CC-4054.DOC
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 eleven (11) investment portfolios listed below. The
investment portfolios are part of Cova Series Trust 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.
Cova Series Trust:
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
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
The Cova Series Trust Lord Abbett Growth and Income Portfolio is not available
in connection with the Policy until February 1, 1999.
General American Capital Company:
Managed by Conning Asset
Management Company
Money Market
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. The SEC maintains a Web site
(http://www.sec.gov) that contains materials incorporated by reference and other
information regarding registrants that file electronically with the SEC.
INVESTMENT IN A VARIABLE LIFE INSURANCE POLICY IS SUBJECT TO RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL. THE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY.
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.
May 1, 1998, as amended January 1, 1999
TABLE OF CONTENTS Page
SPECIAL TERMS 3
SUMMARY 4
PART I 6
1. THE VARIABLE LIFE INSURANCE POLICY 6
2. PURCHASES 6
Premiums 6
Application for a Policy 6
Allocation of Premiums 6
Grace Period 6
Accumulation Unit Values 7
3. INVESTMENT OPTIONS 7
Cova Series Trust 7
General American Capital Company 7
Transfers 7
Dollar Cost Averaging Program 7
Automatic Rebalancing Program 7
Approved Asset Allocation Program 8
Substitution 8
4. EXPENSES 8
Insurance Charges 8
Mortality and Expense Risk Charge 8
Administrative Charge 8
Tax Expense Charge 8
Cost of Insurance Charge 8
Annual Policy Maintenance Fee 8
Annual Withdrawal Amount 8
Surrender Charge 9
Nursing Home Waiver 9
Deferred Premium Tax Charge 9
Transfer Fee 9
Taxes 9
Investment Portfolio Expenses 10
5. DEATH BENEFIT 11
Accelerated Death Benefit 11
Joint Lives 11
6. TAXES 11
Life Insurance in General 11
Taking Money Out of Your Policy 11
Diversification 11
7. ACCESS TO YOUR MONEY 12
Loans 12
Loan Amount 12
Loan Account 12
Loan Interest 12
Interest Credited 12
Preferred Loan 12
Effect of Loan 12
Loan Repayments 12
Total Surrender 12
Partial Surrenders 12
Termination of the Policy 12
Reinstatement 12
8. OTHER INFORMATION 12
Cova 12
The Separate Account 13
Distributor 13
Suspension of Payments or Transfers 13
Ownership 13
Owner 13
Joint Owner 13
Beneficiary 13
Assignment 13
PART II 14
The Company 14
Executive Officers and Directors of Cova 14
Voting 16
Disregard of Voting Instructions 16
The Separate Account 16
Legal Opinions 17
Reduction or Elimination of Surrender Charge 17
Misstatement of Age or Sex 17
Cova's Right to Contest 17
Settlement Options 17
Tax Status 17
Introduction 17
Diversification 17
Tax Treatment of the Policy 18
Policy Proceeds 18
Joint Lives 18
Tax Treatment of Loans and Surrenders 18
Multiple Policies 19
Tax Treatment of Assignments 19
Qualified Plans 19
Income Tax Withholding 19
Reports to Owners 19
Legal Proceedings 19
Experts 19
Financial Statements 19
APPENDIX A
Illustration of Policy Values A-1
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 Fund 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 8
Beneficiary 13
Business Day 7
Death Benefit 11
Insured 4
Investment Portfolio 7
Issue Date 8
Joint Owner 13
Loan Account 12
Monthly Deduction 8
Owner 13
Net Death Benefit or Death Proceeds 11
Premium 6
Processing Date 8
Right to Examine Period 6
Surrender Charge 9
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 eleven (11) 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
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income (available as of 2/1/99)
Managed by Conning Asset Management Company
Money Market
Depending upon market conditions, you can make or lose money in any of these
investment 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 charge
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 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
Fund. 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;
* supplement retirement income; and
* 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 Fund 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 eleven (11) 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 total $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 is 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 Fund. 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 Fund 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 Fund is called the Policy Date. The
money will stay in the Money Market Fund 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 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 eleven (11) 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
THE COVA SERIES TRUST LORD ABBETT GROWTH AND INCOME PORTFOLIO IS NOT AVAILABLE
IN CONNECTION WITH THE POLICY UNTIL FEBRUARY 1, 1999.
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 eleven (11) 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 Fund (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, Cova currently 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 pro rata 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:
Policy Surrender Policy Surrender
Year Charge Year 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%
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:
Deferred Deferred
Policy Premium Policy Premium
Year Tax Charge 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%
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.
<TABLE>
<CAPTION>
Investment Portfolio Expenses
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management certain Portfolios - Total Annual
Fees see Note 1 below) Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust (1)
Managed by J.P. Morgan
Investment Management Inc.
<S> <C> <C> <C>
Select Equity .75% .10% .85%
Small Cap Stock .85% .10% .95%
Large Cap Stock .65% .10% .75%
International Equity .85% .10% .95%
Quality Bond .55% .10% .65%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Lord, Abbett & Co.
Bond Debenture .75% .10% .85%
Mid-Cap Value (2) 1.00% .10% 1.10%
Large Cap Research (2) 1.00% .10% 1.10%
Developing Growth (2) .90% .10% 1.00%
Lord Abbett Growth and Income (3) .65% .07% .72%
- ------------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Managed by Conning Asset
Management Company
Money Market .125% .08% .205%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Since August 20, 1990, an affiliate of 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 annual portfolio expenses (on an
annualized basis) for the year or period ended December 31, 1997 would have been
1.00% for the Select Equity Portfolio; 1.39% for the Small Cap Stock Portfolio;
1.08% for the Large Cap Stock Portfolio; 1.53% for the International Equity
Portfolio; 1.08% for the Quality Bond Portfolio; 1.07% for the Bond Debenture
Portfolio; 8.41% for the Mid-Cap Value Portfolio; 10.04% for the Large Cap
Research Portfolio and 9.00% for the Developing Growth Portfolio.
(2) Annualized. The Portfolio commenced investment operations on August 20,
1997.
(3) Estimated. The Portfolio will commence investment operations on or about
January 8, 1999.
</FN>
</TABLE>
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 fees 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 or 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 is 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 (Cova) 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 Cova, from Xerox Financial
Services, Inc. The acquisition of Xerox Life included related companies,
including Cova. On June 1, 1995 Cova changed its name to Cova Financial Life
Insurance Company.
General American is a St. Louis-based mutual company with more than $300 billion
of life insurance in force and approximately $24 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
<TABLE>
<CAPTION>
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:
Principal Occupation During
Name the Past 5 Years
- ---- ----------------
<S> <C>
John W. Barber*** Director of Cova - June, 1995 to present; Director of First Cova Life Insurance
Company (FCLIC) - June, 1995 to present; Director of Cova Financial Services Life
Insurance Company (CFSLIC) - 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.
Frances S. Cook* Secretary of Cova, CFSLIC and FCLIC - 1997 to present; First Vice President and
Associate General Counsel of CFLIC - July, 1997 to present, prior thereto Vice
President and Assistant General Counsel 1996 to 1997, prior thereto Assistant
General Counsel 1993 to 1997; Secretary of Cova and FCLIC - 1997 to present; First
Vice President of Cova Life Management Company (CLMC) - July, 1997 to present,
prior thereto Vice President and Assistant General Counsel 1996 to 1997, prior
thereto Assistant General Counsel 1993 to 1997; Secretary of Cova Investment
Advisory Corporation (Advisory) - 1997 to present; Assistant Secretary of Cova
Life Sales Company (CLSC) - 1993 to present.
Connie A. Doern**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President
from 1990 to 1995; Vice President of CFSLIC - 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.
Patricia E. Gubbe* Vice President of Cova - 1989 to present; Vice President of CFSLIC -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 CFSLIC - 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.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova - 1991 to present; Vice
President, Chief Actuary and Director of CFSLIC - 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
CFSLIC - 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 Advisers Inc., White Oak Royalty Company, Walnut Street Funds, Inc., and
RGA Reinsurance Company -October, 1994 to present.
Douglas E. Jacobs* Vice President of Cova - 1985 to present; Vice President of CFSLIC -1985 to
present; Vice President of CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President
from 1990 to 1995; Vice President of CFSLIC - 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.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFSLIC, FCLIC, CLMC, Advisory and Cova
Investment Allocation Corporation (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 from 1995 to present, prior
thereto Vice President, Controller, Treasurer and Director. Vice President,
Controller and Director of CFSLIC from 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 Cova Series Trust (Trust) - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova - June, 1995 to present; Assistant
Secretary and Director of CFSLIC - 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 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 Advisory - December, 1996 to present;
Executive Vice President and Director of FCLIC - May, 1997 to present, Executive
Vice President and Director of Allocation - December, 1996 to present.
Leonard M. Rubenstein** Director of Cova, CFSLIC, 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 CFSLIC -1985 to
present; and CLMC - 1989 to present.
John W. Schaus* Vice President of Cova - 1988 to present; Vice President of CFSLIC -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 CFSLIC 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 CFSLIC -1997 to
present; Vice President of FCLIC - 1997 to present.
Kent R. Zimmerman** Assistant Treasurer of Cova - May, 1996 to present; Assistant Treasurer of CFSLIC
- 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.
<FN>
* 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
</FN>
</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/directors 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. Cova has registered the Separate
Account with the Securities and 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 premium payments to be received will be considered. Per
Policy sales expenses are likely to be less on larger premium 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 advisers.
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
modified 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 or her
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 sheets of Cova as of December 31, 1997 and 1996, and the related
statements of income, shareholder's equity, and cash flows for the years ended
December 31, 1997 and 1996, and the periods from June 1, 1995 to December 31,
1995 and January 1, 1995 to May 31, 1995, have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
Cova's financial statements referred to above contains an explanatory paragraph
stating that as a result of its 1995 acquisition, the financial information for
the periods subsequent to the acquisition is presented on a different cost basis
than for the period prior to the acquisition and, therefore, is not comparable.
Financial Statements
There are no financial statements for the Separate Account because it has only
recently commenced operations.
COVA FINANCIAL LIFE INSURANCE COMPANY (a wholly owned subsidiary of Cova
Financial Services Life Insurance Company)
Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
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) (the Company) as of December 31, 1997 and 1996, and
the related statements of income, shareholder's equity, and cash flows for
the years ended December 31, 1997 and 1996, and the period from June 1,
1995 to December 31, 1995 (Successor periods), and the period from January
1, 1995 to May 31, 1995 (Predecessor period). 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 audits 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, 1997 and 1996, 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
Predecessor financial statements present fairly, in all material respects,
the results of its operations and its cash flows for the Predecessor
period, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective June 1, 1995,
the predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company, acquired all of the outstanding stock of Cova Financial
Life Insurance Company in a business combination accounted for as a
purchase. As a result of the acquisition, the financial information for the
periods subsequent to the acquisition is presented on a different cost
basis than that for the period prior to the acquisition and, therefore, is
not comparable.
Chicago, Illinois
March 5, 1998
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
December 31, 1997 and 1996
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Investments:
Debt securities available for sale, at fair value
<S> <C> <C>
(cost of $96,884 in 1997 and $71,257 in 1996) $ 97,520 71,263
Mortgage loans (net) 1,786 -
Policy loans 1,083 1,048
Short-term investments, at fair value - 44
- -------------------------------------------------------------------------------------------------------------------
Total investments 100,389 72,355
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - interest-bearing 756 4,150
Cash - noninterest-bearing 1,392 2,485
Accrued investment income 1,826 1,122
Deferred policy acquisition costs 6,774 3,321
Present value of future profits 900 1,178
Goodwill 1,923 2,034
Deferred tax asset (net) 1,042 1,115
Receivable from OakRe 68,533 92,238
Reinsurance receivables 114 51
Other assets 14 44
Separate account assets 69,318 18,880
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 252,981 198,973
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, continued
December 31, 1997 and 1996
(In thousands of dollars, except share data)
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policyholder deposits $ 157,566 154,566
Future policy benefits 5,381 4,561
Payable on purchase of securities 92 1,048
Accounts payable and other liabilities 1,462 736
Federal and state income taxes payable 106 10
Future purchase price payable to OakRe 565 683
Guaranty fund assessments 1,000 1,585
Separate account liabilities 69,318 18,880
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 235,490 182,069
- -------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Common stock, $233.34 par value. (Authorized
30,000 shares; issued and outstanding 2,800 2,800
12,000 shares in 1997 and 1996
Additional paid-in capital 13,523 13,523
Retained earnings 1,023 580
Net unrealized appreciation on securities,
net of tax 145 1
- -------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 17,491 16,904
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 252,981 198,973
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1997, 1996, and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
----------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums $ 1,191 488 142 82
Net investment income 6,761 4,176 1,419 5,271
Net realized gains (losses) on sales of
investments 158 (28) 118 (272)
Separate account fees 599 134 10 -
Other income (expense) 45 35 (7) 57
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 8,754 4,805 1,682 5,138
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest on policyholder deposits 4,837 2,563 788 5,034
Current and future policy benefits 1,481 722 115 178
Operating and other expenses 1,203 570 309 814
Amortization of purchased intangible
assets 165 66 157 -
Amortization of deferred acquisition
costs 320 187 5 522
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 8,006 4,108 1,374 6,548
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 748 697 308 (1,410)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit):
Current 310 351 - (362)
Deferred (5) (66) 140 (201)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) 305 285 140 (563)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 443 412 168 (847)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1997, 1996, and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
-------------------------------------- -------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Common stock:
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,800 2,800 2,800 600
Par value adjustment - - - 2,200
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 2,800 2,800 2,800 2,800
- ---------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 13,523 13,523 18,093 17,200
Adjustment to reflect purchase acquisition
indicated in note 2 - - (7,570) -
Par value adjustment - - - (2,200)
Capital contribution - - 3,000 3,093
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 13,523 13,523 13,523 18,093
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 580 168 209 4,045
Adjustment to reflect purchase acquisition
indicated in note 2 - - (209) -
Net income (loss) 443 412 168 (847)
Adjustment due to financial reinsurance
transaction with OakRe - - - (2,989)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 1,023 580 168 209
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on securities:
Balance at beginning of period 1 192 (3,789) (11,316)
Adjustment to reflect purchase acquisition
indicated in note 2 - - 3,789 -
Change in unrealized appreciation (depreciation)
of debt and equity securities 630 (840) 846 15,151
Change in deferred Federal income taxes (77) 103 (104) (4,053)
Change in deferred acquisition costs
attributable to unrealized gains (144) (69) - (3,571)
Change in present value of future profits
attributable to unrealized losses (gains) (265) 615 (550) -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 145 1 192 (3,789)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity $ 17,491 16,904 16,683 17,313
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
---------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Interest and dividend receipts $ 6,162 3,676 934 7,283
Premiums received 1,210 509 154 90
Insurance and annuity benefit payments (669) (580) (339) (252)
Operating disbursements (1,341) (768) (490) (1,038)
Taxes on income refunded (paid) (298) (341) - 1,975
Commissions and acquisition costs paid (3,821) (2,413) (1,169) (542)
Other 69 (183) 360 6,299
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 1,312 (100) (550) 13,815
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used for the purchase of
investment securities (53,534) (42,655) (52,399) (935)
Proceeds from investment securities
sold and matured 25,379 10,635 14,399 151,204
Investment expenses (81) (90) (57) (97)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (28,236) (32,110) (38,057) 150,172
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Policyholder deposits 81,788 38,348 12,442 5,614
Transfers from (to) OakRe 25,060 36,553 33,579 (171,081)
Transfer to separate accounts (56,144) (13,669) (3,312) -
Return of policyholder deposits (28,267) (28,521) (26,897) (15,531)
Capital contributions received - - 3,000 3,093
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 22,437 32,711 18,812 (177,905)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (4,487) 501 (19,795) (13,918)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents -
beginning of period 6,635 6,134 25,929 39,847
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents -
end of period $ 2,148 6,635 6,134 25,929
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
---------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income (loss) to net cash provided by operating
activities:
<S> <C> <C> <C> <C>
Net income (loss) $ 443 412 168 (847)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Increase (decrease) in future policy
benefits 820 192 (201) (52)
Increase (decrease) in payables and
accrued liabilities 82 95 161 (252)
Decrease (increase) in accrued
investment income (704) (556) (525) 1,766
Amortization of intangible assets and
deferred acquisition costs 485 253 162 522
Amortization and accretion of
securities premiums and discounts (10) 73 (9) 32
Net realized (gain) loss on sale of
investments (158) 28 (118) 272
Interest on policyholder deposits 4,837 2,563 788 5,034
Investment expenses paid 115 90 57 97
Increase (decrease) in current and
deferred Federal income taxes 91 (66) 140 1,412
Recapture commissions paid to OakRe (159) (273) (223) -
Deferral of acquisition costs (3,917) (2,413) (1,169) (542)
Due to/from affiliates - 44 27 6,470
Other (613) (542) 192 (97)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 1,312 (100) (550) 13,815
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(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 conduct business in the state of California. Most of the
policies issued present no significant mortality or 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. 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 85%, 81%, and 71% of the Company's sales have been through
two specific brokerage firms, A. G. Edwards & Sons, Incorporated, and
Edward Jones & Company, Incorporated, in 1997, 1996, and 1995,
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, 1997 and
1996.
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) Purchase 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 summarizes the
final allocation of purchase price.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 1, 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
Assets acquired:
<S> <C>
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 fair 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 shareholder's equity of approximately $4.0 million in
1995, reflecting the application of push down purchase accounting. The
Company's financial statements subsequent to June 1, 1995 reflect this
new basis of accounting.
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
Debt Securities
Investments in all debt securities with readily determinable fair 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, 1997 and 1996 were classified as
available-for-sale. Securities available-for-sale are carried at fair
value, with unrealized holding gains and losses reported as a separate
component of shareholder's 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.
Mortgage Loans and Other Invested Assets
Mortgage loans and policy loans are carried at their unpaid principal
balance. Other invested assets are carried at the lower of cost or
market.
Reserves for loans are established when the Company determines that
collection of all amounts due under the contractual terms is doubtful
and are calculated in conformity with Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures.
The Company had no impaired loans, but did establish a valuation
allowance of $319 for potential losses on mortgage loans at December 31,
1997.
Cash and Cash Equivalents
Cash and cash equivalents include currency and demand deposits in banks,
U.S. 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.
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 amortization period is
the remaining life of the policies, which is approximately 20 years from
the date of original policy issue.
The components of deferred policy acquisition costs are shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred policy acquisition costs,
<S> <C> <C> <C> <C>
beginning of period $ 3,321 1,164 6,167 9,718
Effects of push down purchase
accounting - - (6,167) -
Commissions and expenses deferred 3,917 2,413 1,169 542
Amortization (320) (187) (5) (522)
Deferred policy acquisition costs
attributable to unrealized
gains (144) (69) - (3,571)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs,
end of period $ 6,774 3,321 1,164 6,167
- ---------------------------------------------------------------------------------------------------------------------------
</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 pretax 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 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 6.2%, 4.6%, 3.8%, 3.1%, and 2.4% for the years ended
December 31, 1998 through 2002, 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 reallocation 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>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Present value of future profits - beginning of period $ 1,178 576 1,233
Net amortization (13) 78 (107)
Adjustment due to revised push down purchase accounting - (91) -
Present value of future profit attributable to unrealized losses (gains) (265) 615 (550)
- ---------------------------------------------------------------------------------------------------------------------------
Present value of future profits - end of period $ 900 1,178 576
- ---------------------------------------------------------------------------------------------------------------------------
</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>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Goodwill - beginning of period $ 2,034 2,306 2,375
Amortization (111) (105) (69)
Adjustment due to revised push down purchase accounting - (167) -
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill - end of period $ 1,923 2,034 2,306
- ---------------------------------------------------------------------------------------------------------------------------
</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 rate 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 a 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.
The components of this future payable are shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Future payable - beginning of period $ 683 1,265 1,438
Interest added 41 39 50
Payments to OakRe (159) (273) (223)
Adjustment due to revised push down purchase accounting - (348) -
- ---------------------------------------------------------------------------------------------------------------------------
Future payable - end of period $ 565 683 1,265
- ---------------------------------------------------------------------------------------------------------------------------
</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 Company's assets as of the date of acquisition was 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 company's policyholder deposits as of December 31, 1997 was
6.15%.
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 filed its own separate income
tax return. Beginning in 1997, the Company files a consolidated income
tax return with its immediate parent, Cova Financial Services Life
Insurance Company. Allocations of Federal income taxes are based upon
separate return calculations.
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 carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
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
- Amortization of deferred policy acquisition costs -
Amortization of present value of future profits -
Recoverability of goodwill
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 SFAS No. 121, Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed of, 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 at December 31, 1997.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments
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 No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosures 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 value 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.
Investment Securities and Mortgage Loans (Including Mortgage-backed
Securities)
Fair values of 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, certain mortgage-backed securities, and mortgage
loans, 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).
Policy Loans
Fair values of policy loans approximate carrying value as the interest
rates on the majority of policy loans are reset periodically and
therefore approximate current interest rates.
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 contracts 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, 1997 and
1996, the cash surrender value of policyholder funds on deposit was
$1,994,062 and $1,030,007, respectively, less than their stated carrying
value. Of the contracts permitting surrender, substantially all 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, 1997 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 1996 and 1995 amounts have been reclassified to conform to the
1997 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 shareholder's equity. The amortized
cost, estimated fair value, and carrying value of investments at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government Treasuries $ 100 1 - 101 101
Collateralized mortgage
obligations 24,018 305 (64) 24,259 24,259
Corporate, state,
municipalities, and
political subdivisions 72,766 1,500 (1,106) 73,160 73,160
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 96,884 1,806 (1,170) 97,520 97,520
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage loans (net) 1,786 143 - 1,929 1,786
Policy loans 1,083 - - 1,083 1,083
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 99,753 1,949 (1,170) 100,532 100,389
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government Treasuries $ 100 1 - 101 101
Collateralized mortgage
obligations 20,181 81 (119) 20,143 20,143
Corporate, state,
municipalities, and
political subdivisions 50,976 433 (390) 51,019 51,019
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 71,257 515 (509) 71,263 71,263
- ---------------------------------------------------------------------------------------------------------------------------
Policy loans 1,048 - - 1,048 1,048
Short-term investments 44 - - 44 44
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 72,349 515 (509) 72,355 72,355
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without 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>
- ---------------------------------------------------------------------------------------------------------------------------
Estimated
Amortized fair
cost value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Less than one year $ 1,375 1,378
Due after one year through five years 27,132 27,100
Due after five years through ten years 36,120 36,463
Due after ten years 8,239 8,320
Mortgage-backed securities 24,018 24,259
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 96,884 97,520
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, approximately 90.9% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 9.1% noninvestment grade debt securities, 7.2%
are rated as BB or its equivalent, and 1.9% are rated B or its
equivalent.
All debt securities were income producing during the years ended
December 31, 1997 and 1996. As of December 31, 1997 and 1996, the
Company had no impaired investments.
The components of investment income, realized gains (losses) and
unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Income on debt securities $ 6,575 3,926 1,166 4,075
Income on short-term investments 186 243 257 1,261
Income on policy loans 83 86 46 29
Interest on mortgage loans 32 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Miscellaneous interest - 8 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income 6,876 4,263 1,469 5,365
Investment expenses (115) (87) (50) (94)
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $ 6,761 4,176 1,419 5,271
- ---------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses) - debt securities $ 158 (28) 118 (272)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) were as follows:
Debt securities $ 633 6 850 (10,594)
Short-term investments 3 - (4) 1
Effects on deferred acquisition costs
amortization (213) (69) - 4,767
Effects on present value of future
profits amortization (200) 65 (550) -
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) before income taxes 223 2 296 (5,826)
Unrealized income tax benefit (expenses) (78) (1) (104) 2,037
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (deprecation)
- ---------------------------------------------------------------------------------------------------------------------------
on investments $ 145 1 192 (3,789)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1997 were $25,379,783. Gross gains of $166,335 and
gross losses of $8,658 were realized on those sales. Included in these
amounts were $47,391 of gross gains and $7,300 of gross losses realized
on the sale of noninvestment grade securities.
Proceeds from sales, redemptions and paydowns for 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 noninvestment
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.
(5) Securities Greater than 10% of Shareholder's Equity
As of December 31, 1997 and 1996, the Company held the following
individual securities which exceeded 10% of shareholder's equity:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Colonial Realty, at carrying value $ 2,017,400 2,036,540
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) Postretirement 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 1997, 1996, and 1995, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1997 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 allocations is not material.
(7) Income Taxes
The Company will file a consolidated Federal income tax return with its
immediate parent, CFSLIC. 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 shareholder's equity accounts. Income tax expense (benefit) for
the years ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Statements of income:
Operating income (excluding realized
<S> <C> <C> <C> <C>
investment gains and losses) $ 250 295 194 (561)
Realized investment gains (losses) 55 (10) (54) (2)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) included
in the statements of income 305 285 140 (563)
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Change in deferred Federal income taxes 77 (103) 104 4,053
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 382 182 244 3,490
- ---------------------------------------------------------------------------------------------------------------------------
The actual Federal income tax expense (benefit) differed from the
expected tax expense computed by applying the U.S. Federal statutory
rate to income before taxes on income as follows:
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 262 35.0% $ 244 35.0% $ 108 35.0% $ (494) 35.0%
Tax-exempt bond interest - - - - - - (70) 5.0
Amortization of intangible assets 39 5.2 37 5.3 25 8.2 - -
Other 4 0.5 4 0.6 7 2.3 1 (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 305 40.7 $ 285 40.9% $ 140 45.5%$ (563) 39.9%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
<S> <C> <C>
Tax basis of intangible assets purchased $ 679 733
Liability for commission on recaptures 198 239
Policy reserves 1,898 972
DAC "Proxy Tax" 977 556
Other deferred tax assets - 6
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 3,752 2,506
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains in investments 78 1
PVFP 144 219
Deferred acquisition costs 2,371 1,162
- ---------------------------------------------------------------------------------------------------------------------------
Other deferred tax liabilities 117 9
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,710 1,391
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,042 1,115
- ---------------------------------------------------------------------------------------------------------------------------
</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 was established at
December 31, 1997 or 1996.
(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
Corporation, which provides management services and the employees
necessary to conduct the activities of the Company; and Conning Asset
Management, which provides investment advice. Additionally, a portion of
overhead and other corporate expenses are allocated by the Company's
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. Expenses and fees paid to affiliated companies in 1997 and
1996 for the Company were $396,806 and $303,694, respectively.
(9) Statutory Surplus and Dividend Restriction
GAAP differs in certain respects from accounting practices prescribed or
permitted by insurance regulatory authorities (statutory accounting
principles).
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 nonrecognition 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
under statutory accounting principles. In addition, adjustments to
record the carrying values of debt securities and certain equity
securities at estimated fair value 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 shareholder's 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 GAAP were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands
of dollars)
<S> <C> <C>
Statutory capital and surplus $ 10,389 11,176
Reconciling items:
Statutory asset valuation reserves 1,151 825
Interest maintenance reserve 111 34
GAAP investment adjustments to fair value 636 6
Deferred policy acquisition costs 6,774 3,321
GAAP basis policy reserves (4,871) (2,101)
Deferred federal income taxes (net) 1,042 1,115
Goodwill 1,923 2,034
Present value of future profits 900 1,178
Future purchase price payable (565) (683)
Other 1 (1)
- ---------------------------------------------------------------------------------------------------------------------------
GAAP shareholder's equity $ 17,491 16,904
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statutory net loss for the years ended December 31, 1997, 1996, and
1995 were $461,118, $113,236, and $2,404,316, respectively.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
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. The maximum
dividend permissible during 1998 will be $758,912, which is 10% of the
Company's December 31, 1997 statutory surplus of $7,589,120.
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,
1997, the Company's Total Adjusted Capital and Authorized Control Level
- RBC were $11,539,912 and $2,062,533, respectively. This level of
adjusted capital qualifies under all tests.
(10) Guaranty Fund Assessments
The Company participates with life insurance companies licensed in
California in an association formed to guaranty benefits to
policyholders of insolvent life insurance companies. Under the state
law, as a condition for maintaining the Company's authority to issue new
business, the Company is contingently liable for its share of claims
covered by the guaranty association for insolvencies incurred through
1997, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
At December 31, 1997, 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
$1.0 million in future assessments on insolvencies that occurred before
December 31, 1997. 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 $1.0 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 remaining 20%. The credits to be retained for 1997 were
not material.
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 .83% for these charges) are approximately
- -0.83%, 5.17% and 11.17%.
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.
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 9,657 8,790 27,290 9,531 8,676 27,290
2 11,025 9,324 8,514 27,290 9,050 8,265 27,290
3 11,576 9,002 8,245 27,290 8,556 7,840 27,290
4 12,155 8,691 8,099 27,290 8,047 7,503 27,290
5 12,763 8,388 7,914 27,290 7,519 7,099 27,290
6 13,401 8,096 7,731 27,290 6,969 6,661 27,290
7 14,071 7,812 7,549 27,290 6,392 6,182 27,290
8 14,775 7,537 7,369 27,290 5,782 5,657 27,290
9 15,513 7,271 7,191 27,290 5,131 5,077 27,290
10 16,289 7,014 7,014 27,290 4,435 4,435 27,290
15 20,789 6,007 6,007 27,290 46 46 27,290
20 26,533 5,124 5,124 27,290 0 0 0
25 33,864 4,350 4,350 27,290 0 0 0
30 43,219 3,671 3,671 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 10,238 9,338 27,290 10,113 9,213 27,290
2 11,025 10,482 9,607 27,290 10,213 9,338 27,290
3 11,576 10,733 9,883 27,290 10,299 9,449 27,290
4 12,155 10,991 10,301 27,290 10,369 9,679 27,290
5 12,763 11,256 10,681 27,290 10,421 9,846 27,290
6 13,401 11,527 11,067 27,290 10,451 9,991 27,290
7 14,071 11,806 11,461 27,290 10,457 10,112 27,290
8 14,775 12,093 11,863 27,290 10,432 10,202 27,290
9 15,513 12,387 12,272 27,290 10,371 10,256 27,290
10 16,289 12,689 12,689 27,290 10,270 10,270 27,290
15 20,789 14,728 14,728 27,290 9,226 9,226 27,290
20 26,533 17,120 17,120 27,290 5,573 5,573 27,290
25 33,864 19,926 19,926 27,290 0 0 0
30 43,219 23,218 23,218 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 10,819 9,919 27,290 10,695 9,795 27,290
2 11,025 11,708 10,833 27,290 11,444 10,569 27,290
3 11,576 12,672 11,822 27,290 12,255 11,405 27,290
4 12,155 13,719 13,029 27,290 13,135 12,445 27,290
5 12,763 14,854 14,279 27,290 14,091 13,516 27,290
6 13,401 16,085 15,625 27,290 15,133 14,673 27,290
7 14,071 17,421 17,076 27,290 16,271 15,926 27,290
8 14,775 18,870 18,640 27,290 17,518 17,288 27,290
9 15,513 20,443 20,328 27,290 18,887 18,772 27,290
10 16,289 22,152 22,152 27,290 20,398 20,398 27,290
15 20,789 34,179 34,179 39,647 31,381 31,381 36,402
20 26,533 52,958 52,958 56,665 48,581 48,581 51,981
25 33,864 82,842 82,842 86,985 75,995 75,995 79,795
30 43,219 128,339 128,339 134,756 117,613 117,613 123,494
<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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 9,657 8,790 17,020 9,423 8,579 17,020
2 11,025 9,324 8,514 17,020 8,804 8,043 17,020
3 11,576 9,002 8,245 17,020 8,134 7,456 17,020
4 12,155 8,691 8,099 17,020 7,397 6,902 17,020
5 12,763 8,388 7,914 17,020 6,579 6,218 17,020
6 13,401 8,096 7,731 17,020 5,665 5,421 17,020
7 14,071 7,812 7,549 17,020 4,633 4,489 17,020
8 14,775 7,537 7,369 17,020 3,463 3,396 17,020
9 15,513 7,271 7,191 17,020 2,125 2,109 17,020
10 16,289 7,014 7,014 17,020 584 584 17,020
15 20,789 6,007 6,007 17,020 0 0 0
20 26,533 5,124 5,124 17,020 0 0 0
25 33,864 4,350 4,350 17,020 0 0 0
30 43,219 3,671 3,671 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 10,238 9,338 17,020 10,010 9,110 17,020
2 11,025 10,482 9,607 17,020 9,991 9,117 17,020
3 11,576 10,733 9,883 17,020 9,936 9,092 17,020
4 12,155 10,991 10,301 17,020 9,838 9,160 17,020
5 12,763 11,256 10,681 17,020 9,687 9,131 17,020
6 13,401 11,527 11,067 17,020 9,473 9,039 17,020
7 14,071 11,806 11,461 17,020 9,184 8,870 17,020
8 14,775 12,093 11,863 17,020 8,807 8,607 17,020
9 15,513 12,387 12,272 17,020 8,324 8,229 17,020
10 16,289 12,689 12,689 17,020 7,707 7,707 17,020
15 20,789 14,728 14,728 17,020 1,045 1,045 17,020
20 26,533 17,120 17,120 17,976 0 0 0
25 33,864 20,011 20,011 20,211 0 0 0
30 43,219 23,468 23,468 23,703 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
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%
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> <C>
1 10,500 10,819 9,919 17,020 10,597 9,697 17,020
2 11,025 11,708 10,833 17,020 11,250 10,375 17,020
3 11,576 12,672 11,822 17,020 11,969 11,119 17,020
4 12,155 13,719 13,029 17,020 12,767 12,077 17,020
5 12,763 14,854 14,279 17,020 13,665 13,090 17,020
6 13,401 16,094 15,634 17,020 14,688 14,228 17,020
7 14,071 17,479 17,134 18,353 15,870 15,525 17,020
8 14,775 18,980 18,750 19,929 17,226 16,996 18,087
9 15,513 20,606 20,491 21,637 18,698 18,583 19,633
10 16,289 22,366 22,366 23,484 20,292 20,292 21,307
15 20,789 34,469 34,469 36,192 31,225 31,225 32,787
20 26,533 53,109 53,109 55,764 47,396 47,396 49,766
25 33,864 82,410 82,410 83,234 72,847 72,847 73,575
30 43,219 128,147 128,147 129,429 112,772 112,772 113,900
<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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE 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%
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> <C>
1 10,500 9,713 8,841 28,020 9,713 8,841 28,020
2 11,025 9,416 8,596 28,020 9,416 8,596 28,020
3 11,576 9,123 8,354 28,020 9,105 8,338 28,020
4 12,155 8,838 8,235 28,020 8,777 8,179 28,020
5 12,763 8,562 8,076 28,020 8,426 7,950 28,020
6 13,401 8,293 7,918 28,020 8,047 7,685 28,020
7 14,071 8,031 7,760 28,020 7,632 7,376 28,020
8 14,775 7,777 7,602 28,020 7,168 7,009 28,020
9 15,513 7,530 7,446 28,020 6,643 6,570 28,020
10 16,289 7,290 7,290 28,020 6,041 6,041 28,020
15 20,789 6,361 6,361 28,020 1,235 1,235 28,020
20 26,533 5,532 5,532 28,020 0 0 0
25 33,864 4,792 4,792 28,020 0 0 0
30 43,219 4,132 4,132 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE 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%
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> <C>
1 10,500 10,298 9,398 28,020 10,298 9,398 28,020
2 11,025 10,589 9,714 28,020 10,589 9,714 28,020
3 11,576 10,881 10,031 28,020 10,870 10,020 28,020
4 12,155 11,182 10,492 28,020 11,140 10,450 28,020
5 12,763 11,492 10,917 28,020 11,393 10,818 28,020
6 13,401 11,811 11,351 28,020 11,625 11,165 28,020
7 14,071 12,140 11,795 28,020 11,831 11,486 28,020
8 14,775 12,480 12,250 28,020 12,001 11,771 28,020
9 15,513 12,829 12,714 28,020 12,127 12,012 28,020
10 16,289 13,189 13,189 28,020 12,196 12,196 28,020
15 20,789 15,587 15,587 28,020 11,577 11,577 28,020
20 26,533 18,450 18,450 28,020 5,974 5,974 28,020
25 33,864 21,868 21,868 28,020 0 0 0
30 43,219 25,950 25,950 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATION
SINGLE 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%
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> <C>
1 10,500 10,883 9,983 28,020 10,883 9,983 28,020
2 11,025 11,830 10,955 28,020 11,830 10,955 28,020
3 11,576 12,850 12,000 28,020 12,848 11,998 28,020
4 12,155 13,961 13,271 28,020 13,943 13,253 28,020
5 12,763 15,169 14,594 28,020 15,121 14,546 28,020
6 13,401 16,485 16,025 28,020 16,390 15,930 28,020
7 14,071 17,918 17,573 28,020 17,761 17,416 28,020
8 14,775 19,478 19,248 28,020 19,245 19,015 28,020
9 15,513 21,177 21,062 28,020 20,857 20,742 28,020
10 16,289 23,026 23,026 28,020 22,619 22,619 28,020
15 20,789 36,163 36,163 37,971 35,451 35,451 37,223
20 26,533 56,757 56,757 59,595 55,387 55,387 58,157
25 33,864 89,247 89,247 93,710 85,217 85,217 89,477
30 43,219 140,341 140,341 141,745 131,464 131,464 132,779
<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.
[BACK COVER]
COVA
Cova Financial Life Insurance Company
Marketing and Executive Office
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
800-523-1661
Annuity Service Office
P.O. Box 10366
Des Moines, IA 50306
800-343-8496
CC-4054(1/99) Policy Form Series XLCC-648, XLCC-833 21-SPVL-CA (1/99)
