Registration No. 333-37559
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Cova Variable Life Account Five
(Exact Name of Trust)
B. Cova Financial Life Insurance Company
(Name of Depositor)
C. 4100 Newport Place Drive, Suite 840
Newport Beach, CA 92600
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Lorry J. Stensrud, President
Cova Financial Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 523-1661
Copies to:
Judith A. Hasenauer and Frances S. Cook
Blazzard, Grodd & Hasenauer, P.C. First Vice President and
P.O. Box 5108 Associate Counsel
Westport, CT 06881 Cova Financial Life Insurance
(203) 226-7866 Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
It is proposed that this filing will become effective (check appropriate
box):
_____ immediately upon filing pursuant to paragraph (b), or
__X__ on May 1, 1999 pursuant to paragraph (b), or
_____ 60 days after filing pursuant to paragraph (a)(1), or
_____ on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
E. Modified Single Premium Variable Life Insurance Policies
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
H. Approximate date of proposed public offering:
_____ Check box if it is proposed that this filing will become
effective on (date) and (time) pursuant to Rule 487.
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CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
- ------------ ------------------------------
1 The Variable Insurance Policy
2 Other Information; The Company
3 Not Applicable
4 Other Information
5 The Separate Account
6(a) Not Applicable
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases
11 Investment Options
12 Investment Options
13 Expenses
14 Purchases
15 Purchases
16 Investment Options
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Ownership
25 The Company
26 Expenses
27 The Company
28 The Company
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company; Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Other Information
46 Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 The Company; Purchases
52 Investment Options
53 The Separate Account
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
THE MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
COVA VARIABLE LIFE ACCOUNT FIVE
AND
COVA FINANCIAL LIFE
INSURANCE COMPANY
This prospectus describes the Modified Single Premium Variable Life Insurance
Policy (Policy) offered by Cova Financial Life Insurance Company (Cova).
The Policy has been designed to be used for estate and retirement planning and
other insurance needs of individuals.
The Policy offers you eighteen (18) investment portfolios listed below. The
investment portfolios are part of Cova Series Trust, General American Capital
Company, Templeton Variable Products Series Fund and AIM Variable Insurance
Funds, Inc. 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
General American Capital Company:
Managed by Conning Asset
Management Company
Money Market
Templeton Variable Products Series Fund, Class 1 Shares:
Managed by Franklin Advisers, Inc.
Franklin Growth Investments
Franklin Small Cap Investments
Managed by Templeton Investment Counsel, Inc.
Templeton Bond
Templeton International
Templeton Stock
AIM Variable Insurance Funds, Inc.:
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
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 companies that file electronically with the SEC.
The Policies:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or government agency
* are not guaranteed and may be subject to loss of principal
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
May 1, 1999
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Premiums
Application for a Policy
Allocation of Premiums
Grace Period
Accumulation Unit Values
3. INVESTMENT OPTIONS
Cova Series Trust
General American Capital Company
Templeton Variable Products Series Fund
AIM Variable Insurance Funds, Inc.
Transfers
Dollar Cost Averaging Program
Automatic Rebalancing Program
Approved Asset Allocation Program
Substitution
4. EXPENSES
Insurance Charges
Mortality and Expense Risk Charge
Administrative Charge
Tax Expense Charge
Cost of Insurance Charge
Annual Policy Maintenance Fee
Annual Withdrawal Amount
Surrender Charge
Nursing Home Waiver
Deferred Premium Tax Charge
Transfer Fee
Taxes
Investment Portfolio Expenses
5. DEATH BENEFIT
Accelerated Death Benefit
Joint Lives
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Loans
Loan Amount
Loan Account
Loan Interest
Interest Credited
Preferred Loan
Effect of Loan
Loan Repayments
Total Surrender
Partial Surrenders
Termination of the Policy
Reinstatement
8. OTHER INFORMATION
Cova
Year 2000
The Separate Account
Distributor
Suspension of Payments or Transfers
Ownership
Owner
Joint Owner
Beneficiary
Assignment
PART II
Cova
Executive Officers and Directors of Cova
Voting
Disregard of Voting Instructions
The Separate Account
Legal Opinions
Reduction or Elimination of Surrender Charge
Misstatement of Age or Sex
Cova's Right to Contest
Settlement Options
Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
Joint Lives
Tax Treatment of Loans and Surrenders
Multiple Policies
Tax Treatment of Assignments
Qualified Plans
Income Tax Withholding
Reports to Owners
Legal Proceedings
Experts
Financial Statements
APPENDIX A
Illustration of Policy Values 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 and need an explanation. 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 below 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. The death proceeds 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 eighteen (18) 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 you a transfer fee.
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 purchase the Policy with a single premium. 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
Managed by Conning Asset Management Company
Money Market
Managed by Franklin Advisers, Inc.
Franklin Growth Investments
Franklin Small Cap Investments
Managed by Templeton Investment Counsel, Inc.
Templeton Bond
Templeton International
Templeton Stock
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
Depending upon market conditions and the performance of the investment
portfolio(s) you select, 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. Your Policy
could lapse if your Cash Surrender Value is insufficient to cover any charges
due.
* Eachyear 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, we will deduct the Policy maintenance fee,
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 .90% annually, with 1/12 of
that amount charged monthly. These totals exclude the charge assessed to
cover the cost of insurance.
* Each month Cova will also deduct an additional insurance charge to cover
the cost of insurance. This charge will depend upon the:
* sex of the insured,
* age of the insured,
* 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 1.30%.
* If you make more than 12 transfers in a year, Cova deducts a transfer fee of
$25 or 2% of the amount transferred, whichever is less.
* 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
withdraw premiums 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.
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 eighteen (18) 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 do not think you will 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 purchase 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
To purchase a Policy, you may be required to 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
* 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 your premium to you (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 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.
Cova determines the number of Accumulation Units to credit to your Policy 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 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 eighteen (18) 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
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
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Variable Products Series Fund is a mutual fund with multiple
portfolios. Templeton Variable Products Series Fund has two classes of
shares - Class 1 and Class 2. Only shares of Class 1 are available under
your Policy. Franklin Advisers, Inc. is the investment manager of the
Franklin Growth Investments Fund and the Franklin Small Cap Investments Fund;
Templeton Investment Counsel, Inc. is the investment manager for the Templeton
International Fund, the Templeton Bond Fund and the Templeton Stock Fund.
The following portfolios are available under the Policy:
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
Templeton Bond Fund
Templeton International Fund
Templeton Stock Fund
AIM VARIABLE INSURANCE FUNDS, INC.
AIM Variable Insurance Funds, Inc. is a mutual fund with multiple portfolios.
A I M Advisors, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the Policy:
AIM V.I. Capital Appreciation Fund
AIM V.I. Value Fund
Shares of the investment portfolios may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with Cova. Certain
investment portfolios may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous
to you.
Cova may enter into certain arrangements under which it is reimbursed by the
investment portfolios' advisers, distributors and/or affiliates for the
administrative services which it provides to the portfolios.
Transfers
You can transfer money among the eighteen (18) 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 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.
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.
Telephone Transfers:
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.
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 to 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 the investment 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 .50%, 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 of the insured,
* age of the insured,
* 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 can 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 on other than a Policy
Anniversary, 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. 10% of your premium payments each year (you may not carry this amount over
to the next 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 .68% .18% .86%
Small Cap Stock .85% .27% 1.12%
Large Cap Stock .65% .10% .75%
International Equity .80% .28% 1.08%
Quality Bond .55% .10% .65%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Lord, Abbett & Co.
Bond Debenture .75% .10% .85%
Mid-Cap Value 1.00% .30% 1.30%
Large Cap Research 1.00% .30% 1.30%
Developing Growth .90% .30% 1.20%
Lord Abbett Growth and Income (2) .65% .07% .72%
- ------------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Managed by Conning Asset
Management Company
Money Market .125% .08% .205%
- ------------------------------------------------------------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS, INC.
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation .62% -- .05% .67%
AIM V.I. Value .61% -- .05% .66%
- ------------------------------------------------------------------------------------------------------------------------------------
TEMPLETON VARIABLE PRODUCTS SERIES FUND,
CLASS 1 SHARES
Managed by Templeton Investment Counsel Inc.
Templeton Bond .50% -- .23% .73%
Templeton International .69% -- .17% .86%
Templeton Stock .70% -- .19% .89%
Managed by Franklin Advisers, Inc.
Franklin Growth Investments (3) .00% -- 1.00% 1.00%
Franklin Small Cap Investments (3) .15% -- .85% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Since May 1, 1996, Cova has been reimbursing the investment portfolios
of Cova Series Trust for all operating expenses (exclusive of management fees)
in excess of approximately .10%. Beginning May 1, 1999, Cova will discontinue
this reimbursement arrangement for the Select Equity, Small Cap Stock and
International Equity Portfolios. Therefore, the amounts shown above under
"Other Expenses" have been restated to reflect the actual expenses for these
Portfolios for the year ended December 31, 1998. Also beginning May 1, 1999,
Cova will reimburse the Mid-Cap Value, Large Cap Research and Developing
Growth Portfolios for all operating expenses (exclusive of the management
fees) in excess of approximately .30% instead of .10%. This change is
reflected above under "Other Expenses" for these three Portfolios. Absent
the expense reimbursement, the percentages shown for total annual portfolio
expenses for the year ended December 31, 1998 would have been .86% for the
Quality Bond Portfolio, .94% for the Large Cap Stock Portfolio, .93% for the
Bond Debenture Portfolio, 1.68% for the Mid-Cap Value Portfolio, 1.95% for
the Large Cap Research Portfolio, and 1.70% for the Developing Growth
Portfolio.
(2) Estimated. The Portfolio commenced investment operations on January 8,
1999.
(3) Figures reflect expenses from the Fund's inception on May 1, 1998 and
are annualized. The investment manager agreed in advance to limit management
fees and make certain payments to reduce Fund expenses as necessary so that
Total Annual Portfolio Expenses did not exceed 1.00% of the Fund's Class 1 net
assets in 1998. The investment manager has agreed to continue this
arrangement through 1999. Management Fees, Other Expenses and Total Annual
Portfolio Expenses in 1998 before any waivers were as follows: 0.60%, 4.08%
and 4.68% for the Franklin Growth Investments Fund; 0.75%, 1.00% and 1.75% for
the Franklin Small Cap Investments Fund; and 0.60%, 2.27% and 2.87% for the
Mutual Shares Investments Fund.
</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 without being considered the owner
of the investments. 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
* if the Policy is in a grace period.
Loans are considered distributions from the Policy for tax purposes. 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,
* less the surrender charge,
* less the Policy maintenance fee, if any, and
* less 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 Cova does not
receive an appropriate loan repayment.
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, Cova will
transfer a portion of the Account Value equal to the loan interest due,
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% annually.
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
annually.
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.
YEAR 2000
Cova has developed and initiated plans to assure that its computer systems will
function properly in the year 2000 and later years. These efforts have included
receiving assurances from outside service providers that their computer systems
will also function properly in this context. Included within these plans are the
computer systems of the advisers and sub-advisers of the various investment
portfolios underlying the Separate Account.
Although an assessment of the total cost of implementing these plans has not
been completed, the total amounts to be expended are not expected to have a
material effect on Cova's financial position or results of operations. Cova
believes that it has taken all reasonable steps to address these potential
problems. There can be no guarantee, however, that the steps taken will be
adequate to avoid any adverse impact.
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.
The Separate Account is divided into sub-accounts.
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
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 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.
William P. Boscow* Vice President of Cova and CFSLIC - _____________ 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.
Constance 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.
E. Thomas 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 and Director of Cova, CFSLIC and FCLIC from __________ to present;
Vice President, Controller and Director of Cova from 1995 to __________, prior
thereto Vice President, Controller, Treasurer and Director. Vice President,
Controller and Director of CFSLIC from 1995 to __________, prior thereto Vice
President, Controller, Treasurer and Director; Vice President, Controller and
Director of FCLIC from 1992 to ________; 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 and Director of Cova -May, 1997 to present; Executive
Vice President and Director 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,
Chief Financial Officer 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.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFSLIC, FCLIC and CLMC since
___________, 1999.
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.
Joann T. Tanaka* Vice President of Cova and CFSLIC - ____________ to present; ____________________.
Peter L. Witkewiz* Vice President and Controller of Cova, CFSLIC and FCLIC - ___________ to present;
Vice President of Cova, CFSLIC and FCLIC - 1997 to ________________________.
<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 under it should be
amended or if the present interpretations 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 the 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 in this prospectus is general in nature. It is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. Cova has not considered any applicable state or other tax laws.
Moreover, the discussion in this prospectus is based upon Cova's understanding
of current federal income tax laws as they are currently interpreted. Cova makes
no representation 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.
The Treasury Department issued Regulations 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
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. 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 agree 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.
You should consult your own tax adviser with respect to the tax consequences of
purchasing the Policy.
Policy Proceeds. Loan proceeds and/or surrender payments, including those
resulting from the lapse of the Policy, 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 the Code and any
benefits paid under the Accelerated Death Benefit Rider should also be
excludable from gross income under the Code. Furthermore, you are not deemed to
be in constructive receipt of the Account Value or Cash Surrender Value,
including increments thereon, under a Policy until you make a surrender. 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 related regulations. 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.
If a Policy is not classified as a modified endowment contract, then any
surrenders shall be treated first as a recovery of the investment in the Policy
which would not be received as taxable income. However, if a distribution is
the result of a reduction in benefits under the Policy within the first fifteen
years after the Policy is issued in order to comply with Section 7702, such
distribution will, under rules set forth in Section 7702, be taxed as ordinary
income to the extent of income in the Policy.
Any loans from a Policy which is not classified as a modified endowment
contract, will be treated as indebtedness of the Owner and not a distribution.
Upon complete surrender or lapse of the Policy or when maturity benefits are
paid, if the amount received plus the policy debt exceeds the total premiums
paid that are not treated as previously surrendered by the Policy Owner, the
excess generally will be treated as ordinary income.
You should seek competent tax advice on the tax consequences of taking loans,
making a partial or total surrender or making any material modifications
to your Policy.
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.
You 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. You should therefore consult a
competent tax adviser if you wish to assign or change the owner of your Policy.
Qualified Plans. The Policies may be used in conjunction with certain qualified
plans. Because the rules governing such use are complex, you should not do so
until you have 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 you semi-annual and annual reports of the investment portfolios.
Within 30 days after each Policy Anniversary, Cova will send you an annual
statement. 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
* all transactions previously confirmed.
The statement will also show premiums paid and all charges deducted during the
Policy Year.
Cova will mail you a confirmation 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, you are 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 the Company as of December 31, 1998 and 1997, and the
related statements of income, shareholder's equity, and cash flows for each of
the years in the three-year period ended December 31, 1998, have been included
herein in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
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, 1998, 1997, and 1996
(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, 1998 and 1997, and
the related statements of income, shareholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cova Financial Life
Insurance Company as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
March 4, 1999
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services
Life Insurance Company)
Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Investments:
Debt securities available-for-sale, at fair value
(cost of $99,228 in 1998 and $96,884 in 1997) $ 100,658 97,520
Mortgage loans, net of allowance for potential loan
loss of $10 in 1998 and $-0- in 1997 5,245 1,786
Policy loans 1,223 1,083
----------- -----------
Total investments 107,126 100,389
Cash and cash equivalents - interest-bearing 5,789 756
Cash - noninterest-bearing 1,200 1,392
Accrued investment income 1,641 1,826
Deferred policy acquisition costs 9,142 6,774
Present value of future profits 854 900
Goodwill 1,813 1,923
Deferred tax asset, net 585 1,042
Receivable from OakRe 35,312 68,533
Reinsurance receivables 118 114
Other assets 398 14
Separate account assets 127,873 69,318
----------- -----------
Total assets $ 291,851 252,981
=========== ===========
</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, 1998 and 1997
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Policyholder deposits $ 135,106 157,566
Future policy benefits 6,191 5,381
Payable on purchase of securities 27 92
Accounts payable and other liabilities 1,653 1,462
Federal and state income taxes payable 172 106
Future purchase price payable to OakRe 342 565
Guaranty fund assessments 1,000 1,000
Separate account liabilities 127,871 69,318
----------- -----------
Total liabilities 272,362 235,490
----------- -----------
Shareholder's equity:
Common stock, $233.34 par value. (Authorized
30,000 shares; issued and outstanding
12,000 shares in 1998 and 1997) 2,800 2,800
Additional paid-in capital 14,523 13,523
Retained earnings 1,833 1,023
Accumulated other comprehensive income,
net of tax 333 145
----------- -----------
Total shareholder's equity 19,489 17,491
----------- -----------
Total liabilities and shareholder's equity $ 291,851 252,981
=========== ===========
</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, 1998, 1997, and 1996
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 1,308 1,191 488
Net investment income 7,516 6,761 4,176
Net realized gains (losses) on sales of
investments 178 158 (28)
Separate account fees 1,392 599 134
Other income 66 45 35
---------- ---------- ----------
Total revenues 10,460 8,754 4,805
---------- ---------- ----------
Benefits and expenses:
Interest on policyholder deposits 5,486 4,837 2,563
Current and future policy benefits 1,549 1,481 722
Operating and other expenses 1,614 1,203 570
Amortization of purchased intangible
assets 194 165 66
Amortization of deferred policy
acquisition costs 530 320 187
---------- ---------- ----------
Total benefits and expenses 9,373 8,006 4,108
---------- ---------- ----------
Income before income taxes 1,087 748 697
---------- ---------- ----------
Income tax expense (benefit):
Current (80) 310 351
Deferred 357 (5) (66)
---------- ---------- ----------
Total income tax expense 277 305 285
---------- ---------- ----------
Net income $ 810 443 412
========== ========== ==========
</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, 1998, 1997, and 1996
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Common stock, at beginning
and end of period $ 2,800 2,800 2,800
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of period 13,523 13,523 13,523
Capital contribution 1,000 -- --
---------- ---------- ----------
Balance at end of period 14,523 13,523 13,523
---------- ---------- ----------
Retained earnings:
Balance at beginning of period 1,023 580 168
Net income 810 443 412
---------- ---------- ----------
Balance at end of period 1,833 1,023 580
---------- ---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 145 1 192
Change in unrealized appreciation (depreciation)
of debt and equity securities 794 630 (840)
Deferred federal income tax impact (101) (77) 103
Change in deferred policy acquisition costs
attributable to unrealized appreciation (513) (144) (69)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 8 (265) 615
---------- ---------- ----------
Balance at end of period 333 145 1
---------- ---------- ----------
Total shareholder's equity $ 19,489 17,491 16,904
========== ========== ==========
Total comprehensive income:
Net income $ 810 443 412
Other comprehensive income (change in net unrealized
appreciation (depreciation) of debt and equity securities) 188 144 (191)
---------- ---------- ----------
Total comprehensive income $ 998 587 221
========== ========== ==========
</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, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ -----------
(in thousands)
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income $ 810 443 412
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Increase in future policy benefits 810 820 192
Increase in payables and
accrued liabilities 191 82 95
Decrease (increase) in accrued
investment income 185 (704) (556)
Amortization of intangible assets and
deferred policy acquisition costs 724 485 253
Amortization and accretion of
securities, premiums, and discounts (87) (10) 73
Net realized (gain) loss on sale of investments (178) (158) 28
Interest on policyholder deposits 5,486 4,837 2,563
Increase (decrease) in current and
deferred federal income taxes 523 91 (66)
Recapture commissions paid to OakRe (223) (159) (273)
Commissions and expenses deferred (3,411) (3,917) (2,413)
Due to/from affiliates -- -- 44
Other 219 (498) (452)
------------ ------------ -----------
Net cash provided by (used in) operating activities 5,049 1,312 (100)
------------ ------------ -----------
Cash flows from investing activities:
Cash used in the purchase of
investment securities (56,673) (53,534) (42,655)
Proceeds from investment securities
sold and matured 50,661 25,379 10,635
Other (121) (81) (90)
------------ ------------ -----------
Net cash used in investing activities (6,133) (28,236) (32,110)
------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services
Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------ ------------ -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 69,459 81,788 38,348
Transfers from OakRe 35,590 25,060 36,553
Transfer to separate accounts (60,181) (56,144) (13,669)
Return of policyholder deposits (39,943) (28,267) (28,521)
Capital contributions received 1,000 -- --
------------ ------------ -----------
Net cash provided by financing activities 5,925 22,437 32,711
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents 4,841 (4,487) 501
Cash and cash equivalents - beginning of period 2,148 6,635 6,134
------------ ------------ -----------
Cash and cash equivalents - end of period $ 6,989 2,148 6,635
============ ============ ===========
</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
December 31, 1998, 1997, and 1996
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company) markets and
services single premium deferred annuities, immediate annuities,
variable annuities, term life, single premium variable universal
life, 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 fixed 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.
Under the variable annuity contracts, policyholder deposits are
allocated to various separate account sub-accounts or the general
account. A sub-account is valued at the sum of market values of
the securities in its underlying investment portfolio. The
contract value allocated to a sub-account will fluctuate based on
the performance of the sub-accounts. The contract value allocated
to the general account is credited with a fixed interest rate for
a specified period. The Company may assess surrender fees against
amounts withdrawn prior to the end of the withdrawal charge
period. Policyholders may also incur certain federal income tax
penalties on withdrawals.
Under the single premium variable life contracts, policyholder
deposits are allocated to various separate account sub-accounts.
The account value allocated to a sub-account will fluctuate based
on the performance of the sub-accounts. The Company guarantees a
minimum death benefit to be paid to the beneficiaries upon the
death of the insured. The Company may assess surrender fees
against amounts withdrawn prior to the end of the surrender charge
period. A deferred premium tax may also be assessed against
amounts withdrawn in the first ten years. Policyholders may also
incur certain federal income tax penalties on withdrawals.
Under the term life insurance policies, policyholders pay a level
premium over a certain period of time to guarantee a death benefit
will be paid to the beneficiaries upon the death of the insured.
This policy has no cash accumulation available to the
policyholder.
Although the Company markets its products through numerous
distributors, including regional brokerage firms, national
brokerage firms, and banks, approximately 97%, 85%, and 81% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated, and Edward Jones & Company,
Incorporated, in 1998, 1997, and 1996, respectively.
ORGANIZATION
The Company, formerly Xerox Financial Life Insurance Company
(XFLIC), 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.
Cova Corporation purchased the Company from Xerox Financial
Services, Inc. (XFSI), a wholly owned subsidiary of Xerox
Corporation, on June 1, 1995. In conjunction with the purchase,
Cova Corporation entered into a financing reinsurance transaction
with OakRe Life Insurance Company (OakRe), a subsidiary of XFSI,
to assume the economic benefits and risks of the existing single
premium deferred annuity deposits (SPDAs) of the Company. 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 end of
the year 2000, from 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, 1998 and 1997.
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) 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, 1998 and
1997 were classified as available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized
holding gains and losses reported as accumulated other
comprehensive income 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 POLICY LOANS
Mortgage loans and policy loans are carried at their unpaid
principal balances. An allowance for mortgage loan losses is
established based on an evaluation of the mortgage loan portfolio,
past credit loss experience, and current economic conditions.
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, and the valuation allowance for
potential losses on mortgage loans was $10,000 and $319, at
December 31, 1998 and 1997, respectively.
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.
In order to provide for optimum policyholder returns and to allow
for the replication of the investment performance of existing
"cloned" mutual funds, the Company has periodically transferred
capital to the separate accounts to provide for the initial
purchase of investments in new portfolios. As additional funds
have been received through policyholder deposits, the Company has
periodically reduced its capital investment in the separate
accounts. The Company's capital investment in the separate
accounts as of December 31, 1998 and 1997, are presented in note
3.
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 policy 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 are not recognized currently in
income but as an offset to the accumulated other comprehensive
income of shareholder's equity. The amortization period is the
remaining life of the policies, which is approximately 20 years
from the date of original policy issue.
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below:
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period $ 6,774 3,321 1,164
Commissions and expenses deferred 3,411 3,917 2,413
Amortization (530) (320) (187)
Deferred policy acquisition costs attributable to
unrealized appreciation (513) (144) (69)
------------ ------------ ------------
Deferred policy acquisition costs, end of period $ 9,142 6,774 3,321
============ ============ ============
</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
The Company established an intangible asset which represents
the present value of future profits (PVFP) 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
appreciation and depreciation, 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 PVFP 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 appreciation and depreciation is not recognized
currently in income but as an offset to the accumulated other
comprehensive income of shareholder's equity. The amortization
period is the remaining life of the policies, which is
estimated to be 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 4.9%, 7.2%, 7.8%, 7.7%, and
7.2% for the years ended December 31, 1999 through 2003,
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
PVFP, 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.
<TABLE>
<CAPTION>
The components of PVFP are shown below:
1998 1997 1996
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 900 1,178 576
Net amortization (54) (13) 78
Adjustment due to revised push-down purchase
accounting -- -- (91)
PVFP attributable to unrealized
depreciation (appreciation) 8 (265) 615
-------- ---------- ---------
PVFP - end of period $ 854 900 1,178
======== ========== =========
</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.
<TABLE>
<CAPTION>
The components of goodwill are shown below:
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 1,923 2,034 2,306
Amortization (110) (111) (105)
Adjustment due to revised push-down purchase
accounting -- -- (167)
------------ ------------ ------------
Future payable - end of period $ 1,813 1,923 2,034
============ ============ ============
</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 end of
the year 2000.
<TABLE>
<CAPTION>
The components of this future payable are shown below:
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 565 683 1,265
Interest added 29 41 39
Payments to OakRe (252) (159) (273)
Adjustment due to revised push-down purchase
accounting -- -- (348)
---------- ---------- ----------
Future payable - end of period $ 342 565 683
========== ========== ==========
</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, 1998 was 6.05%.
FUTURE POLICY BENEFITS
Reserves are held for policy 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. Amounts
collected on annuity policies not subject to longevity risk are
recorded as increases in the policyholder deposits liability. For
term and single premium variable life products, premiums are
recognized as revenue when due.
FEDERAL INCOME TAXES
Beginning in 1997, the Company files a consolidated income tax
return with its immediate parent, CFSLIC. 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 valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of goodwill
The fair 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 PVFP 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.
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, 1998.
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 disclosure requirements.
Because of this, and further because a value of a business is also
based upon its anticipated earning power, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Short-term Investments,
and Accrued Investment Income
The carrying 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.
Investments 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 3 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, 1998 and 1997, the cash
surrender value of policyholder deposits was $4,707,689 and
$7,204,647, 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 its ultimate parent, 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, 1998 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS
On June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is
effective for the fiscal year beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided is required for comparative purposes. The Company has
elected to adopt SFAS No. 130 in 1998. The adoption of SFAS No.
130 has no impact on the Company's net income or shareholder's
equity. The Company's only component of accumulated other
comprehensive income relates to unrealized appreciation and
depreciation on debt securities.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. SFAS No. 133 requires all
derivative instruments to be recorded on the balance sheet at
estimated fair value. The Company's present accounting policies
would apply such accounting treatment only to marketable
securities as defined under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and to off-balance
sheet derivative instruments. SFAS No. 133 will broaden the
definition of derivative instruments to include all classes of
financial assets and liabilities. It also will require separate
disclosure of identifiable derivative instruments embedded in
hybrid securities. Change in the fair value of derivative
instruments is to be recorded each period either in current
earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it
is, on the type of hedge transaction.
SFAS No. 133 is effective for the Company beginning January 1,
2000. The Company's management is currently evaluating the impact
of SFAS No. 133; at present, the management does not believe it
will have a material effect on the Company's financial position or
results of operations.
OTHER
Certain 1997 and 1996 amounts have been reclassified to conform to
the 1998 presentation.
<TABLE>
<CAPTION>
(3) 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, 1998 and 1997, are as follows:
1998
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government
treasuries $ 100 1 -- 101 101
Collateralized
mortgage obligations 15,260 161 (32) 15,389 15,389
Corporate, state,
municipalities, and
political subdivisions 83,868 1,733 (433) 85,168 85,168
--------------- -------------- -------------- -------------- --------------
Total debt
securities 99,228 1,895 (465) 100,658 100,658
Mortgage loans (net) 5,245 204 -- 5,449 5,245
Policy loans 1,223 -- -- 1,223 1,223
--------------- -------------- -------------- -------------- --------------
Total investments $ 105,696 2,099 (465) 107,330 107,126
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 2 -- -- 2 2
=============== ============== ============== ============== ==============
</TABLE>
<TABLE>
1997
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
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
--------------- -------------- -------------- -------------- --------------
$ 99,753 1,949 (1,170) 100,532 100,389
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ -- -- -- -- --
=============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and estimated fair value of debt securities at
December 31, 1998, 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.
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 2,341 2,362
Due after one year through five years 34,579 35,067
Due after five years through ten years 32,584 33,321
Due after ten years 14,464 14,519
Mortgage-backed securities 15,260 15,389
--------------- ---------------
Total $ 99,228 100,658
=============== ===============
</TABLE>
At December 31, 1998, approximately 95.1% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 4.9% noninvestment grade debt securities, 4.3%
are rated as BB or its equivalent, and 0.6% are rated B or its
equivalent.
All debt securities were income producing during the years ended
December 31, 1998 and 1997. As of December 31, 1998 and 1997, the
Company had no impaired investments.
<TABLE>
<CAPTION>
The components of investment income, realized gains (losses), and
unrealized appreciation are as follows:
1998 1997 1996
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 6,928 6,575 3,926
Income on short-term investments 305 186 243
Income on policy loans 92 83 86
Interest on mortgage loans 308 32 --
Miscellaneous interest 2 -- 8
------------ ------------- ------------
Total investment income 7,635 6,876 4,263
Investment expenses (119) (115) (87)
------------ ------------- ------------
Net investment income $ 7,516 6,761 4,176
============ ============= ============
Net realized capital gains (losses) -
debt securities $ 178 158 (28)
============ ============= ============
Unrealized appreciation
is as follows:
Debt securities $ 1,430 633 6
Short-term investments -- 3 --
Effects on deferred acquisition
costs amortization (726) (213) (69)
Effects on PVFP amortization (192) (200) 65
------------ ------------- ------------
Unrealized appreciation before income taxes 512 223 2
Unrealized income tax expenses (179) (78) (1)
------------ ------------- ------------
Net unrealized appreciation on
investments $ 333 145 1
============ ============= ============
</TABLE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1998 were $50,660,583. Gross gains of $591,755 and
gross losses of $413,588 were realized on those sales. Included in these
amounts were $133,138 of gross gains and $106,165 of gross losses
realized on the sale of noninvestment grade securities.
Proceeds from sales, redemptions, and paydowns for 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.
<TABLE>
<CAPTION>
(4) SECURITY GREATER THAN 10% OF SHAREHOLDER'S EQUITY
As of December 31, 1998 and 1997, the Company held the following
individual security which exceeded 10% of shareholder's equity:
1998 1997
--------------- ---------------
<S> <C> <C>
Colonial Realty, at carrying value $ 1,997,287 2,017,400
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
(5) COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 810 443 412
------------ ------------ ------------
Other comprehensive income (loss), before tax -
unrealized appreciation (depreciation) on
investments arising during period:
Unrealized appreciation (depreciation)
on investments 616 472 (812)
Adjustment to deferred acquisition
costs attributable to unrealized
(appreciation) depreciation (398) (108) (67)
Adjustment to PVFP attributable to
unrealized (appreciation) depreciation 6 (198) 594
------------ ------------ ------------
Total unrealized appreciation (depreciation) on
investments arising during period 224 166 (285)
------------ ------------ ------------
Less reclassification adjustments for realized (gains) losses included
in net income:
Adjustment for (gains) losses included in
net realized gains (losses) on sales
of investments (178) (158) 28
Adjustment for (gains) losses included in
amortization of PVFP 115 36 2
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (2) 67 (21)
------------ ------------ ------------
Total reclassification adjustments for (gains) losses
included in net income (65) (55) 9
------------ ------------ ------------
Other comprehensive income (loss), before related income tax
expense (benefits) 289 221 (294)
Related income tax expense (benefit) 101 77 (103)
------------ ------------ ------------
Other comprehensive income (loss), net of tax 188 144 (191)
------------ ------------ ------------
Comprehensive income $ 998 587 221
============ ============ ============
</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 1998, 1997, and 1996, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1998, 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.
<TABLE>
<CAPTION>
(7) INCOME TAXES
The Company will file a consolidated federal income tax return with its
immediate parent, CFSLIC. Income taxes are recorded in the statements of
income and directly in certain shareholder's equity accounts. Income
tax expense for the years ended December 31 was allocated as follows:
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating income (excluding realized investment gains and losses) $ 215 250 295
Realized investment gains (losses) 62 55 (10)
--------- --------- ---------
Income tax expense included in the statements of
income 277 305 285
Shareholder's equity - change in deferred federal income taxes
related to unrealized appreciation (depreciation) on securities 101 77 (103)
--------- --------- ---------
Total income tax expense $ 378 382 182
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The actual federal income tax expense differed from the expected tax
expense computed by applying the U.S. federal statutory rate to income
before taxes on income as follows:
1998 1997 1996
-------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 380 35.0% $ 262 35.0% $ 244 35.0%
Dividends received deduction - separate
account (150) (13.9) -- -- -- --
Amortization of intangible assets 39 3.6 39 5.2 37 5.3
Other 8 0.8 4 0.5 4 0.6
-------- ---------- -------- ---------- -------- ---------
Total $ 277 25.5% $ 305 40.7% $ 285 40.9%
======== ========== ======== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows:
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 624 679
Liability for commission on recaptures 120 198
Policy reserves 2,477 1,898
DAC "Proxy Tax" 1,252 977
Other deferred tax assets (359) --
------------ ------------
Total deferred tax assets 4,114 3,752
------------ ------------
Deferred tax liabilities:
Unrealized gains in investments 179 78
PVFP 150 144
Deferred acquisition costs 3,200 2,371
Other deferred tax liabilities -- 117
------------ ------------
Total deferred tax liabilities 3,529 2,710
------------ ------------
Net deferred tax asset $ 585 1,042
============ ============
</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, 1998 or 1997.
(8) RELATED-PARTY TRANSACTIONS
On December 31, 1997, CLMC and Navisys Incorporated, affiliated
companies, purchased certain assets of Johnson & Higgins/Kirke Van
Orsdel, Inc. (J&H/KVI), an unaffiliated Delaware corporation, for
$2,500,000. The purchased assets are the administrative and service
systems that provide the marketing, underwriting, claims, and
administrative functions for the Company's life and annuity products. On
January 1, 1998, the purchased assets of J&H/KVI were merged into Cova
Life Administrative Service Company (CLASC). Navisys Incorporated
purchased 51% of CLASC, the remaining 49% was purchased by CLMC.
The Company has entered into management, operations, and servicing
agreements with its affiliated companies. The affiliated companies are
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. CLASC provides
various services for the Company including underwriting, claims, and
administrative functions. Expenses and fees paid to affiliated
companies in 1998, 1997, and 1996 for the Company were $1,587,833,
$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.
<TABLE>
<CAPTION>
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP were as
follows:
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 10,411 10,389
Reconciling items:
Statutory asset valuation reserve 1,078 1,151
Statutory interest maintenance reserve 190 111
GAAP investment adjustments to fair value 1,430 636
GAAP deferred policy acquisition costs 9,142 6,774
GAAP basis policy reserves (4,670) (3,871)
GAAP deferred federal income taxes (net) 585 1,042
GAAP guarantee assessment adjustment (1,000) (1,000)
GAAP goodwill 1,813 1,923
GAAP present value of future profits 854 900
GAAP future purchase price payable (342) (565)
Other (2) 1
------------ ------------
GAAP shareholder's equity $ 19,489 17,491
============ ============
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova
Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1998, 1997, and 1996
Statutory net loss for the years ended December 31, 1998, 1997, and 1996
was $142,046, $461,118, and $113,236, respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the
insurance commissioner is the greater of 10% of statutory surplus or
statutory net gain from operations for the preceding year. The maximum
dividend permissible during 1998 will be $761,109, which is 10% of the
Company's December 31, 1998 statutory surplus of $7,611,089.
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,
1998, the Company's Total Adjusted Capital and Authorized Control Level
RBC were $11,488,766 and $1,619,495, 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 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
1998, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
In November 1998, the National Organization of Life and Health Guaranty
Associations 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,
1998. 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. The Company paid $33,505, $460,167, and $265,760 in
guaranty fund assessment in 1998, 1997, and 1996, respectively. These
payments were substantially reimbursed by OakRe.
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 1998 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 .88% for these charges) are approximately
- -.88%, 5.12% and 11.12%.
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 9,652 8,786 27,290 9,526 8,672 27,290
2 11,025 9,315 8,505 27,290 9,040 8,257 27,290
3 11,576 8,988 8,232 27,290 8,542 7,827 27,290
4 12,155 8,673 8,082 27,290 8,029 7,487 27,290
5 12,763 8,367 7,894 27,290 7,497 7,079 27,290
6 13,401 8,070 7,707 27,290 6,944 6,637 27,290
7 14,071 7,784 7,522 27,290 6,363 6,155 27,290
8 14,775 7,506 7,338 27,290 5,750 5,626 27,290
9 15,513 7,237 7,157 27,290 5,097 5,044 27,290
10 16,289 6,977 6,977 27,290 4,398 4,398 27,290
15 20,789 6,035 6,035 27,290 33 33 27,290
20 26,533 5,201 5,201 27,290 0 0 0
25 33,864 4,463 4,463 27,290 0 0 0
30 43,219 3,809 3,809 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 CONTRACT 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.
<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 Value Surrender Death Account Surrender Death
Year Per Year Value Benefit Value Value Benefit
---- -------- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,233 9,333 27,290 10,107 9,207 27,290
2 11,025 10,472 9,597 27,290 10,202 9,327 27,290
3 11,576 10,717 9,867 27,290 10,282 9,432 27,290
4 12,155 10,968 10,278 27,290 10,346 9,656 27,290
5 12,763 11,227 10,652 27,290 10,391 9,816 27,290
6 13,401 11,492 11,032 27,290 10,415 9,955 27,290
7 14,071 11,764 11,419 27,290 10,413 10,068 27,290
8 14,775 12,043 11,813 27,290 10,380 10,150 27,290
9 15,513 12,329 12,214 27,290 10,311 10,196 27,290
10 16,289 12,623 12,623 27,290 10,201 10,201 27,290
15 20,789 14,798 14,798 27,290 9,247 9,247 27,290
20 26,533 17,375 17,375 27,290 5,706 5,706 27,290
25 33,864 20,429 20,429 27,290 0 0 0
30 43,219 24,048 24,048 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 CONTRACT 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.
<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 Value Surrender Death Account Value Surrender Death
Year Per Year Value Benefit Value Benefit
---- -------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,814 9,914 27,290 10,689 9,789 27,290
2 11,025 11,696 10,821 27,290 11,432 10,557 27,290
3 11,576 12,653 11,803 27,290 12,236 11,386 27,290
4 12,155 13,691 13,001 27,290 13,107 12,417 27,290
5 12,763 14,816 14,241 27,290 14,053 13,478 27,290
6 13,401 16,036 15,576 27,290 15,082 14,622 27,290
7 14,071 17,359 17,014 27,290 16,206 15,861 27,290
8 14,775 18,793 18,563 27,290 17,436 17,206 27,290
9 15,513 20,349 20,234 27,290 18,786 18,671 27,290
10 16,289 22,038 22,038 27,290 20,275 20,275 27,290
15 20,789 34,341 34,341 39,836 31,497 31,497 36,536
20 26,533 53,745 53,745 57,507 49,250 49,250 52,698
25 33,864 84,916 84,916 89,162 77,815 77,815 81,706
30 43,219 132,870 132,870 139,514 121,637 121,637 127,719
<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 CONTRACT 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.
<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 9,652 8,786 17,020 9,418 8,575 17,020
2 11,025 9,315 8,505 17,020 8,795 8,034 17,020
3 11,576 8,988 8,232 17,020 8,119 7,443 17,020
4 12,155 8,673 8,082 17,020 7,378 6,884 17,020
5 12,763 8,367 7,894 17,020 6,556 6,196 17,020
6 13,401 8,070 7,707 17,020 5,637 5,395 17,020
7 14,071 7,784 7,522 17,020 4,601 4,459 17,020
8 14,775 7,506 7,338 17,020 3,427 3,361 17,020
9 15,513 7,237 7,157 17,020 2,086 2,070 17,020
10 16,289 6,977 6,977 17,020 541 541 17,020
15 20,789 6,035 6,035 17,020 0 0 0
20 26,533 5,201 5,201 17,020 0 0 0
25 33,864 4,463 4,463 17,020 0 0 0
30 43,219 3,809 3,809 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 CONTRACT 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.
<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 10,233 9,333 17,020 10,004 9,104 17,020
2 11,025 10,472 9,597 17,020 9,980 9,107 17,020
3 11,576 10,717 9,867 17,020 9,919 9,076 17,020
4 12,155 10,968 10,278 17,020 9,813 9,137 17,020
5 12,763 11,227 10,652 17,020 9,655 9,101 17,020
6 13,401 11,492 11,032 17,020 9,432 9,001 17,020
7 14,071 11,764 11,419 17,020 9,134 8,822 17,020
8 14,775 12,043 11,813 17,020 8,747 8,548 17,020
9 15,513 12,329 12,214 17,020 8,250 8,157 17,020
10 16,289 12,623 12,623 17,020 7,620 7,620 17,020
15 20,789 14,798 14,798 17,020 935 935 17,020
20 26,533 17,375 17,375 18,244 0 0 0
25 33,864 20,516 20,516 20,721 0 0 0
30 43,219 24,306 24,306 24,550 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 CONTRACT 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.
<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 10,814 9,914 17,020 10,591 9,691 17,020
2 11,025 11,696 10,821 17,020 11,237 10,362 17,020
3 11,576 12,653 11,803 17,020 11,948 11,098 17,020
4 12,155 13,690 13,000 17,020 12,737 12,047 17,020
5 12,763 14,815 14,240 17,020 13,622 13,047 17,020
6 13,401 16,042 15,582 17,020 14,630 14,170 17,020
7 14,071 17,413 17,068 18,284 15,794 15,449 17,020
8 14,775 18,900 18,670 19,845 17,131 16,901 17,988
9 15,513 20,508 20,393 21,533 18,586 18,471 19,516
10 16,289 22,248 22,248 23,360 20,160 20,160 21,168
15 20,789 34,630 34,630 36,361 31,332 31,332 32,899
20 26,533 53,891 53,891 56,586 48,036 48,036 50,437
25 33,864 84,461 84,461 85,305 74,568 74,568 75,314
30 43,219 132,649 132,649 133,976 116,592 116,592 117,758
<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 CONTRACT 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.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment Return of 0%
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 9,710 8,839 30,490 9,710 8,839 30,490
2 11,025 9,417 8,597 30,490 9,417 8,597 30,490
3 11,576 9,119 8,351 30,490 9,117 8,349 30,490
4 12,155 8,830 8,228 30,490 8,808 8,208 30,490
5 12,763 8,549 8,065 30,490 8,487 8,007 30,490
6 13,401 8,276 7,903 30,490 8,149 7,782 30,490
7 14,071 8,011 7,741 30,490 7,788 7,526 30,490
8 14,775 7,754 7,580 30,490 7,396 7,231 30,490
9 15,513 7,503 7,419 30,490 6,962 6,885 30,490
10 16,289 7,260 7,260 30,490 6,471 6,471 30,490
15 20,789 6,399 6,399 30 490 2,750 2,750 30,490
20 26,533 5,622 5,622 30,490 0 0 0
25 33,864 4,923 4,923 30,490 0 0 0
30 43,219 4,292 4,292 30,490 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 CONTRACT 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.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment Return of 6%
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 10,295 9,395 30,490 10,295 9,395 30,490
2 11,025 10,589 9,714 30,490 10,589 9,714 30,490
3 11,576 10,879 10,029 30,490 10,879 10,029 30,490
4 12,155 11,174 10,484 30,490 11,165 10,475 30,490
5 12,763 11,478 10,903 30,490 11,442 10,867 30,490
6 13,401 11,791 11,331 30,490 11,709 11,249 30,490
7 14,071 12,114 11,769 30,490 11,960 11,615 30,490
8 14,775 12,446 12,216 30,490 12,188 11,958 30,490
9 15,513 12,787 12,672 30,490 12,386 12,271 30,490
10 16,289 13,140 13,140 30,490 12,543 12,543 30,490
15 20,789 15,684 15,684 30,490 12,860 12,860 30,490
20 26,533 18,752 18,752 30,490 9,240 9,240 30,490
25 33,864 22,452 22,452 30,490 0 0 0
303020
30 43,219 26,915 26,915 30,490 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 CONTRACT 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.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment Return of 12%
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 10,880 9,980 30,490 10,880 9,980 30,490
2 11,025 11,829 10,954 30,490 11,829 10,954 30,490
3 11,576 12,854 12,004 30,490 12,854 12,004 30,490
4 12,155 13,960 13,270 30,490 13,960 13,270 30,490
5 12,763 15,161 14,586 30,490 15,154 14,579 30,490
6 13,401 16,467 16,007 30,490 16,445 15,985 30,490
08,020
7 14,071 17,889 17,544 30,490 17,841 17,496 30,490
8 14,775 19,437 19,207 30,490 19,352 19,122 30,490
9 15,513 21,121 21,006 30,490 20,989 20,874 30,490
10 16,289 22,953 22,953 30,490 22,768 22,768 30,490
15 20,789 36,433 36,433 38,255 36,063 36,063 37,866
20 26,533 57,827 57,827 60,719 57,143 57,143 60,001
25 33,864 91,839 91,839 96,431 89,183 89,183 93,642
30 43,219 145,871 145,871 147,329 139,206 139,206 140,598
<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 CONTRACT MAY
BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON ACTUAL INVESTMENT RESULTS. NO
REPRESENTATION CAN BE MADE THAT THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities
and Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Cova Financial Life
Insurance Company ("Company") hereby represents that the fees and charges
deducted under the Policy described in the Prospectus, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
INDEMNIFICATION
The Bylaws of the Company (Article V, Section 9) provide that:
This corporation shall indemnify, to the fullest extent allowed by California
law, its present and former directors and officers against expenses, judgements,
fines, settlements, and other amounts incurred in connection with and proceeding
or threatened proceeding brought against such directors or officers in their
capacity as such. Such indemnification shall be made in accordance with
procedures set forth by California Law. Sums for expenses incurred in defending
any such proceeding may also be advanced to any such director or officer to the
extent and under the conditions provided by California law.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling person of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet
The Prospectus consisting of __ pages.
Undertakings to file reports.
The signatures.
The following exhibits.
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2.
1. Resolution of the Board of Directors of the Company*
2. Not Applicable
3.a. Form of Principal Underwriter's Agreement**
3.b. Selling Agreement**
3.c. Schedules of Commissions**
4. Not Applicable
5. Modified Single Premium Variable Life Insurance Policy*
6.a. Articles of Incorporation of the Company**
6.b. Bylaws of the Company**
7. Not Applicable
8. Not Applicable
9.a. Form of Fund Participation Agreement by and among AIM Variable
Insurance Funds, Inc., A I M Distributors, Inc., Cova Financial
Life Insurance Company, on behalf of itself and its Separate
Accounts, and Cova Life Sales Company***
9.b. Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and Cova
Financial Life Insurance Company
10. Application Form*
11. Powers of Attorney*
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Consent of Independent Auditors
*Incorporated by reference to Registrant's initial Form S-6 filed electronically
on October 9, 1997.
**Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
Form S-6 (File No. 333-37559) electronically filed on November 13, 1997.
***Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4
(File No. 333-34817) as filed electronically on February 11, 1998.
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that it
meets the requirements of Rule 485(b) for effectiveness of this Registration
Statement and has duly caused this Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized in the City of
Oakbrook Terrace and State of Illinois on this 23rd day of March, 1999.
COVA VARIABLE LIFE ACCOUNT FIVE
Registrant
By: COVA FINANCIAL LIFE INSURANCE COMPANY
By: /s/LORRY J. STENSRUD
______________________________
COVA FINANCIAL LIFE INSURANCE COMPANY
Attest:
/s/FRANCES S. COOK /s/LORRY J. STENSRUD
________________________ By: ______________________________
Secretary
- ------------------------
Title
Pursuant to the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board and
- ---------------------- Director -------
Richard A. Liddy Date
/s/LORRY J. STENSRUD President and Director 3/23/99
- -------------------- -------
Lorry J. Stensrud Date
Director
- ---------------------- -------
Leonard M. Rubenstein Date
Director
- -------------------- -------
J. Robert Hopson Date
William C. Mair* Controller and Director 3/23/99
- ----------------------- -------
William C. Mair Date
E. Thomas Hughes, Jr.* 3/23/99
- ---------------------- Treasurer and Director -------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 3/23/99
- ---------------------- -------
Matthew P. McCauley Date
John W. Barber* Director 3/23/99
- ---------------------- -------
John W. Barber Date
/s/MARK E. REYNOLDS Director 3/23/99
- ---------------------- -------
Mark E. Reynolds Date
</TABLE>
*By: /s/LORRY J. STENSRUD
______________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
EX-99.A9.b. Form of Participation Agreement - Templeton
EX-99.B2 Opinion and Consent of Counsel
EX-99.C1 Consent of Actuary
EX-99.C2 Consent of Independent Auditors
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. and
COVA FINANCIAL LIFE INSURANCE COMPANY
THIS AGREEMENT made as of May 1, 1998, among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and COVA Financial Life Insurance Company, a life insurance
company organized as a corporation under California law (the "Company"), on its
own behalf and on behalf of each segregated asset account of the Company set
forth in Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act" );
WHEREAS, the Trust and the Underwriter desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule B, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November
16, 1993 (File No. 812-8546), granting Participating Insurance Companies and
their separate accounts exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule C attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule B (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act") and any applicable state
securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to unit investment trusts such as each Account
at net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2. The Trust agrees to make shares of the Portfolios available to
the Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by
the Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Portfolio Shares purchased from the Trust will be recorded in the
appropriate title for each Account or the appropriate subaccount of each
Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice
to the Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans as provided for under Section 817(h)(4)
of the Internal Revenue Code of 1986, as amended, (the "Code"), and to the
extent permitted by the Shared Funding Exemptive Order. No shares of any
Portfolio will be sold directly to the general public. The Company agrees that
it will use Trust shares only for the purposes of funding the Contracts through
the Accounts listed in Schedule A, as amended from time to time.
1.10 The Company agrees that all net amounts available under the
Contracts shall be invested in the Trust, in such other Funds advised by an
Adviser or its affiliates as may be mutually agreed to in writing by the parties
hereto, or in the Company's general account, provided that such amounts may also
be invested in an investment company other than the Trust if: (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies of
the Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule D to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
Obligations of the Parties; Fees and Expenses
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 The Trust or its designee shall provide the Company, free of
charge, with as many copies of the current prospectus (or prospectuses),
statements of additional information, annual and semi-annual reports and proxy
statements for the shares of the portfolios as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such shares, for non-marketing purposes. The Trust or its designee shall
provide the Company, at the Company's expense, with as many copies of the
current prospectus (or prospectuses) for the shares as the Company may
reasonably request for distribution to prospective purchasers of the Contracts.
If requested by the Company, the Trust or its designee shall provide such
documents in a "camera ready," digital or other form, and other assistance as is
reasonably necessary in order for the parties hereto once a year (or more
frequently if necessary) to have the prospectus for the Contracts and the
prospectus (or prospectuses) for the Trust shares printed together in one
document. The expenses of printing such a combined document for existing
Contract owners for non-marketing purposes will be apportioned between the
Company and the Trust in proportion to the number of pages of the Contract, the
Trust prospectus, and the prospectus of other funds, although such expenses
shall not exceed the regular costs for printing the Trust prospectus. The Trust
shall bear the cost of printing the Trust prospectus portion of such document
for distribution only to owners of existing Contracts, for non-marketing
purposes, funded by the Trust shares and the Company shall bear the expense of
printing the portion of such documents relating to the Separate Account. The
Company shall bear all printing expenses of such combined documents where used
for distribution to prospective purchasers or to owners of existing Contracts
not funded by the shares.
2.3 The Company shall bear the costs of distributing proxy materials
(or similar materials such as voting solicitation instructions), prospectuses
and statements of additional information to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i)
solicit voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.7, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 Except as provided in section 2.7, the Trust or the Underwriter
shall not use any designation comprised in whole or in part of the name or mark
"COVA" or any other Trademark relating to the Company without prior written
consent, and upon termination of this Agreement for any reason, the Trust or the
Underwriter shall cease all use of such name or mark as soon as reasonably
practicable.
2.7 The Company shall furnish, or cause to be furnished to the Trust
or its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
The Trust shall furnish or cause to be furnished, to the Company or
its designee each piece of sales literature or other promotional material (as
defined above) in which the Company is named, at least 15 Business Days prior to
its use. No such material shall be used if the Company or its designee
reasonably objects to such use within five Business Days after receipt of such
material.
2.8 The Company and its agents shall not give any information or make
any representations or statements on behalf of the Trust or concerning the
Trust, the Underwriter or an Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust, Trust-sponsored
proxy statements, or in sales literature or other promotional material approved
by the Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.9 The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.10 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from disclosure documents for the Contracts
(as such disclosure documents may be amended or supplemented from time to time),
or in materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal process
or regulatory authorities or with the written permission of the Company.
2.11 So long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for Contract owners, the Company
will provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.12 The Trust and Underwriter shall pay no fee or other compensation
to the Company under this Agreement except as provided on Schedule E, if
attached. Nevertheless, the Trust or the Underwriter or an affiliate may make
payments (other than pursuant to a Rule 12b-1 Plan) to the Company or its
affiliates or to the Contracts' underwriter in amounts agreed to by the
Underwriter in writing and such payments may be made out of fees otherwise
payable to the Underwriter or its affiliates, profits of the Underwriter or its
affiliates, or other resources available to the Underwriter or its affiliates.
ARTICLE III.
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Missouri and
that it has legally and validly established each Account as a segregated asset
account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each
Contract, (1) the Contract will be registered under the 1933 Act, or (2) if the
Contract is exempt from registration under Section 3(a)(2) of the 1933 Act or
under Section 4(2) and Regulation D of the 1933 Act, the Company will make every
effort to maintain such exemption and will notify the Trust and the Adviser
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future. The Company further represents
and warrants that the Contracts will be sold by broker-dealers, or their
registered representatives, who are registered with the SEC under the 1934 Act
and who are members in good standing of the NASD; the Contracts will be issued
and sold in compliance in all material respects with all applicable federal and
state laws; and the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Code, and the rules and regulations thereunder, including without limitation
Treasury Regulation 1.817-5, and will notify the Company immediately upon having
a reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will in that event immediately take all reasonable steps to
adequately diversify the Portfolio to achieve compliance within the grace period
afforded by Regulation 1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as
a "regulated investment company" under Subchapter M of the Code, that it will
maintain such qualification and will notify the Company immediately upon having
a reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act, the Trustees, including a majority who are not "interested
persons" of the Trust under the 1940 Act ( "disinterested Trustees" ), will
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Underwriter represents that it is a member in good standing of
the NASD and is registered as a broker-dealer with the SEC. The Underwriter
represents that it will sell and distribute the shares in accordance with all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act and the 1940 Act.
3.13 The Trust currently intends for one or more Classes to make
payments to finance its distribution expenses, including service fees, pursuant
to a Plan adopted under Rule 12b-1 under the 1940 Act ("Rule 12b-1"), although
it may determine to discontinue such practice in the future. To the extent that
any Class of the Trust finances its distribution expenses pursuant to a Plan
adopted under Rule 12b-1, the Trust undertakes to comply with any then current
SEC and SEC staff interpretations concerning Rule 12b-1 or any successor
provisions.
ARTICLE IV.
Potential Conflicts
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawal of the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the Contracts.
In the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE V.
Indemnification
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless the Trust and each
of its Trustees, officers, employees and agents and each person, if
any, who controls the Trust within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Article V) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company, which consent
shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees
incurred in connection therewith) (collectively, "Losses"), to which
the Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such Losses are
related to the sale or acquisition of Trust Shares or the Contracts
and
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a disclosure
document for the Contracts or in the Contracts themselves or in
sales literature generated or approved by the Company on behalf
of the Contracts or Accounts (or any amendment or supplement to
any of the foregoing) (collectively, "Company Documents" for the
purposes of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written information
furnished to the Company by or on behalf of the Trust for use in
Company Documents or otherwise for use in connection with the
sale of the Contracts or Trust shares; or
(ii) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2 (a)(i)) or
wrongful conduct of the Company or persons under its control,
with respect to the sale or acquisition of the Contracts or Trust
shares; or
(iii)arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust Documents
as defined in Section 5.2(a)(i) or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance
upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(iv) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
(b) The Company shall not be liable under this indemnification provision
with respect to any Losses to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or
to the Trust or Underwriter, whichever is applicable. The Company
shall also not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also
shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable
to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
(c) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Trust shares or the
Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the Company, the
underwriter of the Contracts and each of its directors and officers
and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
and individually an "Indemnified Party" for purposes of this Section
5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses") to which the Indemnified Parties may become subject under
any statute, at common law or otherwise, insofar as such Losses are
related to the sale or acquisition of the Trust's Shares or the
Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
Registration Statement, prospectus or sales literature of the
Trust (or any amendment or supplement to any of the foregoing)
(collectively, the "Trust Documents") or arise out of or are
based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission of such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Trust by or on behalf
of the Company for use in the Registration Statement or
prospectus for the Trust or in sales literature (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
disclosure documents or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or
wrongful conduct of the Trust, Adviser or Underwriter or persons
under their control, with respect to the sale or distribution of
the Contracts or Trust shares; or
(iii)arise out of any untrue statement or alleged untrue statement of
a material fact contained in a disclosure document or sales
literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance
upon information furnished to the Company by or on behalf of the
Trust; or
(iv) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the qualification
representation specified in Section 3.7 of this Agreement and the
diversification requirements specified in Section 3.6 of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter; as limited by and in
accordance with the provisions of Sections 5.2(b) and 5.2(c)
hereof.
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party
would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this
Agreement or to each Company or the Account, whichever is applicable.
(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated
agent), but failure to notify the Underwriter of any such claim shall
not relieve the Underwriter from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, the Underwriter
will be entitled to participate, at its own expense, in the defense
thereof. The Underwriter also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action.
After notice from the Underwriter to such party of the Underwriter's
election to assume the defense thereof, the Indemnified Party shall
bear the expenses of any additional counsel retained by it, and the
Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the Company, and each
of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section
5.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Section 5.3(b) and
5.3(c) hereof. It is understood and expressly stipulated that neither
the holders of shares of the Trust nor any Trustee, officer, agent or
employee of the Trust shall be personally liable hereunder, nor shall
any resort to be had to other private property for the satisfaction of
any claim or obligation hereunder, but the Trust only shall be liable.
(b) The Trust shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against any Indemnified Party as such may arise
from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations
and duties under this Agreement or to the Company, the Trust, the
Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Trust in writing within
a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served
upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but
failure to notify the Trust of any such claim shall not relieve the
Trust from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. The Trust also shall be
entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Trust to such
party of the Trust's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional
counsel retained by it, and the Trust will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
(d) The Company and the Underwriter agree promptly to notify the Trust of
the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, with respect to the
operation of either the Account, or the sale or acquisition of share
of the Trust.
ARTICLE VI.
Termination
6.1 This Agreement may be terminated by any party in its entirety or with
respect to one, some or all Portfolios or any reason by ninety (90) days advance
written notice delivered to the other parties, and shall terminate immediately
in the event of its assignment, as that term is used in the 1940 Act.
6.2 This Agreement may be terminated immediately by either the Trust or the
Underwriter following consultation with the Trustees upon written notice to the
Company:
(a) if the Company notifies the Trust or the Underwriter that the
exemption from registration under Section 3(c) of the 1940 Act no
longer applies, or might not apply in the future, to the unregistered
Accounts, or that the exemption from registration under Section 4(2)
or Regulation D promulgated under the 1933 Act no longer applies or
might not apply in the future, to interests under the unregistered
Contracts; or
(b) if either one or both of the Trust or the Underwriter respectively,
shall determine, in their sole judgment exercised in good faith, that
the Company or the Contracts' underwriter has suffered a material
adverse change in its business, operations, financial condition or
prospects since the date of this Agreement or is the subject of
material adverse publicity; or
(c) if the Company gives the Trust and the Underwriter the written notice
specified in Section 1.10 hereof and at the same time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, that any termination
under this Section 6.2(c) shall be effective forty-five (45) days
after the notice specified in Section 1.10 was given; or
(d) upon the Company's or the Contracts' underwriter's material breach of
any provision of this Agreement; but no termination shall be effective
under this section 6.2(d) until the Trust has stated in writing the
nature of the breach and the Company or the Contracts' underwriter has
been afforded a reasonable opportunity to cure the breach; or
(e) upon the institution of formal proceedings against the Company or the
Contracts' underwriter by the NASD, the SEC, or any state securities
or insurance department or any other regulatory body regarding the
Company's or the Contracts' underwriter's duties under this Agreement
or related to the sale of its Contracts.
6.3 This Agreement may be terminated immediately by the Company upon
written notice to the Trust and the Underwriter:
(a) if the Company shall determine, in its sole judgment exercised in good
faith, that either the Trust or the Underwriter has suffered a
material adverse change in its business, operations, financial
conditions or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(b) upon the Trust's or the Underwriter's material breach of any provision
of this Agreement; but no termination shall be effective under this
section 6.3(b) until the Company has specified the nature of the
breach in writing and Trust or the Underwriter has been afforded a
reasonable opportunity to cure the breach; or
(c) upon the institution of formal proceedings against the Trust or the
Underwriter by the NASD, the SEC, or any state securities or insurance
department or any other regulatory body regarding the Trust's or the
Underwriter's duties under this Agreement or related to the sale of
its shares.
6.4 If this Agreement is terminated for any reason, except under
Article IV (Potential Conflicts) above, the Trust shall, at the option of the
Company, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.5 The provisions of Articles II (Representations and Warranties) and
V (Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.4, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.6 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of its intention to do so.
ARTICLE VII.
Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or the Underwriter:
Templeton Variable Products Series Fund or
Franklin Templeton Distributors, Inc.
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO
Franklin Resources, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Karen L. Skidmore, Senior Corporate Counsel
If to the Company:
COVA Financial Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Attention: Ms. Shari Ruecker, Vice President,
Product Development Manager
ARTICLE VIII.
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders. Copies of any such orders
shall be promptly forwarded by the Trust to the Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and
addresses of the Contract owners and all information reasonably identified as
confidential in writing by any other party hereto, and, except as permitted by
this Agreement or as required by legal process or regulatory authorities, shall
not disclose, disseminate, or utilize such names and addresses and other
confidential information until such time as they may come into the public
domain, without the express written consent of the affected party. Without
limiting the foregoing, no party hereto shall disclose any information that such
party has been advised is proprietary, except such information that such party
is required to disclose by any appropriate governmental authority (including,
without limitation, the SEC, the NASD, and state securities and insurance
regulators).
8.8 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly
authorized officers to execute this Participation Agreement as of the date and
year first above written.
The Company:______________________________________
COVA Financial Life Insurance Company
By its authorized officer
By: ______________________________________________
Name:_____________________________________________
Title:____________________________________________
The Trust:________________________________________
Templeton Variable Products Series Fund
By its authorized officer
By:_______________________________________________
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By: _______________________________________________
Name: Deborah R. Gatzek
Title: Senior Vice President, Assistant Secretary
SCHEDULE A
Separate Accounts of COVA Financial
Life Insurance Company
SCHEDULE B
Trust Portfolios and Classes Available
--------------------------------------
Templeton Variable Products Series Adviser
- ---------------------------------- -------
SCHEDULE C
Variable Annuity Contracts
Issued by COVA Financial Life Insurance Company
Representative
Contract Form Number
-------- -----------
SCHEDULE D
Other Portfolios Available under the Contracts
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 29, 1999
Board of Directors
Cova Financial Life Insurance Company
4100 Newport Place Drive
Suite 840
Newport Beach, CA 92600
RE: Opinion of Counsel - Cova Variable Life Account Five
-------------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of Post-Effective Amendment No. 2 to a Registration Statement on Form
S-6 for the Modified Single Premium Variable Life Insurance Policies to be
issued by Cova Financial Life Insurance Company and its separate account, Cova
Variable Life Account Five.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Cova Variable Life Account Five is a Unit Investment Trust as that term
is defined in Section 4(2) of the Investment Company Act of 1940 (the "Act"),
and is currently registered with the Securities and Exchange Commission,
pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premiums paid by an Owner pursuant to a Policy
issued in accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable law, such an Owner will have a
legally-issued, fully paid, non-assessable contractual interest under such
Policy.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/RAYMOND A. O'HARA III
-----------------------------
Raymond A. O'Hara III
ACTUARIAL OPINION AND CONSENT
This opinion is furnished in connection with Post-Effective Amendment No. 2 to
the registration of the individual modified single premium variable universal
life policy of the Cova Variable Life Account Five, file numbers 333-37559
and 811-08433.
I am familiar with the terms of the Registration Statement and the accompanying
exhibits. The prospectus included in the Registration Statement describes the
policy issued by Cova. In my professional opinion:
1. The charges on the policy are reasonable in relation to industry norms and
in relation to the expenses expected to be incurred by Cova in connection
with this policy. There are policy charges for administration, Federal
taxes, premium taxes, cost of insurance, and mortality and expense risk.
The Surrender Charge is the only sales load charge in the policy. This
charge is a declining scale over the first 9 policy years, starting at a
maximum of 7.5% of premium.
2. The illustrations of accumulated premium, death benefits, account values,
and cash surrender values that appear in the prospectus are consistent with
the provisions of the policy, and are based on the assumptions stated in
the accompanying text.
3. The illustrations show values on both a current basis and a guaranteed
basis. The only charge that is on a current and guaranteed basis is the
cost of insurance charge, all other charges are identical on a current and
guaranteed basis. The current illustration uses the current cost of
insurance charges that are currently assessed by the company. The
guaranteed illustration uses the maximum cost of insurance charges that
could be assessed at any future date during the lifetime of a policy.
4. The specific ages, sex, rate class, and the premium amounts used in these
illustrations are representative of the typical purchasers that Cova
expects will purchase the product. These characteristics have not been
selected so as to make the relationship between premiums and benefits look
more favorable in these specific instances than it would for prospective
purchasers with different characteristics.
I hereby consent to the use of this opinion as an Exhibit to the registration.
/S/ J. ROBERT HOPSON, FSA, MAAA
--------------------------------
J. Robert Hopson, FSA, MAAA
Senior Vice President & Chief Actuary
The Board of Directors
Cova Financial Life Insurance Company
We consent to the use of our reports on the financial statements of Cova
Financial Life Insurance Company (the Company) dated March 4, 1999, and
to the reference to our firm under the heading "Experts" in the Statement
of Additional Information, in the Post-Effective Amendment No. 2 to the
Registration Statement (Form S-6, No. 333-37559) of Cova Variable Life
Account Five.
/s/KPMG LLP
KPMG LLP
Chicago, Illinois
April 29, 1999
