINCIPAL UNDERWRITER with copies of all prospectuses, financial statements and
other documents which PRINCIPAL UNDERWRITER reasonably requests for use in
connection with the distribution of the Policies. INSURANCE COMPANY shall
provide to PRINCIPAL UNDERWRITER such number of copies of the current effective
prospectuses as PRINCIPAL UNDERWRITER shall request.
V
PRINCIPAL UNDERWRITER is not authorized to give any information, or to make
any representations concerning the Policies or the Variable Account of
INSURANCE COMPANY other than those contained in the current registration
statements or prospectuses relating to the Variable Account filed with the
Securities and Exchange Commission or such sales literature as may be authorized
by INSURANCE COMPANY.
VI
Both parties to this Agreement agree to keep the necessary records as
indicated by applicable state and federal law and to render the necessary
assistance to one another for the accurate and timely preparation of such
records.
VII
This Agreement shall be effective upon the execution hereof and will remain
in effect unless terminated as hereinafter provided. This Agreement shall
automatically be terminated in the event of its assignment by PRINCIPAL
UNDERWRITER.
This Agreement may at any time be terminated by either party hereto upon 60
days' written notice to the other party.
VIII
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been given on the date of
service if served personally on the party to whom notice is to be given, or on
the date of mailing if sent by First Class Mail, Registered or Certified,
postage prepaid and properly addressed.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their respective officers thereunto duly authorized.
EXECUTED THIS ____ day of ______, 19__.
INSURANCE COMPANY
COVA FINANCIAL LIFE
INSURANCE COMPANY
BY:___________________________
ATTEST:____________________
Secretary
PRINCIPAL UNDERWRITER
COVA LIFE SALES COMPANY
BY:__________________________
ATTEST:____________________
Secretary
SELLING AGREEMENT
Agreement dated as of ___________________, 19____, by and among COVA
FINANCIAL LIFE INSURANCE COMPANY, a California corporation ("Life Company");
COVA LIFE SALES COMPANY, a Delaware corporation ("Distributor");
________________________, ("Broker-Dealer") and __________________________,
("Insurance Agent").
RECITALS
A. Pursuant to a distribution agreement with Distributor, Life Company has
appointed Distributor as the principal underwriter of the variable annuity
contracts identified in Schedule 1 to this Agreement at the time that this
Agreement is executed, and such other variable annuity contracts or variable
life insurance contracts that may be added to Schedule 1 from time-to-time in
accordance with Section 2(f) of this Agreement. Such contracts together with any
fixed annuity contracts shown on Schedule 1 shall be referred to herein as
"Contracts".
B. The parties to this Agreement desire that Broker-Dealer and Insurance Agent
be authorized to solicit applications for the sale of the Contracts to the
general public subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual promises and
covenants hereinafter set forth, the parties agree as follows:
1. ADDITIONAL DEFINITIONS
(a) Affiliate - With respect to a person, any other person controlling,
controlled by, or under common control with, such person.
(b) Agent - An individual associated with Insurance Agent and Broker-Dealer
who is appointed by Life Company as an agent for the purpose of soliciting
applications.
(c) NASD - The National Association of Securities Dealers, Inc.
(d) 1933 Act - The Securities Act of 1933, as amended.
(e) 1934 Act - The Securities and Exchange Act of 1934, as amended.
(f) 1940 Act - The Investment Company Act of 1940, as amended.
(g) Premium - A payment made under a Contract to purchase benefits under
such Contract.
(h) Prospectus - With respect to each Contract, the prospectus for such
Contract included within the Registration Statement for such Contract; provided,
however, that, if the most recently filed prospectus, filed pursuant to Rule 497
under the 1933 Act subsequent to the date on which the Registration Statement
became effective differs from the prospectus on file at the time the
Registration Statement became effective, the term "Prospectus" shall refer to
the most recently filed prospectus filed under Rule 497 from and after the date
on which it shall have been filed.
(i) Registration Statement - With respect to each Contract, the most recent
effective registration statement(s) filed with the SEC or the most recent
effective post-effective amendment(s) thereto with respect to such Contract,
including financial statements included therein and all exhibits thereto. There
may be more than one Registration Statement in effect at the time for a
Contract; in such case, any reference to "the Registration Statement" for a
Contract shall refer to any or all, depending on the context, of the
Registration Statements for such Contract.
(j) SEC - The Securities and Exchange Commission.
(k) Service Center - Policy Service office:
(i) Fixed Products: P.O. Box 295, Des Moines, IA 50301
(ii) Variable Products: P.O. Box 10366, Des Moines, IA 50306
(iii)Express Mail Only: 1776 West Lakes Parkway, West Des Moines, IA
50266
2. AUTHORIZATION OF BROKER-DEALER AND INSURANCE AGENT
(a) Distributor hereby authorizes Broker-Dealer under the securities laws,
and Life Company hereby authorizes and appoints Insurance Agent under the
insurance laws, each in a non-exclusive capacity, to distribute the Contracts.
Broker-Dealer and Insurance Agent accept such authorization and appointment and
shall use their best efforts to find purchasers for the Contracts, in each case
acceptable to Life Company.
(b) Life Company shall notify Broker-Dealer and Insurance Agent in writing
of all states and jurisdictions in which Life Company is licensed to sell the
Contracts. Broker-Dealer and Insurance Agent acknowledge that no territory is
exclusively assigned hereunder, and Life Company reserves the right in its sole
discretion to establish or appoint one or more agencies in any jurisdiction in
which Insurance Agent transacts business hereunder.
(c) Insurance Agent is vested under this Agreement with power and authority
to select and recommend individuals associated with Insurance Agent for
appointment as Agents of Life Company, and only individuals so recommended by
Insurance Agent shall become Agents, provided that Life Company reserves the
right in its sole discretion to refuse to appoint any proposed agent or, once
appointed, to terminate the same at any time with or without cause.
(d) Neither Broker-Dealer nor Insurance Agent shall expend or contract for
the expenditure of the funds of Life Company. Broker-Dealer and Insurance Agent
each shall pay all expenses incurred by each of them in the performance of this
Agreement, unless otherwise specifically provided for in this Agreement or
unless Life Company and Distributor shall have agreed in advance in writing to
share the cost of certain expenses. Initial and renewal state appointment fees
for Insurance Agent and appointees of Insurance Agent as Agents of Life Company
will be paid by Life Company according to the terms set forth in the rules and
regulations as may be adopted by Life Company from time-to-time. Neither
Broker-Dealer nor Insurance Agent shall possess or exercise any authority on
behalf of Distributor or Life Company other than that expressly conferred on
Broker-Dealer or Insurance Agent by this Agreement. In particular, and without
limiting the foregoing, neither Broker-Dealer nor Insurance Agent shall have any
authority, nor shall either grant such authority to any Agent, on behalf of
Distributor or Life Company: to make, alter or discharge any Contract or other
contract entered into pursuant to a Contract; to waive any Contract forfeiture
provision; to extend the time of paying any Premiums; or to receive any monies
or Premiums from applicants for or purchasers of the Contracts (except for the
sole purpose of forwarding monies or Premiums to Life Company).
(e) Broker-Dealer and Insurance Agent acknowledge that Life Company has the
right in its sole discretion to reject any applications or Premiums received by
it and to return or refund to an applicant such applicant's Premium.
(f) Schedule 1 to this Agreement may be amended by Distributor and Life
Company in their sole discretion from time-to-time to include other variable
annuity contracts, fixed annuity contracts, or variable life insurance
contracts, or to delete contracts from the Schedule.
(g) Distributor and Life Company acknowledge that Broker-Dealer and
Insurance Agent are each an independent contractor. Accordingly, Broker-Dealer
and Insurance Agent are not obliged or expected to give full time and energies
to the performance of their obligations hereunder, nor are Broker-Dealer and
Insurance Agent obliged or expected to represent Distributor or Life Company
exclusively. Nothing herein contained shall constitute Broker-Dealer, Insurance
Agent, the Agents or any agents or representatives of Broker-Dealer or Insurance
Agent as employees of Distributor or Life Company in connection with
solicitation of applications for the Contracts.
3. LICENSING AND REGISTRATION OF BROKER-DEALER, INSURANCE AGENT AND AGENTS
(a) Broker-Dealer represents and warrants that it is a Broker-Dealer
registered with the SEC under the 1934 Act, and is a member of the NASD in good
standing. Broker-Dealer must, at all times when performing its functions and
fulfilling its obligations under this Agreement, be duly registered as a
Broker-Dealer under the 1934 Act and as required by applicable law, in each
state or other jurisdiction in which Broker-Dealer intends to perform its
functions and fulfill its obligations hereunder.
(b) Insurance Agent represents and warrants that it is a licensed life
insurance agent where required to solicit applications. Insurance Agent must, at
all times when performing its functions and fulfilling its obligations under
this Agreement, be duly licensed to sell the Contracts in each state or other
jurisdiction in which insurance Agent intends to perform its functions and
fulfill its obligations hereunder.
(c) Broker-Dealer shall ensure that no individual shall offer or sell the
Contracts on its behalf in any state or other jurisdiction in which the
Contracts may lawfully be sold unless such individual is an associated person of
Broker-Dealer (as that term is defined in Section 3(a)(18) of the 1934 Act) and
duly registered with the NASD and any applicable state securities regulatory
authority as a registered person of Broker-Dealer qualified to distribute the
Contracts in such state o jurisdiction. Broker-Dealer shall be solely
responsible for the background investigations of the Agents to determine their
qualifications and will provide Life Company upon request with copies of such
investigations.
(d) Insurance Agent shall ensure that no individual shall offer or sell the
Contracts on behalf of Insurance Agent in any state or other jurisdiction unless
such individual is duly affiliated as an agent of Insurance Agent, duly licensed
and appointed as an agent of Life Company, and appropriately licensed,
registered or otherwise qualified to offer and sell the Contracts to be offered
and sold by such individual under the insurance laws of such state or
jurisdiction. Insurance Agent shall be responsible for investigating the
character, work experience and background of any proposed agent prior to
recommending appointment as agent of Life Company. Upon request, Life Company
shall be provided with copies of such investigation. All matters concerning the
licensing of any individuals recommended for appointment by Insurance Agent
under any applicable state insurance law shall be a matter directly between
Insurance Agent and such individual, and the Insurance Agent shall furnish Life
Company with proof of proper licensing of such individual or other proof,
reasonably acceptable to Life Company. Broker-Dealer and Insurance Agent shall
notify Distributor and Life Company immediately upon termination of an Agent's
association with Broker-Dealer or Insurance Agent.
(e) Without limiting the foregoing, Broker-Dealer and Insurance Agent
represent that they are in compliance with the terms and conditions of letters
issued by the Staff of the SEC with respect to the non-registration as a
broker-dealer of an insurance agency associated with a registered broker-dealer.
Broker-Dealer and the Insurance Agent shall notify Distributor immediately in
writing if Broker-Dealer and/or Insurance Agent fail to comply with any such
terms and conditions and shall take such measures as may be necessary to comply
with any such terms and conditions.
4. BROKER-DEALER AND INSURANCE AGENT COMPLIANCE
(a) Broker-Dealer and Insurance Agent hereby represent and warrant that
they are duly in compliance with all applicable federal and state securities
laws and regulations, and all applicable insurance laws and regulations.
Broker-Dealer and Insurance Agent each shall carry out their respective
obligations under this Agreement in continued compliance with such laws and
regulations. Broker-Dealer shall be responsible for securities training,
supervision and control of the Agents in connection with their solicitation
activities with respect to the Contracts and shall supervise Agents' compliance
with applicable federal and state securities law and NASD requirements in
connection with such solicitation activities. Broker-Dealer and Insurance Agent
shall comply, and shall ensure that Agents comply, with the rules and procedures
established by Life Company from time-to-time, and the rules set forth below,
and Broker-Dealer and Insurance Agent shall be solely responsible for such
compliance.
(b) Broker-Dealer, Insurance Agent and Agents shall not offer or attempt to
offer the Contracts, nor solicit applications for the Contracts, nor deliver
Contracts, in any state or jurisdiction in which the Contracts may not lawfully
be sold or offered for sale.
(c) Broker-Dealer, Insurance Agent and Agents shall not solicit
applications for the Contracts without delivering the Prospectus for the
Contracts, the then-currently effective prospectus(es) for the underlying
fund(s) and, where required by state insurance law, the then-currently effective
statement of additional information for the Contracts.
(d) Broker-Dealer, Insurance Agent and Agents shall not recommend the
purchase of a Contract to an applicant unless each has reasonable grounds to
believe that such purchase is suitable for the applicant in accordance with,
among other things, applicable regulations of any state insurance commission,
the SEC and the NASD.
(e) Insurance Agent shall return promptly to Life Company all receipts for
delivered Contracts, all undelivered contracts and all receipts for
cancellation, in accordance with the requirements established by Life Company
and/or as required under state insurance law. Upon issuance of a Contract by
Life Company and delivery of such Contract to Insurance Agent, Insurance Agent
shall promptly deliver such Contract to its purchaser. For purposes of this
provision "promptly" shall be deemed to mean not later than five (5) calendar
days. Life Company will assume that a Contract will be delivered by Insurance
Agent to the purchaser of such Contract within five (5) calendar days for
purposes of determining when to transfer premiums initially allocated to the
Money Market Account available under such Contracts to the particular investment
options specified by such purchaser. As a result, if purchasers exercise the
free-look provisions under such Contracts, Broker-Dealer shall indemnify Life
Company for any loss incurred by Life Company that results from Insurance
Agent's failure to deliver such Contracts to the purchasers within the
contemplated five (5) calendar day period.
(f) In the event that Premiums are sent to Insurance Agent or
Broker-Dealer, rather than to the Service Center, Insurance Agent and
Broker-Dealer shall promptly (and in any event, not later than two (2) business
days) remit such Premiums to Life Company at the Service Center. Insurance Agent
and Broker-Dealer acknowledge that if any Premium is held at any time by either
of them, such Premium shall be held on behalf of the customer, and Insurance
Agent or Broker-Dealer shall segregate such Premium from their own funds and
promptly (and in any event, within two (2) business days) remit such Premium to
Life Company. All such Premiums, whether by check, money order or wire, shall at
all times be the property of Life Company.
(g) Neither Broker-Dealer nor Insurance Agent, nor any of their directors,
partners, officers, employees, registered persons, associated persons, agents or
affiliated persons, in connection with the offer or sale of the Contracts, shall
give any information or make any representations or statements, written or oral,
concerning the Contracts, the underlying funds or fund Shares, other than
information or representations contained in the Prospectuses, statements of
additional information and Registration Statements for the Contracts, or a fund
prospectus, or in reports or proxy statements therefore, or in promotional,
sales or advertising material or other information supplied and approved in
writing by Distributor and Life Company.
(h) Broker-Dealer and Insurance Agent shall not use or implement any
promotional, sales or advertising material relating to the Contracts without the
prior written approval of Distributor and Life Company.
(i) Broker-Dealer and Insurance Agent shall be solely responsible under
applicable tax laws for the reporting of compensation paid to Agents.
(j) Broker-Dealer and Insurance Agent each represent that it maintains and
shall maintain such books and records concerning the activities of the Agents as
may be required by the SEC, the NASD and any appropriate insurance regulatory
agencies that have jurisdiction and that may be reasonably required by Life
Company. Broker-Dealer and Insurance Agent shall make such books and records
available to Life Company upon written request.
(k) Broker-Dealer and Insurance Agent shall promptly furnish to Life
Company or its authorized agent any reports and information that Life Company
may reasonably request for the purpose of meeting Life Company's reporting and
record keeping requirements under the insurance laws of any state, under any
applicable federal and state securities laws, rules and regulations, and the
rules of the NASD.
(l) Broker-Dealer shall secure and maintain a fidelity bond (including
coverage for larceny and embezzlement), issued by a reputable bonding company,
covering all of its directors, officers, agents and employees who have access to
funds of Insurance Company. This bond shall be maintained at Broker-Dealer's
expense in at least the amount prescribed by the NASD rules. Broker-Dealer shall
upon request provide Distributor with a copy of said bond. Broker-Dealer shall
also secure and maintain errors and omissions insurance acceptable to
Distributor and covering Broker-Dealer, Insurance Agent and Agents.
Broker-Dealer hereby assigns any proceeds received from a fidelity bonding
company, errors and omissions or other liability coverage, to Distributor or
Life Company as their interests may appear, to the extent of their loss due to
activities covered by the bond, policy or other liability coverage. If there is
any deficiency amount, whether due to a deductible or otherwise, Broker-Dealer
shall promptly pay such amount on demand. Broker-Dealer hereby indemnifies and
holds harmless Distributor or Life Company from any such deficiency and from the
costs of collection thereof, including reasonable attorneys' fees.
5. SALES MATERIALS
(a) During the term of this Agreement, Distributor and Life Company will
provide Broker-Dealer and Insurance Agent, without charge, with as many copies
of Prospectuses (and any supplements thereto), current fund prospectus(es) (and
any supplements thereto), and applications for the Contracts, as Broker-Dealer
or Insurance Agent may reasonably request. Upon termination of this Agreement,
Broker-Dealer and Insurance Agent will promptly return to Distributor any
Prospectuses, applications, fund prospectuses, and other materials and supplies
furnished by Distributor or Life Company to Broker-Dealer, Insurance Agent or
the Agents.
(b) During the term of this Agreement, Distributor will be responsible for
providing and approving all promotional, sales and advertising material to be
used by Broker-Dealer and Insurance Agent. Distributor will file such materials
or will cause such materials to be filed with the SEC, the NASD, and/or with any
state securities regulatory authorities, as appropriate.
6. COMMISSION AGREEMENT
(a) During the term of this Agreement, Distributor and Life Company shall
pay to Broker-Dealer or Insurance Agent, as applicable, commissions and fees set
forth in Schedule 1 to this Agreement. The payment of such commissions and fees
shall be subject to the terms and conditions of this Agreement and those set
forth on Schedule 1. Schedule 1, including the commissions and fees therein, may
be amended at any time, in any manner, and without prior notice, by Distributor
or Life Company. Any amendment to Schedule 1 will be applicable to any Contract
for which any application or Premium is received by the Service Center on or
after the effective date of such amendment. However, Life Company reserves the
right to amend such Schedule with respect to subsequent premiums and renewal
commissions and the right to amend such Schedule pursuant to this subsection
even after termination of this Agreement. Compensation with respect to any
Contract shall be paid to Insurance Agent only for so long as Insurance Agent is
the agent-of-record and maintains compliance with applicable state insurance
laws and only while this Agreement is in effect.
(b) No compensation shall be payable, and Broker-Dealer and Insurance Agent
agree to reimburse Distributor and Life Company for any compensation that may
have been paid to Broker-Dealer, Insurance Agent or any Agents in any of the
following situations: (i) Insurance Company, in its sole discretion, determines
not to issue the Contract applied for; (ii) Insurance Company refunds the
premiums upon the applicant's surrender or withdrawal pursuant to any
"free-look" provision; (iii) Insurance Company refunds the premiums paid by
applicant as a result of a complaint by applicant; (iv) Insurance Company
determines that any person soliciting an application who is required to be
licensed or any other person or entity receiving compensation for soliciting
applications or premiums for the Contracts is not or was not duly licensed as an
insurance agent; or (v) any other situation listed on Schedule 1.
(c) Agents shall have no interest in this Agreement or right to any
commissions to be paid by Distributor or Life Company to Insurance Agent.
Insurance Agent shall be solely responsible for the payment of any commission or
consideration of any kind to Agents. Insurance Agent shall have no right to
withhold or deduct any commission from any Premiums in respect of the Contract
which it may collect unless and only to the extent that Life Company agrees in
writing, to permit Insurance Agent to net its commissions against Premiums
collected. Insurance Agent shall have no interest in any compensation paid by
Life Company to Distributor or any affiliate, now or hereafter, in connection
with the sale of any Contracts hereunder.
7. TERM AND TERMINATION
This Agreement may not be assigned except by written consent of the parties
hereto and shall continue for an indefinite term, subject to the termination by
any party hereto upon thirty (30) days advance written notice to the other
parties. This Agreement shall automatically terminate upon its breach by any
party hereto, or in the event the Distributor or Broker-Dealer ceases to be a
registered broker-dealer, a member of the NASD, or Insurance Agent ceases to be
properly licensed or upon th filing by any party hereto for protection under any
state or federal bankruptcy, insolvency or similar law.
8. COMPLAINTS AND INVESTIGATIONS
(a) Distributor, Life Company, Broker-Dealer and Insurance Agent shall
cooperate fully in any insurance regulatory investigation or proceeding or
judicial proceeding arising in connection with the Contracts marketed under this
Agreement. In addition, Distributor, Life Company, Broker-Dealer and Insurance
Agent shall cooperate fully in any securities regulatory investigation or
proceeding or judicial proceeding with respect to Distributor, Broker-Dealer,
their Affiliates and their agents, to the extent that such investigation or
proceeding relates to the Contracts marketed under this Agreement. Without
limiting the foregoing:
(i) Broker-Dealer and Insurance Agent will be notified promptly of any
customer complaint or notice of any regulatory investigation or proceeding
or judicial proceeding received by Distributor or Life Company with respect
to Insurance Agent or any Agent which may affect the issuance of any
Contract marketed under this Agreement.
(ii) Broker-Dealer and Insurance Agent will promptly notify Distributor and
Life Company of any written customer complaint or notice of any regulatory
investigation or proceeding or judicial proceeding received by
Broker-Dealer or Insurance Agent or their Affiliates with respect to
themselves, their Affiliates, or any Agent in connection with any Contract
marketed under this Agreement or any activity in connection with any such
Contract.
(b) In the case of a customer complaint, Distributor, Life Company,
Broker-Dealer and Insurance Agent will cooperate in investigating such complaint
and any response by Broker-Dealer or Insurance Agent to such complaint will be
sent to Distributor and Life Company for approval not less than five (5)
business days prior to its being sent to the customer or regulatory authority,
except that if a more prompt response is required, the proposed response shall
be communicated by telephone or facsimile.
(c) The provisions of this Section 8 shall remain in full force and effect
regardless of any termination of this Agreement.
9. MODIFICATION OF AGREEMENT
This Agreement supersedes all prior agreements, either oral or written,
between the parties relating to the Contracts, and except for any amendment of
Schedule 1 pursuant to the terms of the Agreement, may not be modified in any
way unless by written agreement signed by all of the parties to this Agreement.
10. INDEMNIFICATION
(a) Broker-Dealer and Insurance Agent, jointly and severally, shall
indemnify and hold harmless Distributor and Life Company and each person who
controls or is associated with Distributor or Life Company within the meaning of
such terms under the federal securities laws, and any officer, director,
employee or agent of the foregoing, against any and all losses, claims, damages
or liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any reasonable amounts paid
in settlement of, any action, suit or proceeding or any claim asserted), to
which they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any actual or alleged:
(i) violation(s) by Broker-Dealer, Insurance Agent or an Agent of federal
or state securities law or regulations, insurance law or regulation(s), or
any rule or requirement of the NASD;
(ii) unauthorized use of sales or advertising material, any oral or written
misrepresentations, or any unlawful sales practices concerning the
Contracts, by Broker-Dealer, Insurance Agent or an Agent;
(iii) claims by the Agents or other agents or representatives of Insurance
Agent or Broker-Dealer for commissions or other compensation or
remuneration of any type;
(iv) any failure on the part of Broker-Dealer, Insurance Agent, or an Agent
to submit Premiums or applications to Life Company, or to submit the
correct amount of a Premium, on a timely basis and in accordance with this
Agreement;
(v) any failure on the part of Broker-Dealer, Insurance Agent, or an Agent
to deliver Contracts to purchasers thereof on a timely basis as set forth
in Section 4(e) of this Agreement; or
(vi) a breach by Broker-Dealer or Insurance Agent of any provision of this
Agreement.
This indemnification will be in addition to any liability which
Broker-Dealer and Insurance Agent may otherwise have.
(b) Distributor and Life Company, jointly and severally, shall indemnify
and hold harmless Broker-Dealer and Insurance Agent and each person who controls
or is associated with Broker-Dealer or Insurance Agent within the meaning of
such terms under the federal securities laws, and any officer, director,
employee or agent of the foregoing, against any and all losses, claims, damages
or liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any reasonable amounts paid
in settlement of, any action, suit or proceeding or any claim asserted), to
which they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon a breach by Distributor or Life Company of any
provision of this Agreement. This indemnification will be in addition to any
liability which Distributor and Life Company may otherwise have.
(c) After receipt by a party entitled to indemnification ("indemnified
party") under this Section 10 of notice of the commencement of any action, if a
claim in respect thereof is to be made against any person obligated to provide
indemnification under this Section 10 ("indemnifying party"), such indemnified
party will notify the indemnifying party in writing of the commencement thereof
as soon as practicable thereafter, provided that the omission to so notify the
indemnifying party will not relieve it from any liability under this Section 10,
except to the extent that the omission results in a failure of actual notice to
the indemnifying party and such indemnifying party is damaged as a result of the
failure to give such notice. The indemnifying party will be entitled to
participate in the defense of the indemnified party but such participation will
not relieve such indemnifying party of the obligation to reimburse the
indemnified party for reasonable legal and other expenses incurred by such
indemnified party in defending himself or itself. The indemnification provisions
contained in this Section 10 shall remain operative in full force and effect,
regardless of any termination of this Agreement. A successor by law of
Distributor or Life Company, as the case may be, shall be entitled to the
benefits of the indemnification provisions contained in this Section 10.
11. RIGHTS, REMEDIES, ETC. ARE CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws. Failure of either party to insist upon strict compliance with any
of the conditions of this Agreement shall not be construed as a waiver of any of
the conditions, but the same shall remain in full force and effect. No waiver of
any of the provisions of this Agreement shall be deemed, nor shall constitute, a
waiver of any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver.
12. NOTICES
All notices hereunder are to be made in writing and shall be given:
<TABLE>
<CAPTION>
<S> <C>
IF TO DISTRIBUTOR, TO: IF TO LIFE COMPANY, TO:
Cova Life Sales Company Cova Financial Life Insurance Company
Attention: Judy M. Drew, President Attention: Judy M. Drew, Senior Vice President
One Tower Lane One Tower Lane
Suite 3000 Suite 3000
Oakbrook Terrace, Illinois 60181-4644 Oakbrook Terrace, Illinois 60181-4644
IF TO BROKER-DEALER, TO: IF TO INSURANCE AGENT, TO:
XXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX
</TABLE>
or such other address as such party may hereafter specify in writing. Each
such notice to a party shall be either hand delivered, transmitted by registered
or certified United States mail with return receipt requested or by express
courier, and shall be effective upon delivery.
13. INTERPRETATION, JURISDICTION, ETC.
This Agreement constitutes the whole agreement between the parties hereto
with respect to the subject matter hereof, and supersedes all prior oral or
written understandings, agreements or negotiations between the parties with
respect to the subject matter hereof. No prior writings by or between the
parties hereto with respect to the subject matter hereof shall be used by either
party in connection with the interpretation of any provision of this Agreement.
This Agreement shall be construe and its provisions interpreted under and in
accordance with the internal laws of the State of California without giving
effect to principles of conflict of laws.
14. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement, or
the breach hereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
15. SETOFFS; CHARGEBACKS
Broker-Dealer and Insurance Agent hereby authorize Distributor and Life
Company to set off from all amounts otherwise payable to Broker-Dealer and
Insurance Agent all liabilities of Broker-Dealer, Insurance Agent or Agent.
Broker-Dealer and Insurance Agent shall be jointly and severally liable for the
payment of all monies due to Distributor and/or Life Company which may arise out
of this Agreement or any other agreement between Broker-Dealer, Insurance Agent
and Distributor or Life Company including, but not limited to, any liability for
any chargebacks or for any amounts advanced by or otherwise due Distributor or
Life Company hereunder. All such amounts shall be paid to the Distributor and
Life Company within thirty (30) days of written request therefore. Distributor
and Life Company do not waive any of its other rights to pursue collection of
any indebtedness owed by Broker-Dealer or Insurance Agent or its Agents to
Distributor or Life Company. In the event Distributor or Life Company initiates
legal action to collect any indebtedness of Broker-Dealer, Insurance Agent or
its Agents, Broker-Dealer and Insurance Agent shall reimburse Distributor and
Life Company for reasonable attorney fees and expenses in connection therewith.
This provision shall remain in full force and effect regardless of any
termination of this Agreement.
16. HEADINGS
The headings in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
17. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
18. SEVERABILITY
This is a severable Agreement. In the event that any provision of this
Agreement would require a party to take action prohibited by applicable federal
or state law or prohibit a party from taking action required by applicable
federal or state law, then it is the intention of the parties hereto that such
provision shall be enforced to the extent permitted under the law, and, in any
event, that all other provisions of this Agreement shall remain valid and duly
enforceable as if the provision at issue had never been part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
COVA FINANCIAL
LIFE INSURANCE COMPANY
Date: ______________________________ By: _______________________________________________
Judy M. Drew, Senior Vice President
COVA LIFE SALES COMPANY
Date: ______________________________ By: ________________________________________________
Patricia E. Gubbe, First Vice President
XXXXXXXXXXXXX
Broker-Dealer
Date: ______________________________ By: ________________________________________________
Signature
________________________________________________
Print Name
________________________________________________
Title
XXXXXXXXXXXXXXX
Insurance Agent
Date: ______________________________ By: _________________________________________________
Signature
_________________________________________________
Print Name
_________________________________________________
Title
</TABLE>
<TABLE>
<CAPTION>
MODIFIED SINGLE PREMIUM VARIABLE LIFE
POLICY FORM SERIES CL-1020
<S> <C> <C> <C>
FOR AGES 0-80
Base Persistency
Commission Bonus Years
---------- ----- -----
5.50% Paid per purchase payment
.25% 2 - 9 The Persistency Bonus is to
be calculated on the contract's
.40% 10 & after anniversary value and paid on
a quarterly contract basis for
contracts serviced by the
Broker-Dealer or Insurance Agent.
FOR AGES 81-85
Base Persistency
Commission Bonus Years
---------- ----- -----
3.00% Paid per purchase payment
.25% 2 - 9 The Persistency Bonus is to
be calculated on the contract's
.40% 10 & after anniversary value and paid on
a quarterly contract basis for
contracts serviced by the
Broker-Dealer or Insurance Agent.
FOR AGES 86-90
Base Persistency
Commission Bonus Years
---------- ----- -----
1.50% Paid per purchase payment
.25% 2 - 9 The Persistency Bonus is to
be calculated on the contract's
.40% 10 & after anniversary value and paid on
a quarterly contract basis for
contracts serviced by the
Broker-Dealer or Insurance Agent.
</TABLE>
ARTICLES OF INCORPORATION
OF
INDUSTRIAL INDEMNITY LIFE INSURANCE COMPANY
KNOW ALL MEN BY THESE PRESENT:
We, the undersigned, all citizens and residents of the State of California,
have this day voluntarily associated ourselves together for the purpose of
forming a corporation under the laws of the State of California, and we do
hereby certify:
I.
The name of this corporation is Industrial Indemnity Life Insurance
Company.
II.
The purposes for which this corporation is formed are:
(A) The primary business in which this corporation is intended to engage is
to transact the business of insurance of the following classes, to-wit:
1. Life;
2. Disability;
3. Liability;
4. Workmen's Compensation;
5. Common Carrier Liability.
The foregoing classes of insurance shall have the definitions assigned
thereto by the Insurance Code of the State of California as the same may be from
time to time amended.
(B) This corporation is also formed for the following additional purposes:
1. To issues participating policies for any and all classes of insurance
above enumerated, except as prohibited by law;
2. To subscribe for, purchase, own, hold, loan upon, and dispose of, shares
of the capital stock of other corporations, and to exercise the rights of a
stockholder therein;
3. To acquire, own, hold, loan upon, pledge, reissue, and dispose of the
shares of the capital stock of this corporation;
4. To acquire, hold, own and dispose of bonds, notes, bills, debentures,
and any and every kind of obligation or evidence of indebtedness of individuals
or corporations, both public and private;
5. To acquire, own, hold, lease, improve, sell and dispose of real estate
to the full extent that an insurance company is permitted so to do under the
laws of the State of California;
6. To incur indebtedness, and as evidence thereof, to make, execute and
deliver the promissory notes or other obligations of this corporation, and
secure the same by pledge of its personal property, or mortgage, or deed of
trust of its real estate;
7. To lend money, and to take as security for such loans such security as
insurance companies are permitted to loan upon under and by virtue of the laws
of the State of California;
8. To employ agents to solicit insurance business on its behalf;
9. To make contracts and to do and perform any and all other matters and
things incidental or proper for the accomplishment of any of the purposes herein
enumerated, or which shall at any time appear conducive to or expedient for the
protection or benefit of this corporation, and to do any, and perform any and
all other matters and things which it may legally do and perform under and by
virtue of the laws of the State of California;
10. To do business anywhere in the world;
11. To act as partner or joint venturer or in any other legal capacity in
any transaction; and
12. To have and exercise all rights and powers and to do all acts which may
from time to time be authorized or granted by the General Corporation Law of the
State of California.
The foregoing enumeration of specific powers shall be construed as
independent objects, purposes and powers, and each of the purposes and objects
mentioned in this Article II of these Articles shall be in furtherance of, but
not in limitation of each other, and each shall, except when otherwise expressly
stated, be in no wise limited or restricted by the statement of other objects or
purposes herein, and said enumeration of specific powers shall not be construed
or held as limiting or restricting the ordinary powers of this corporation as
granted in the laws of the State of California.
III.
The county in this State where the principal office for the transaction of
the business of the corporation is located shall be the City and County of San
Francisco.
IV.
The total number of shares which the corporation is authorized to issue is
thirty thousand (30,000) shares. The aggregate par value of all said shares is
one million five hundred thousand ($1,500,000) dollars, and the par value of
each share is fifty ($50) dollars.
V.
The number of directors of this corporation is five (5). The number of
directors of the corporation set forth above shall constitute the authorized
number of directors until changed by an amendment of these Articles of
Incorporation or by a by-law duly adopted by the vote or written consent of a
majority of the then outstanding shares of stock of the corporation.
The names and addresses of the persons who are appointed to act as the
first directors are:
Fred Drexler #1 Myrtle Avenue
Mill Valley, California 94941
James G. LaPlante 1200 Bay Laurel Drive
Menlo Park, California 94025
Arno A. Rayner 275 East Strawberry Drive
Mill Valley, California 94941
Donald W. Satterlee 336 Hedge Road
Menlo Park, California 94025
Roxani M. Gillespie 134 Presidio Avenue
San Francisco, California 94115
IN WITNESS WHEREOF, for the purpose of forming this corporation under the
laws of the State of California, we, the undersigned, constituting the
incorporators of this corporation, and including all of the persons named herein
as the first directors, have executed these Articles of Incorporation this 29th
day of August, 1972.
/s/ Fred Drexler
----------------
/s/ James G. LaPlante
---------------------
/s/ Arno A. Rayner
------------------
/s/ Donald W. Satterlee
-----------------------
/s/ Roxani M. Gillespie
-----------------------
STATE OF CALIFORNIA
City and County of San Francisco
On this 29th day of August, 1972, before me, Marion E. Larson, a Notary
Public in and for the City and County of San Francisco, State of California,
residing therein, duly commissioned and sworn, personally appeared Fred Drexler,
James G. LaPlante, Arno A. Rayner, Donald W. Satterlee and Roxani M. Gillespie,
known to me to be the persons whose names are subscribed to the foregoing
Articles of Incorporation of Industrial Indemnity Life Insurance Company, and
acknowledged to me that they executed the same.
WITNESS my hand and official seal.
/s/ Marion E. Larson
--------------------
Notary Public
In and for the City and
County of San Francisco,
State of California
My Commission expires:
March 17, 1975
XEROX FINANCIAL LIFE
INSURANCE COMPANY
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
ROBERT A. PUCCINELLI and LAWRENCE E. MULRYAN Certify that:
1. They are the president and the secretary, respectively, of INDUSTRIAL
INDEMNITY LIFE INSURANCE COMPANY, a California Corporation.
2. Article I of the articles of incorporation of this corporation is
amended to read as follows:
"The name of this corporation is Xerox Financial Life Insurance
Company."
3. The foregoing amendment of articles of incorporation has been duly
approved by the board of directors.
4. The foregoing amendment of articles of incorporation has been duly
approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding
shares of the corporation is 12,000. The number of number of shares
voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
to our knowledge.
Date: August 11, 1985 /s/ Robert A. Puccinelli
------------------------
Robert A. Puccinelli, President
/s/ Lawrence E. Mulryan
-----------------------
Lawrence E. Mulryan, Secretary
STATE OF CALIFORNIA
Department of Insurance
San Francisco
I, BRUCE BUNNER, Insurance Commissioner of the State of California, do
hereby certify that on the date specified herein, the name XEROX FINANCIAL LIFE
INSURANCE COMPANY has been approved for use in California as a name change for
INDUSTRIAL INDEMNITY LIFE INSURANCE COMPANY for a period of 90 days from the
date herein.
IN WITNESS WHEREOF, I have hereunto set my
hand and affixed my official seal the day and
year specified below.
BRUCE BUNNER
Insurance Commissioner
By: /s/ Rita Fontana Pasquinucci
--------------------------------
RITA FONTANA PASQUINUCCI
Deputy
October 24, 1985
A California corporation must attach this Certificate to its Articles of
Incorporation (Amendment) filed with the California Secretary of State.
CERTIFICATE OF AMENDMENT
OF THE ARTICLES OF INCORPORATION
OF XEROX FINANCIAL LIFE INSURANCE COMPANY
UNDER SECTION 905 OF THE GENERAL CORPORATION LAW OF CALIFORNIA
We, Michael R. Hogan and Jeffrey K. Hoelzel, the duly elected Chairman and
Secretary, respectively, of Xerox Financial Life Insurance Company, a
corporation duly organized and existing under the General Corporation Law of the
State of California (the "Corporation"), do hereby certify as follows:
1. The Corporation's Articles of Incorporation were filed with the
California Secretary of State on September 6, 1972.
2. Article I of the Corporation's Articles of Incorporation is hereby
amended to read, in its entirety, as follows:
I.
The name of this corporation is Cova Financial Life Insurance
Company.
3. Article III of the Corporation's Articles of Incorporation is hereby
amended to read, in its entirety, as follows:
III.
The City and County in this State where the principal office for
the transaction of the business of the Corporation is located shall
be the City of Costa Mesa in Orange County.
4. The foregoing amendments of the Articles of Incorporation of the
Corporation have been duly approved by the Corporation's Board of
Directors.
5. The foregoing amendments to the Articles of Incorporation have been
duly approved by the required vote of shareholders in accordance with
Section 902 of the General Corporation Law of California. The total
number of outstanding shares of the Corporation is 12,000. The number
of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was more than 50 percent.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
to the best of our own knowledge.
Date: June 1, 1995
Place: St. Louis, Missouri
/s/ Michael R. Hogan
--------------------
Michael R. Hogan, Chairman
/s/ Jeffery K. Hoelzel
----------------------
Jeffery K. Hoelzel, Secretary
STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
San Francisco
I, CHUCK QUACKENBUSH, Insurance Commissioner of the State of California, do
hereby certify that on the date specified herein, the name Cova Financial Life
Insurance Company has been approved and reserved in California as name change
for Xerox Financial Life Insurance Company for a period of 90 days from the date
herein.
IN WITNESS WHEREOF, I have hereunto set my
hand and affixed my official seal the day
and year specified below.
CHUCK QUACKENBUSH
Insurance Commissioner
By: /s/ Judith A. Milch
-----------------------
JUDITH A. MILCH
Deputy
August 11, 1995
A California corporation must attach this Certificate to its Articles of
Incorporation (Amendment) filed with the California Secretary of State.
Note: This certificate does not authorize the subject entity to transact
business in California unless and until a Certificate of Authority
or license has been issued.
BY-LAWS
OF
COVA FINANCIAL LIFE INSURANCE COMPANY
(Amended 6/l/95) (Formerly Xerox Financial Life
Insurance Company - Amended 8/12/85)
(Formerly Industrial Indemnity Life Insurance Company)
a California domiciled life insurance company
ARTICLE I
OFFICES
Section 1. Principal Office.
The Board of Directors is hereby granted full power and authority to select the
location of the principal office for the transaction of the business of the
corporation in the State of California and may change said location by
resolution at any time. (Amended 6/l/96)
Section 2. Other Offices.
Branch or subordinate offices may be established at any place or places where
the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings.
All meetings of the shareholders shall be held at the principal office of the
corporation, or at any other place within or without the State of California
designated either by the written consent of all shareholders entitled to vote
thereat or designated by the Board of Directors. In the absence of such
designation, such meetings shall be held at the principal office of the
corporation.
Any meeting shall be valid, wherever held, if held by written consent of all the
shareholders entitled to vote thereat, given either before or after the meeting
and filed with the Secretary of the corporation.
Section 2. Annual Meetings.
An annual meeting of the shareholders to elect directors and to transact such
other business as may properly be brought before the meeting shall be held each
year at such date, time and place as the Board of Directors may determine.
(Amended 6/1/95)
Section 3. Special Meetings - Call - Notice.
Special meetings of shareholders for any purpose or purposes whatsoever, may be
called at any time by the Chief Executive Officer, or by the Board of Directors,
or by any two or more members thereof, or by one or more shareholders holding at
least one-fifth (1/5th) of the voting power of the corporation. Except in
special cases where other express provision is made by statute, notice of such
special meetings shall be given as provided by law. Notices of any special
meeting shall specify in addition to the place, day and hour of such meeting,
the general nature of the business to be transacted.
Section 4. Adjourned Meetings and Notice Thereof.
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of a majority of the
shares, the holders of which are either present in person or represented by
proxy thereat, but in the absence of a quorum no other business may be
transacted at any such meeting.
When any shareholders' meeting, either annual or special, is adjourned for
thirty (30) days or more, notice of the adjourned meeting shall be given as in
the case of an original meeting. Save as aforesaid, it shall not be necessary to
give any notice of an adjournment or of the business to be transacted at an
adjourned meeting, other than by announcement at the meeting at which such
adjournment is taken.
Section 5. Entry of Notice.
Whenever any shareholder entitled to vote has been absent from any meeting of
shareholders, whether annual or special, an entry in the minutes to the effect
that notice has been duly given shall be conclusive and incontrovertible
evidence that due notice of such meeting was given to such shareholders, as
required by law and the by-laws of the corporation.
Section 6. Voting.
At all meetings of shareholders, every shareholder entitled to vote shall have
the right to vote in person or by proxy the number of shares standing in his own
name on the stock records of the corporation. Such vote may be by voice vote or
by ballot; provided, however, that all elections for directors must be by ballot
upon demand made by a shareholder at any election before voting begins. The
candidates receiving the highest number of votes up to the number of directors
to be elected shall be elected. (Amended 6/1/95)
Section 7. Quorum
The presence in person or by proxy of the holders of a majority of the shares
entitled to vote at any meeting shall constitute a quorum for the transaction of
business. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Section 8. Consent of Absentees.
The transactions of any meetings of shareholders, either annual or special,
however called and noticed, shall be as valid as though had a meeting duly-held
after regular call and notice, if a quorum be present either in person or by
proxy, and if, either before or after the meeting, each of the shareholders
entitled to vote, not present in person or by proxy, sign a written waiver of
notice, or a consent to the holding of such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 9. Action without Meeting.
Any action which under the provisions of the Corporations Code may be taken at a
meeting of the shareholders may be taken without a meeting if authorized by a
writing signed by all the holders of shares who would be entitled to vote at a
meeting for such purpose and filed with the Secretary of the Corporation.
Section 10. Proxies.
Every person entitled to vote or execute consents shall have the right to do so
either in person or by an agent or agents authorized by a written proxy executed
by such person or his duly authorized agent and filed with the Secretary of the
Corporation; provided that no such proxy shall be valid after the expiration of
eleven (11) months from the date of its execution, unless the shareholder
executing it specifies therein the length of time for which such proxy is to
continue in force, which in no case shall exceed seven (7) years from the date
of its execution.
ARTICLE III
DIRECTORS
Section 1. Powers.
Subject to the limitations of the Articles of Incorporation, By-Laws and the
California Corporations Code as to actions to be authorized or approved by the
shareholders, all corporate power shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be controlled by, the
Board of Directors.
Section 2. Committees.
A. Executive Committee. The Board of Directors may from time to time appoint
from its own number an Executive Committee of three (3) or more members,
and shall by resolution fix the Chairmanship of said committee and the
members thereof.
The Executive Committee shall consult with the Chief Executive Officer upon
such matters as he may designate. In addition, the Executive Committee
shall have authority to exercise, at any time when the Board of Directors
is not in session, all powers of the Board of Directors which may be
lawfully delegated, and shall report to the Board of Directors all actions
taken under such authority.
The members of the Executive Committee may be allowed a fixed fee, with or
without expenses of attendance, for attending a meeting of the committee,
such fee to be determined from time to time by resolution of the Board of
Directors.
B. Investment Committee. By resolution, the Board of Directors may appoint
from its own number, supplemented in the minority by persons other than
members of the Board, an Investment Committee which shall have all the
powers as designated by the Board, except as limited by statute. The
Investment Committee shall be responsible for establishing the Investment
Policy of the Corporation, reviewing all of the corporation's investments
and shall conduct its business and hold meetings as determined by it from
time to time; that a quorum of such Committee shall be a majority of the
members of such Committee and that a majority vote of the members present
at a meeting of such committee shall constitute the act of such committee.
The Investment Committee shall keep a record of its acts and proceedings
and report the same to the Board of Directors. (Amended 5/23/86)
C. Standing or Temporary Committees. The Board of Directors may from time to
time appoint from its own number, or supplemented in the minority by
persons other than members of the Board, standing or temporary committees;
and the Board of Directors may from time to time invest such committees
which such powers as may be prescribed by the Board.
Section 3. Number of Directors.
Unless and until changed by the Board of Directors as hereinafter provided the
number of directors to constitute the Board of Directors shall be nine (9). The
Board of Directors, to the extent permitted by law, shall have the power, by
resolution, to change the number of directors from time to time provided that
any notice required by law of any such change is duly given. Directors need not
be shareholders unless the Articles of Incorporation at any time so provide.
(Amended 6/l/95)
Section 4. Election and Term of Office.
The directors shall be elected at each annual meeting of shareholders, but if
any such annual meeting is not held, or the directors are not elected thereat,
the directors may be elected at any meeting of the shareholders. All directors
shall hold office until his respective successors are elected.
Section 5. Vacancies.
Vacancies in the Board of Directors may be filled by a majority of the remaining
directors, though less than a quorum, and each director so elected shall hold
office until his successor is elected at an annual meeting of shareholders, or
at a special meeting called for that purpose.
A vacancy or vacancies shall be deemed to exist in case of the death,
resignation, or removal of any director, or if the shareholders shall increase
the authorized number of directors but shall fail at the voting at which such
increase is authorized, or at an adjournment thereof, to elect the additional
directors so provided for, or in case the shareholders fail at any time to elect
the full number of authorized directors.
The shareholders may at any time elect directors to fill any vacancy not filled
by the directors, and may elect the additional directors at the meeting at which
an amendment of the by-laws is voted authorizing an increase in the number of
directors.
If any director tenders his resignation, the Board shall have the power to elect
a successor to take office at such time as the resignation shall become
effective. No reduction of the authorized number of directors shall have the
effect of removing any director prior to the date of the next annual meeting of
shareholders.
Section 6. Place of Meeting.
All meetings of the Board of Directors shall be held at the principal office of
the corporation, or at such other place within or without the State of
California designated at any time by resolution of the Board or by written
consent of all members of the Board.
Section 7. Organization Meeting.
Immediately following each annual meeting of shareholders, the Board of
Directors shall hold a meeting for the purpose of organization, election of
officers, and the transaction of other business. Notice of such meeting is
hereby dispensed with.
Section 8. Regular Meetings. A regular meeting of the Board of Directors shall
be held without notice other than this By-Law immediately after, and at the same
place as, the annual meeting of shareholders. The Board of Directors may
provide, by resolution the time and place, either within or without the State of
California, for the holding of additional regular meetings without notice other
than such resolution. (Amended 6/1/95)
Section 9. Notice of Adjournment.
Notice of adjournment of any directors' meeting need not be given to absent
directors, if the time and place are fixed at the meeting.
Section 10. Entry of Notice.
Whenever any director has been absent from any meeting of the Board of
Directors, an entry in the minutes to the effect that notice has been duly given
shall be conclusive and incontrovertible evidence that due notice of such
meeting was given to such director, as required by law and the by-laws of the
corporation.
Section 11. Waiver of Notice.
The transactions of any meeting of the Board of Directors, however called and
noticed and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present, and if, either
before or after the meeting, each of the directors not present sign a written
waiver of notice or a consent to holding such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 12. Quorum.
One-third (1/3rd) of the authorized number of directors, but not less than two
(2), shall be necessary to constitute a quorum for the transaction of all
business, except to adjourn, as hereinafter provided, and except as provided
under Article IV, subsections 4 and 6.
Section 13. Adjournment.
A quorum of two directors may adjourn any directors' meeting to meet again at a
stated day and hour; provided, however, that in the absence of a quorum, a
majority of the directors present at any directors' meeting may adjourn from
time to time.
Section 14. Fees and Compensation.
Directors shall not receive any stated salary for their services as directors,
but, by resolution of the Board, a fixed fee, with or without expenses of
attendance, may be allowed for attendance at each meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity, as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
Section 15. Meeting by Conference Telephone.
Members of the Board of Directors or any committee thereof may participate in
any meeting through the use of conference telephone or similar communications
equipment, so long as all members participating in such a meeting can hear one
another. Participation in a meeting pursuant to this section constitutes
presence in person at any such meeting.
Section 16. Removal of Directors.
Any director may be removed either with or without cause at any time by the
affirmative vote of the shareholders of record holding a majority of the
outstanding shares of the corporation entitled to vote for the election of
directors, given at a meeting of the shareholders called for that purpose, or by
the holders of a majority of the outstanding shares entitled to vote for the
election of directors without holding a meeting or notice but by merely
presenting their majority to the secretary of the corporation in writing for the
removal of a director or directors without cause. Any director may be removed
with cause by a majority of the total number of directors constituting the
entire Board of Directors at a meeting of the Board of Directors. (Amended
6/l/95)
ARTICLE IV
OFFICERS
Section 1. Officers.
The officers of the corporation shall be the Chairman of the Board, Vice
Chairman of the Board, President, one or more Vice Presidents, Secretary, and
Treasurer. The corporation may also have such other officers as may be elected
by the Board of Directors or appointed in accordance with the provisions of
Section 3 of this Article. Officers other than the Chairman of the Board, Vice
Chairman of the Board and President need not be directors. One person may hold
two or more offices, except those of President and Secretary.
Section 2. Election.
The officers of the corporation required by Section I shall be chosen annually
by the Board of Directors, and each shall hold his office until he shall resign
or shall be removed or otherwise disqualified to serve, or his successor shall
be elected or qualified.
Section 3. Other Officers.
The Board of Directors or the Chief Executive Officer, subject to confirmation
by the Board of Directors, may appoint such other officers as the business of
the corporation may require, each of whom shall have such titles, hold office
for such period, have such authority and perform such duties as are provided in
the by-laws or as the Board of Directors or the Chief Executive Officer may from
time to time determine.
Section 4. Removal and Resignation.
Any officer may be removed, either with or without cause, by a majority of the
directors at the time in office, at any regular or special meeting of the Board,
or, except in the case of an officer elected by the Board of Directors, by the
Chief Executive Officer.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the chairman of the Board or to the President. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 5. Vacancies.
A vacancy in any office because of death, resignation, removal,
disqualification, or any other cause, shall be filled in the manner prescribed
by the by-laws for regular appointment to such office.
Section 6. Chief Executive Officer.
The Board of Directors shall by vote of a majority of the directors in office at
the time of any regular or special meeting of the Board at which a majority of
the authorized directors are present, designate as Chief Executive Officer
either the Chairman of the Board or the President, and may by said majority vote
remove such designation. The Chief Executive Officer shall, subject to the
authority vested in the Board of Directors, supervise and control all of the
business and affairs of the corporation.
Section 7. Chairman of the Board.
The Chairman of the Board shall, if present, preside at all meetings of the
shareholders and of the Board of Directors and exercise and perform such other
powers and duties as may be from time to time assigned to him by the Board of
Directors or prescribed by the by-laws.
Section 8. Vice Chairman of the Board.
The Vice Chairman of the Board shall, in the absence of the Chairman of the
Board, preside at all meetings of the shareholders and of the Board of Directors
at which he is present and perform such other duties and exercise such other
powers as may be from time to time assigned to him by the Board of Directors or
the Chairman of the Board or prescribed by the by-laws.
Section 9. The President.
The President shall be the chief operating officer of the corporation in charge
of insurance affairs, subject to the direction and control of the Chief
Executive Officer. The President shall, in the absence of the Chairman of the
Board and the Vice Chairman of the Board, preside at all meetings of the
shareholders and of the Board of Directors.
Section 10. Vice Presidents.
Each Vice President shall have such powers and perform such duties as may be
from time to time assigned to him by the Board of Directors or the Chief
Executive Officer or prescribed by the by-laws.
Section 11. Secretary.
The Secretary shall keep, or cause to be kept, a book of minutes at the
principal office, or such other place as the Board of Directors may order, of
all meetings of directors and shareholders, with the time and place of holding,
how authorized, the notice thereof given, the names of those present at
directors' meetings, the number of shares present or represented at
shareholders' meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office or at the
Office of the corporation's transfer agent, a share register, or a duplicate
share register, showing the names of the shareholders and their addresses, the
number of classes of shares held by each, the number and date of certificates
issued for the same, and the number and date of cancellation of every
certificate surrendered for cancellation.
The Secretary shall give, or cause to be given notice of all the meetings of the
shareholders and of the Board of Directors required by the by-laws to be given,
and he shall keep the seal of the corporation in safe custody, and shall have
such other powers and perform such other duties as may be assigned by the Board
of Directors or the Chief Executive Officer or prescribed by the by-laws.
Section 12. Treasurer.
The treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital surplus and shares. Any surplus, including
earned surplus, paid-in surplus and surplus arising from a reduction of stated
capital, shall be classified according to source and shown in a separate
account. The books of account shall at all times be open to inspection by any
director.
The treasurer shall have such other powers and perform such other duties as may
be assigned to him by the Board of Directors or the Chief Executive Officer or
prescribed by the by-laws.
ARTICLE V
MISCELLANEOUS
Section 1. Record Date and Closing Stock Books.
The Board of Directors may fix a time, in the future, not exceeding thirty (30)
days preceding the date of any meeting of shareholders, and not exceeding thirty
(30) days preceding the date fixed for the payment of any dividend or
distribution, or for the allotment of rights, or when any change or conversion
or exchange or shares shall go into effect, as a record date for the
determination of the shareholders entitled to notice of and to vote at any such
meeting, or entitled to receive any such dividend or distribution, or any such
allotment of rights or to exercise the right in respect to any such change,
conversion or exchange of shares, and in such case only shareholders of record
on the date so fixed shall be entitled to notice of and to vote at such meeting,
or to receive such dividend, distribution or allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any shares on
the books of the corporation after any record date fixed as aforesaid. The Board
of Directors may close the books of the corporation against transfers of shares
during the whole, or any part of any such period.
Section 2. Inspection of Corporate Records.
The share register or duplicate share register, the books of account, the
minutes of proceedings of the shareholders and directors shall be open to
inspection upon the written demand of any shareholders or the holder of a voting
trust certificate, at any reasonable time, and for a purpose reasonably related
to his interests as a shareholder, and shall be produced at any time when
required by the demand of ten percent (10%) of the shares represented at any
shareholder's meeting. Such inspection may be made in person or by an agent or
attorney, and shall include the right to make extracts. Demand of inspection
other than at a shareholder's meeting shall be made in writing upon the Chairman
of the Board, President, Secretary or Assistant Secretary of the corporation.
Section 3. Checks, Drafts, etc.
All checks, drafts or other orders for payment of money, notes, or other
evidence of indebtedness, issued in the name of or payable to the corporation,
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the Board of Directors.
Section 4. Annual Report.
Any annual report to the shareholders required by law is hereby expressly
dispensed with.
Section 5. Contract, etc./How Executed.
The Board of Directors, except as the by-laws otherwise provide, may authorize
any officer or officers, or agent or agents, to enter into any contract or
execute any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances; and unless so
authorized by the Board of Directors or Chief Executive Officer, shall have any
power or authority to bind the corporation by any contract or engagement, except
contracts of insurance, or to pledge its credit, or to render it liable for any
purpose, or to any amount; provided, the officers of the corporation are
expressly authorized to issue participating policies on its behalf, containing
such language with reference to participating as in their discretion will be to
the best interests of the corporation.
Section 6. Certificates of Stock.
A certificate or certificates for shares of the capital stock of the corporation
shall be issued to each shareholder when any such shares are fully paid up. All
such certificates shall be signed by the President or a Vice President and the
Secretary or an Assistant Secretary, or be authenticated by facsimile of the
signature of the President or a Vice President and the written signature of the
Secretary or an Assistant Secretary. Every certificate authenticated by a
facsimile of a signature must be countersigned by a transfer agent or transfer
clerk, and be registered by an incorporated bank or trust company, either
domestic or foreign, as registrar of transfers, before issuance.
Section 7. Representation of Shares of Other Corporation.
The Chief Executive Officer, President or Treasurer of this corporation is
authorized to vote, represent and exercise on behalf of this corporation, all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority herein granted to said
officers to vote or represent on behalf of this corporation shares in any other
corporation or corporations may be exercised either by such officers in person
or by a person authorized to do so by proxy or power of attorney duly executed
by said officer.
Section 8. Inspection of By-Laws.
The corporation shall keep in its principal office for the transaction of
business, the original or a copy of the ByLaws, as amended or otherwise altered
to date, certified by the Secretary, which shall be open to inspection by the
shareholders at all reasonable times during office hours.
Section 9. Indemnification.
This corporation shall indemnify, to the fullest extent allowed by California
law, its present and former directors and officers against expenses, judgments,
fines, settlements, and other amounts incurred in connection with any proceeding
or threatened proceeding brought against such directors or officer in their
capacity as such. Such indemnification shall be made in accordance with
procedures set forth by California law. Sums for expenses incurred in defending
any such proceeding may also be advanced to any such director or officer to the
extent and under the conditions provided by California law.
ARTICLE VI
CORPORATE SEAL
SECTION 1. Corporate Seal.
The Board of Directors may provide a corporate seal in the form of a circle with
the name of the corporation inscribed thereon. (Amended 6/1/95).
ARTICLE VII
AMENDMENTS
Section 1. Power of Shareholders.
By-laws may be adopted, amended or repealed, either at a meeting by the vote of
shareholders entitled to exercise a majority of the voting power, or by the
written assent of such shareholders.
Section 2. Power of Directors.
Authority to adopt, repeal or amend the By-Law fixing the number of directors is
hereby delegated to the Board of Directors.
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
November 13, 1997
Board of Directors
Cova Financial Life Insurance Company
4100 Newport Place Drive
Suite 840
Newport Beach, CA 92600
RE: Opinion of Counsel - Cova Variable Life Account Five
-------------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of a Registration Statement on Form S-6 for the Modified Single Premium
Variable Life Insurance Policies to be issued by Cova Financial Life Insurance
Company and its separate account, Cova Variable Life Account Five.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Cova Variable Life Account Five is a Unit Investment Trust as that term
is defined in Section 4(2) of the Investment Company Act of 1940 (the "Act"),
and is currently registered with the Securities and Exchange Commission,
pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premiums paid by an Owner pursuant to a Policy
issued in accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable law, such an Owner will have a
legally-issued, fully paid, non-assessable contractual interest under such
Policy.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /S/ LYNN KORMAN STONE
-----------------------------
Lynn Korman Stone
ACTUARIAL OPINION AND CONSENT
This opinion is furnished in connection with the registration of the individual
modified single premium variable universal life policy of the Cova Variable Life
Account Five, file numbers 333-37559 and 811-08433.
I am familiar with the terms of the Registration Statement and the accompanying
exhibits. The prospectus included in the Registration Statement describes the
policy issued by Cova. In my professional opinion:
1. The charges on the policy are reasonable in relation to industry norms and
in relation to the expenses expected to be incurred by Cova in connection
with this policy. There are policy charges for administration, Federal
taxes, premium taxes, cost of insurance, and mortality and expense risk.
The Surrender Charge is the only sales load charge in the policy. This
charge is a declining scale over the first 9 policy years, starting at a
maximum of 7.5% of premium.
2. The illustrations of accumulated premium, death benefits, account values,
and cash surrender values that appear in the prospectus are consistent with
the provisions of the policy, and are based on the assumptions stated in
the accompanying text.
3. The illustrations show values on both a current basis and a guaranteed
basis. The only charge that is on a current and guaranteed basis is the
cost of insurance charge, all other charges are identical on a current and
guaranteed basis. The current illustration uses the current cost of
insurance charges that are currently assessed by the company. The
guaranteed illustration uses the maximum cost of insurance charges that
could be assessed at any future date during the lifetime of a policy.
4. The specific ages, sex, rate class, and the premium amounts used in these
illustrations are representative of the typical purchasers that Cova
expects will purchase the product. These characteristics have not been
selected so as to make the relationship between premiums and benefits look
more favorable in these specific instances than it would for prospective
purchasers with different characteristics.
I hereby consent to the use of this opinion as an Exhibit to the registration.
/s/ J. ROBERT HOPSON
--------------------------------
J. Robert Hopson, FSA, MAAA
Senior Vice President & Chief Actuary
Consent of Independent Auditors
The Board of Directors
Cova Financial Life Insurance Company
We consent to the reference to our firm under the caption "Experts" in the
prospectus and to the use of our report with respect to the financial statements
of Cova Financial Life Insurance Company as of December 31, 1996 and for the
seven-month period ended December 31, 1996 and the preacquisition five-month
period ended May 31, 1996 and the year ended December 31, 1994, dated March 7,
1997, in the Pre-Effective Amendment No. 1 to the Registration Statement (Form
S-6 No. 333-37559) of Cova Variable Life Account Five.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
November 13, 1997
