Flexible Premium Variable Life Insurance Policy
issued by
COVA FINANCIAL LIFE
INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT FIVE
This prospectus describes the Flexible Premium Variable Life Insurance Policy
that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following 41
Investment Funds listed below which are offered through our Separate Account
(you can invest in up to 15 of the Investment Funds and the General Account at
any one time). When you purchase a Policy, you bear the complete investment
risk. This means that the Accumulation Account Value of your Policy may increase
and decrease depending upon the investment performance of the Investment Fund(s)
you select. The duration of the Policy and, under some circumstances, the death
benefit will increase and decrease depending upon investment performance.
AIM Variable Insurance Funds, Inc.:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital Management L.P.
Premier Growth Portfolio
Real Estate Investment Portfolio
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
Select Equity Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Large Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
General American Capital Company:
Advisor: Conning Asset Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust:
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Small Cap Value Portfolio
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund Management Inc.
Newport Tiger Fund, Variable Series
MFS(R) Variable Insurance TrustSM:
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS High Income Series
MFS Global Governments Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New
Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Templeton Variable Products Series Fund:
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund, Class 1
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund, Class 1
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund, Class 1
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
Life Insurance Policy. The Securities and Exchange Commission maintains a Web
site (http://www.sec.gov) that contains information regarding registrants that
file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: November 8, 1999
TABLE OF CONTENTS Page
SPECIAL TERMS 4
SUMMARY 5
The Variable Life Insurance Policy 5
Purchases 5
Investment Choices 5
Expenses 5
Death Benefit 9
Taxes 9
Access to Your Money 9
Other Information 9
Inquiries 10
PART I 11
1. THE VARIABLE LIFE INSURANCE POLICY 11
2. PURCHASES 11
Application for a Policy 11
Premiums 11
Unscheduled Premiums 11
Lapse and Grace Period 11
Reinstatement 12
Allocation of Premium 12
Accumulation Account Value of Your Policy 12
Method of Determining Accumulation Account Value
of an Investment Fund 12
Net Investment Factor 13
Our Right to Reject or Return a Premium Payment 13
3. INVESTMENT FUNDS 13
Substitution and Limitations on Further Investments 14
Transfers 14
Dollar Cost Averaging 15
Portfolio Rebalancing 15
Approved Asset Allocation Programs 16
4. EXPENSES 16
Tax Charges 16
Sales Charge 16
Selection and Issue Expense Charge 16
Monthly Policy Charge 16
Monthly Cost of Insurance Charge 16
Charges for Additional Benefit Riders 17
Mortality and Expense Risk Charge 17
Surrender Charge 17
Transaction Charges 18
Investment Fund Expenses 18
5. DEATH BENEFIT 18
Change of Death Benefit 19
Change in Face Amount 19
6. TAXES 19
Life Insurance in General 19
Taking Money Out of Your Policy 19
Diversification 20
7. ACCESS TO YOUR MONEY 20
Policy Loans 20
Loan Interest Charged 20
Security 21
Repaying Policy Debt 21
Partial Withdrawals 21
Pro-Rata Surrender 21
Full Surrenders 22
8. OTHER INFORMATION 22
Cova 22
Distribution 22
Year 2000 22
The Separate Account 22
Suspension of Payments or Transfers 22
Ownership 23
Adjustment of Charges 23
PART II 23
Executive Officers and Directors 23
Voting 25
Disregard of Voting Instructions 26
Legal Opinions 26
Our Right to Contest 26
Additional Benefits 26
Federal Tax Status 27
Introduction 27
Diversification 27
Tax Treatment of the Policy 28
Policy Proceeds 28
Tax Treatment of Loans and Surrenders 28
Multiple Policies 29
Tax Treatment of Assignments 29
Qualified Plans 29
Income Tax Withholding 29
Reports to Owners 29
Legal Proceedings 29
Experts 29
Financial Statements 29
APPENDIX A-1
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Accumulation Account Value -- The total of the amounts credited to the Owner in
the Separate Account, the General Account and the Loan Account.
Attained Age -- The Issue Age of the Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Insured's death. A Beneficiary may
be changed as set forth in the Policy and this prospectus.
Cash Surrender Value -- The Accumulation Account Value of a Policy on the date
of surrender, less any Indebtedness, less any unpaid selection and issue expense
charge due for the remainder of the first Policy year, less any unpaid monthly
Policy charge due for the remainder of the first Policy year, and less any
surrender charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insured -- The person whose life is insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office.
Issue Age -- The age of the Insured at his or her nearest birthday as of the
Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Accumulation Account Value transferred
to the Loan Account will be allocated to the appropriate Loan Subaccount to
reflect the origin of the Accumulation Account Value. At any point in time, the
Loan Account will equal the sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium variable life insurance Policy offered by us and
described in this prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the
Accumulation Account Value by a given percentage.
Separate Account -- Cova Variable Life Account Five, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Life Insurance Company, P.O. Box 66757, St.
Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insured's age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of the person Insured. This death
benefit is distributed free from Federal income taxes. The Policy can be used as
part of your estate planning or used to save for retirement. The Insured is the
person you choose to have insured under the Policy.
You, the owner, can be the Insured, but you do not have to be.
The Policy described in this prospectus is a flexible premium variable life
insurance Policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Accumulation Account Value of your Policy,
when allocated to the Investment Funds, may increase or decrease depending upon
the investment results of the selected Investment Funds. The duration of your
Policy may vary and, under certain circumstances, so may your death benefit.
So long as the Insured is alive, you can surrender the Policy for all or part of
its Cash Surrender Value. You may also obtain a Policy loan, using the Policy as
security. We will pay a death benefit when the Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum Face Amount of insurance that we offer is $50,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insured. We may require the Insured to
provide us with medical records, physician's statement or a complete paramedical
examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. However, you can only put your money in up to 15 of the Investment Funds
and the General Account at any one time. A detailed description of the
Investment Funds, their investment policies, restrictions, risks, and charges is
contained in the prospectuses for each Investment Fund. You should read the
prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Accumulation Account Value
and from the Investment Funds. These deductions are made for taxes, mortality
and expense risks, administrative expenses, sales charges, the cost of providing
life insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
Tax Charge. We also deduct a Premium Tax Charge currently equal to 2.35% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Accumulation Account Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insured.
Monthly Policy Charge. This charge is equal to $25 per month for the first
policy year, and $6 per policy month thereafter. This amount is deducted from
the Accumulation Account Value of your Policy on the Investment Start Date and
each Monthly Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your
Accumulation Account Value on the Investment Start Date and each Monthly
Anniversary date. The amount of the deduction varies with the age, sex (except
in unisex policies), risk class of the Insured, duration and the amount of death
benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds, Inc.
Advisor: A I M Advisors, Inc.
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
- ------------------------------------------------------------------------------------------------------------------------------
Alliance Variable Products Series Fund, Inc.
Advisor: Alliance Capital Management, L.P.
Premier Growth Portfolio(1) 1.00% 0.06% 1.06%
Real Estate Investment Portfolio(2) 0.08% 0.87% 0.95%
- ------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust (3)
Advisor: J.P. Morgan Investment Management, Inc.
Select Equity Portfolio 0.68% 0.18% 0.86%
Small Cap Stock Portfolio 0.85% 0.27% 1.12%
International Equity Portfolio 0.80% 0.28% 1.08%
Quality Bond Portfolio 0.55% 0.10% 0.65%
Large Cap Stock Portfolio 0.65% 0.10% 0.75%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio 0.75% 0.10% 0.85%
Mid-Cap Value Portfolio 1.00% 0.30% 1.30%
Large Cap Research Portfolio 1.00% 0.30% 1.30%
Developing Growth Portfolio 0.90% 0.30% 1.20%
Lord Abbett Growth & Income Portfolio(4) 0.65% 0.07% 0.72%
- ------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Advisor: Conning Asset Management Company
Money Market Fund 0.125% 0.08% 0.205%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Investment Fund Expenses (continued)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Variable Insurance Trust (5)
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund 0.75% 0.15% 0.90%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund 1.00% 0.25% 1.25%
Goldman Sachs Global Income Fund 0.90% 0.15% 1.05%
- ------------------------------------------------------------------------------------------------------------------------------
Kemper Variable Series
Advisor: Scudder Kemper Investments, Inc.
Kemper Small Cap Value Portfolio(6) 0.75% 0.05% 0.80%
Kemper Government Securities Portfolio 0.55% 0.11% 0.66%
Kemper Small Cap Growth Portfolio 0.65% 0.05% 0.70%
- ------------------------------------------------------------------------------------------------------------------------------
Liberty Variable Investment Trust
Advisor: Newport Fund Management, Inc.
Newport Tiger, Variable Series 0.90% 0.40% 1.30%
- ------------------------------------------------------------------------------------------------------------------------------
MFS(R) Variable Insurance TrustSM (7)
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series 0.75% 0.10% 0.85%
MFS Research Series 0.75% 0.11% 0.86%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS High Income Series 0.75% 0.28% 1.03%
MFS Global Governments Series(8) 0.75% 0.26% 1.01%
- ------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA 0.74% 0.04% 0.78%
Oppenheimer Bond Fund/VA 0.72% 0.02% 0.74%
Oppenheimer Capital Appreciation Fund/VA 0.72% 0.03% 0.75%
Oppenheimer Main Street Growth and Income Fund/VA 0.74% 0.05% 0.79%
Oppenheimer Strategic Bond Fund/VA 0.74% 0.06% 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
Putnam Variable Trust
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares 0.46% 0.04% 0.50%
Putnam VT International Growth Fund - Class IA Shares 0.80% 0.27% 1.07%
Putnam VT International New Opportunities Fund -
Class IA Shares(9) 1.18% 0.42% 1.60%
Putnam VT New Value Fund - Class IA Shares 0.70% 0.11% 0.81%
Putnam VT Vista Fund - Class IA Shares 0.65% 0.12% 0.77%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Investment Fund Expenses (continued)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
- ------------------------------------------------------------------------------------------------------------------------------
Templeton Variable Products Series Fund, Class 1 Shares
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund 1.25% 0.41% 1.66%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund 0.69% 0.17% 0.86%
- ------------------------------------------------------------------------------------------------------------------------------
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund(10) 0.00% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The adviser to the Fund discontinued the expense reimbursement with respect
to the Premier Growth Portfolio effective May 1, 1998.
(2) The expenses shown with respect to the Real Estate Investment Portfolio are
net of voluntary reimbursements. Expenses have been capped at .95% annually
and the adviser to the Fund intends to continue such reimbursements for the
foreseeable future. The estimated expenses for the Real Estate Investment
Portfolio, before reimbursement, are: .90% management fees and 1.41% for
other expenses.
(3) Since May 1, 1996, Cova has been reimbursing the Investment Funds of Cova
Series Trust for all operating expenses (exclusive of the management fees)
in excess of approximately .10%. Effective May 1, 1999, Cova discontinued
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 is reimbursing 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.
(4) Estimated. The Portfolio commenced investment operations on January 8,
1999.
(5) The investment advisers to the Goldman Sachs Growth and Income,
International Equity and Global Income Funds have voluntarily agreed to
reduce or limit certain "Other Expenses" of such Funds (excluding
management fees, taxes, interest and brokerage fees and litigation,
indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.15%, 0.25% and 0.15% per year of such Funds' average
daily net assets, respectively. The expenses shown include this
reimbursement. If not included, the "Other Expenses" and "Total Annual Fund
Expenses" for the Goldman Sachs Growth and Income, International Equity and
Global Income Funds would be 1.94% and 2.69%, 1.97% and 2.97% and 2.40% and
3.30%, respectively. The reductions or limitations may be discontinued or
modified by the investment advisers in their discretion at any time.
(6) Pursuant to its agreement with Kemper Variable Series, the investment
manager and the accounting agent have agreed, for the one year period
commencing on May 1, 1999, to limit their respective fees and to reimburse
other operating expenses, in a manner communicated to the Board of the
Fund, to the extent necessary to limit total operating expenses of the
Kemper Small Cap Value Portfolio to .84%. The amounts set forth in the
table above reflect actual expenses for the past fiscal year, which were
lower than these expense limits.
(7) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(8) MFS has agreed to bear expenses for the MFS Global Governments Series,
subject to reimbursement by the series, such that the series' "Other
Expenses" do not exceed 0.25% of the average daily net assets of the series
during the current fiscal year. Absent the expense reimbursement, the Total
Annual Fund Expenses for the year ended December 31, 1998, would have been
1.11% for the MFS Global Governments Series. The payments made by MFS on
behalf of the series under this arrangement are subject to reimbursement by
the series to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the series to MFS computed and paid monthly at a
percentage of the series' average daily net assets for its then current
fiscal year, with a limitation that immediately after such payment, the
series' "Other Expenses" will not exceed the percentage set forth above for
the series. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date provided that the arrangement will
continue for the series until at least May 1, 2000, unless terminated with
the consent of the board of trustees which oversees the series.
(9) The Management Fees and Total Annual Portfolio Expenses reflect an expense
limitation. In the absence of the expense limitation, the Management Fees
and Total Annual Fund Expenses would have been 1.20% and 1.62%,
respectively.
(10) Figures reflect expenses from the Fund's inception on May 1, 1998 and are
annualized. The manager agreed in advance to limit management fees and make
certain payments to reduce Fund expenses as necessary so that Total Annual
Fund Expenses did not exceed 1.00% of the Fund's Class 1 net assets in
1998. The manager is contractually obligated to continue this arrangement
through 1999. Management Fees, Other Expenses and Total Annual Fund
Expenses in 1998 before any waivers were as follows: 0.60%, 2.27% and 2.87%
for the Mutual Shares Investments Fund. o Deductions for surrenders,
partial withdrawals and transfers.
</FN>
</TABLE>
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the
Accumulation Account Value of your Policy to help us recover the costs of
selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Insured's
death; and
o under some circumstances the Accumulation Account Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Accumulation Account Value of your Policy on the
date of the Insured's death multiplied by the applicable factor. Under this
option, the amount of the death benefit is fixed, except when we use the factor
to determine the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Accumulation Account Value of your Policy,
or the Accumulation Account Value of your Policy multiplied by the applicable
factor. Under this option, the amount of the death benefit is variable (but will
never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Accumulation Account Value multiplied by an
Attained Age factor.
So long as the Policy remains in force, prior to the Insured's Attained Age 100,
the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
change the Face Amount under certain circumstances.
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 Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 5 91/2 when you take money
out of a MEC, you may also be subject to a 10% Federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of the Insured and
we will pay you the Cash Surrender Value of your Policy. At any time during the
Insured's lifetime and before the Policy has terminated, you may withdraw a part
of your Accumulation Account Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Accumulation Account Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it or the
45th day after you sign your application, whichever period ends later. We will
refund all premiums paid. In the state of California, if you are 60 years or
older on the Issue Date, you can cancel your Policy within 30 days after you
receive it in which case we will refund your Policy's Account Value plus fees
and charges (i.e., premium tax charge, Federal tax charge, selection and issue
expense charge, cost of insurance, monthly Policy charge, percent of premium
charge and mortality and expense risk charge) deducted from the Account Value as
of the day we receive your returned Policy. Upon completion of the underwriting
process, we will allocate your initial Net Premium to the Money Market Fund
until the reallocation date, which occurs upon the expiration of the free look
period. After that, we will invest your Policy's Accumulation Account Value and
any subsequent premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds 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 the Insured.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Accumulation Account Value
between Investment Funds periodically to keep the allocation you select. We
call this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
877-357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insured. It has an
Accumulation Account Value, a death benefit, surrender rights, loan privileges
and other characteristics associated with traditional and universal life
insurance. However, since the Policy is a variable life insurance policy, the
value of your Policy will increase or decrease depending upon the investment
experience of the Investment Funds you choose. The duration or amount of the
death benefit may also vary based on the investment performance of the
underlying Investment Funds. To the extent you select any of the Investment
Funds, you bear the investment risk. If your Accumulation Account Value less any
loans, loan interest accrued, unpaid selection and issue charge due for the
remainder of the first Policy year and, if surrender charges and any Partial
Withdrawal Fee is insufficient to pay the monthly deductions, the Policy may
terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When the Insured dies,
the death proceeds are paid to your Beneficiary which should be excludable from
the gross income of the Beneficiary. The tax-free death proceeds make this an
excellent way to accumulate money you do not think you will use in your
lifetime. It is also a tax-efficient way to provide for those you leave behind.
If you need access to your money, you can borrow from the Policy, make a total
surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about the proposed Insured. In some cases, we will ask for
additional information. We may request that the proposed Insured provide us with
medical records, a physician's statement or possibly require other medical
tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment; or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insured within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Accumulation Account Value.
If the Insured dies during the grace period, any overdue monthly deductions will
be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that the Insured is still insurable at the
risk class that applies for the latest Face Amount portion then in effect;
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Accumulation Account Value of your Policy on
the reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if the Insured
dies before the reinstatement date. There will be a full monthly deduction for
the Policy month which includes the reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Accumulation
Account Value of your Policy is allocated to the General Account and/or the
Investment Funds in accordance with your selections requested in the
application. For any chosen allocation, the minimum percentage that may be
allocated is 5% of the Net Premium and the percentages must be in whole numbers.
This allocation is not subject to the transfer fee provision. However, we
reserve the right to limit the number of selections that you may invest in at
any one time.
Accumulation Account Value of Your Policy
The Accumulation Account Value equals the sum of the amounts in the General
Account, the Investment Funds you have selected, and the Loan Account.
Method of Determining Accumulation
Account Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Accumulation Account Value of the Investment Funds is determined for each
Valuation Period. When we apply your initial premium to an Investment Fund, the
Accumulation Account Value equals the Net Premium allocated to the Investment
Fund, minus the monthly deduction(s) due from the Issue Date through the
Investment Start Date. Thereafter, on each Valuation Date, the Accumulation
Account Value in an Investment Fund will equal:
(1) The Accumulation Account Value in the Investment Fund on the preceding
Valuation Date, multiplied by the Investment Fund's Net Investment Factor
(defined below) for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a Pro-Rata Surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or Pro-Rata Surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently 41 Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of eleven
open-end, diversified management investment companies: (1) AIM Variable
Insurance Funds, Inc., (2) Alliance Variable Products Series Fund, Inc., (3)
Cova Series Trust, (4) General American Capital Company, (5) Goldman Sachs
Variable Insurance Trust, (6) Kemper Variable Series, (7) Liberty Variable
Investment Trust, (8) MFS Variable Insurance Trust, (9) Oppenheimer Variable
Account Funds, (10) Putnam Variable Trust, and (11) Templeton Variable Product
Series Fund.
You can only invest in up to 15 of the Investment Funds and the General Account
at any one time.
Purchasers should read this prospectus and the prospectuses for the above listed
investment companies carefully before investing. Certain portfolios contained in
the fund prospectuses may not be available with your Policy.
The following is a list of the Investment Funds and investment managers
available under the Policy:
AIM VARIABLE INSURANCE FUNDS, INC.
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Advisor: Alliance Capital Management, L.P.
Premier Growth Portfolio
Real Estate Investment Portfolio
COVA SERIES TRUST
Advisor: J.P. Morgan Investment Management, Inc.
Select Equity Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Large Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
Advisor: Conning Asset Management Company
Money Market Fund
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Advisor: Goldman Sachs Asset Management
Goldman Sachs Growth and Income Fund
Advisor: Goldman Sachs Asset Management International
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
KEMPER VARIABLE SERIES
Advisor: Scudder Kemper Investments, Inc.
Kemper Small Cap Value Portfolio
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
LIBERTY VARIABLE INVESTMENT TRUST
Advisor: Newport Fund Management, Inc.
Newport Tiger Fund, Variable Series
(a portfolio investing in equity securities of companies located in certain
countries of Asia).
MFS(R) VARIABLE INSURANCE TRUSTSM
Advisor: MFS Investment Management(R)
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS High Income Series
MFS Global Governments Series
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Advisor: OppenheimerFunds, Inc.
Oppenheimer High Income Fund/VA
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
PUTNAM VARIABLE TRUST
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares (a stock portfolio)
TEMPLETON VARIABLE PRODUCTS SERIES FUND,
CLASS 1 SHARES
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets Fund
Advisor: Templeton Investment Counsel, Inc.
Templeton International Fund
Advisor: Franklin Mutual Advisers LLC
Mutual Shares Investments Fund
The investment objectives and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher or
lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results of
similar funds will be comparable even though the funds have the same investment
advisers.
Shares of the Investment Funds 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 us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year; or
(b) the previous Policy year's General Account maximum withdrawal amount not to
exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
The minimum transfer amount is $100. The minimum amount that can be allocated to
an Investment Fund is 5% of the amount transferred. You can elect to participate
in this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Accumulation Account
Value in the General Account and in the Investment Funds to the percentages
determined in advance. There are two methods of rebalancing available --
periodic and variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Accumulation Account Value according to the investment
percentages you elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit 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 Funds,
and should we 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 transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.35% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insured.
Monthly Policy Charge
We deduct a monthly Policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of the Insured and the fact
that the death benefit is not payable until the death of the Insured. Because
the monthly cost of insurance charge depends upon a number of variables, the
charge will vary for each Policy month. We will determine the cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insured at issue. The monthly cost
of insurance rates generally increase as the Insured's Attained Age increases.
The rate class of an Insured also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Accumulation Account Value, an increase in
Accumulation Account Value will cause an automatic increase in the death
benefit. The rate class for such increase will be the same as that used for the
initial Face Amount.
We currently place the Insured into a preferred rate class, a standard rate
class, or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans). All Policies are based on the Attained Age of the
Insured. Higher rates apply if the Insured is determined to be in a substandard
risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Accumulation Account Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed. We expect to profit from this
charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Accumulation Account Value before
the withdrawal and multiplying the result by the surrender charge. Immediately
after a withdrawal, the Policy's remaining surrender charge will equal the
amount of the surrender charge immediately before the withdrawal less the amount
deducted in connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Accumulation Account Value. Expenses of the Funds are not
fixed or specified under the terms of the Policy, and actual expenses may vary.
These underlying Investment Fund expenses are taken into consideration in
computing each Investment Fund's net asset value, which is used to calculate the
unit values in the Separate Account. The management fees and other expenses are
more fully described in the prospectus of each individual Investment Fund. The
information relating to the Investment Fund expenses was provided by the
Investment Fund and was not independently verified by us. Except as otherwise
specifically noted, the management fees and other expenses are not currently
subject to fee waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the
Accumulation Account Value of your Policy on the date of death and the death
benefit option (Option A, Option B, or Option C) in effect at that time. The
actual amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Accumulation Account Value of your Policy on the
date of death; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Applicable Percentage of Accumulation Account Value Table
For Insureds Less Than Age 100
Insured Policy Accumulation Account Value
Person's Age Multiple Percentage
---------------- -----------------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown on this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of the Insured's
death multiplied by the applicable factor from the Table of Attained Age
Factors shown in your Policy.
If your Policy is in force after the Insured's Attained Age is 100, then the
Death Benefit will be 101% of the Policy's Accumulation Account Value.
Change of Death Benefit
If the Policy was issued with either death benefit Option A or death benefit
Option B, the death benefit option may be changed. A Policy issued under death
benefit Option C may not be changed for the entire lifetime of the Policy.
Similarly, a Policy issued under either death benefit Option A or B may not
change to death benefit Option C for the lifetime of the Policy. A request for
change must be made to us in writing. The Effective Date of such a change will
be the Monthly Anniversary on or following the date we receive the change
request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the
Accumulation Account Value on the Effective Date of the change. Satisfactory
evidence of insurability must be submitted to us in connection with a request
for a change from death benefit Option A to death benefit Option B. A change may
not be made if it would result in a Face Amount of less than the minimum Face
Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Change in Face Amount
Subject to certain limitations set forth below, you may decrease or increase the
Face Amount of a Policy once each Policy year after the first Policy year. A
written request is required for a change in the Face Amount. A change in Face
Amount may affect the cost of insurance rate and the net amount at risk, both of
which affect your cost of insurance charge. A reduction in the Face Amount of a
Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested change must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the
Accumulation Account Value may be returned to you (at your election), to the
extent necessary to meet these requirements. If you want to increase the Face
Amount, you must submit proof that the Insured is insurable by our standards on
the date the requested increase is submitted and the Insured must have an
Attained Age not greater than age 80 on the Policy anniversary that the increase
will become effective.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this 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.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Insured. However, estate taxes may apply.
Taking Money Out of Your Policy
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. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC 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 591/2 ; (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 your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore, any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
Policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such 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 us would be considered the owner of the shares of the
Investment Funds. 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 Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, 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 Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Accumulation Account Value of the Policy on the date the loan request
is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500. The loan may be completely or partially repaid at
any time while the Insured is living. When a Policy loan is made, we will deduct
Accumulation Account Value from your Policy equal to the amount of the loan,
plus interest due and place it in the Loan Subaccount as security for the loan.
This Accumulation Account Value amount is expected to earn interest at a rate
("the earnings rate") which is lower than the rate charged on the Policy loan
("the borrowing rate"). The Accumulation Account Value that we use as security
will accrue interest daily at an annual earnings rate of 4%.
Unless the Owner requests a different allocation, the Accumulation Account Value
amount used as security for the loan will be transferred from the Investment
Funds and the General Account on a pro-rata basis to the Loan Account. This will
reduce the Policy's Accumulation Account Value in the General Account and the
Investment Fund(s). These transactions will not be considered transfers for
purposes of the limitations on transfers between Investment Funds or to or from
the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Accumulation Account Value minus the
surrender charge on any Monthly Anniversary, the Policy will lapse, subject to a
grace period. (See "Purchases -- Lapse and Grace Period".) A lapse of the Policy
with a loan outstanding may have Federal income tax consequences. (See "Federal
Tax Status".)
Interest credited to the Accumulation Account Value held in the Loan Subaccount
as security for the loan will be allocated on Policy anniversaries to the
General Account and the Investment Funds. The interest credited will also be
transferred: (1) when a new loan is made; (2) when a loan is partially or fully
repaid; and (3) when an amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences. (See "Federal Tax
Status".)
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Insured and as long
as the Policy is in force. Any Indebtedness outstanding will be deducted before
any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Accumulation Account Value used for security was allocated.
Unpaid loans and loan interest will be deducted from any settlement of your
Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
(1) $500 from an Investment Fund or the General Account; or
(2) the Policy's Accumulation Account Value in an Investment Fund.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Accumulation Account Value net of any applicable surrender charges
and fees in that Investment Fund. The total partial withdrawals and transfers
from the General Account over the Policy year may not exceed a maximum amount
equal to the greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Accumulation Account Value in each Investment Fund
and the General Account bears to the total Accumulation Account Value of the
Policy, less the Accumulation Account Value in the Loan Account, on the date the
request was received. If the limitations on withdrawals from the General Account
will not permit this pro-rata allocation, you will be requested to provide an
alternate allocation.
No amount may be withdrawn that would result in there being insufficient
Accumulation Account Value to meet any surrender charge and applicable fees that
would be payable immediately following the withdrawal upon the surrender of the
remaining Accumulation Account Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the
Accumulation Account Value, then a partial withdrawal will decrease the Face
Amount by an amount by which the partial withdrawal plus the applicable
surrender charge and fees exceeds the difference between the death benefit and
the Face Amount. If death benefit Option B is in effect, the Face Amount will
not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Accumulation Account
Value by a percentage chosen by you. This percentage must be any whole number. A
Pro-Rata Surrender may have Federal income tax consequences. The percentage will
be applied to the Face Amount and the Accumulation Account Value on the Monthly
Anniversary on or following our receipt of the request.
You may allocate the amount of decrease in Accumulation Account Value plus any
applicable surrender charge and fees among the Investment Funds and the General
Account. If no allocation is specified, then the decrease in Accumulation
Account Value and any applicable surrender charge and fees will be allocated
among the Investment Funds and the General Account in the same proportion that
the Policy's Accumulation Account Value in each Investment Fund and the General
Account bears to the total Accumulation Account Value of the Policy, less the
Accumulation Account Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Accumulation
Account Value reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Insured must be living at the time of
a surrender. A surrender may have Federal income tax consequences.
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 (General American Life) purchased Cova, which on that date
changed its name to Cova Financial Life Insurance Company. On August 26, 1999,
it was announced that The Metropolitan Life Insurance Company would purchase the
ultimate parent of General American Life, the parent company of Cova.
Metropolitan Life is one of the country's oldest and most financially sound life
insurance organizations.
Cova is presently licensed to do business in the state of California.
Distribution
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 our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premium and 4.0% of excess premiums paid in Policy year 1. In renewal years, the
commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and 2.0%
in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, asset-based compensation equal up to .25% of Accumulation Account
Value for all Policy years beginning the 13th month. Sometimes, Cova enters into
an agreement with the broker-dealer to pay the broker-dealer persistency bonuses
in addition to the standard commission.
Year 2000
We have developed and initiated plans to assure that our 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
Funds underlying the Separate Account.
The total cost of implementing these plans is not expected to have a material
effect on our financial position or results of operations. We believe that we
have 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
We 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 our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we 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 we may issue.
Suspension of Payments or Transfers
We 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 Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insured is the Owner of the Policy unless another person or entity is
shown as the Owner in the application. The Owner is entitled to all rights
provided by the Policy. If there is more than one Owner at a given time, all
owners must exercise the rights of ownership by joint action. If the Owner dies,
and the Owner is not the Insured, the Owner's interest in the Policy becomes the
property of his or her estate unless otherwise provided. Unless otherwise
provided, the Policy is jointly owned by all Owners named in the Policy or by
the survivors of those joint Owners. Unless otherwise stated in the Policy, the
final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Insured. 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.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement, from the amount of the initial premium payment or
payments, or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
<TABLE>
<CAPTION>
Principal Occupation During
Name the Past Five 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 - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January 1999.
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 1998; Vice President of Cova Life Administration
Services Company (CLASC) - 1998 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; President and Chief Compliance Officer of Cova Life Sales Company
(CLSC) from February, 1999 to present; Vice President and Chief Compliance Officer of CLSC -1989 to
January, 1999.
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 and 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, CFSLIC and 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 1998; Vice President of CLASC - 1998 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFSLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (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 1995 to present; Vice President,
Controller and Director of Cova from 1995 to 1998, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and Director of CFSLIC from 1995 to 1998, prior
thereto Vice President, Controller, Treasurer and Director; Director of FCLIC from 1993 to present;
Vice President, Controller and Director of FCLIC from 1992 to 1998; Secretary of FCLIC from 1992 to
1995; 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 Trustee of Cova Series Trust - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova, CFSLIC and 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 and CFSLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer and Director of FCLIC - May, 1997 to present; Executive Vice
President of CLMC - May, 1997 to present; Executive Vice President and Director of Advisory -
December, 1996 to present; Executive Vice President and Director of Allocation - December, 1996 to
present.
Myron H. Sandberg* Vice President of Cova and CFSLIC - 1985 to present; and Vice President of CLMC - 1989 to present.
John W. Schaus* Vice President of Cova and CFSLIC - 1988 to present; First Vice President of CLMC from January,
1999 to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFSLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFSLIC, FCLIC - September 1999 to present.
Lorry J. Stensrud* President and Director of Cova, CFSLIC, FCLIC and CLMC from June, 1995 to present, prior thereto
Executive Vice President; 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 Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFSLIC - January, 1999 to present; prior thereto, Vice President
of Cova and CFSLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset
Management, General American - June, 1987 to June, 1998. Director of CFSLIC, Cova and FCLIC from
September, 1999 to present.
Peter L. Witkewiz* Vice President and Controller of Cova, CFSLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFSLIC and FCLIC - 1993 to June, 1998.
<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: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from Owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have received instructions.
The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the funds in our own
right, we 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 Accumulation Account Value of a Policy
which is allocated to an Investment Fund 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 us 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 Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We 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 Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We may also disapprove changes
in the investment policy initiated by owners or trustees/directors of the funds,
if such disapproval is reasonable and is based on a good faith determination by
us that the change would violate state or Federal law or the change would not be
consistent with the investment objectives of the Investment Funds 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 us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We 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. 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 Indebtedness and less any surrenders. We also have the right
to adjust any benefits under the Policy if the answers in the application
regarding the use of tobacco are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Accelerated Benefit Rider -- This rider provides a benefit to the Owner if the
Insured becomes terminally ill and is not expected to live more then twelve
months. The Owner may receive 25%, 50% or 75% (but no more than $250,000) of the
eligible proceeds in a lump sum. "Eligible proceeds" means the death benefit
that would have been payable had the Insured died on the date the rider is
exercised.
The receipt of an accelerated death benefit amount may adversely affect the
recipient's eligibility for Medicaid or other government benefits or
entitlements.
Anniversary Partial Withdrawal Rider -- This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy Anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Guaranteed Survivor Purchase Option (GSPO-Plus) -- This rider grants the Policy
Owner or the Insured's Beneficiary the option to purchase, upon the death of the
Insured, on the 10th anniversary of the rider, and on the rider anniversary
nearest the Designated Life's 65th birthday, a specified amount of additional
insurance coverage on the Designated Life (or Lives) without furnishing evidence
of insurability.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Accumulation Account Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of an Accumulation Account Value less any
loans, loan interest due, and any surrender charge being insufficient to pay the
monthly deduction.
The secondary guarantee period is the lesser of twenty Policy years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Monthly Deduction Rider -- This rider provides for the waiver of the
monthly deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled after
age 5 and before age 65.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Accumulation Account Value with a specified monthly premium while the
Insured is totally disabled. The monthly premium selected at issue is not
guaranteed to keep the Policy in force. The Insured must have become disabled
after age 5 and before age 65.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We 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. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the Policies. Purchasers
bear the complete risk that the Policies may not be treated as "life insurance"
under Federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
Federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current Federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For Federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
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 these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment funds 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 fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund is represented by any four investments. For
purposes of these regulations, all securities of the same issuer are treated as
a single investment. The Code provides that, for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
We intend that each Investment Fund 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 Policyowner 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 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 you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve the right to modify the Policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires the use of reasonable mortality and other expense charges. In
establishing these charges, we have 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 we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our 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 advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the Policy should receive the same Federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the Beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
owner or Beneficiary.
Tax Treatment of Loans and Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 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 or addition of qualified additional
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 with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC 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 MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then 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, including those resulting from
the lapse of the Policy, 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 distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer
becoming disabled (within the meaning of Section 72(m)(7) of the Code); or (3)
which is part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
Beneficiary.
If a Policy is not classified as a MEC, 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 MEC, will be treated as
Indebtedness of the owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness 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.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC 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 policies. You should consult a tax adviser prior to purchasing
more than one MEC 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 should 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
includible in gross income of the Policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
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. We are
not involved in any litigation that is of material importance in relation to our
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
Financial statements of the Separate Account and of the Company are provided
below.
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Assets:
<S> <C> <C> <C>
Investments:
Cova Series Trust (Trust):
Lord Abbett Growth and Income Portfolio 1,837 shares at a net asset value of $23.682058 per share $ 43,512
Bond Debenture Portfolio 983 shares at a net asset value of $12.503713 per share 12,290
Small Cap Stock Portfolio 1,046 shares at a net asset value of $12.704940 per share 13,286
Large Cap Stock Portfolio 3,106 shares at a net asset value of $20.430631 per share 63,449
Select Equity Portfolio 2,825 shares at a net asset value of $17.903279 per share 50,571
International Equity Portfolio 1,457 shares at a net asset value of $13.590555 per share 19,801
General American Capital Company (GACC):
Money Market Fund 32,922 shares at a net asset value of $19.715236 per share 649,058
-----------
Total assets $ 851,967
===========
</TABLE>
<TABLE>
<CAPTION>
Net Assets:
<S> <C> <C> <C>
Accumulation units:
Trust Lord Abbett Growth and Income 3,553 accumulation units at $12.247286 per unit $ 43,512
Trust Bond Debenture 1,186 accumulation units at $10.364187 per unit 12,290
Trust Small Cap Stock 1,409 accumulation units at $9.427602 per unit 13,286
Trust Large Cap Stock 4,636 accumulation units at $13.686681 per unit 63,449
Trust Select Equity 3,955 accumulation units at $12.785358 per unit 50,571
Trust International Equity 1,774 accumulation units at $11.162725 per unit 19,801
GACC Money Market 60,541 accumulation units at $10.720997 per unit 649,058
-----------
Net assets $ 851,967
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Commencement of operations through June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust GACC
------------------------------------------------------------------- ----------
Lord Abbett Small Large
Growth and Bond Cap Cap Select International Money
Income Debenture Stock Stock Equity Equity Market Total
----------- --------- ------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - - - - -
----------- --------- ------- ---------- --------- ----------- ---------- ---------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares 2 - - - - (1) 530 531
Realized gain distributions - - - - - - - -
----------- --------- ------- ---------- --------- ----------- ---------- ---------
Net realized gain (loss) 2 - - - - (1) 530 531
----------- --------- ------- ---------- --------- ----------- ---------- ---------
Change in unrealized appreciation 1,131 (209) 787 938 559 (120) 374 3,460
----------- --------- ------- ---------- --------- ----------- ---------- ---------
Net increase (decrease) in
net assets from
operations $ 1,133 (209) 787 938 559 (121) 904 3,991
=========== ========= ======= ========== ========= =========== ========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Commencement of operations through June 30, 1999
Unaudited
<TABLE>
<CAPTION>
Trust GACC
------------------------------------------------------------------ ----------
Lord Abbett Small Large
Growth and Bond Cap Cap Select International Money
Income Debenture Stock Stock Equity Equity Market Total
---------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations:
Investment income $ - - - - - - - -
Net realized gain (loss) 2 - - - - (1) 530 531
Change in unrealized appreciation 1,131 (209) 787 938 559 (120) 374 3,460
Net increase (decrease) ---------- ------- --------- --------- --------- --------- ----------- -----------
from operations 1,133 (209) 787 938 559 (121) 904 3,991
---------- ------- --------- --------- --------- --------- ----------- -----------
Contract transactions:
Cova payments - - - - - - 100 100
Cova redemptions - - - - - - - -
Payments received from contract
owners - - - - - - 850,000 850,000
Transfers between sub-accounts,
net 42,547 12,548 12,548 62,560 50,012 20,000 (200,215) -
Transfers for contract benefits,
terminations and insurance
charges (168) (49) (49) (49) - (78) (1,731) (2,124)
Net increase (decrease) in
net assets from contract ---------- ------- --------- --------- --------- --------- ----------- -----------
transactions 42,379 12,499 12,499 62,511 50,012 19,922 648,154 847,976
---------- ------- --------- --------- --------- --------- ----------- -----------
Net increase (decrease) in
net assets 43,512 12,290 13,286 63,449 50,571 19,801 649,058 851,967
Net assets at beginning of period - - - - - - - -
---------- ------- --------- --------- --------- --------- ----------- -----------
Net assets as end of period $ 43,512 12,290 13,286 63,449 50,571 19,801 649,058 851,967
========== ======= ========= ========= ========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
June 30, 1999
Unaudited
(1) Organization
Cova Variable Life Account Five (the Separate Account), a unit investment
trust registered under the Investment Company Act of 1940 as amended, was
established by Cova Financial Life Insurance Company (Cova) and exists in
accordance with the regulations of the California Department of Insurance.
The Separate Account is a funding vehicle for variable life insurance
policies issued by Cova.
The Separate Account is divided into sub-accounts with the assets of each
sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified, open-end,
management investment company registered under the Investment Company Act
of 1940 as amended. The sub-accounts available for investment may vary
between variable life insurance policies offered for sale by Cova.
Cova Series Trust (Trust) 10 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 2 portfolios
General American Capital Company (GACC) 1 portfolio
Templeton Variable Products Series Fund (Templeton) 5 portfolios
(2) Significant Accounting Policies
(a) Investment Valuation
Investments made in the portfolios of the investment companies are
valued at the reported net asset value of such portfolios, which
value their investment securities at fair value. The average cost
method is used to compute the realized gains and losses on the sale
of portfolio shares owned by the sub-accounts. Income from dividends
and gains from realized capital gain distributions are recorded on
the ex-distribution date.
(b) Reinvestment of Distributions
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in additional
shares of the portfolio.
GACC follows the Federal income tax practice known as consent
dividending, whereby substantially all of its net investment income
and realized capital gains are deemed to pass through to the
Separate Account. As a result, GACC does not distribute dividends
and realized capital gains. During December of each year, the
accumulated net investment income and realized capital gains of the
GACC Money Market Fund are allocated to the Separate Account by
increasing the cost basis and recognizing a gain in the Separate
Account.
(c) Federal Income Taxes
The operations of the Separate Account are included in the federal
income tax return of Cova which is taxed as a Life Insurance Company
under the provisions of the Internal Revenue Code (IRC). Under
current IRC provisions, Cova believes it will be treated as the
owner of the Separate Account assets for federal income tax purposes
and does not expect to incur federal income taxes on the earnings of
the Separate Account to the extent the earnings are credited to the
variable life policies. Based on this, no charge has been made to
the Separate Account for federal income taxes. A charge may be made
in future years for any federal income taxes that would be
attributable to the variable life policies.
(3) Contract Charges and Fees
There are contract charges and fees associated with the variable life
insurance policy that are deducted from the policy account value that
reduce the return on investment.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
June 30, 1999
Unaudited
(a) Insurance Charges
The insurance charges are: (1) mortality and expense risk, (2)
administrative, (3) tax expense and (4) cost of insurance. These
charges are deducted from the policy account value on a monthly
basis.
For the first 10 years, the mortality and expense charge is equal,
on an annual basis, to 0.90% of the policy account value, 1/12 of
which is deducted each month. In succeeding years, the mortality and
expense charge is equal, on an annual basis, to 0.75% of the policy
account value, 1/12 of which is deducted each month. The
administrative charge is equal, on an annual basis, to 0.40% of the
policy account value, 1/12 of which is deducted each month. During
the six months ending June 30, 1999, mortality and expense risk and
administrative charges of $1,192 were deducted from the policy
values in the Separate Account.
During the first 10 years, a tax expense charge is deducted. The tax
expense charge is equal, on an annual basis, to 0.40% (0.15% for
federal tax and 0.25% for premium tax) of the policy account value,
1/12 of which is deducted each month. Premium taxes range from 0% to
4% and the premium tax charge is assessed regardless of the owner's
actual state or local jurisdiction. During the six months ending
June 30, 1999, tax expense charges of $367 were deducted from the
policy values in the Separate Account.
The cost of insurance charge deducted each month from the policy
account value depends upon the sex, age and rating classification of
the insured and whether the initial premium is 100% of the maximum
premium limit. During the six months ending June 30, 1999, cost of
insurance charges of $571 were deducted from the policy values in
the Separate Account.
(b) Surrender Charges
During the first 10 years, a surrender charge is deducted on
withdrawals in excess of the annual withdrawal amount. The surrender
charge is a percentage of the premium surrendered as follows:
policy years 1-3 7.5% policy year 7 3.0%
policy year 4 6.0% policy year 8 2.0%
policy year 5 5.0% policy year 9 1.0%
policy year 6 4.0% policy year 10+ 0.0%
During the first 10 years, a deferred premium tax charge is deducted
on premium surrendered. The deferred premium tax charge is a
percentage of the premium surrendered as follows:
policy year 1 2.25% policy year 6 1.00%
policy year 2 2.00% policy year 7 0.75%
policy year 3 1.75% policy year 8 0.50%
policy year 4 1.50% policy year 9 0.25%
policy year 5 1.25% policy year 10+ 0.00%
(c) Contract Fees
An annual contract maintenance fee of $30 is imposed on all variable
life contracts with policy values less than $50,000 on their policy
anniversary. This fee covers the cost of contract administration for
the previous year and is prorated between the sub-accounts to which
the policy value is allocated.
Subject to certain restrictions, the contract owner may transfer all
or a part of the accumulated value of the policy among the available
sub-accounts of the Separate Account. If more than 12 transfers have
been made in the policy year, a transfer fee of $25 per transfer or,
if less, 2% of the amount transferred, will be deducted from the
policy account value. Transfers made in a dollar cost averaging
program are not subject to the transfer fee.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(4) Cost Basis of Investments
The cost basis of each sub-account's investment follows:
<S> <C>
Trust Lord Abbett Growth and Income $ 42,381
Trust Bond Debenture 12,499
Trust Small Cap Stock 12,499
Trust Large Cap Stock 62,511
Trust Select Equity 50,012
Trust International Equity 19,921
GACC Money Market 648,684
--------------
$ 848,507
==============
</TABLE>
<TABLE>
<CAPTION>
(5) Unit Fair Value
A summary of accumulation unit values, net assets and total return for
each sub-account follows:
Accumulation
Unit Net Assets Total
Commenced Value (in thousands) Return
Operations 6/30/99 6/30/99 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Trust Lord Abbett Growth and Income 4/30/99 $12.247286 $ 44 3.81%
Trust Bond Debenture 4/29/99 10.364187 12 -1.70%
Trust Small Cap Stock 4/29/99 9.427602 13 5.92%
Trust Large Cap Stock 4/29/99 13.686681 63 2.38%
Trust Select Equity 6/29/99 12.785358 51 1.10%
Trust International Equity 5/4/99 11.162725 20 -0.61%
GACC Money Market 3/1/99 10.720997 649 1.55%
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(6) Realized Gain (Loss) and Change in Unrealized Appreciation
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the six months ending
June 30, 1999 and the year ending December 31, 1998 follows:
Realized Gain (Loss)
---------------------------------------------------------------
Aggregate Aggregate Cost
Proceeds from Sales of Portfolio Shares Realized
of Portfolio Shares Redeemed Gain (Loss)
------------------ ------------------ -------------------
<S> <C> <C> <C>
Trust Lord Abbett Growth and Income $ 168 $ 166 $ 2
Trust Bond Debenture 49 49 -
Trust Small Cap Stock 49 49 -
Trust Large Cap Stock - - -
Trust Select Equity - - -
Trust International Equity 77 78 (1)
GACC Money Market 200,311 199,781 530
</TABLE>
<TABLE>
<CAPTION>
Unrealized Appreciation (Depreciation)
---------------------------------------------------------------
Appreciation Appreciation
(Depreciation) (Depreciation)
End of Period Beginning of Period Change
------------------ -----------------------------------------
<S> <C> <C> <C>
Trust Lord Abbett Growth and Income $ 1,131 $ - $ 1,131
Trust Bond Debenture (209) - (209)
Trust Small Cap Stock 787 - 787
Trust Large Cap Stock 938 - 938
Trust Select Equity 559 - 559
Trust International Equity (120) - (120)
GACC Money Market 374 - 374
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
June 30, 1999
Unaudited
<TABLE>
<CAPTION>
(7) Unit Transactions
The change in the number of units for each sub-account follows:
Trust GACC
--------------------------------------------------------------------------- -------------
Lord Abbett Small Large
Growth and Bond Cap Cap Select International Money
Income Debenture Stock Stock Equity Equity Market
------------- --------- --------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
Unit balance at 12/31/98
Cova units purchased - - - - - - 10
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - 79,440
Contract units transferred, net 3,567 1,191 1,415 4,640 3,955 1,781 (18,747)
Contract units redeemed (14) (5) (6) (4) - (7) (162)
------------- --------- --------- ---------- ----------- ---------- -----------
Unit balance at 6/30/99 3,553 1,186 1,409 4,636 3,955 1,774 60,541
============= ========= ========= ========== =========== ========== ===========
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Financial Statements (Unaudited)
June 30, 1999 and 1998
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
---------------- ------------------
<S> <C> <C>
Assets
Investments:
Debt securities available for sale at fair value
(cost of $105,997 in 1999 and $99,228 in 1998) $103,276 $100,658
Mortgage loans, net of allowance for potential loan loss 4,508 5,245
Policy loans 1,054 1,223
----- -----
Total investments 108,838 107,126
------- -------
Cash and cash equivalents - interest bearing 5,831 5,789
Cash - non-interest bearing 1,419 1,200
Accrued investment income 1,744 1,641
Deferred policy acquisition costs 12,882 9,142
Present value of future profits 1,009 854
Goodwill 1,758 1,813
Deferred tax benefits, net 1,130 585
Receivable from OakRe 27,058 35,312
Other assets 639 516
Separate account assets 160,272 127,873
------- -------
Total assets $322,580 $291,851
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
(In thousands)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
Liabilities and Shareholder's Equity (Unaudited) 1998
-------------- --------------
<S> <C> <C>
Policyholder deposits $131,604 $135,106
Future policy benefits 6,596 6,191
Payable on purchase of securities 1,000 27
Accounts payable and other liabilities 1,543 1,653
Federal and state income taxes payable 377 172
Future purchase price payable to OakRe 281 342
Guaranty fund assessments 1,000 1,000
Separate account liabilities 160,270 127,871
------- -------
Total liabilities 302,671 272,362
------- -------
Shareholder's equity:
Common stock 2,800 2,800
Additional paid-in capital 15,523 14,523
Retained earnings 2,218 1,833
Accumulated other comprehensive income (loss), net of tax (632) 333
----- ---
Total shareholder's equity 19,909 19,489
------ ------
Total liabilities and shareholder's equity $322,580 $291,851
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $1,448 $592 $1,273 $536
Net investment income 3,855 3,737 1,956 1,825
Net realized investment losses (4) (29) (42) (35)
Separate account fees 1,004 612 537 341
Other income 160 29 78 12
--- -- -- --
Total revenues 6,463 4,941 3,802 2,679
----- ----- ----- -----
Benefits and expenses:
Interest on policyholder deposits 2,953 2,697 1,481 1,270
Current and future policy benefits 1,694 746 1,430 562
Operating and other expenses 764 877 462 398
Amortization of purchased intangible assets 91 88 45 45
Amortization of deferred acquisition costs 396 254 207 146
--- --- --- ---
Total benefits and expenses 5,898 4,662 3,625 2,421
----- ----- ----- -----
Income before income taxes 565 279 177 258
--- --- --- ---
Income tax expense(benefit):
Current 205 (10) (200) 320
Deferred (25) 130 255 (220)
---- --- --- -----
Total income tax expense 180 120 55 100
--- --- -- ---
Net income $385 $159 $122 $158
==== ==== ==== ====
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholder's Equity (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the periods ended
6/30/99 12/31/98
------------ ------------
<S> <C> <C>
Common stock, at beginning and end of period $2,800 $2,800
------ ------
Additional paid-in capital:
Balance at beginning of period 14,523 13,523
Capital contribution 1,000 1,000
----- -----
Balance at end of period 15,523 14,523
------ ------
Retained earnings:
Balance at beginning of period 1,833 1,023
Net income 385 810
--- ---
Balance at end of period 2,218 1,833
----- -----
Accumulated other comprehensive income:
333 145
Balance at beginning of period
Change in unrealized appreciation (depreciation) of debt
securities (4,151) 794
Change in deferred acquisition costs attributable to
unrealized appreciation (depreciation) 2,485 (513)
Change in present value of future profits attributable to
unrealized depreciation 181 8
Change in deferred federal income taxes impact 520 (101)
--- -----
Balance at end of period (632) 333
----- ---
Total shareholder's equity $19,909 $19,489
======= =======
Total comprehensive income:
Net income $385 $810
Other comprehensive income (loss)(change in
unrealized gains(losses) on debt securities) (965) 188
----- ---
Total comprehensive income(loss) $(580) $998
====== ====
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
For the periods ended
6/30/99 6/30/98
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $385 $159
Adjustments to reconcile net income to net cash
Provided by operating activities:
Increase in future policy benefits 405 361
Decrease in payables and accrued liabilities (110) (380)
Decrease(increase) in accrued investment income (103) 72
Amortization of intangible assets 487 487
Recapture commission paid to OakRe (61) (145)
Net realized investment losses 4 29
Interest accumulated on policyholder deposits 2,953 2,697
Decrease(increase) in current and deferred income taxes (340) 13
Commissions and expenses deferred (1,651) (1,475)
Other 1,036 347
------ ------
Net cash provided by operating
Activities 3,005 2,165
----- -----
Cash flows from investing activities:
Cash used in the purchase of investment
Securities (16,925) (20,458)
Proceeds from investment securities sold
and matured 11,700 24,046
Other (63) (58)
---- ----
Net cash provided by (used in) investing
Activities (5,288) 3,530
------- -----
</TABLE>
See accompanying notes to unaudited financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, (Unaudited) (Continued)
Six months ended June 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
For the periods ended
6/30/99 6/30/98
------------ --------------
<S> <C> <C>
Cash flows from financing activities:
Policyholder deposits $35,427 $30,408
Transfers from OakRe 8,836 18,514
Transfer to separate accounts (23,006) (32,931)
Return of policyholder deposits (19,713) (15,882)
Capital contribution received 1,000 -
----- -------
Net cash provided by financing
activities 2,544 109
----- ---
Increase in cash and cash
equivalents 261 5,804
--- -----
Cash and cash equivalents - beginning of
period 6,989 2,148
----- -----
Cash and cash equivalents - end of period $7,250 $7,952
====== ======
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Interim Financial Statements - (Unaudited)
June 30, 1999 and 1998
(1)
The interim consolidated financial statements for Cova Financial Life Insurance
Company (the Company) have been prepared on the basis of generally accepted
accounting principles and, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation or
results for such periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the financial
statements as of December 31, 1998 and December 31, 1997, and for each of the
years in the three-year period ended December 31, 1998 and related notes
thereto, presented elsewhere herein. Interim financial data presented herein are
unaudited.
(2) Investments
The Company's investments in debt securities are considered available for sale
and carried at estimated fair value, with the aggregate unrealized appreciation
or depreciation being recorded as other comprehensive income. The carrying value
and amortized cost of investments at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Debt Securities:
Government agency obligations $2,289 $45 $ - $2,334 $2,334
Corporate securities 82,093 261 (2,612) 79,742 79,742
Mortgage-backed securities 9,101 28 (43) 9,086 9,086
Asset-backed securities 12,514 50 (450) 12,114 12,114
------ -- ----- ------ ------
Total debt securities 105,997 384 (3,105) 103,276 103,276
Mortgage loans(net) 4,508 112 - 4,620 4,508
Policy loans 1,054 - - 1,054 1,054
------ ----- ---- ----- -----
Total investments $111,559 $496 ($3,105) $108,950 $108,838
======== ==== ======== ======== ========
Company's beneficial interest
In separate accounts $2 -- -- $2 $2
== == == == ==
</TABLE>
As of June 30, 1999, the Company had one nonincome producing debt security
totaling $502,244. The Company's valuation allowance for potential losses on
mortgage loans is $27,500 at June 30, 1999
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Interim Financial Statements - (Unaudited)
The amortized cost and fair market value of debt securities at June 30, 1999, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Maturities of
mortgage-backed securities will be substantially shorter than their contractual
maturity because they require monthly principal installments and mortgagees may
prepay principal.
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------
Fair
Amortized Market
Cost Value
---------------------------------------------
(in thousands )
<S> <C> <C>
Less than one year $3,373 $3,398
Due after one year through five years 36,700 36,166
Due after five years through ten years 36,041 34,702
Due after ten years 20,782 19,924
Mortgage-backed securities 9,101 9,086
----- -----
Total $105,997 $103,276
======== ========
</TABLE>
At June 30, 1999, approximately 93.4% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade. Of
the 6.6% non-investment grade debt securities, 6.1% are rated as BB, and 0.5%
are rated as C and treated as impaired.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Interim Financial Statements - (Unaudited)
The components of net investment income, net realized capital losses and
comprehensive income were as follows:
<TABLE>
<CAPTION>
-------------------------- -----------------------------
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
-------------------------- -----------------------------
(in thousands)
<S> <C> <C> <C> <C>
Income on debt securities $3,565 $3,515 $1,790 $1,705
Income on short-term investments 96 110 52 60
Income on mortgage loans 217 122 126 68
Income on policy loans 41 44 21 22
Miscellaneous interest 1 3 1 -
------ ------ ------- -------
Total investment income 3,920 3,794 1,990 1,855
Investment expenses (65) (57) (34) (30)
---- ---- ---- ----
Net investment income $3,855 $3,737 $1,956 $1,825
====== ====== ====== ======
Net realized capital losses -
debt securities $(4) $(29) $(42) $(35)
==== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
For the periods ended
6/30/99 6/30/98
---------------------------------
(in thousands)
<S> <C> <C>
Comprehensive income was as follows:
Debt securities $(4,151) $59
Effects on deferred acquisition costs
amortization 2,485 (61)
Effects on present value of future
Profits amortization 181 23
--- --
Unrealized appreciation (depreciation)
before income taxes (1,485) 21
Unrealized income tax benefit/(expense) 520 (8)
--- ---
Net change in comprehensive income $(965) $13
====== ====
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Interim Financial Statements - (Unaudited)
(3) Securities Greater than 10% of Shareholder's Equity
As of June 30, 1999 the Company had one individual security which exceeded 10%
of shareholder's equity:
Colonial Realty 7.5%, 07/15/2001 $1,997,781
(4) Statutory Surplus
As of June 30, 1999, the Company's statutory capital and surplus was
$10,758,290. The Company's statutory net losses for the periods ended June 30,
1999 and 1998 were $418,255 and $444,318, respectively.
(5) Related-Party Transactions
The Company has entered into management, operations, and servicing agreements
with its affiliated companies. The affiliated companies are Cova Life Management
Company, 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, General
American Life Insurance Company. Cova Life Administrative Service Company
provides various services for the Company including underwriting, claims, and
administrative functions. Expenses and fees paid to affiliated companies as of
June 30, 1999 and 1998 were $489,502 and $403,709, respectively.
(6) SUBSEQUENT EVENT
On August 26, 1999, the Company's ultimate parent, General American Life
Insurance Company (GALIC), entered into a definitive agreement, whereby MetLife
will acquire GALIC's parent company GenAmerica Corporation for $1.2 billion in
cash. The purchase is subject to the approval of the Missouri Director of
Insurance, and it is expected to be completed in the fourth quarter of 1999.
(7) Others
Certain 1998 amounts have reclassified to conform to the 1999 presentation.
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 --
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 50 and 60. Our hypothetical insureds are
non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options: Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $6,000 for the 50-year-old example and $9,000
for the 60-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35% thereafter)
and advisory fee and operating expenses (equal to approximately .92%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.47% for these charges) are approximately -1.47, 4.53% and
10.53%. The Policy will lapse if you do not make additional premiums where 0% is
used in the illustrations.
It is important to be aware that these illustrations assume 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 Accumulation Account
Value, Cash Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of the prospectus.
These charges are:
(1) A Federal Tax Charge of 1.3% and a Premium Tax Charge of 2.35% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy Year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if 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,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 3,885 2,164 250,000 2,997 1,275 250,000
2 12,915 8,206 6,485 250,000 6,464 4,742 250,000
3 19,861 12,381 10,660 250,000 9,777 8,056 250,000
4 27,154 16,421 14,700 250,000 12,928 11,207 250,000
5 34,811 20,335 18,614 250,000 15,900 14,179 250,000
6 42,852 24,139 22,609 250,000 18,684 17,154 250,000
7 51,295 27,834 26,687 250,000 21,265 20,118 250,000
8 60,159 31,430 30,665 250,000 23,639 22,874 250,000
9 69,467 34,918 34,536 250,000 25,795 25,412 250,000
10 79,241 38,294 38,294 250,000 27,711 27,711 250,000
15 135,945 56,952 56,952 250,000 36,571 36,571 250,000
20 208,316 70,419 70,419 250,000 34,519 34,519 250,000
25 300,681 78,088 78,088 250,000 12,845 12,845 250,000
30 418,565 76,508 76,508 250,000 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,154 2,433 250,000 3,237 1,516 250,000
2 12,915 9,017 7,296 250,000 7,165 5,443 250,000
3 19,861 14,016 12,295 250,000 11,168 9,447 250,000
4 27,154 19,170 17,448 250,000 15,241 13,519 250,000
5 34,811 24,491 22,770 250,000 19,370 17,649 250,000
6 42,852 30,006 28,476 250,000 23,549 22,019 250,000
7 51,295 35,724 34,576 250,000 27,767 26,620 250,000
8 60,159 41,665 40,900 250,000 32,024 31,259 250,000
9 69,467 47,831 47,449 250,000 36,312 35,930 250,000
10 79,241 54,230 54,230 250,000 40,618 40,618 250,000
15 135,945 94,450 94,450 250,000 66,290 66,290 250,000
20 208,316 142,807 142,807 250,000 90,980 90,980 250,000
25 300,681 204,835 204,835 250,000 112,105 112,105 250,000
30 418,565 287,351 287,351 301,718 122,170 122,170 250,000
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,424 2,703 250,000 3,479 1,757 250,000
2 12,915 9,861 8,140 250,000 7,897 6,176 250,000
3 19,861 15,787 14,066 250,000 12,679 10,958 250,000
4 27,154 22,265 20,544 250,000 17,856 16,135 250,000
5 34,811 29,364 27,642 250,000 23,458 21,737 250,000
6 42,852 37,168 35,638 250,000 29,524 27,994 250,000
7 51,295 45,758 44,610 250,000 36,098 34,950 250,000
8 60,159 55,229 54,464 250,000 43,238 42,473 250,000
9 69,467 65,673 65,290 250,000 51,009 50,627 250,000
10 79,241 77,196 77,196 250,000 59,475 59,475 250,000
15 135,945 161,199 161,199 250,000 120,940 120,940 250,000
20 208,316 301,873 301,873 350,172 225,431 225,431 261,499
25 300,681 535,978 535,978 573,496 404,654 404,654 432,980
30 418,565 924,088 924,088 970,292 699,609 699,609 734,590
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 3,880 2,159 253,880 2,977 1,256 252,977
2 12,915 8,186 6,465 258,186 6,404 4,683 256,404
3 19,861 12,333 10,612 262,333 9,655 7,934 259,655
4 27,154 16,332 14,611 266,332 12,718 10,997 262,718
5 34,811 20,188 18,466 270,188 15,572 13,851 265,572
6 42,852 23,917 22,387 273,917 18,204 16,674 268,204
7 51,295 27,518 26,371 277,518 20,598 19,450 270,598
8 60,159 31,001 30,236 281,001 22,744 21,979 272,744
9 69,467 34,353 33,971 284,353 24,628 24,245 274,628
10 79,241 37,567 37,567 287,567 26,225 26,225 276,225
15 135,945 54,815 54,815 304,815 32,443 32,443 282,443
20 208,316 64,859 64,859 314,859 25,668 25,668 275,668
25 300,681 66,070 66,070 316,070 0 0 0
30 418,565 53,784 53,784 303,784 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,148 2,427 254,148 3,216 1,495 253,216
2 12,915 8,994 7,273 258,994 7,099 5,378 257,099
3 19,861 13,962 12,240 263,962 11,027 9,306 261,027
4 27,154 19,063 17,342 269,063 14,989 13,267 264,989
5 34,811 24,309 22,588 274,309 18,961 17,240 268,961
6 42,852 29,720 28,190 279,720 22,927 21,397 272,927
7 51,295 35,301 34,154 285,301 26,867 25,719 276,867
8 60,159 41,068 40,303 291,068 30,765 30,000 280,765
9 69,467 47,013 46,630 297,013 34,602 34,220 284,602
10 79,241 53,136 53,136 303,136 38,346 38,346 288,346
15 135,945 90,562 90,562 340,562 58,490 58,490 308,490
20 208,316 130,563 130,563 380,563 69,268 69,268 319,268
25 300,681 171,757 171,757 421,757 59,254 59,254 309,254
30 418,565 208,218 208,218 458,218 6,690 6,690 256,690
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,418 2,696 254,418 3,456 1,735 253,456
2 12,915 9,836 8,115 259,836 7,824 6,103 257,824
3 19,861 15,725 14,003 265,725 12,518 10,797 262,518
4 27,154 22,139 20,418 272,139 17,557 15,836 267,557
5 34,811 29,140 27,418 279,140 22,952 21,231 272,952
6 42,852 36,804 35,274 286,804 28,724 27,194 278,724
7 51,295 45,196 44,049 295,196 34,891 33,743 284,891
8 60,159 54,403 53,638 304,403 41,480 40,715 291,480
9 69,467 64,495 64,113 314,495 48,519 48,137 298,519
10 79,241 75,555 75,555 325,555 56,024 56,024 306,024
15 135,945 154,063 154,063 404,063 106,187 106,187 356,187
20 208,316 276,246 276,246 526,246 172,671 172,671 422,671
25 300,681 469,604 469,604 719,604 256,682 256,682 506,682
30 418,565 773,767 773,767 1,023,767 350,541 350,541 600,541
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 3,885 2,164 250,000 2,997 1,275 250,000
2 12,915 8,206 6,485 250,000 6,464 4,742 250,000
3 19,861 12,381 10,660 250,000 9,777 8,056 250,000
4 27,154 16,421 14,700 250,000 12,928 11,207 250,000
5 34,811 20,335 18,614 250,000 15,900 14,179 250,000
6 42,852 24,139 22,609 250,000 18,684 17,154 250,000
7 51,295 27,834 26,687 250,000 21,265 20,118 250,000
8 60,159 31,430 30,665 250,000 23,639 22,874 250,000
9 69,467 34,918 34,536 250,000 25,795 25,412 250,000
10 79,241 38,294 38,294 250,000 27,711 27,711 250,000
15 135,945 56,952 56,952 250,000 36,571 36,571 250,000
20 208,316 70,419 70,419 250,000 34,519 34,519 250,000
25 300,681 78,088 78,088 250,000 12,845 12,845 250,000
30 418,565 76,508 76,508 250,000 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,154 2,433 250,000 3,237 1,516 250,000
2 12,915 9,017 7,296 250,000 7,165 5,443 250,000
3 19,861 14,016 12,295 250,000 11,168 9,447 250,000
4 27,154 19,170 17,448 250,000 15,241 13,519 250,000
5 34,811 24,491 22,770 250,000 19,370 17,649 250,000
6 42,852 30,006 28,476 250,000 23,549 22,019 250,000
7 51,295 35,724 34,576 250,000 27,767 26,620 250,000
8 60,159 41,665 40,900 250,000 32,024 31,259 250,000
9 69,467 47,831 47,449 250,000 36,312 35,930 250,000
10 79,241 54,230 54,230 250,000 40,618 40,618 250,000
15 135,945 94,450 94,450 250,000 66,290 66,290 250,000
20 208,316 142,807 142,807 250,000 90,980 90,980 250,000
25 300,681 203,547 203,547 287,418 112,105 112,105 250,000
30 418,565 275,443 275,443 357,897 122,170 122,170 250,000
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 6,300 4,424 2,703 250,000 3,479 1,757 250,000
2 12,915 9,861 8,140 250,000 7,897 6,176 250,000
3 19,861 15,787 14,066 250,000 12,679 10,958 250,000
4 27,154 22,265 20,544 250,000 17,856 16,135 250,000
5 34,811 29,364 27,642 250,000 23,458 21,737 250,000
6 42,852 37,168 35,638 250,000 29,524 27,994 250,000
7 51,295 45,758 44,610 250,000 36,098 34,950 250,000
8 60,159 55,229 54,464 250,000 43,238 42,473 250,000
9 69,467 65,673 65,290 250,000 51,009 50,627 250,000
10 79,241 77,196 77,196 250,000 59,475 59,475 250,000
15 135,945 161,052 161,052 284,165 120,940 120,940 250,000
20 208,316 295,284 295,284 462,335 220,002 220,002 344,463
25 300,681 508,910 508,910 718,607 367,192 367,192 518,493
30 418,565 843,945 843,945 1,096,580 576,844 576,844 749,523
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 5,731 2,840 250,000 3,169 278 250,000
2 19,373 12,052 9,160 250,000 6,889 3,998 250,000
3 29,791 18,031 15,140 250,000 10,257 7,365 250,000
4 40,731 23,780 20,889 250,000 13,233 10,341 250,000
5 52,217 29,266 26,375 250,000 15,775 12,884 250,000
6 64,278 34,634 32,064 250,000 17,848 15,278 250,000
7 76,942 39,814 37,886 250,000 19,418 17,491 250,000
8 90,239 44,790 43,505 250,000 20,448 19,163 250,000
9 104,201 49,573 48,931 250,000 20,895 20,252 250,000
10 118,861 54,100 54,100 250,000 20,669 20,699 250,000
15 203,917 78,911 78,911 250,000 12,286 12,286 250,000
20 312,473 91,868 91,868 250,000 0 0 0
25 451,021 92,744 92,744 250,000 0 0 0
30 627,847 71,204 71,204 250,000 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,130 3,238 250,000 3,486 595 250,000
2 19,373 13,252 10,361 250,000 7,771 4,880 250,000
3 29,791 20,447 17,556 250,000 11,955 9,064 250,000
4 40,731 27,828 24,937 250,000 15,993 13,102 250,000
5 52,217 35,373 32,482 250,000 19,840 16,949 250,000
6 64,278 43,238 40,668 250,000 23,451 20,881 250,000
7 76,942 51,369 49,441 250,000 26,791 24,863 250,000
8 90,239 59,770 58,485 250,000 29,812 28,527 250,000
9 104,201 68,470 67,828 250,000 32,469 31,826 250,000
10 118,861 77,434 77,434 250,000 34,694 34,694 250,000
15 203,917 134,630 134,630 250,000 42,620 42,620 250,000
20 312,473 204,938 204,938 250,000 17,285 17,285 250,000
25 451,021 302,279 302,279 317,393 0 0 0
30 627,847 422,013 422,013 443,113 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,529 3,638 250,000 3,806 914 250,000
2 19,373 14,503 11,612 250,000 8,697 5,806 250,000
3 29,791 23,064 20,172 250,000 13,813 10,921 250,000
4 40,731 32,392 29,500 250,000 19,144 16,252 250,000
5 52,217 42,544 39,653 250,000 24,684 21,793 250,000
6 64,278 53,763 51,193 250,000 30,437 27,867 250,000
7 76,942 66,104 64,176 250,000 36,419 34,492 250,000
8 90,239 79,690 78,405 250,000 42,648 41,363 250,000
9 104,201 94,688 94,046 250,000 49,151 48,508 250,000
10 118,861 111,229 111,229 250,000 55,953 55,953 250,000
15 203,917 234,985 234,985 251,433 104,356 104,356 250,000
20 312,473 443,983 443,983 466,183 181,434 181,434 250,000
25 451,021 788,010 788,010 827,410 341,765 341,765 358,854
30 627,847 1,345,576 1,345,576 1,412,855 600,469 600,469 630,492
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 5,717 2,826 255,717 3,101 210 253,101
2 19,373 12,001 9,110 262,001 6,694 3,803 256,694
3 29,791 17,904 15,013 267,904 9,869 6,978 259,869
4 40,731 23,535 20,644 273,535 12,579 9,688 262,579
5 52,217 28,850 25,959 278,850 14,777 11,886 264,777
6 64,278 34,006 31,436 284,006 16,422 13,852 266,422
7 76,942 38,916 36,989 288,916 17,481 15,554 267,481
8 90,239 43,556 42,271 293,556 17,917 16,632 267,917
9 104,201 47,931 47,288 297,931 17,694 17,051 267,694
10 118,861 51,951 51,951 301,951 16,762 16,762 266,762
15 203,917 71,970 71,970 321,970 3,804 3,804 253,804
20 312,473 72,563 72,563 322,563 0 0 0
25 451,021 52,537 52,537 302,537 0 0 0
30 627,847 2,467 2,467 252,467 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,115 3,224 256,115 3,413 522 253,413
2 19,373 13,197 10,305 263,197 7,554 4,663 257,554
3 29,791 20,301 17,410 270,301 11,506 8,614 261,506
4 40,731 27,536 24,645 277,536 15,204 12,313 265,204
5 52,217 34,858 31,967 284,858 18,583 15,692 268,583
6 64,278 42,429 39,859 292,429 21,577 19,007 271,557
7 76,942 50,167 48,239 300,167 24,127 22,199 274,127
8 90,239 58,051 56,766 308,051 26,164 24,879 276,164
9 104,201 66,089 65,446 316,089 27,620 26,978 277,620
10 118,861 74,191 74,191 324,191 28,407 28,407 278,407
15 203,917 121,924 121,924 371,924 23,882 23,882 273,882
20 312,473 160,932 160,932 410,932 0 0 0
25 451,021 186,692 186,692 436,692 0 0 0
30 627,847 183,085 183,085 433,085 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,514 3,623 256,514 3,728 837 253,728
2 19,373 14,442 11,550 264,442 8,457 5,566 258,457
3 29,791 22,898 20,007 272,898 13,296 10,404 263,296
4 40,731 32,047 29,156 282,047 18,198 15,307 268,198
5 52,217 41,912 39,020 291,912 23,115 20,224 273,115
6 64,278 52,729 50,159 302,729 27,994 25,424 277,994
7 76,942 64,505 62,577 314,505 32,700 30,863 282,790
8 90,239 77,310 76,025 327,310 37,444 36,159 287,444
9 104,201 91,253 90,611 341,253 41,893 41,250 291,893
10 118,861 106,357 106,357 356,357 46,052 46,052 296,052
15 203,917 211,553 211,553 461,553 64,934 64,934 314,934
20 312,473 361,900 361,900 611,900 50,322 50,322 300,322
25 451,021 586,015 586,015 836,015 0 0 0
30 627,847 917,612 917,612 1,167,612 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 5,731 2,840 250,000 3,169 278 250,000
2 19,373 12,052 9,160 250,000 6,889 3,998 250,000
3 29,791 18,031 15,140 250,000 10,257 7,365 250,000
4 40,731 23,780 20,889 250,000 13,233 10,341 250,000
5 52,217 29,266 26,375 250,000 15,775 12,884 250,000
6 64,278 34,634 32,064 250,000 17,848 15,278 250,000
7 76,942 39,814 37,886 250,000 19,418 17,491 250,000
8 90,239 44,790 43,505 250,000 20,448 19,163 250,000
9 104,201 49,573 48,931 250,000 20,895 20,252 250,000
10 118,861 54,100 54,100 250,000 20,699 20,699 250,000
15 203,917 78,911 78,911 250,000 12,286 12,286 250,000
20 312,473 91,868 91,868 250,000 0 0 0
25 451,021 92,744 92,744 250,000 0 0 0
30 627,847 71,204 71,204 250,000 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,130 3,238 250,000 3,486 595 250,000
2 19,373 13,252 10,361 250,000 7,771 4,880 250,000
3 29,791 20,447 17,556 250,000 11,955 9,064 250,000
4 40,731 27,828 24,937 250,000 15,993 13,102 250,000
5 52,217 35,373 32,482 250,000 19,840 16,949 250,000
6 64,278 43,238 40,668 250,000 23,451 20,881 250,000
7 76,942 51,369 49,441 250,000 26,791 24,863 250,000
8 90,239 59,770 58,485 250,000 29,812 28,527 250,000
9 104,201 68,470 67,828 250,000 32,469 31,826 250,000
10 118,861 77,434 77,434 250,000 34,694 34,694 250,000
15 203,917 134,630 134,630 250,000 42,620 42,620 250,000
20 312,473 204,517 204,517 265,740 17,285 17,285 250,000
25 451,021 290,343 290,343 352,808 0 0 0
30 627,847 389,926 389,926 450,637 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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
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 9,450 6,529 3,638 250,000 3,806 914 250,000
2 19,373 14,503 11,612 250,000 8,697 5,806 250,000
3 29,791 23,064 20,172 250,000 13,813 10,921 250,000
4 40,731 32,392 29,500 250,000 19,144 16,252 250,000
5 52,217 42,544 39,653 250,000 24,684 21,793 250,000
6 64,278 53,763 51,193 250,000 30,437 27,867 250,000
7 76,942 66,104 64,176 250,000 36,419 34,492 250,000
8 90,239 79,690 78,405 250,000 42,648 41,363 250,000
9 104,201 94,688 94,046 250,000 49,151 48,508 250,000
10 118,861 111,229 111,229 250,000 55,953 55,953 250,000
15 203,917 233,231 233,231 329,334 104,356 104,356 250,000
20 312,473 423,884 423,884 550,773 181,434 181,434 250,000
25 451,021 722,628 722,628 878,094 315,597 315,597 383,494
30 627,847 1,184,450 1,184,450 1,368,869 501,805 501,805 579,936
<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 death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
[back cover]
COVA
Cova Financial Life Insurance Company
Marketing and Executive Office
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
800-523-1661
Service Office
P.O. Box 66757
St. Louis, MO 63166-6757
877-357-4419
CC-4278 (11/99) Policy Form Series CCP00104 21-CVUL-CASL (11/99)
