Flexible Premium
Joint and Last Survivor
Variable Life
Insurance Policy
issued by
COVA FINANCIAL LIFE
INSURANCE COMPANY COVA VARIABLE LIFE ACCOUNT FIVE
This prospectus describes the Flexible Premium Joint and Last Survivor 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 6
Investment Funds listed below which are offered through our Separate Account.
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.
General American Capital Company:
Advisor: Conning Asset Management Company
Money Market Fund
Russell Insurance Funds:
Advisor: Frank Russell Investment
Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Joint
and Last Survivor 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: May 1, 2000
<PAGE>
TABLE OF CONTENTS Page
SPECIAL TERMS 3
SUMMARY 4
The Variable Life Insurance Policy 4
Purchases 4
Investment Choices 4
Expenses 4
Death Benefit 6
Taxes 6
Access to Your Money 6
Other Information 6
Inquiries 7
PART I 8
1. THE VARIABLE LIFE INSURANCE POLICY 8
2. PURCHASES 8
Application for a Policy 8
Premiums 8
Unscheduled Premiums 8
Lapse and Grace Period 8
Reinstatement 9
Allocation of Premium 9
Accumulation Account Value of Your Policy 9
Method of Determining Accumulation Account Value
of an Investment Fund 9
Net Investment Factor 10
Our Right to Reject or Return a Premium Payment 10
3. INVESTMENT FUNDS 10
Substitution and Limitations on Further Investments 11
Transfers 11
Dollar Cost Averaging 11
Portfolio Rebalancing 11
Approved Asset Allocation Programs 12
4. EXPENSES 12
Tax Charges 12
Sales Charge 12
Selection and Issue Expense Charge 12
Monthly Policy Charge 13
Monthly Cost of Insurance Charge 13
Charges for Additional Benefit Riders 13
Mortality and Expense Risk Charge 13
Surrender Charge 14
Transaction Charges 14
Investment Fund Expenses 14
5. DEATH BENEFIT 14
Change of Death Benefit 15
Decrease in Face Amount 15
6. TAXES 15
Life Insurance in General 16
Taking Money Out of Your Policy 16
Diversification 16
7. ACCESS TO YOUR MONEY 16
Policy Loans 16
Loan Interest Charged 17
Security 17
Repaying Policy Debt 17
Partial Withdrawals 17
Pro-Rata Surrender 18
Full Surrenders 18
8. OTHER INFORMATION 18
Cova 18
Distribution 18
The Separate Account 19
Suspension of Payments or Transfers 19
Ownership 19
Adjustment of Charges 19
PART II 20
Executive Officers and Directors 20
Voting 22
Disregard of Voting Instructions 22
Legal Opinions 22
Our Right to Contest 22
Additional Benefits 22
Federal Tax Status 23
Introduction 23
Diversification 23
Tax Treatment of the Policy 24
Policy Proceeds 24
Tax Treatment of Loans and Surrenders 24
Multiple Policies 25
Tax Treatment of Assignments 25
Qualified Plans 25
Income Tax Withholding 25
Reports to Owners 25
Legal Proceedings 25
Experts 25
Financial Statements 25
APPENDIX
Illustration of Policy Values A-1
<PAGE>
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 an 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 Last 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 younger 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.
Insureds -- The persons whose lives are 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 each 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.
Last Insured -- The Insured whose death succeeds the death of all other Insureds
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 joint and last survivor 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
Insureds' joint 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.
<PAGE>
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 both of the persons 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
Insureds are the persons you choose to have their lives insured under the
Policy. You, the Owner, can also be one of the Insureds, but you do not have to
be.
The Policy described in this prospectus is a flexible premium joint and last
survivor 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 either 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 Last 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 $100,000.
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 Insureds. We may require each of the
Insureds to provide us with medical records, a 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. 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 Insureds.
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 Insureds, 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:
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Annual
Management Fees Fund Expenses
(after reimbursement (after reimbursement
Investment Funds and/or waivers as noted) Other Fund Expenses and/or waivers as noted)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General American Capital Company
Advisor: Conning Asset Management Company
Money Market Fund 0.125% 0.08% 0.205%
------------------------------------------------------------------------------------------------------------------------------------
Russell Insurance Funds*
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund 0.77% 0.15% 0.92%
Aggressive Equity Fund 0.86% 0.39% 1.25%
Non-U.S. Fund 0.75% 0.55% 1.30%
Real Estate Securities Fund 0.85% 0.30% 1.15%
Core Bond Fund 0.54% 0.26% 0.80%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
*The manager of Russell Insurance Funds, Frank Russell Investment Management
Company, has contractually agreed to waive, at least until April 30, 2001, a
portion of the management fee, up to the full amount of that fee, equal to the
amount by which the Fund's total operating expenses exceed the amounts set forth
above under "Total Annual Fund Expenses" and to reimburse the Fund for all
remaining expenses, after fee waivers which exceed the amount set forth above
for each Fund under "Total Annual Fund Expenses." Absent such waiver and
reimbursement, the management fees and total operating expenses would be .78%
and .93% for the Multi-Style Equity Fund; .95% and 1.34% for the Aggressive
Equity Fund; .95% and 1.50% for the Non-U.S. Fund; and .60% and .86% for the
Core Bond Fund.
<PAGE>
o Deductions for surrenders, partial withdrawals and transfers.
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 Last 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 Last 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
on the date of the Last Insured's death, 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 on the date of the
Last Insured's death multiplied by an Attained Age factor.
So long as the Policy remains in force, prior to the younger 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
decrease 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 591/2 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 either Insured
and we will pay you the Cash Surrender Value of your Policy. At any time during
either of the Insureds' lifetimes 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 any
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 one of the
Insureds, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of one of the Insureds.
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 Office:
Cova Financial Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
(800) 357-4419
<PAGE>
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 Insureds. 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 both of the
Insureds die, 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 both of the proposed Insureds. In some cases, we will
ask for additional information. We may request that the proposed Insureds
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 Insureds 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 Last 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 both of the Insureds are still
insurable at the risk class that applies for the latest Face Amount portion
then in effect (if only one Insured is alive on the date the Policy lapsed,
you need only submit proof for the living Insured);
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 an Insured who
was living at the time of lapse 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 6 Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of two
open-end, diversified management investment companies: General American Capital
Company and Russell Insurance Funds.
Purchasers should read this prospectus and the prospectuses for the above listed
investment companies carefully before investing.
The following is a list of the Investment Funds and investment managers
available under the Policy:
GENERAL AMERICAN CAPITAL COMPANY
Advisor: Conning Asset Management Company
Money Market Fund
RUSSELL INSURANCE FUNDS
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond 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 Investment Funds have the same
advisers.
A Fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments,
non-investment grade debt securities, initial public offerings (IPOs) or
companies with relatively small market capitalizations. IPOs and other
investment techniques may have a magnified performance impact on a Fund with a
small asset base. A Fund may not experience similar performance as its assets
grow.
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.
<PAGE>
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.
Dollar cost averaging may be selected by completing the proper forms. 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 currently is 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 Insureds.
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 both Insureds and the
fact that the death benefit is not payable until the death of the Last 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 Insureds at issue. The monthly cost
of insurance rates generally increase as the Insureds' Attained Ages increase.
The rate class of the Insureds 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 Insureds 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 Ages of the
Insureds. Higher rates apply if either 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 Funds 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 the Last Insured's
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 the Last
Insured's death multiplied by the applicable multiple percentage shown in
the "Applicable Percentage of Accumulation Account Value Table For Younger
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 the Last Insured's death; or
o the Accumulation Account Value of your Policy on the date of the Last
Insured's death multiplied by the applicable multiple percentage shown in
the "Applicable Percentage of Accumulation Account Value Table For Younger
Insureds Less than Age 100" shown below.
Applicable Percentage of Accumulation Account Value Table
For Younger Insureds Less Than Age 100
Younger Insured Policy Accumulation Account
Person's Age Value 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 in 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 Last
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 younger 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.
Decrease in Face Amount
Subject to certain limitations set forth below, you may decrease (but not
increase) the Face Amount of a Policy once each Policy year after the first
Policy year. A written request is required for a reduction in the Face Amount. A
reduction 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 decrease 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.
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 Last 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 59 1/2; (2) paid if the taxpayer becomes totally disabled (as that
term is defined in the Code); or (3) in a series of substantially equal payments
made annually (or more frequently) for the life (or life expectancy) of the
taxpayer.
If 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 either 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 Cash 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 Last 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:
a) $500 from an Investment Fund or the General Account; or
b) 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 for a partial withdrawal is 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 Last 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 January 6, 2000,
Metropolitan Life Insurance Company (MetLife) acquired GenAmerica Corporation,
the ultimate parent company of Cova Financial Services Life Insurance Company
(Cova Life), the parent company of Cova. The acquisition of GenAmerica
Corporation does not affect policy benefits or any other terms or conditions
under your policy. MetLife, headquartered in New York City since 1868, is a
leading provider of insurance and financial products and services to individual
and group customers.
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.
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 Insureds jointly are 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 one or both of the Insureds, 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 Last Insured. Unless an irrevocable Beneficiary has been named, you
can change the Beneficiary at any time before the Last 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.
<PAGE>
PART II
<TABLE>
<CAPTION>
Executive Officers and Directors
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
Principal Occupation During
Name the Past 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.
James W. Koeger** Assistant Treasurer of Cova.
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 June, 2000; Chairman of
the Board and Chief Executive Officer of General American Life Insurance Company - May, 1992 to present, prior
thereto, Chairman of the Board, President and Chief Executive Officer of General American - May, 1992 to
February, 2000; 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; 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 and CLMC since July, 1999.
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.
Patricia M. Wersching** Assistant Treasurer of Cova.
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.
* 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
</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 lifetime of either Insured for two years. If
the Policy is reinstated, the two-year period is measured from the date of
reinstatement. In addition, if either 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.
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.
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 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.
Divorce Split Rider -- This rider allows the Policy to be split into two
separate policies in the event of the divorce of a married couple who are the
Insureds under the Policy. The exercise of this option to split the Policy may,
under certain circumstances, result in adverse tax consequences. Please consult
your tax adviser before exercising any options under this rider.
Split Policy Option Rider -- This rider allows the Policy to be split into two
separate policies in the event there are changes in the Federal Estate Tax Law
resulting in the removal of the unlimited marital deductions or reduction of at
least 50% in the level of estate taxes payable on the death of the last Insured.
The exercise of this option to split the Policy may, under certain
circumstances, result in adverse tax consequences. Please consult your tax
adviser before exercising any options under this rider.
Estate Preservation Term Rider -- This rider provides joint level term
insurance, payable at the death of the Last Insured, for a period of four years
from the date of the rider.
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 that the amount of mortality and other expense charges be reasonable.
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, 1999 and 1998, 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, 1999 and the statement of
assets and liabilities of the Separate Account as of December 31, 1999, and the
related statements of operations and changes in net assets for the period from
commencement of operations through December 31, 1999, 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
Financial Statements
December 31, 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Cova Variable
Life Account Five, Board of Directors
and Shareholder of Cova Financial Life
Insurance Company:
We have audited the accompanying statement of assets and liabilities of each of
the sub-accounts comprising Cova Variable Life Account Five of Cova Financial
Life Insurance Company (the Separate Account), as of December 31, 1999, and the
related statements of operations and changes in net assets for the year then
ended. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
transfer agents. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts of Cova
Variable Life Account Five of Cova Financial Life Insurance Company as of
December 31, 1999, and the results of their operations and the changes in their
net assets for the year then ended, in conformity with generally accepted
accounting principles.
Chicago, Illinois
March 20, 2000
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Cova):
<S> <C> <C> <C>
Lord Abbett Growth and Income Portfolio 8,901 shares at a net asset value of $24.070563 per share $214,245
Bond Debenture Portfolio 8,713 shares at a net asset value of $12.474609 per share 108,696
Developing Growth Portfolio 8 shares at a net asset value of $14.885144 per share 113
Large Cap Research Portfolio 7,812 shares at a net asset value of $14.991245 per share 117,113
Mid-Cap Value Portfolio 5,439 shares at a net asset value of $11.168093 per share 60,745
Quality Bond Portfolio 9 shares at a net asset value of $10.669328 per share 100
Small Cap Stock Portfolio 7,608 shares at a net asset value of $17.268582 per share 131,374
Large Cap Stock Portfolio 21,786 shares at a net asset value of $20.674865 per share 450,417
Select Equity Portfolio 8,640 shares at a net asset value of $16.112437 per share 139,209
International Equity Portfolio 7,466 shares at a net asset value of $16.225039 per share 121,140
AIM Variable Insurance Funds, Inc. (AIM):
AIM V.I. Value Fund 1,900 shares at a net asset value of $33.50 per share 63,660
AIM V.I. Capital Appreciation Fund 764 shares at a net asset value of $35.58 per share 27,171
General American Capital Company (GACC):
Money Market Fund 15,680 shares at a net asset value of $20.252283 per share 317,557
Templeton Variable Products Series
Fund (Templeton):
Templeton Bond Fund 10 shares at a net asset value of $9.99 per share 100
Franklin Small Cap Investments Fund 9 shares at a net asset value of $15.79 per share 141
Templeton Stock Fund 5 shares at a net asset value of $24.39 per share 110
Templeton International Fund 5 shares at a net asset value of $22.25 per share 108
Franklin Growth Investments Fund 7 shares at a net asset value of $16.70 per share 123
------------
Total assets $1,752,122
============
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
Single premium variable life policies (SPVL):
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income 17,211 accumulation units at $12.448204 per unit $214,245
Cova Bond Debenture 10,240 accumulation units at $10.614338 per unit 108,696
Cova Developing Growth 9 accumulation units at $13.050371 per unit 113
Cova Large Cap Research 8,504 accumulation units at $13.771430 per unit 117,113
Cova Mid-Cap Value 6,003 accumulation units at $10.119059 per unit 60,745
Cova Quality Bond 9 accumulation units at $10.551764 per unit 100
Cova Small Cap Stock 10,224 accumulation units at $12.850204 per unit 131,374
Cova Large Cap Stock 31,535 accumulation units at $14.283064 per unit 450,417
Cova Select Equity 11,048 accumulation units at $12.600289 per unit 139,209
Cova International Equity 8,926 accumulation units at $13.571289 per unit 121,140
AIM V.I. Value 5,407 accumulation units at $11.774189 per unit 63,660
AIM V.I. Capital Appreciation 1,951 accumulation units at $13.925402 per unit 27,171
GACC Money Market 28,826 accumulation units at $11.013039 per unit 317,457
Templeton Bond 10 accumulation units at $9.970060 per unit 100
Franklin Small Cap Investments 10 accumulation units at $14.136079 per unit 141
Templeton Stock 10 accumulation units at $11.011283 per unit 110
Templeton International 10 accumulation units at $10.827249 per unit 108
Franklin Growth Investments 10 accumulation units at $12.333825 per unit 123
------------
1,752,022
Flexible premium variable universal life policies (FPVUL):
GACC Money Market 10 accumulation units at $10.047103 per unit 100
------------
Total net assets $1,752,122
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - 242 - 156 78 1 213
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (50) 2 - (13) (46) - 77
Realized gain distributions - 78 - - - 1 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) (50) 80 - (13) (46) 1 77
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 6,603 3,326 13 10,702 (3,648) - 34,864
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
------------------------------------ ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 329 275 415 110 18 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (116) (167) 31 6 17 6,140 -
Realized gain distributions 7,182 9,317 1,110 575 558 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets from operations $ 23,427 (879) 18,444 4,760 7,201 9,865 -
========== =========== ============ =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
-------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - 1,837
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares - - - - 5,881
Realized gain distributions - - - - 18,821
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) - - - - 24,702
----------- ----------- -------------- ------------- -----------
Change in unrealized appreciation 41 10 8 23 88,221
----------- ----------- -------------- ------------- -----------
Net increase (decrease) in net
assets from operations $ 41 10 8 23 114,760
=========== =========== ============== ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - 242 - 156 78 1 213
Net realized gain (loss) (50) 80 - (13) (46) 1 77
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 6,603 3,326 13 10,702 (3,648) - 34,864
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 100 100
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 209,709 105,997 - 107,473 65,008 - 97,560
Transfers for contract benefits,
terminations and insurance charges (2,167) (727) - (1,162) (715) - (1,150)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 207,642 105,370 100 106,411 64,393 100 96,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 214,245 108,696 113 117,113 60,745 100 131,374
Net assets at beginning of period - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 214,245 108,696 113 117,113 60,745 100 131,374
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
-------------------------------------- ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
----------- ---------- ------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 329 275 415 110 18 - -
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
Net increase (decrease) from ----------- ---------- ------------- ----------- ------------ ----------- -----------
operations 23,427 (879) 18,444 4,760 7,201 9,865 -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 300 100
Cova redemptions - - - - - (102) -
Payments received from contract
owners - - - - - 1,654,000 -
Transfers between sub-accounts, net 430,747 141,193 103,808 59,046 20,004 (1,340,545) -
Transfers for contract benefits,
terminations and insurance charges (3,857) (1,205) (1,212) (246) (134) (5,961) -
Net increase (decrease) in net
assets from contract ----------- ---------- ------------- ----------- ------------ ----------- -----------
transactions 426,990 140,088 102,696 58,900 19,970 307,692 100
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets 450,417 139,209 121,140 63,660 27,171 317,557 100
Net assets at beginning of period - - - - - - -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net assets at end of period $ 450,417 139,209 121,140 63,660 27,171 317,557 100
=========== ========== ============= =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
---------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
-------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - - - - 1,837
Net realized gain (loss) - - - - 24,702
Change in unrealized appreciation 41 10 8 23 88,221
Net increase (decrease) from -------------- ----------- ------------- ------------- -----------
operations 41 10 8 23 114,760
-------------- ----------- ------------- ------------- -----------
Contract transactions:
Cova payments 100 100 100 100 2,000
Cova redemptions - - - - (102)
Payments received from contract
owners - - - - 1,654,000
Transfers between sub-accounts, net - - - - -
Transfers for contract benefits,
terminations and insurance charges - - - - (18,536)
Net increase (decrease) in net
assets from contract -------------- ----------- ------------- ------------- -----------
transactions 100 100 100 100 1,637,362
-------------- ----------- ------------- ------------- -----------
Net increase (decrease) in net
assets 141 110 108 123 1,752,122
Net assets at beginning of period - - - - -
-------------- ----------- ------------- ------------- -----------
Net assets at end of period $ 141 110 108 123 1,752,122
============== =========== ============= ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(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
(CFLIC) and exists in accordance with the regulations of the California
Department of Insurance. The Separate Account is a funding vehicle for
single premium variable life (SPVL) and flexible premium variable
universal life insurance policies (FPVUL) offered by CFLIC.
On August 26, 1999, CFLIC's ultimate parent company, GenAmerica
Corporation, entered into a definitive agreement to be acquired by
Metropolitan Life Insurance Company. The acquisition occurred on
January 6, 2000.
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 by
CFLIC.
<TABLE>
<S> <C>
Cova Series Trust (Cova) 10 portfolios
General American Capital Company (GACC) 1 portfolios
Russell Insurance Funds (Russell) 5 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 3 portfolios
Alliance Variable Products Series Fund, Inc. (Alliance) 2 portfolios
Liberty Variable Investment Trust (Liberty) 1 portfolios
Goldman Sachs Variable Insurance Trust (Goldman Sachs) 3 portfolios
Investors Fund Series (Kemper) 3 portfolios
MFS Variable Insurance Trust (MFS) 5 portfolios
Oppenheimer Variable Account Funds (Oppenheimer) 5 portfolios
Putnam Variable Trust (Putnam) 5 portfolios
Templeton Variable Products Series Fund (Templeton) 7 portfolios
</TABLE>
<TABLE>
<CAPTION>
The Separate Account commenced operations on March 1, 1999. The
sub-accounts commenced operations as follows:
<S> <C>
Cova Lord Abbett Growth and Income April 29, 1999
Cova Bond Debenture April 29, 1999
Cova Developing Growth July 17, 1999
Cova Large Cap Research July 12, 1999
Cova Mid-Cap Value July 12, 1999
Cova Quality Bond July 19, 1999
Cova Small Cap Stock April 29, 1999
Cova Large Cap Stock April 29, 1999
Cova Select Equity June 29, 1999
Cova International Equity May 4, 1999
AIM V.I. Value May 3, 1999
AIM V.I. Capital Appreciation May 3, 1999
GACC Money Market March 1, 1999
Templeton Bond July 19, 1999
Franklin Small Cap Investments July 19, 1999
Templeton Stock July 19, 1999
Templeton International July 19, 1999
Franklin Growth Investments July 19, 1999
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(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 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 portfolios.
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 CFLIC which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, CFLIC 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 FEES
There are fees associated with the variable life insurance
policies that are deducted from the policy account value and
Separate Account that reduce the return on investment. The type,
amount, and timing of the fees may vary between the variable life
policies offered by CFLIC and include mortality and expense risk,
administrative, selection and issue expense, cost of insurance,
tax expense (premium and federal taxes), contingent deferred sales
(surrender) and transfer charges.
(4) SEPARATE ACCOUNT EXPENSES
The mortality and expense fees for FPVUL policies are deducted
from the separate account and are reflected in the accumulation
unit value. There were no fees incurred in 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(5) COST BASIS OF INVESTMENTS
The cost basis of each sub-account's investment follows:
Cova Lord Abbett Growth and Income $ 207,592
Cova Bond Debenture 105,692
Cova Developing Growth 100
Cova Large Cap Research 106,554
Cova Mid-Cap Value 64,425
Cova Quality Bond 102
Cova Small Cap Stock 96,800
Cova Large Cap Stock 434,385
Cova Select Equity 149,513
Cova International Equity 104,252
AIM V.I. Value 59,591
AIM V.I. Capital Appreciation 20,563
GACC Money Market 313,832
Templeton Bond 100
Franklin Small Cap Investments 100
Templeton Stock 100
Templeton International 100
Franklin Growth Investments 100
----------
$ 1,663,901
==========
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(6) UNIT FAIR VALUE
A summary of the total return for each sub-account follows:
Commenced Total
Operations Return
--------------- ------------
SPVL policies:
<S> <C> <C>
Cova Lord Abbett Growth and Income 4/29/99 4.60%
Cova Bond Debenture 4/29/99 0.70%
Cova Developing Growth 7/17/99 12.75%
Cova Large Cap Research 7/12/99 9.95%
Cova Mid-Cap Value 7/12/99 -5.60%
Cova Quality Bond 7/19/99 -0.23%
Cova Small Cap Stock 4/29/99 44.89%
Cova Large Cap Stock 4/29/99 6.90%
Cova Select Equity 6/29/99 -0.35%
Cova International Equity 5/4/99 20.84%
AIM V.I. Value 5/3/99 17.74%
AIM V.I. Capital Appreciation 5/3/99 28.36%
GACC Money Market 3/1/99 4.34%
Templeton Bond 7/19/99 -0.30%
Franklin Small Cap Investments 7/19/99 41.36%
Templeton Stock 7/19/99 10.11%
Templeton International 7/19/99 8.27%
Franklin Growth Investments 7/19/99 23.34%
FPVUL policies:
GACC Money Market 11/29/99 0.47%
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) 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 period ended
December 31, 1999 follows:
Realized Gain (Loss)
----------------------------------------------------------------
Aggregate Aggregate Cost
Proceeds from Sales of Portfolio Shares Realized
of Portfolio Shares Redeemed Gain (Loss)
--------------------- --------------------- --------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 1,940 $ 1,990 $ (50)
Cova Bond Debenture 727 725 2
Cova Developing Growth - - -
Cova Large Cap Research 1,159 1,172 (13)
Cova Mid-Cap Value 715 761 (46)
Cova Quality Bond - - -
Cova Small Cap Stock 1,150 1,073 77
Cova Large Cap Stock 3,539 3,655 (116)
Cova Select Equity 1,195 1,362 (167)
Cova International Equity 1,062 1,031 31
AIM V.I. Value 246 240 6
AIM V.I. Capital Appreciation 134 117 17
GACC Money Market 1,342,862 1,336,722 6,140
Templeton Bond - - -
Franklin Small Cap Investments - - -
Templeton Stock - - -
Templeton International - - -
Franklin Growth Investments - - -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION, CONTINUED
Unrealized Appreciation (Depreciation)
----------------------------------------------------------------
Appreciation Appreciation
(Depreciation) (Depreciation)
End of Period Beginning of Period Change
----------------- ------------------------ -------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 6,653 $ - $ 6,653
Cova Bond Debenture 3,004 - 3,004
Cova Developing Growth 13 - 13
Cova Large Cap Research 10,559 - 10,559
Cova Mid-Cap Value (3,680) - (3,680)
Cova Quality Bond (2) - (2)
Cova Small Cap Stock 34,574 - 34,574
Cova Large Cap Stock 16,032 - 16,032
Cova Select Equity (10,304) - (10,304)
Cova International Equity 16,888 - 16,888
AIM V.I. Value 4,069 - 4,069
AIM V.I. Capital Appreciation 6,608 - 6,608
GACC Money Market 3,725 - 3,725
Templeton Bond - - -
Franklin Small Cap Investments 41 - 41
Templeton Stock 10 - 10
Templeton International 8 - 8
Franklin Growth Investments 23 - 23
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS
The change in the number of units for each sub-account follows:
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 8 9 9 8 9 9 10
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net 17,386 10,301 - 8,590 6,065 - 10,327
Contract units redeemed (183) (70) - (94) (71) - (113)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/99 17,211 10,240 9 8,504 6,003 9 10,224
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Cova AIM GACC Templeton
------------------------------------ -------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 7 8 8 9 9 19 10
Cova units redeemed - - - - - (10) -
Contract units purchased - - - - - 155,502 -
Contract units transferred, net 31,815 11,141 9,019 5,421 1,954 (124,311) -
Contract units redeemed (287) (101) (101) (23) (12) (2,374) -
---------- ----------- ------------ ----------- ------------- ----------- -----------
Unit balance at 12/31/99 31,535 11,048 8,926 5,407 1,951 28,826 10
========== =========== ============ =========== ============= =========== ===========
FPVUL policies:
Unit balance at 12/31/98 -
Cova units purchased 10
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/99 10
===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Templeton
------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments
-------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - -
Cova units purchased 10 10 10 10
Cova units redeemed - - - -
Contract units purchased - - - -
Contract units transferred, net - - - -
Contract units redeemed - - - -
-------------- ----------- --------------- --------------
Unit balance at 12/31/99 10 10 10 10
============== =========== =============== ==============
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services
Life Insurance Company)
Financial Statements
December 31, 1999, 1998, and 1997
(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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
February 4, 2000
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- -----------
(in thousands)
Investments:
<S> <C> <C>
Debt securities available-for-sale, at fair value
(cost of $101,690 in 1999 and $99,228 in 1998) $ 95,568 100,658
Mortgage loans, net of allowance for potential loan
loss of $40 in 1999 and $10 in 1998 5,439 5,245
Policy loans 938 1,223
----------- -----------
Total investments 101,945 107,126
Cash and cash equivalents - interest-bearing 751 5,789
Cash - noninterest-bearing 1,448 1,200
Accrued investment income 1,624 1,641
Deferred policy acquisition costs 15,093 9,142
Present value of future profits 1,740 854
Goodwill 1,631 1,813
Deferred tax asset, net 1,232 585
Receivable from OakRe 18,890 35,312
Federal and state income taxes recoverable 75 --
Reinsurance receivables 9 118
Other assets 24 398
Separate account assets 186,040 127,873
----------- -----------
Total assets $ 330,502 291,851
=========== ===========
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Policyholder deposits $ 116,184 135,106
Future policy benefits 6,707 6,191
Payable on purchase of securities 85 27
Accounts payable and other liabilities 1,589 1,653
Federal and state income taxes payable -- 172
Future purchase price payable to OakRe 172 342
Guaranty fund assessments 1,100 1,000
Separate account liabilities 186,035 127,871
----------- -----------
Total liabilities 311,872 272,362
----------- -----------
Shareholder's equity:
Common stock, $233.34 par value, (authorized
30,000 shares; issued and outstanding
12,000 shares in 1999 and 1998) 2,800 2,800
Additional paid-in capital 15,523 14,523
Retained earnings 1,993 1,833
Accumulated other comprehensive (loss) income,
net of tax (1,686) 333
----------- -----------
Total shareholder's equity 18,630 19,489
----------- -----------
Total liabilities and shareholder's equity $ 330,502 291,851
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
(in thousands)
Revenues:
<S> <C> <C> <C>
Premiums $ 1,041 1,308 1,191
Net investment income 7,663 7,516 6,761
Net realized (losses) gains on sales of
investments (452) 178 158
Separate account fees 2,215 1,392 599
Other income 382 66 45
----------- ---------- -----------
Total revenues 10,849 10,460 8,754
----------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 6,064 5,486 4,837
Current and future policy benefits 1,479 1,549 1,481
Operating and other expenses 2,336 1,548 1,134
Amortization of purchased intangible
assets 233 260 234
Amortization of deferred policy
acquisition costs 383 530 320
----------- ---------- -----------
Total benefits and expenses 10,495 9,373 8,006
----------- ---------- -----------
Income before income taxes 354 1,087 748
----------- ---------- -----------
Income tax expense (benefit):
Current (246) (80) 310
Deferred 440 357 (5)
----------- ---------- -----------
Total income tax expense 194 277 305
----------- ---------- -----------
Net income $ 160 810 443
=========== ========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(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 14,523 13,523 13,523
Capital contribution 1,000 1,000 --
---------- ----------- ----------
Balance at end of period 15,523 14,523 13,523
---------- ----------- ----------
Retained earnings:
Balance at beginning of period 1,833 1,023 580
Net income 160 810 443
---------- ----------- ----------
Balance at end of period 1,993 1,833 1,023
---------- ----------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 333 145 1
Change in unrealized (depreciation) appreciation
of debt securities (7,552) 794 630
Deferred federal income tax impact 1,087 (101) (77)
Change in deferred policy acquisition costs
attributable to unrealized depreciation (appreciation) 3,519 (513) (144)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 927 8 (265)
---------- ----------- ----------
Balance at end of period (1,686) 333 145
---------- ----------- ----------
Total shareholder's equity $ 18,630 19,489 17,491
========== =========== ==========
Total comprehensive income:
Net income $ 160 810 443
Other comprehensive (loss) income (change in net unrealized
(depreciation) appreciation of debt and equity securities) (2,019) 188 144
---------- ----------- ----------
Total comprehensive (loss) income $ (1,859) 998 587
========== =========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 160 810 443
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Increase in future policy benefits 516 810 820
Increase (decrease) in payables and
accrued liabilities 94 126 (815)
Decrease (increase) in accrued
investment income 17 185 (704)
Amortization of intangible assets and
deferred policy acquisition costs 616 790 554
Amortization and accretion of
securities, premiums, and discounts (7) (87) (10)
Decrease (increase) in other assets 374 (384) 30
Net realized loss (gain) on sale of investments 452 (178) (158)
Interest on policyholder deposits 6,064 5,486 4,837
(Decrease) increase in current and
deferred federal income taxes 193 423 101
Decrease in recapture commissions payable to OakRe (170) (223) (159)
Commissions and expenses deferred (2,815) (3,411) (3,917)
Other 499 702 290
----------- ----------- -----------
Net cash provided by operating activities 5,993 5,049 1,312
----------- ----------- -----------
Cash flows from investing activities:
Cash used in the purchase of
investment securities (29,365) (56,673) (53,534)
Proceeds from investment securities
sold and matured 26,689 50,661 25,379
Other (128) (121) (81)
----------- ----------- -----------
Net cash used in investing activities (2,804) (6,133) (28,236)
----------- ----------- -----------
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 55,181 69,459 81,788
Transfers from OakRe 19,050 35,590 25,060
Transfer to separate accounts (36,544) (60,181) (56,144)
Return of policyholder deposits (46,666) (39,943) (28,267)
Capital contributions received 1,000 1,000 --
----------- ----------- -----------
Net cash (used) provided by financing activities (7,979) 5,925 22,437
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (4,790) 4,841 (4,487)
Cash and cash equivalents - beginning of period 6,989 2,148 6,635
----------- ----------- -----------
Cash and cash equivalents - end of period $ 2,199 6,989 2,148
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(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 by the Company
for periods from one to ten years, but in no case may renewal
rates be less than 3%. The Company may assess surrender fees
against amounts withdrawn prior to scheduled rate reset and adjust
account values based on current crediting rates. Policyholders
also may incur certain federal income tax penalties on
withdrawals.
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 94%, 97%, and 85% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated, and Edward Jones & Company,
Incorporated, in 1999, 1998, and 1997, respectively.
<PAGE>
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial
Services Life Insurance Company (CFSLIC). CFSLIC is a wholly owned
subsidiary of Cova Corporation, which is a wholly owned subsidiary
of General American Life Insurance Company (GALIC), a Missouri
domiciled life insurance company. GALIC is a wholly owned
subsidiary of GenAmerica Corporation, which in turn is a wholly
owned by the ultimate parent, General American Mutual Holding
Company (GAMHC).
On August 26, 1999, GAMHC entered into a definitive agreement
whereby Metropolitan Life Insurance Company (MetLife), a New York
domiciled life insurance company, will acquire GenAmerica
Corporation and all its holdings for $1.2 billion in cash. The
purchase was approved by the Missouri Director of Insurance on
November 10, 1999. The purchase, however, was not consummated as
of December 31, 1999 and as a result, these financial statements
do not reflect purchase accounting treatment of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP)
and include the accounts and operations of the Company. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported. Actual results could differ from these
estimates.
DEBT SECURITIES
Investments in all debt securities with readily determinable
market values are classified into one of three categories:
held-to-maturity, trading, or available-for-sale. Classification
of investments is based on management's current intent. All debt
securities at December 31, 1999 and 1998 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 in the 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.
<PAGE>
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 $40,000 and $10,000, at
December 31, 1999 and 1998, 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, 1999 and 1998, is presented in note 3.
<PAGE>
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. The Company sets a
limit on the deferral of acquisition costs incurred from internal
marketing and wholesaling operations in any year at 1% to 1.5% of
premiums and deposits receipts, varying according to specific
product. This limit is based on typical market rates of
independent marketing service and wholesaling organizations. This
practice also avoids possible deferral of costs in excess of
amounts recoverable.
The costs deferred 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 component 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.
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period
$ 9,142 6,774 3,321
Commissions and expenses deferred 2,815 3,411 3,917
Amortization (383) (530) (320)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) 3,519 (513) (144)
------------ ------------ ------------
Deferred policy acquisition costs, end
of period $ 15,093 9,142 6,774
============ ============ ============
Costs expensed that exceeded the established deferred
limit $ 382 231 6
=========== ============ =============
</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
date the Company was purchased by GALIC.
<PAGE>
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
single premium deferred annuity (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 5.5%, 4.9%, 4.5%, 4.2%, and
4.2% for the years ended December 31, 2000 through 2004,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results. The average crediting rate on the original
in-force PVFP asset is 6.4% for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
The components of PVFP are shown below:
1999 1998 1997
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 854 900 1,178
Interest credited 62 66 69
Amortization (103) (120) (82)
PVFP attributable to unrealized
depreciation (appreciation) 927 8 (265)
------------ ---------- ------------
PVFP - end of period $ 1,740 854 900
============ ========== ============
</TABLE>
<PAGE>
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:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 1,813 1,923 2,034
Amortization (111) (110) (111)
Experience adjustment to future purchase price
payable to OakRe (71) -- --
------------ ------------ ------------
Goodwill - end of period $ 1,631 1,813 1,923
============ ============ ============
</TABLE>
Future Payable
Pursuant to the financial reinsurance agreement with OakRe,
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.
<PAGE>
<TABLE>
<CAPTION>
The components of this future payable are shown below:
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 342 565 683
Interest added 20 29 41
Payment to Oak Re (119) (252) (159)
Experience adjustment to future purchase price payable
to OakRe (71) -- --
---------- ---------- ----------
Future payable - end of period $ 172 342 565
========== ========== ==========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
Xerox Financial Services, Inc. (XFSI) (previous parent of the
company) 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, 1999 was 5.96%.
FUTURE POLICY BENEFITS
Reserves are held for future 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 4.50% to 8.00%, 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.
<PAGE>
OTHER INCOME
Other income consists primarily of policy surrender charges.
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.
COMPREHENSIVE INCOME
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 has no impact on the Company's
consolidated net income or shareholder's equity. The Company's
only component of accumulated other comprehensive income relates
to unrealized appreciation and depreciation on debt and equity
securities held as available-for-sale.
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.
<PAGE>
The amortization of deferred policy 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, 1999.
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.
<PAGE>
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, 1999 and 1998, the cash
surrender value of policyholder deposits was $4,058,740 and
$4,707,689, 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 parent GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective July 25, 1999, the Company entered into a modified
coinsurance reinsurance agreement with Metropolitan Life Insurance
Company (MetLife). Under the reinsurance agreement, the Company
ceded life insurance and annuity business that was issued or
renewed from July 25, 1999 through December 31, 1999 to MetLife
amounting to $15 million. Net earnings to MetLife from that
business are experience refunded to the Company. The agreement
does not meet the conditions for reinsurance accounting under
GAAP. In substance, the agreement represents a guarantee by
MetLife of new business and renewed SPDA business during this
period. There was no impact on the Company's financial statements
resulting from the reinsurance transaction with MetLife.
On June 1, 1995, when Cova Corporation purchased the Company, then
known as Xerox Financial Life Insurance Company (XFLIC), from
XFSI, a wholly owned subsidiary of Xerox Corporation, it entered
into a financing reinsurance transaction with OakRe Life Insurance
Company (OakRe), then a subsidiary of XFLIC, for OakRe to assume
the economic benefits and risks of the existing SPDA deposits of
XFLIC. Ownership of OakRe was retained by XFSI subsequent to the
sale of XFLIC and other affiliates.
<PAGE>
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.
The financing reinsurance agreement entered into with OakRe as
condition to the purchase of the Company does not meet the
criteria for reinsurance accounting under GAAP. The net assets
initially transferred to OakRe were established as a receivable
and are subsequently increased as interest accrued on the
underlying deposits and decrease as funds are transferred back to
the Company when policies reach their crediting rate reset date or
benefits are claimed. 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 mid-year 2000, and completely by mid-year
2002. The liquidations transfer cash daily 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 since inception of the
agreement.
The impact of reinsurance on the December 31, 1999 financial
statements is not considered material.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, requires all derivative financial
instruments to be recorded on the balance sheet at estimated fair
value. The Company's present accounting policies applies 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.
The 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.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 defers for one year
the effective date of Statement of SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans
to adopt the provision of SFAS No. 133 effective January 1, 2001.
At this time the Company does not believe it will have a material
effect on the Company's consolidated financial position or results
of operations.
<PAGE>
OTHER
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
(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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
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 $ 1,702 19 -- 1,721 1,721
Corporate securities 76,444 30 (4,756) 71,718 71,718
Mortgage-backed
securities 8,272 1 (202) 8,071 8,071
Asset backed securities 15,272 -- (1,214) 14,058 14,058
--------------- -------------- -------------- -------------- --------------
Total debt securities 101,690 50 (6,172) 95,568 95,568
Mortgage loans (net) 5,439 -- (70) 5,369 5,439
Policy loans 938 -- -- 938 938
--------------- -------------- -------------- -------------- --------------
Total investments $ 108,067 50 (6,242) 101,875 101,945
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 5 -- -- 5 5
=============== ============== ============== ============== ==============
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
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. treasury securities $ 100 1 -- 101 101
Government agency
obligations 3,471 74 -- 3,545 3,545
Corporate securities 70,883 1,384 (406) 71,861 71,861
Mortgage-backed
securities 11,789 87 (32) 11,844 11,844
Asset-backed securities 12,985 349 (27) 13,307 13,307
--------------- -------------- -------------- -------------- --------------
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>
The amortized cost and estimated fair value of debt securities at
December 31, 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>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 3,573 3,573
Due after one year through five years 33,093 31,752
Due after five years through ten years 39,035 35,583
Due after ten years 17,717 16,589
Mortgage-backed securities 8,272 8,071
--------------- ---------------
Total $ 101,690 95,568
=============== ===============
</TABLE>
<PAGE>
At December 31, 1999, approximately 94.2% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 5.8% noninvestment grade debt securities, 5.7%
are rated as BB or its equivalent, and 0.1% are rated B or its
equivalent.
The Company had one impaired debt security, which became nonincome
producing in 1999. The Company had no impaired investments, and all debt
securities were income producing in 1998
<TABLE>
<CAPTION>
The components of investment income, realized gains (losses), and
unrealized appreciation are as follows:
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 7,119 6,928 6,575
Income on cash and cash equivalents 185 305 186
Interest on mortgage loans 401 308 32
Income on policy loans 82 92 83
Miscellaneous interest 1 2 --
------------ ------------- ------------
Total investment income 7,788 7,635 6,876
Investment expenses (125) (119) (115)
------------ ------------- ------------
Net investment income $ 7,663 7,516 6,761
============ ============= ============
Net realized capital (losses) gains -
debt securities $ (452) 178 158
============ ============= ============
Unrealized (depreciation) appreciation is as follows:
Debt securities $ (6,122) 1,430 633
Short-term investments -- -- 3
Effects on deferred acquisition
costs amortization 2,793 (726) (213)
Effects on PVFP amortization 735 (192) (200)
------------ ------------- ------------
Unrealized (depreciation) appreciation
before income tax (2,594) 512 223
Unrealized income tax benefit (expense) 908 (179) (78)
------------ ------------- ------------
Net unrealized appreciation (depreciation) on
investments $ (1,686) 333 145
============ ============= ============
</TABLE>
<PAGE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1999 were $25,986,787. Gross gains of $165,919 and
gross losses of $618,025 were realized on those sales. Included in these
amounts were $25,816 of gross gains and $19,890 of gross losses realized
on the sale of noninvestment grade securities. Net realized losses
include a 1999 impairment adjustment totaling approximately $493,244
related to one debt security held by the Company.
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.
(4) SECURITY GREATER THAN 10% OF SHAREHOLDER'S EQUITY
As of December 31, 1999 and 1998, the Company held the following
individual mortgage loan which exceeded 10% of shareholder's equity:
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Colonial Realty, at carrying value $ 1,998,296 1,997,287
=============== ===============
</TABLE>
<PAGE>
(5) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
The components of comprehensive income are as follows:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 160 810 443
------------ ------------ ------------
Other comprehensive income (loss), before tax -
Unrealized appreciation (depreciation) on
Investments arising during period:
Unrealized (depreciation) appreciation
on investments (7,100) 616 472
Adjustment to deferred acquisition
costs attributable to unrealized
depreciation (appreciation) 3,308 (398) (108)
Adjustment to PVFP attributable to
unrealized depreciation (appreciation) 872 6 (198)
------------ ------------ ------------
Total unrealized (depreciation) appreciation on
investments arising during period (2,920) 224 166
------------ ------------ ------------
Less reclassification adjustments for realized losses (gains) included
in net income:
Adjustment for losses (gains) included in
net realized (losses) gains on sales
of investments 452 (178) (158)
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (211) 115 36
Adjustment for (gains) losses included in
amortization of PVFP (55) (2) 67
------------ ------------ ------------
Total reclassification adjustments for losses (gains)
included in net income 186 (65) (55)
------------ ------------ ------------
Other comprehensive (loss) income, before related income tax
(benefits) expense (3,106) 289 221
Related income tax (benefit) expense (1,087) 101 77
------------ ------------ ------------
Other comprehensive (loss) income, net of tax (2,019) 188 144
------------ ------------ ------------
Comprehensive (loss) income $ (1,859) 998 587
============ ============ ============
</TABLE>
<PAGE>
(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 1999, 1998, and 1997, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1999, CLMC had no retired
employees nor any employees fully eligible for retirement, and had no
disbursements for such benefit commitments. The expense arising from
these allocations is not material.
(7) INCOME TAXES
<TABLE>
<CAPTION>
The Company will file a consolidated federal income tax return with its
immediate parent, CFSLIC. Income taxes are recorded in the statements of
earnings and directly in certain shareholder's equity accounts. Income
tax expense for the years ended December 31 was allocated as follows:
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating income (excluding realized investment gains) $ 179 215 250
Realized investment gains 15 62 55
----------- --------- ---------
Income tax expense included in the statements of
income 194 277 305
Shareholder's equity - change in deferred federal income taxes
related to unrealized (depreciation) appreciation on securities (1,087) 101 77
----------- --------- ---------
Total income tax (benefit) expense $ (893) 378 382
=========== ========= =========
</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:
1999 1998 1997
-------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 124 35.0% $ 380 35.0% $ 262 35.0%
Dividends received deduction - separate
account (115) (32.5) (150) (13.9) -- --
Amortization of intangible assets 39 11.0 39 3.6 39 5.2
Valuation allowance for permanent
impairments 173 48.9 -- -- -- --
Other (27) (7.6) 8 0.8 4 0.5
-------- ---------- -------- ---------- -------- ----------
Total $ 194 54.8% $ 277 25.5% $ 305 40.7%
======== ========== ======== ========== ======== ==========
</TABLE>
<PAGE>
<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, 1999 and 1998 are as follows:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 569 624
Liability for commission on recaptures 60 120
Policy reserves 2,678 2,477
DAC "Proxy Tax" 1,383 1,252
Permanent impairments 173 --
Unrealized depreciation in investments 908 --
Other deferred tax assets 165 (359)
------------ ------------
Total deferred tax assets 5,936 4,114
Valuation allowance (173) --
------------ ------------
Total deferred tax assets, net of valuation allowance 5,763 4,114
------------ ------------
Deferred tax liabilities:
Unrealized appreciation in investments -- 179
PVFP 226 150
Deferred acquisition costs 4,305 3,200
------------ ------------
Total deferred tax liabilities 4,531 3,529
------------ ------------
Net deferred tax asset $ 1,232 585
============ ============
</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. As of
December 31, 1999, the Company has provided a 100% valuation allowance
against the deferred tax asset related to the permanent impairments.
<PAGE>
(8) RELATED-PARTY TRANSACTIONS
On December 31, 1997, Cova Life Management Company (CLMC) and Navisys
Incorporated (Navisys), both affiliated companies, purchased certain
assets of Johnson & Higgins/Kirke Van Orsdel, Inc. (J&H/KVI), an
unaffiliated Delaware corporation, for $2,500,000, and merged them into
Cova Life Administrative Service Company (CLASC), a joint subsidiary of
CLMC and Navisys. Navisys purchased 51% of CLASC, and the remaining 49%
was purchased by CLMC. The purchased assets are the administrative and
service systems and organization that provide the policy service
functions for the Company's life and annuity products. On October 31,
1999, CLMC purchased the remaining 51% interest in CLASC from Navisys
for $1,184,414.
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; Conning
Asset Management, which provides investment advice; and CLASC, which
provides underwriting, policy issuance, claims, and other policy
administration functions. Additionally, a portion of overhead and other
corporate expenses is allocated by the Company's parent, GALIC. Expenses
and fees paid to affiliated companies in 1999, 1998, and 1997 by the
Company were $2,496,782, $1,587,833, and $396,806, 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 at the date of purchase, and shareholder's equity to the net
purchase price.
Statutory accounting does not recognize the purchase method of
accounting.
<PAGE>
<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:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 9,826 10,411
Reconciling items:
Statutory asset valuation reserve 827 1,078
Statutory interest maintenance reserve 187 190
GAAP investment adjustments to fair value (6,122) 1,430
GAAP deferred policy acquisition costs 15,093 9,142
GAAP basis policy reserves (4,480) (4,670)
GAAP deferred federal income taxes (net) 1,232 585
GAAP guarantee assessment adjustment (1,100) (1,000)
GAAP goodwill 1,631 1,813
GAAP present value of future profits 1,740 854
GAAP future purchase price payable (172) (342)
GAAP investment valuation reserves (40) (10)
Other 8 8
------------ ------------
GAAP shareholder's equity $ 18,630 19,489
============ ============
</TABLE>
Statutory net loss for the years ended December 31, 1999, 1998,
and 1997 was $1,478,513, $142,046, and $461,118, 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 2000 will be $702,615, which is 10% of the
Company's December 31, 1999 statutory surplus of $7,026,153.
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,
1999, the Company's Total Adjusted Capital and Authorized Control Level
RBC were $10,653,128 and $1,705,480, 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
1999, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
In November 1999, 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 $1.1 million in
future assessments on insolvencies that occurred before December 31,
1999. 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 $8,000, $33,505, and $460,167 in guaranty
fund assessment in 1999, 1998, and 1997, 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 were not
material.
(11) SUBSEQUENT EVENT
The purchase of GenAmerica Corporation and subsidiary, including the
Company, by MetLife was completed on January 6, 2000. On that date also,
the Company's modified coinsurance agreement with MetLife was suspended
for subsequent new business.
<PAGE>
APPENDIX --
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. In the first example, we chose a husband and wife age 55. In the
second example, we chose a husband and wife age 65. 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 $4,000 for the 55-year-old example and $8,500
for the 65-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 .94%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.49% for these charges) are approximately -1.49%, 4.51% and
10.51%. 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 this 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 Insureds' ages, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,630 1,674 250,000 2,630 1,674 250,000
2 8,610 5,649 4,693 250,000 5,630 4,673 250,000
3 13,241 8,623 7,666 250,000 8,552 7,596 250,000
4 18,103 11,550 10,593 250,000 11,394 10,437 250,000
5 23,208 14,431 13,474 250,000 14,147 13,191 250,000
6 28,568 17,264 16,414 250,000 16,806 15,956 250,000
7 34,196 20,050 19,412 250,000 19,361 18,724 250,000
8 40,106 22,786 22,361 250,000 21,799 21,374 250,000
9 46,312 25,476 25,260 250,000 24,102 23,890 250,000
10 52,827 28,105 28,105 250,000 26,250 26,250 250,000
15 90,630 43,271 43,271 250,000 36,782 36,782 250,000
20 138,877 55,571 55,571 250,000 38,167 38,167 250,000
25 200,454 62,660 62,660 250,000 17,859 17,859 250,000
30 279,043 57,191 57,191 250,000 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,812 1,856 250,000 2,812 1,856 250,000
2 8,610 6,199 5,242 250,000 6,178 5,222 250,000
3 13,241 9,737 8,781 250,000 9,664 8,708 250,000
4 18,103 13,434 12,477 250,000 13,268 12,312 250,000
5 23,208 17,294 16,338 250,000 16,988 16,032 250,000
6 28,568 21,324 20,474 250,000 20,823 19,973 250,000
7 34,196 25,531 24,893 250,000 24,766 24,129 250,000
8 40,106 29,920 29,495 250,000 28,810 28,385 250,000
9 46,312 34,497 34,285 250,000 32,942 32,729 250,000
10 52,827 39,269 39,269 250,000 37,144 37,144 250,000
15 90,630 69,735 69,735 250,000 62,111 62,111 250,000
20 138,877 106,317 106,317 250,000 86,054 86,054 250,000
25 200,454 150,007 150,007 250,000 101,232 101,232 250,000
30 279,043 201,903 201,903 250,000 89,061 89,061 250,000
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,994 2,038 250,000 2,994 2,038 250,000
2 8,610 6,771 5,814 250,000 6,750 5,793 250,000
3 13,241 10,943 9,987 250,000 10,866 9,910 250,000
4 18,103 15,552 14,596 250,000 15,376 14,420 250,000
5 23,208 20,644 19,688 250,000 20,314 19,358 250,000
6 28,568 26,266 25,416 250,000 25,717 24,867 250,000
7 34,196 32,474 31,836 250,000 31,626 30,988 250,000
8 40,106 39,327 38,902 250,000 38,082 37,657 250,000
9 46,312 46,892 46,680 250,000 45,127 44,915 250,000
10 52,827 55,242 55,242 250,000 52,810 52,810 250,000
15 90,630 116,127 116,127 250,000 107,282 107,282 250,000
20 138,877 216,283 216,283 250,000 194,555 194,555 250,000
25 200,454 384,355 384,355 403,573 344,744 344,744 361,981
30 279,043 661,233 661,233 694,294 588,261 588,261 617,675
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,630 1,674 252,630 2,630 1,674 252,630
2 8,610 5,649 4,693 255,649 5,629 4,672 255,629
3 13,241 8,621 7,665 258,621 8,549 7,593 258,549
4 18,103 11,547 10,591 261,547 11,385 10,429 261,385
5 23,208 14,427 13,470 264,427 14,129 13,173 264,129
6 28,568 17,258 16,408 267,258 16,773 15,923 266,773
7 34,196 20,041 19,403 270,041 19,305 18,667 269,305
8 40,106 22,773 22,348 272,773 21,709 21,284 271,709
9 46,312 25,453 25,240 275,453 23,963 23,751 273,963
10 52,827 28,077 28,077 278,077 26,044 26,044 276,044
15 90,630 43,116 43,116 293,116 35,704 35,704 285,704
20 138,877 54,745 54,745 304,745 34,451 34,451 284,451
25 200,454 59,473 59,473 309,473 9,230 9,230 259,230
30 279,043 47,649 47,649 297,649 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,812 1,856 252,812 2,812 1,856 252,812
2 8,610 6,198 5,242 256,198 6,177 5,221 256,177
3 13,241 9,736 8,780 259,736 9,660 8,704 259,660
4 18,103 13,431 12,475 263,431 13,257 12,301 263,257
5 23,208 17,289 16,333 267,289 16,966 16,010 266,966
6 28,568 21,317 20,467 271,317 20,780 19,930 270,780
7 34,196 25,519 24,882 275,519 24,692 24,054 274,692
8 40,106 29,902 29,477 279,902 28,687 28,262 278,687
9 46,312 34,470 34,257 284,470 32,745 32,533 282,745
10 52,827 39,228 39,228 289,228 36,841 36,841 286,841
15 90,630 69,468 69,468 319,468 60,201 60,201 310,201
20 138,877 104,639 104,639 354,639 77,775 77,775 327,775
25 200,454 142,086 142,086 392,086 72,552 72,552 322,552
30 279,043 170,673 170,673 420,673 12,545 12,545 262,545
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,994 2,038 252,994 2,994 2,038 252,994
2 8,610 6,770 5,814 256,770 6,749 5,792 256,749
3 13,241 10,941 9,985 260,941 10,862 9,906 260,862
4 18,103 15,549 14,593 265,549 15,364 14,408 265,364
5 23,208 20,638 19,682 270,638 20,287 19,331 270,287
6 28,568 26,256 25,406 276,256 25,664 24,814 275,664
7 34,196 32,458 31,821 282,458 31,529 30,891 281,529
8 40,106 39,302 38,877 289,302 37,914 37,489 287,914
9 46,312 46,854 46,641 296,854 44,850 44,637 294,850
10 52,827 55,182 55,182 305,182 52,365 52,365 302,365
15 90,630 115,658 115,658 365,658 103,859 103,859 353,859
20 138,877 212,719 212,719 462,719 175,807 175,807 425,807
25 200,454 366,803 366,803 616,803 264,595 264,595 514,595
30 279,043 601,942 601,942 851,942 351,086 351,086 601,086
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,630 1,674 250,000 2,630 1,674 250,000
2 8,610 5,649 4,693 250,000 5,630 4,673 250,000
3 13,241 8,623 7,666 250,000 8,552 7,596 250,000
4 18,103 11,550 10,593 250,000 11,394 10,437 250,000
5 23,208 14,431 13,474 250,000 14,147 13,191 250,000
6 28,568 17,264 16,414 250,000 16,806 15,956 250,000
7 34,196 20,050 19,412 250,000 19,361 18,724 250,000
8 40,106 22,786 22,361 250,000 21,799 21,374 250,000
9 46,312 25,472 25,260 250,000 24,102 23,890 250,000
10 52,827 28,105 28,105 250,000 26,250 26,250 250,000
15 90,630 43,271 43,271 250,000 36,782 36,782 250,000
20 138,877 55,571 55,571 250,000 38,167 38,167 250,000
25 200,454 62,660 62,660 250,000 17,859 17,859 250,000
30 279,043 57,191 57,191 250,000 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,812 1,856 250,000 2,812 1,856 250,000
2 8,610 6,199 5,242 250,000 6,178 5,222 250,000
3 13,241 9,737 8,781 250,000 9,664 8,708 250,000
4 18,103 13,434 12,477 250,000 13,268 12,312 250,000
5 23,208 17,294 16,338 250,000 16,988 16,032 250,000
6 28,568 21,324 20,474 250,000 20,823 19,973 250,000
7 34,196 25,531 24,893 250,000 24,766 24,129 250,000
8 40,106 29,920 29,495 250,000 28,810 28,385 250,000
9 46,312 34,497 34,285 250,000 32,942 32,729 250,000
10 52,827 39,269 39,269 250,000 37,144 37,144 250,000
15 90,630 69,735 69,735 250,000 62,111 62,111 250,000
20 138,877 106,317 106,317 250,000 86,054 86,054 250,000
25 200,454 150,007 150,007 250,000 101,232 101,232 250,000
30 279,043 201,880 201,880 253,408 89,061 89,061 250,000
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 55, Female, Issue Age 55, Preferred Rate Class
$4,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 4,200 2,994 2,038 250,000 2,994 2,038 250,000
2 8,610 6,771 5,814 250,000 6,750 5,793 250,000
3 13,241 10,943 9,987 250,000 10,866 9,910 250,000
4 18,103 15,552 14,596 250,000 15,376 14,420 250,000
5 23,208 20,644 19,688 250,000 20,314 19,358 250,000
6 28,568 26,266 25,416 250,000 25,717 24,867 250,000
7 34,196 32,474 31,836 250,000 31,626 30,988 250,000
8 40,106 39,327 38,902 250,000 38,082 37,657 250,000
9 46,312 46,892 46,680 250,000 45,127 44,915 250,000
10 52,827 55,242 55,242 250,000 52,810 52,810 250,000
15 90,630 116,127 116,127 250,000 107,282 107,282 250,000
20 138,877 215,722 215,722 340,956 193,301 193,301 305,519
25 200,454 377,643 377,643 524,085 322,294 322,294 447,273
30 279,043 633,541 633,541 795,246 505,222 505,222 634,175
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 5,858 3,608 250,000 5,808 3,558 250,000
2 18,296 12,346 10,096 250,000 12,093 9,843 250,000
3 28,136 18,731 16,681 250,000 18,098 15,848 250,000
4 38,468 25,012 22,762 250,000 23,800 21,550 250,000
5 49,316 31,187 28,937 250,000 29,170 26,920 250,000
6 60,707 37,252 35,252 250,000 34,173 32,173 250,000
7 72,667 43,203 41,703 250,000 38,748 37,248 250,000
8 85,226 49,034 48,034 250,000 42,855 41,855 250,000
9 98,412 54,737 54,237 250,000 46,398 45,898 250,000
10 112,258 60,302 60,302 250,000 49,282 49,282 250,000
15 192,589 91,883 91,883 250,000 56,652 56,652 250,000
20 295,114 112,804 112,804 250,000 23,334 23,334 250,000
25 425,964 116,616 116,616 250,000 0 0 0
30 592,967 85,554 85,554 250,000 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,252 4,002 250,000 6,200 3,950 250,000
2 18,296 13,539 11,289 250,000 13,276 11,026 250,000
3 28,136 21,150 18,900 250,000 20,482 18,232 250,000
4 38,468 29,095 26,845 250,000 27,797 25,547 250,000
5 49,316 37,386 35,136 250,000 35,199 32,949 250,000
6 60,707 46,034 44,034 250,000 42,658 40,658 250,000
7 72,667 55,049 53,549 250,000 50,122 48,622 250,000
8 85,226 64,444 63,444 250,000 57,560 56,560 250,000
9 98,412 74,225 73,725 250,000 64,897 64,397 250,000
10 112,258 84,404 84,404 250,000 72,055 72,055 250,000
15 192,589 149,268 149,268 250,000 110,989 110,989 250,000
20 295,114 227,940 227,940 250,000 139,753 139,753 250,000
25 425,964 329,211 329,211 345,672 145,685 145,985 250,000
30 592,967 454,752 454,752 459,299 68,400 68,400 250,000
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,646 4,396 250,000 6,593 4,343 250,000
2 18,296 14,782 12,532 250,000 14,508 12,258 250,000
3 28,136 23,767 21,517 250,000 23,062 20,812 250,000
4 38,468 33,688 31,438 250,000 32,300 30,050 250,000
5 49,316 44,639 42,389 250,000 42,272 40,022 250,000
6 60,707 56,726 54,726 250,000 53,031 51,031 250,000
7 72,667 70,063 68,563 250,000 64,626 63,126 250,000
8 85,226 84,778 83,778 250,000 77,138 76,138 250,000
9 98,412 101,012 100,512 250,000 90,633 90,133 250,000
10 112,258 118,924 118,924 250,000 105,209 105,209 250,000
15 192,589 250,167 250,167 262,676 212,018 212,018 250,000
20 295,114 466,769 466,769 490,108 398,131 398,131 418,038
25 425,964 822,026 822,026 863,128 693,085 693,085 727,739
30 592,967 1,404,536 1,404,536 1,418,581 1,169,582 1,169,582 1,181,278
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 5,858 3,608 255,858 5,807 3,557 255,807
2 18,296 12,344 10,094 262,344 12,079 9,829 262,079
3 28,136 18,727 16,477 268,727 18,051 15,801 268,051
4 38,468 25,004 22,754 275,004 23,684 21,434 273,684
5 49,316 31,171 28,921 281,171 28,935 26,685 278,935
6 60,707 37,225 35,225 287,225 33,748 31,748 283,748
7 72,667 43,157 41,657 293,157 38,037 36,537 288,037
8 85,226 48,958 47,958 298,958 41,735 40,735 291,735
9 98,412 54,614 54,114 304,614 44,711 44,211 294,711
10 112,258 60,111 60,111 310,111 46,825 46,825 296,825
15 192,589 90,448 90,448 340,448 45,681 45,681 295,681
20 295,114 102,830 102,830 352,830 0 0 0
25 425,964 81,379 81,379 331,379 0 0 0
30 592,967 4,977 4,977 254,977 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,251 4,001 256,251 6,198 3,948 256,198
2 18,296 13,538 11,288 263,538 13,261 11,011 263,261
3 28,136 21,146 18,896 271,146 20,428 18,178 270,428
4 38,468 29,086 26,836 279,086 27,660 25,410 277,660
5 49,316 37,367 35,117 287,367 34,910 32,660 284,910
6 60,707 46,000 44,000 296,000 42,116 40,116 292,116
7 72,667 54,989 53,489 304,989 49,181 47,681 299,181
8 85,226 64,340 63,340 314,340 56,020 55,020 306,020
9 98,412 74,053 73,553 324,053 62,478 61,978 312,478
10 112,258 84,125 84,125 334,125 68,384 68,384 318,384
15 192,589 146,805 146,805 396,805 90,171 90,171 340,171
20 295,114 207,305 207,305 457,305 63,091 63,091 313,091
25 425,964 245,978 245,978 495,978 0 0 0
30 592,967 229,727 229,727 479,727 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,646 4,396 256,646 6,591 4,341 256,591
2 18,296 14,780 12,530 264,780 14,491 12,241 264,491
3 28,136 23,762 21,512 273,762 23,001 20,751 273,001
4 38,468 33,676 31,426 283,676 32,139 29,889 282,139
5 49,316 44,616 42,366 294,616 41,920 39,670 291,920
6 60,707 56,682 54,682 306,682 52,347 50,347 302,347
7 72,667 69,983 68,483 319,983 63,388 61,888 313,388
8 85,226 84,637 83,637 334,637 75,029 74,029 325,029
9 98,412 100,769 100,269 350,769 87,183 86,683 337,183
10 112,258 118,517 118,517 368,517 99,744 99,744 349,774
15 192,589 245,876 245,876 495,876 172,746 172,746 422,746
20 295,114 436,339 436,339 686,339 231,356 231,356 481,356
25 425,964 711,069 711,069 961,069 220,195 220,195 470,195
30 592,967 1,093,250 1,093,250 1,343,250 50,538 50,538 300,538
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 5,858 3,608 250,000 5,808 3,558 250,000
2 18,296 12,346 10,096 250,000 12,093 9,843 250,000
3 28,136 18,731 16,481 250,000 18,098 15,848 250,000
4 38,468 25,012 22,762 250,000 23,800 21,550 250,000
5 49,316 31,187 28,937 250,000 29,170 26,920 250,000
6 60,707 37,252 35,252 250,000 34,173 32,173 250,000
7 72,667 43,203 41,703 250,000 38,748 37,248 250,000
8 85,226 49,034 48,034 250,000 42,855 41,855 250,000
9 98,412 54,737 54,237 250,000 46,398 45,898 250,000
10 112,258 60,302 60,302 250,000 49,282 49,282 250,000
15 192,589 91,883 91,883 250,000 56,652 56,652 250,000
20 295,114 112,804 112,804 250,000 23,334 23,334 250,000
25 425,964 116,616 116,616 250,000 0 0 0
30 592,967 85,554 85,554 250,000 0 0 0
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,252 4,002 250,000 6,200 3,950 250,000
2 18,296 13,539 11,289 250,000 13,276 11,026 250,000
3 28,136 21,150 18,900 250,000 20,482 18,232 250,000
4 38,468 29,095 26,845 250,000 27,797 25,547 250,000
5 49,316 37,386 35,136 250,000 35,199 32,949 250,000
6 60,707 46,034 44,034 250,000 42,658 40,658 250,000
7 72,667 55,049 53,549 250,000 50,122 48,622 250,000
8 85,226 64,444 63,444 250,000 57,560 56,560 250,000
9 98,412 74,225 73,725 250,000 64,897 64,397 250,000
10 112,258 84,404 84,404 250,000 72,055 72,055 250,000
15 192,589 149,268 149,268 250,000 110,989 110,989 250,000
20 295,114 226,850 226,850 285,305 139,753 139,753 250,000
25 425,964 317,981 317,981 372,111 145,685 145,685 250,000
30 592,967 421,993 421,993 466,066 68,400 68,400 250,000
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Joint & Survivor
Male, Issue Age 65, Female, Issue Age 65, Preferred Rate Class
$8,500 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
1 8,925 6,646 4,396 250,000 6,593 4,343 250,000
2 18,296 14,782 12,532 250,000 14,508 12,258 250,000
3 28,136 23,767 21,517 250,762 23,062 20,812 250,000
4 38,468 33,688 31,438 250,000 32,300 30,050 250,000
5 49,316 44,639 42,389 250,000 42,272 40,022 250,000
6 60,707 56,726 54,726 250,000 53,031 51,031 250,000
7 72,667 70,063 68,563 250,000 64,626 63,126 250,000
8 85,226 84,778 83,778 250,000 77,138 76,138 250,000
9 98,412 101,012 100,512 250,000 90,633 90,133 250,000
10 112,258 118,924 118,924 250,000 105,209 105,209 250,000
15 192,589 249,496 249,496 348,287 210,396 210,396 293,705
20 295,114 456,791 456,791 574,497 364,755 364,755 458,745
25 425,964 780,654 780,654 913,544 579,189 579,189 677,784
30 592,967 1,278,265 1,278,265 1,411,767 880,213 880,213 972,143
</TABLE>
<PAGE>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
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
A MetLife(R) Company
Marketing and Executive Office
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
800-523-1661
Variable Life Service Office
P.O. Box 66757
St. Louis, MO 63166-6757
800-357-4419
CC-4285 (5/00) Policy Form Series CCP00204 21-RVUL-CAJT (5/00)
