Registration No. 333-37559
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Cova Variable Life Account Five
(Exact Name of Trust)
B. Cova Financial Life Insurance Company
(Name of Depositor)
C. 4100 Newport Place Drive, Suite 840
Newport Beach, CA 92600
(Complete address of depositor's principal executive offices)
D. Name and complete address of agent for service:
Lorry J. Stensrud, President
Cova Financial Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 523-1661
Copies to:
Judith A. Hasenauer and Bernard J. Spaulding
Blazzard, Grodd & Hasenauer, P.C. Senior Vice President, General
P.O. Box 5108 Counsel and Secretary
Westport, CT 06881 Cova Financial Life Insurance
(203) 226-7866 Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
It is proposed that this filing will become effective (check appropriate
box):
_____ immediately upon filing pursuant to paragraph (b), or
__X__ on May 1, 2000 pursuant to paragraph (b), or
_____ 60 days after filing pursuant to paragraph (a)(1), or
_____ on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
E. Modified Single Premium Variable Life Insurance Policies
(Title and amount of securities being registered)
F. Proposed maximum aggregate offering price to the public of the
securities being registered:
Continuous offering
G. Amount of Filing Fee: Not Applicable
H. Approximate date of proposed public offering:
_____ Check box if it is proposed that this filing will become
effective on (date) and (time) pursuant to Rule 487.
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CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
- ------------ ------------------------------
1 The Variable Insurance Policy
2 Other Information; The Company
3 Not Applicable
4 Other Information
5 The Separate Account
6(a) Not Applicable
(b) Not Applicable
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Purchases
11 Investment Options; Appendix B
12 Investment Options; Appendix B
13 Expenses
14 Purchases
15 Purchases
16 Investment Options; Appendix B
17 Access to Your Money
18 Access to Your Money
19 Reports to Owners
20 Not Applicable
21 Access to Your Money
22 Not Applicable
23 Not Applicable
24 Ownership
25 The Company
26 Expenses
27 The Company
28 The Company
29 The Company
30 The Company
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company; Other Information
36 Not Applicable
37 Not Applicable
38 Other Information
39 Other Information
40 Not Applicable
41 Not Applicable
42 Not Applicable
43 Not Applicable
44 Purchases
45 Other Information
46 Access to Your Money
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 The Company; Purchases
52 Investment Options; Appendix B
53 The Separate Account
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
THE MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
COVA VARIABLE LIFE ACCOUNT FIVE
AND
COVA FINANCIAL LIFE
INSURANCE COMPANY
This prospectus describes the Modified Single Premium Variable Life Insurance
Policy (Policy) offered by Cova Financial Life Insurance Company (Cova).
The Policy has been designed to be used for estate and retirement planning and
other insurance needs of individuals.
The Policy offers you nineteen (19) investment portfolios listed below. The
investment portfolios are part of AIM Variable Insurance Funds, Cova Series
Trust, Franklin Templeton Variable Insurance Products Trust and General American
Capital Company. When you buy a Policy, you bear the complete investment
risk.
Your Account Value and, under certain circumstances, the death benefit under the
Policy may increase or decrease or the duration of the death benefit may vary
depending on the investment experience of the investment portfolio(s) you
select.
AIM Variable Insurance Funds:
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
AIM V.I. International Equity
Cova Series Trust:
Managed by J.P. Morgan Investment Management Inc.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
Managed by Lord, Abbett & Co.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
Franklin Templeton Variable Insurance Products Trust*, Class 1 Shares:
Managed by Franklin Advisers, Inc.
Franklin Small Cap Fund (the surviving fund of the merger
with Franklin Small Cap Investments Fund)
Franklin Large Cap Growth Securities Fund (the surviving fund
of the merger with Franklin Large Cap Growth Investments Fund)
Templeton Global Income Securities Fund (the surviving fund
of the merger with Templeton Bond Fund)
Managed by Templeton Investment Counsel, Inc.
Templeton International Securities Fund (formerly, Templeton
International Fund)
Managed by Templeton Global Advisors Limited
Templeton Growth Securities Fund (the surviving fund of
the merger with Templeton Stock Fund)
*Effective May 1, 2000, the portfolios of Templeton Variable Products Series
Fund were merged into similar portfolios of Franklin Templeton Variable
Insurance Products Trust.
General American Capital Company:
Managed by Conning Asset Management Company
Money Market
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Cova Modified Single
Premium Variable Life Insurance Policy. The SEC maintains a Web site
(http://www.sec.gov) that contains materials incorporated by reference and other
information regarding companies that file electronically with the SEC.
The Policies:
* are not bank deposits
* are not federally insured
* are not endorsed by any bank or government agency
* are not guaranteed and may be subject to loss of principal
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
May 1, 2000
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Premiums
Application for a Policy
Allocation of Premiums
Grace Period
Accumulation Unit Values
3. INVESTMENT OPTIONS
AIM Variable Insurance Funds
Cova Series Trust
Franklin Templeton Variable Insurance
Products Trust
General American Capital Company
Transfers
Dollar Cost Averaging Program
Automatic Rebalancing Program
Approved Asset Allocation Programs
Substitution
4. EXPENSES
Insurance Charges
Mortality and Expense Risk Charge
Administrative Charge
Tax Expense Charge
Cost of Insurance Charge
Annual Policy Maintenance Fee
Annual Withdrawal Amount
Surrender Charge
Nursing Home Waiver
Deferred Premium Tax Charge
Transfer Fee
Taxes
Investment Portfolio Expenses
5. DEATH BENEFIT
Accelerated Death Benefit
Joint Lives
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Loans
Loan Amount
Loan Account
Loan Interest
Interest Credited
Preferred Loan
Effect of Loan
Loan Repayments
Total Surrender
Partial Surrenders
Termination of the Policy
Reinstatement
8. OTHER INFORMATION
Cova
The Separate Account
Distributor
Suspension of Payments or Transfers
Ownership
Owner
Joint Owner
Beneficiary
Assignment
PART II
Cova
Executive Officers and Directors of Cova
Voting
Disregard of Voting Instructions
The Separate Account
Legal Opinions
Reduction or Elimination of Surrender Charge
Misstatement of Age or Sex
Cova's Right to Contest
Settlement Options
Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
Joint Lives
Tax Treatment of Loans and Surrenders
Multiple Policies
Tax Treatment of Assignments
Qualified Plans
Income Tax Withholding
Reports to Owners
Legal Proceedings
Experts
Financial Statements
APPENDIX A
Illustration of Policy Values
APPENDIX B
Participating Investment Portfolios
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Policy, however, certain technical words or
terms are unavoidable and need an explanation. We have identified some of those
words or terms. For several of these terms we have provided a definition. For
the remainder, we believe that you will find an adequate discussion in the text.
For those terms, we have identified them in the text in italic and the page
number that is indicated below is where we believe you will find the best
explanation for the word or term.
Account Value - The total value of your Policy. It is equal to the sum of the
Policy values allocated to the investment portfolios and the Policy values
allocated to the loan account.
Accumulation Unit - An accounting unit used to calculate Policy values when they
are allocated to the investment portfolios.
Cash Value - Your Policy's Account Value less any surrender charge and less any
deferred premium tax charge and less any Policy maintenance fee.
Cash Surrender Value - Your Policy's Cash Value less any outstanding loans and
accrued loan interest.
Coverage Amount - It is the difference between the death benefit and the Account
Value.
Face Amount - The amount of coverage that you have chosen (unless later reduced
by a partial surrender) and which will be used to determine the death benefit.
Maximum Premium Limit - This is the maximum amount of premium that Cova will
accept under a Policy. We can also refer to this as MPL. Cova's MPL has been
designed not to exceed the maximum premium allowed under the Internal Revenue
Code for a specified Face Amount of Insurance for a given age.
Policy Date, Policy Anniversary, Policy Year - The Policy Date is the day your
premium was initially invested in the Money Market Fund which may be before we
actually issue the Policy. It is the date from which Policy Anniversaries and
Policy Years are determined.
Page
Annual Withdrawal Amount 11
Beneficiary 18
Business Day 8
Death Benefit 15
Insured 4
Investment Portfolio 8
Issue Date 10
Joint Owner 18
Loan Account 16
Monthly Deduction 10
Owner 18
Net Death Benefit or Death Proceeds 15
Premium 7
Processing Date 10
Right to Examine Period 8
Surrender Charge 11
SUMMARY
The Prospectus is divided into three sections:
* Summary,
* Part I, and
* Part II.
The sections in this Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Even more detailed information is
contained in Part II.
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance policy offered by Cova is a contract between you,
the owner, and Cova, an insurance company.
The Policy provides for the payment of death proceeds to your selected
beneficiary upon the death of the insured. The death proceeds are free from
federal income taxes. The Policy can be used:
* as part of your estate planning, or
* to save for retirement.
The insured is the person whose life is insured under the Policy. The insured
can be the same as the owner but does not have to be.
You can choose among nineteen (19) investment portfolios which are listed in
Item 3. The investment portfolios are the investment options available under the
Policy. You can allocate your unloaned Account Value to any or all of the
investment portfolios. You can transfer between investment portfolios up to 12
times a year without charge and without being taxed. If you make more than 12
transfers in a year, we will charge you a transfer fee.
While the Policy is in force, the Account Value and, under certain
circumstances, the death benefit, will vary, up or down, or the duration of the
death benefit may vary with the investment performance of the investment
portfolios you choose.
You are not taxed on the earnings until you surrender or borrow from your
Policy.
2. PURCHASES
You can purchase the Policy with a single premium. Under certain conditions, you
can make additional premiums. Your registered representative can help you fill
out the proper forms.
The minimum initial premium we will accept is generally $10,000. There is no
minimum required for additional premiums. However, the total of all premiums
paid will be limited to that which is required to qualify the Policy as life
insurance under the Internal Revenue Code. We call this the Maximum Premium
Limit.
We may also require additional information. In some circumstances, the insured
may be required to provide us with medical records or a complete paramedical
examination.
3. INVESTMENT OPTIONS
You can put your money in any or all of these investment portfolios which are
briefly described in Appendix B and more fully described in the prospectuses for
the funds:
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation
AIM V.I. Value
AIM V.I. International Equity
Managed by J.P. Morgan Investment
Management Inc.
Select Equity
Small Cap Stock
Large Cap Stock
International Equity
Quality Bond
Managed by Lord, Abbett & Co.
Bond Debenture
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
Managed by Conning Asset Management Company
Money Market
Managed by Franklin Advisers, Inc.
Franklin Large Cap Growth Securities (the surviving fund of the
merger with Franklin Large Cap Growth Investments)
Franklin Small Cap (the surviving fund of the merger with
Franklin Small Cap Investments)
Templeton Global Income Securities (the surviving fund of the
merger with Templeton Bond)
Managed by Templeton Investment Counsel, Inc.
Templeton International Securities (formerly, Templeton International)
Managed by Templeton Global Advisors Limited
Templeton Growth Securities (the surviving fund of the merger with
Templeton Stock)
Depending upon market conditions and the performance of the investment
portfolio(s) you select, you can make or lose money in any of these investment
portfolios.
4. EXPENSES
The Policy has both insurance features and investment features, and there are
costs related to each that reduce the return on your investment. Your Policy
could lapse if your Cash Surrender Value is insufficient to cover any charges
due.
* Each year Cova deducts a $30 Policy maintenance fee from your Policy. Cova
will not deduct this charge if the Account Value of your Policy is at least
$50,000 at the time the deduction is to be made. If you make a complete
surrender of your Policy, we will deduct the Policy maintenance fee,
regardless of your Account Value at that time.
* Cova also deducts insurance charges on a monthly basis. For the first ten
years, the total charges are equal, on an annual basis, to 1.70% of the
value of your Policy, with 1/12 of that amount charged monthly. After the
tenth year, the total for insurance charges is .90% annually, with 1/12 of
that amount charged monthly. These totals exclude the charge assessed to
cover the cost of insurance.
* Each month Cova will also deduct an additional insurance charge to cover
the cost of insurance. This charge will depend upon the:
* sex of the insured,
* age of the insured,
* rating classification of the insured, and
* whether your initial premium was 100% of the Maximum Premium Limit.
* There are also daily investment charges which apply to the average daily
value of the investment portfolio and vary depending upon the investment
portfolio. These annual charges range from .205% to ____%.
* If you make more than 12 transfers in a year, Cova deducts a transfer fee
of $25 or 2% of the amount transferred, whichever is less.
* If you take out more than the annual withdrawal amount, Cova may assess a
surrender charge which ranges from 7.5% of the premium surrendered in the
first year to 0% in the tenth year. Each year you may withdraw up to that
sum of the excess of your Account Value over premiums paid which have not
been previously surrendered; plus 10% of premiums without incurring this
surrender charge. We call this amount the annual withdrawal amount. If you
withdraw premiums before the tenth year, Cova will assess a deferred
premium tax charge which declines from 2.25% of premium surrendered in the
first year to 0% in the tenth year. After the tenth year there is no
surrender charge or deferred premium tax charge when you withdraw your
money.
5. DEATH BENEFIT/DEATH PROCEEDS
The Policy provides for a Face Amount of insurance. The actual amount payable to
your beneficiary is the death benefit less any loans plus accrued loan interest
under the Policy. This amount is called the death proceeds. It may also be
called the net death benefit.
The death benefit will be the greater of:
(1) your Face Amount, or
(2) your Account Value multiplied by a specified percentage.
These percentages vary by the age of the insured and are shown in your Policy.
Therefore, increases in your Account Value may increase the death benefit. A
decrease in Account Value may decrease the death benefit, but the death benefit
will never be less than the Face Amount (so long as the Policy remains in
force). Also, a partial surrender will reduce the Face Amount in the same
proportion as the Account Value was reduced.
All or part of the death proceeds may be paid in a lump sum or applied under one
of the Settlement Options contained in the Policy.
The Policy is offered on a single life or on a "joint life" basis. Under "joint
life" coverage, death proceeds are paid after the second insured's death.
At the time of application for a Policy, you designate a beneficiary who is the
person or persons who will receive the death proceeds. You can change your
beneficiary unless you have designated an irrevocable beneficiary. The
beneficiary does not have to be a natural person.
6. TAXES
Your earnings are not taxed until you take them out. In most cases, your Policy
will be a modified endowment contract unless it was exchanged for a contract
issued before June 21, 1988. Money taken out of a modified endowment contract is
considered to come from earnings first and is taxed as income. Also, if you are
younger than 59 1/2 when you take money out, you may be charged a 10% federal
tax penalty on the earnings withdrawn.
Death proceeds are paid to your beneficiary income tax free.
7. ACCESS TO YOUR MONEY
Under the Policy you have access to a portion of your Account Value equal to
earnings without charge. You may also withdraw up to 10% of premium each year,
without incurring the surrender charge. Premiums withdrawn in excess of this 10%
will incur a surrender charge during the first 10 years. However, a deferred
premium tax charge will be assessed on all premiums surrendered during the first
ten years.
The minimum partial surrender that you can make is $500. You can also borrow
some of your Cash Value. The minimum loan amount is $500.
8. OTHER INFORMATION
Right to Examine
If you cancel your Policy within ten days after you receive it (or whatever
period is required in your state), we will return to you the greater of
(1) the premium(s) you paid, or
(2) your Account Value on the day we, or the agent through whom it was
purchased, received the returned Policy.
Until the end of the time you are allowed to examine your Policy (10 days or the
required period in your state) plus five days, your premium will remain in the
Money Market Fund. After that, we will invest your Account Value as you
requested. In the state of California, if you are 60 years or older on the
Policy Date, you can cancel your Policy within 30 days after you receive it in
which case we will refund your Account Value as of the day we receive your
returned Policy.
Who Should Purchase the Policy?
The Policy is designed for an individual who wants to:
* create or conserve his/her estate;
* supplement retirement income; and
* retain access to cash through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life of an insured.
Cova will not issue a Policy on insureds older than 90.
Additional Features
* You can arrange to have a regular amount of money automatically invested in
selected investment portfolios each month, theoretically giving you a lower
average cost per unit over time than a single one time purchase. The amount
you selected will be placed in the Money Market Fund and will be
transferred to the selected investment portfolios monthly. We call this
feature Dollar Cost Averaging. There is no additional charge for this
feature.
* You can arrange to automatically readjust your unloaned Account Value
between investment portfolios periodically to keep the allocation you
select. We call this feature Automatic Rebalancing. There is no additional
charge for this feature.
* In the event the insured is terminally ill, you can request to receive up
to 50% of the death benefit up to a maximum of $500,000. If you have
selected the Joint Life Option, the provision will only be available on the
second life after the death of the first. We call this feature the
Accelerated Death Benefit. There is no additional charge for this feature.
* If you or the joint owner are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins after the first
Policy Year, you can make a full or partial surrender and we will waive the
surrender charge. We call this feature the Nursing Home Waiver. There is no
additional charge for this feature.
* You can elect to have the death benefit payable upon the death of a second
person. This benefit is written on spouses only. We call this option the
Joint Life Option.
These features may not be suitable for your particular situation.
9. INQUIRIES
If you need more information, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policy owner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at:
Cova Financial Life Insurance Company
P.O. Box 10366
Des Moines, IA 50306
515-243-5834
800-343-8496
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
This variable life insurance policy is a contract between you, the owner, and
Cova, an insurance company. This kind of policy is most commonly used for
retirement and/or estate planning.
During the insured's lifetime, you can select among the investment portfolios
offered in the Policy. (There are currently nineteen (19) investment portfolios
offered. They are listed in Item 3.) You can transfer between them up to 12
times a year without charge. The Account Value and, under some circumstances,
the death benefit will go up or down or the duration of the death benefit may
vary depending upon the investment experience of the investment portfolio(s) you
select. This gives you the opportunity to capture the upside potential of the
market. It also means you could lose money.
While your money remains in the Policy, you pay no current income taxes on
earnings or gains. This is called tax-deferred accumulation. It helps your money
grow faster. Subject to some limitations, you may take money out at any time
through loans or partial surrenders. Any money you take out, however, is taxed
as earnings until all earnings have been removed from the Policy. If you are
younger than age 59 1/2 when you take money out, you may also incur an
additional 10% federal tax penalty. If you purchased a Policy in exchange for a
policy issued prior to June 21, 1988, different tax rules may apply. (See
Section 6. Taxes. Part II also contains more detailed information regarding
taxes.)
Because this is a life insurance policy, it provides a death benefit, which is
an amount greater than your Account Value. When the insured dies, the death
benefit (minus any loans and any accrued loan interest) is paid to your
beneficiary free from federal income tax. The tax-free death benefit combined
with the ability to use your money while you're alive, makes this an excellent
way to accumulate money you do not think you will use in your lifetime and a
tax-efficient way to provide for those you leave behind.
2. PURCHASES
Premiums
Premiums are the monies you give us to purchase the Policy. The minimum initial
premium we will accept is generally $10,000. When you apply for the Policy, you
request a specific amount of insurance. We call this amount the Face Amount of
the Policy. Your initial premium must be 80%, 90% or 100% of the initial Maximum
Premium Limit (MPL). The Internal Revenue Code (Code) has established certain
criteria which must be met in order for a life insurance policy to qualify as
life insurance under the Code. The MPL satisfies one of the criteria. Cova's MPL
has been designed not to exceed the Maximum Premium Limit allowed under the Code
for a specified Face Amount of insurance for a given age.
You can invest additional premiums up to the MPL. However, if the additional
premium increases the amount of insurance, we will require evidence of the
insurability of the insured. If all of your premiums total $1,000,000 or more,
you will need Cova's prior approval before you add premiums. If the additional
premium would cause the Policy to fail to meet the criteria established by the
Code to qualify as life insurance, Cova will send the premium back within 60
days of the anniversary of the Policy Date (Policy Anniversary). The amount and
frequency of additional premiums will affect the Account Value of your Policy
and may affect the amount or duration of your insurance.
Application for a Policy
To purchase a Policy, you may be required to submit an application to Cova which
requests some information regarding the proposed insured. In some cases, we will
ask for additional information. We may request that the insured provide us with
medical records or possibly require other medical tests.
Cova will not issue a Policy if the insured is over age 90.
Cova will review all the information it has about the insured and determine
whether or not the insured meets Cova's standards for issuing the Policy. This
process is called underwriting. If the insured meets all of Cova's underwriting
requirements, we will issue a Policy. There are several underwriting classes
under which the Policy may be issued.
During the underwriting period, which could be up to 60 days or longer from the
time the application is signed, we offer fixed insurance called conditional
insurance. The initial premium must be submitted with the application before the
conditional insurance is provided.
* The conditional insurance is effective up to 60 days from when the
application is signed.
* For applicants 65 or younger, conditional insurance will be for the lesser
of $500,000 plus the initial premium paid or the amount of insurance
applied for.
* If the applicant is 66 or older, the conditional insurance will be the
lesser of $200,000 plus the initial premium paid or the amount of insurance
applied for.
* The conditional insurance is subject to a number of restrictions and is
only applicable if the proposed insured was an acceptable risk for the
insurance applied for.
Allocation of Premiums
When you purchase a Policy, we will initially invest your money in the Money
Market Fund. After 15 days from the issue date (or the period required in your
state plus five days), we will allocate your Account Value to the investment
portfolios as you requested in the application. All allocation directions must
be in whole percentages. If you make additional premiums, we will allocate them
in the same way as your first premium unless you tell us otherwise.
If you change your mind about owning a Policy, you can cancel it within 10 days
after receiving it (or the period required in your state (right to examine
period)). When you cancel the Policy within this time period, Cova will not
assess a surrender charge or a deferred premium tax charge. Cova will give you
back the greater of your premium payment or your Account Value. In the state of
California, if you are 60 years or older on the Policy Date, you can cancel your
Policy within 30 days after you receive it in which case we will refund your
Account Value as of the day we receive your returned Policy.
If your application for the Policy is in good order, Cova will invest your first
premium in the Money Market Fund two days after it is received, even if our
underwriting is not yet complete and the Policy is not yet issued. The day we
invest your premium in the Money Market Fund is called the Policy Date. The
money will stay in the Money Market Fund for 15 days after the issue date. (In
some states, the period may be longer.) At the end of that period, we will
re-allocate those funds as you selected in the application.
If, as a result of underwriting review, Cova does not issue you a Policy, we
will return your premium to you (plus interest required by your state).
If we do issue a Policy, on the issue date, we will deduct the monthly
deductions for the period from the Policy Date through the next processing date.
Grace Period
Your Policy will stay in effect as long as your Cash Surrender Value is
sufficient to cover the monthly deductions and Policy maintenance fee. If the
Cash Surrender Value of your Policy is not enough to cover these deductions to
be made from the Policy, Cova will mail you a notice. You will have 61 days from
the time the notice is mailed to you to send Cova the required premium payment.
This is called the grace period. If the premium is not paid by the end of the
grace period, the Policy will terminate without value.
Accumulation Unit Values
The value of your Policy that is invested in the investment portfolios will go
up or down depending upon the investment performance of the investment
portfolio(s) you choose. In order to keep track of the value of your Policy, we
use a unit of measure we call an Accumulation Unit. (An Accumulation Unit works
like a share of a mutual fund.)
Every business day we determine the value of an Accumulation Unit for each of
the investment portfolios. The value of an Accumulation Unit for any given
business day is determined by multiplying a factor we call the net investment
factor times the value of an Accumulation Unit for the previous business day. We
do this for each investment portfolio. The net investment factor is a number
that reflects the change (up or down) in an underlying investment portfolio
share.
Our business days are each day that the New York Stock Exchange is open for
business. Our business day closes when the New York Stock Exchange closes,
usually 4:00 P.M. Eastern time.
The value of an Accumulation Unit may go up or down from day to day.
When you make a premium payment, we credit your Policy with Accumulation Units.
Cova determines the number of Accumulation Units to credit to your Policy by
dividing the amount of premiums allocated to an investment portfolio by the
value of the Accumulation Unit for that investment portfolio.
We calculate the value of an Accumulation Unit for each investment portfolio
after the New York Stock Exchange closes each day and then apply it to your
Policy.
When Cova assesses the monthly deduction and the annual Policy maintenance fee,
we do so by deducting Accumulation Units from your Policy. When you have
selected more than one investment portfolio, we make the deductions pro rata
from all of the investment portfolios.
3. INVESTMENT OPTIONS
The Policy offers nineteen (19) investment portfolios which are listed below.
Additional investment portfolios may be available in the future.
You should read the prospectuses for these funds. Copies of these prospectuses
will be sent to you with your Policy. Certain portfolios contained in the fund
prospectuses may not be available with your Policy. (See Appendix B which
contains a summary of investment objectives and strategies for each investment
portfolio.)
The investment objectives and policies of certain of the investment portfolios
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 portfolios may be
higher or lower than the results of such other mutual funds. The investment
advisers cannot guarantee, and make no representation, that the investment
results of similar funds will be comparable even though the funds have the same
investment advisers.
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 portfolios may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with Cova. Certain
investment portfolios may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
Cova may enter into certain arrangements under which it is reimbursed by the
investment portfolios' advisers, distributors and/or affiliates for the
administrative services which it provides to the portfolios.
AIM Variable Insurance Funds
AIM Variable Insurance Funds is a mutual fund with multiple portfolios.
A I M Advisors, Inc. is the investment adviser to each portfolio. The following
portfolios are available under the Policy:
AIM V.I. Capital Appreciation Fund
AIM V.I. Value Fund
AIM V.I. International Equity Fund
Cova Series Trust
Cova Series Trust is managed by Cova Investment Advisory Corporation, which is
an indirect subsidiary of Cova. Cova Series Trust is a mutual fund with multiple
portfolios. Each investment portfolio has a different investment objective. Cova
Investment Advisory Corporation has engaged subadvisers to provide investment
advice for the individual investment portfolios. The following investment
portfolios are available under the Policy:
J.P. Morgan Investment Management Inc. is the sub-adviser to the following
portfolios:
Select Equity Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
Lord, Abbett & Co. is the sub-adviser to the following portfolios:
Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
Franklin Templeton Variable Insurance Products Trust
Franklin Templeton Variable Insurance Products Trust is a mutual fund
with multiple portfolios. Effective May 1, 2000, the portfolios of
Templeton Variable Products Series Fund were merged into similar portfolios
of Franklin Templeton Variable Insurance Products Trust. Franklin
Templeton Variable Insurance Products Trust issues two classes
of shares Class 1 and Class 2. Only shares of Class 1 are available
under your contract. Franklin Advisers, Inc. is the investment manager of
the Franklin Large Cap Growth Securities Fund, the Franklin Small Cap Fund and
the Templeton Global Income Securities Fund. Templeton Investment
Counsel, Inc. is the investment manager of the Templeton International
Securities Fund. Templeton Global Advisors Limited is the investment
manager for the Templeton Growth Securities Fund. The following portfolios
are available under the contract:
Franklin Large Cap Growth Securities Fund (the surviving fund of
the merger with Franklin Large Cap Growth Investments Fund)
Franklin Small Cap Fund (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Templeton Global Income Securities Fund (the surviving fund of the
merger with Templeton Bond Fund)
Templeton Growth Securities Fund (the surviving fund of the merger
with Templeton Stock Fund)
Templeton International Securities Fund (formerly, Templeton International
Fund)
General American Capital Company
General American Capital Company is a mutual fund with multiple portfolios. Only
the following portfolio is available under the Policy and is managed by Conning
Asset Management Company:
Money Market Fund
)
Transfers
You can transfer money among the nineteen (19) investment portfolios.
You can make 12 transfers every Policy Year without charge while the insured is
alive. If you make more than 12 transfers in a year, there is a transfer fee
deducted. (We measure years from your Policy Date.) The following apply to any
transfer:
1. the minimum amount which you can transfer is $500 or your entire value in
the investment portfolio.
2. your request for transfer must clearly state the amount to be transferred
and which investment portfolios are involved in the transfer.
3. if a transfer fee applies, the charge will be deducted from the amount
transferred.
We have reserved the right to modify your transfer rights if we decide that the
exercise of this right by you, your authorized agent, or any owner is or would
be disadvantageous to other owners. We have also reserved the right to restrict
transfers to a maximum of 12 per year and to restrict transfers from being made
on consecutive business days.
Telephone Transfers. You can make transfers by telephone. Prior to making a
transfer by telephone, you will need to complete a written pre-authorization
form. If you own the Policy with a joint owner, unless Cova is instructed
otherwise, Cova will accept instructions from either you or the other owner.
Cova will use reasonable procedures to confirm that instructions given to us by
telephone are genuine. If Cova fails to use such procedures, we may be liable
for any losses due to unauthorized or fraudulent instructions. Cova records all
telephone instructions.
Dollar Cost Averaging Program
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Fund to any of the other investment
portfolio(s). By allocating amounts on a regular schedule as opposed to
allocating the total amount at one particular time, you may be less susceptible
to the impact of market fluctuations.
You must have at least $6,000 in the Money Market Fund (or the amount required
to complete your program, if more) in order to participate in the Dollar Cost
Averaging Program. There is no additional charge for this feature.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
Automatic Rebalancing Program
Once your money has been allocated to the investment portfolios, the performance
of each portfolio may cause your allocation to shift. You can direct us to
automatically readjust your non-loaned Account Value between investment
portfolios to keep the blend you selected. You can tell us whether to rebalance
quarterly, semi-annually or annually. We will measure these periods from the
Policy Date.
There is no additional charge for this feature. The transfer date will be the
1st business day after the end of the period you selected. If you participate in
the Automatic Rebalancing Program, the transfers made under the program are not
taken into account in determining any transfer fee.
You cannot participate in both the Dollar Cost Averaging and Automatic
Rebalancing Programs at the same time.
Approved Asset Allocation Programs
Cova recognizes the value to certain owners of having available, on a continuous
basis, advice for the allocation of your money among the investment portfolios
available under the Policy. Certain providers of these types of services have
agreed to provide such services to owners in accordance with Cova's
administrative rules regarding such programs.
Cova has made no independent investigation of these programs. Cova has only
established that these programs are compatible with our administrative systems
and rules.
Even though Cova permits the use of approved asset allocation programs, the
Policy was not designed for professional market timing organizations. Repeated
patterns of frequent transfers are disruptive to the operations of the
investment portfolios, and should Cova become aware of such disruptive
practices, we may modify the transfer privilege either on an individual or class
basis.
If you participate in an Approved Asset Allocation Program, the transfers made
under the program are not taken into account in determining any transfer fee.
Substitution
Cova may elect to substitute one of the investment portfolios you have selected
with another portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intent to do
this. Cova may also limit further investment in an investment portfolio if it
deems the investment inappropriate.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. These charges and expenses are:
Insurance Charges
Each month, Cova will make certain deductions from your Policy on the processing
date. The processing date is the day each month that we deduct certain charges
from your Policy. The first processing date is the issue date. The issue date is
the date on which we issue you a Policy. After that, it is the same day each
month as the Policy Date.
The insurance charges are:
(1) mortality and expense risk charge;
(2) administrative charge;
(3) tax expense charge; and
(4) cost of insurance charge.
Collectively, we refer to these charges as the monthly deduction. When you have
selected more than one investment portfolio, we make the deduction pro rata from
all of the investment portfolios you have selected.
Mortality and Expense Risk Charge. For the first ten years, this charge is
equal, on an annual basis, to .90%, 1/12 of which is charged each month, of the
Account Value of your Policy invested in the investment portfolios. For the
eleventh year and after, the charge is .50%, 1/12 of which is charged each
month. This charge cannot be increased.
Administrative Charge. This charge is equal, on an annual basis, to .40%, 1/12
of which is charged each month, of the Account Value of your Policy. This charge
cannot be increased.
Tax Expense Charge. This deduction is the sum of the premium tax charge and the
federal tax charge. It is deducted monthly for the first ten years. It is equal,
on an annual basis, to .40% (.15% for federal tax charge and .25% for premium
tax charge), 1/12 of which is charged each month, of the Account Value of your
Policy.
This charge compensates Cova for its expenses incurred for federal taxes
incurred as a result of issuing the Policy. It also compensates Cova for the
state and local premium taxes it incurred as a result of issuing the Policy.
Premium taxes range from 0% to 4%. You will be assessed the premium tax charge
regardless of what the total actual premium tax is in your state or local
jurisdiction.
If you surrender all or part of your Policy during the first 10 years, Cova will
charge a deferred premium tax charge. See below.
Cost of Insurance Charge. This charge compensates Cova for insurance coverage
provided during the month.
The guaranteed cost of insurance charge is determined by multiplying the
Coverage Amount by the cost of insurance rate. The Coverage Amount is the
difference between the death benefit and the Account Value. The cost of
insurance rate is based upon the:
* sex of the insured,
* age of the insured,
* rate classification of the insured, and
* whether you paid 100%, or 90%, or 80% of the MPL.
The rate classification of the insured is determined through our underwriting
process.
The Policy provides that for standard risks, the guaranteed cost of insurance
rate is based on the 1980 Commissioners Standard Ordinary Mortality Table, age
last birthday (1980 CSO Table).
For substandard risks, the guaranteed cost of insurance rate will be higher and
will be based upon a multiple of the 1980 CSO Table. The multiple will be based
on the insured's substandard rating. Tables setting forth the guaranteed cost of
insurance rates are included in each Policy.
Cova can use rates that are less than the guaranteed cost of insurance rates
shown in the Policy. Cova refers to these as the current cost of insurance
rates.
If 100% of the MPL is paid, Cova's current cost of insurance rate is a
percentage of the Account Value. The basis and amount of this charge may change
in the future, but can never be more than the guaranteed cost of insurance rates
contained in the Policy. For a better understanding of how the cost of insurance
rate and the other charges affect Policy values, you can request personalized
illustrations from your registered representative.
Annual Policy Maintenance Fee
Every year on the Policy Anniversary, Cova currently deducts $30 as a Policy
maintenance fee. This charge cannot be increased once the Policy is issued. Cova
will not deduct this charge, if when the deduction is to be made, your Account
Value is $50,000 or more. Cova may some time in the future discontinue this
practice for new policies issued and deduct the charge.
If you make a complete surrender of your Policy on other than a Policy
Anniversary, the Policy maintenance fee will be deducted, regardless of your
Account Value at that time. When you have selected more than one investment
portfolio, we make the deduction pro rata from all of the investment portfolios
you have selected.
Annual Withdrawal Amount
While the Policy is in force, prior to the death of the insured and after the
expiration of the right to examine period, you can make a total or partial
surrender of the Account Value of your Policy up to the Cash Surrender Value. A
surrender may be subject to:
* a surrender charge, and
* a deferred premium tax charge.
When you request a surrender, we will determine what portion, if any, is part of
your annual withdrawal amount. The annual withdrawal amount is equal to:
1. the excess of the Account Value over premiums paid which have not been
previously surrendered. Neither the surrender charge nor deferred premium
tax charge is assessed on this amount; and
2. 10% of your premium payments each year (you may not carry this amount over
to the next year). This portion of the annual withdrawal amount is subject
to the deferred premium tax charge.
Surrender Charge
During the first 10 years, the surrender charge is assessed against any premium
surrendered, which is not part of the annual withdrawal amount. The surrender
charge, which is a percent of premiums surrendered, is shown in the table below:
Policy Surrender Policy Surrender
Year Charge Year Charge
_________ ______________ _________ _______________
1 7.5% 6 4.0%
2 7.5% 7 3.0%
3 7.5% 8 2.0%
4 6.0% 9 1.0%
5 5.0% 10+ 0%
Nursing Home Waiver
If you or the joint owner, if any, are confined in a qualifying facility for 90
consecutive days or more and if the confinement begins during the first ten
years, under the Nursing Home Waiver rider, you can make a full or partial
surrender and we will waive the surrender charge. The Nursing Home Waiver goes
into effect after the first Policy Anniversary. There is no additional charge
for this feature.
Deferred Premium Tax Charge
When you purchase a Policy there are various premium taxes assessed by state and
local governmental entities that we must pay on the Policy. You are charged a
portion of that each month for the first ten years as part of the tax expense
charge. (See the discussion of the Tax Expense Charge in Section 4 above.) The
deferred premium tax charge enables Cova to collect that portion of the premium
tax charge it has not collected when you surrender all or part of your Policy.
The deferred premium tax charge is assessed only on premiums surrendered from
the Policy during the first ten years.
The deferred premium tax charge, which is a percent of premiums surrendered, is
shown in the table below:
Deferred Deferred
Policy Premium Policy Premium
Year Tax Charge Year Tax Charge
_________ ______________ _________ _______________
1 2.25% 6 1.00%
2 2.00% 7 .75%
3 1.75% 8 .50%
4 1.50% 9 .25%
5 1.25% 10+ 0%
Transfer Fee
You can make 12 free transfers every year. We measure a year from the Policy
Date. If you make more than 12 transfers a year, we will deduct a transfer fee
of $25 or 2% of the amount that is transferred, whichever is less. If we do
assess a transfer fee, it will be deducted from the amount transferred.
If the transfer is part of the Dollar Cost Averaging Program, the Automatic
Rebalancing Program or an Approved Asset Allocation Program, it will not count
in determining the transfer fee.
Taxes
Cova may assess a charge against a Policy for any taxes attributable to the
Separate Account. Cova does not expect to incur such taxes.
Investment Portfolio Expenses
There are deductions from and expenses paid out of the assets of the various
investment portfolios, which are summarized below. See the fund prospectuses for
a complete description.
<TABLE>
<CAPTION>
Investment Portfolio Expenses
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management certain Portfolios - Total Annual
Fees see Note 1 below) Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds
Managed by A I M Advisors, Inc.
<S> <C> <C> <C>
AIM V.I. Capital Appreciation .62% .11% .73%
AIM International Equity .75% .22% .97%
AIM V.I. Value .61% .15% .76%
- ------------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust (1)
Managed by J.P. Morgan Investment Management Inc.
Select Equity .67% .10% .77%
Small Cap Stock .85% .19% 1.04%
Large Cap Stock .65% .10% .75%
International Equity .79% .31% 1.10%
Quality Bond .54% .10% .64%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Lord, Abbett & Co.
Bond Debenture .75% .10% .85%
Mid-Cap Value 1.00% .30% 1.30%
Large Cap Research 1.00% .30% 1.30%
Developing Growth .90% .30% 1.20%
Lord Abbett Growth and Income (2) .65% .05% .70%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Portfolio Expenses (continued)
(as a percentage of the average daily net assets of an investment portfolio)
Other Expenses
(after expense
reimbursement for
Management certain Portfolios - Total Annual
Fees see Note 1 below) Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Templeton Variable Insurance Products
Trust, Class 1 Shares
Managed by Templeton Investment Counsel, Inc.
Templeton International Securities (3) .69% .19% .88%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Templeton Global Advisors Limited
Templeton Growth Securities (4) .83% .05% .88%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Franklin Advisers, Inc.
Franklin Large Cap Growth Securities (5) .75% .02% .77%
Franklin Small Cap (6) .55% .27% .82%
Templeton Global Income Securities (7) .60% .05% .65%
- ------------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Managed by Conning Asset Management Company
Money Market .125% .08% .205%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Cova reimburses the investment portfolios, except the Select Equity,
Small Cap Stock and International Equity Portfolios, for all operating expenses
(exclusive of the management fees) in excess of approximately .30% for the
Mid-Cap Value, Large Cap Research and Developing Growth Portfolios and in
excess of approximately .10% for the other investment portfolios. Prior to
May 1, 1999, Cova had reimbursed expenses in excess of approximately .10% with
respect to the Select Equity, Small Cap Stock, International Equity, Mid-Cap
Value, Large Cap Research and Developing Growth Portfolios. Therefore, the
amounts shown above under "Other Expenses" have been restated to reflect the
estimated expenses for the Select Equity, Small Cap Stock and International
Equity Portfolios for the year ending December 31, 2000. Absent these
expense reimbursement arrangements, the total annual portfolio expenses
for the year ended December 31, 1999 were: 1.09% for the Small Cap
Stock Portfolio; 1.15% for the International Equity Portfolio; .71% for
the Quality Bond Portfolio; .76% for the Large Cap Stock Portfolio;
.86% for the Bond Debenture Portfolio; 1.41% for the Mid-Cap Value
Portfolio; 1.38% for the Large Cap Research Portfolio, and 1.34% for the
Developing Growth Portfolio.
(2) The Portfolio commenced investment operations on January 8, 1999.
(3) On 2/8/00, shareholders approved a merger and reorganization
that combined the fund with the Templeton International Equity Fund,
effective 5/1/00. The shareholders of that fund had approved new management
fees, which apply to the combined fund effective 5/1/00. The table shows
restated total expenses based on the new fees and the assets of the fund as
of 12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees 0.65%, Other Expenses
0.20%, and Total Fund Operating Expenses 0.85%.
(4) On 2/8/00, a merger and reorganization was approved that combined
the fund with a similar fund of Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's assets
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.80%, Other Expenses 0.05%, and Total Fund Operating
Expenses 0.85%. The fund administration fee is paid indirectly through the
management fee.
(5) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.75%, Other Expenses 0.02%, and Total Fund Operating
Expenses 0.77%. Before December 15, 1999, the Fund was known as the Franklin
Capital Growth Fund. The fund administration fee is paid indirectly through
the management fee.
(6) On 2/8/00, a merger and reorganization was approved that combined the
assets of the fund with a similar fund of Templeton Variable Products Series
Fund, effective 5/1/00. On 2/8/00, fund shareholders approved new management
fees, which apply to the combined fund effective 5/1/00. The table shows
restated total expenses based on the new fees and assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees 0.55%, Other Expenses
0.27%, and Total Fund Operating Expenses 0.82%.
(7) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.60%, Other Expenses 0.04%, and Total Fund Operating
Expenses 0.64%. The fund administration fee is paid indirectly through the
management fee.
</FN>
</TABLE>
5. DEATH BENEFIT
The primary purpose of the Policy is to provide death benefit protection on the
life of the insured. While the Policy is in force, if the insured dies, the
beneficiary(ies) will receive the death proceeds. The death proceeds equal the
death benefit under the Policy less any loans and accrued loan interest.
The death benefit is the greater of:
(1) the Face Amount of the Policy; and
(2) the minimum death benefit. (The minimum death benefit is the Account Value
multiplied by a percentage.)
Cova has included the minimum death benefit in order to assure that the Policy
will continue to qualify as life insurance under the Internal Revenue Code.
You can choose to have the death proceeds paid:
* in a lump sum, or
* under a Settlement Option.
If you have not made a choice before the insured dies, the beneficiary will
choose the method of payment. If a method of payment has not been chosen within
90 days after receiving proof of death, Cova may pay the death proceeds in a
lump sum.
The death benefit payable during the grace period is the death benefit in effect
immediately prior to the start of the grace period less any loans, accrued loan
interest and any overdue deductions. See discussion of grace period above.
Accelerated Death Benefit
If the insured is terminally ill, under the Accelerated Death Benefit rider,
Cova will pre-pay a portion of the death benefit. You may elect to have an
Accelerated Death Benefit of up to 50% of the death benefit but no greater than
$500,000.
You can only elect to receive an Accelerated Death Benefit once. The Accelerated
Death Benefit must first be used to repay any outstanding loans and accrued loan
interest. After repayment of the outstanding loans and accrued loan interest,
any remaining amount will be paid as a lump sum or under a payment plan.
The subsequent amount available for loans or surrenders or as a death benefit
will be reduced by the amount of the Accelerated Death Benefit, plus interest
accrued at the Policy loan interest rate.
This benefit may not be available in your state or may have different provisions
in your state.
Joint Lives
Cova offers a rider to the Policy that provides that the death benefit will be
paid only upon the death of a second person. This option is only available to
spouses.
The cost of insurance charge reflects the anticipated life expectancy of both
insureds. It also reflects the fact that the death benefit is payable at the
death of the last surviving insured.
If you wish to reinstate a lapsed Policy with a Joint Life rider attached, both
insureds must be alive and provide satisfactory evidence of insurability.
The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both insureds.
If a Joint Life rider is issued in conjunction with the Policy, the Accelerated
Death Benefit will only be payable on the terminal illness of the last surviving
insured.
This benefit may not be available in your state.
6. TAXES
NOTE: Cova has prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any person. You
should consult your own tax adviser about your own circumstances. Cova has
included in Part II an additional discussion regarding taxes.
Life Insurance in General
Life insurance, such as the Policy, is a means of providing for death protection
and setting aside money for future needs. Congress recognized the importance of
such planning and provided special rules in the Internal Revenue Code for life
insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance policy until you take the money out. The
beneficiaries are not taxed when they receive the death proceeds upon the death
of the insured.
You, as the owner, will not be taxed on increases in the value of your Policy
until a distribution occurs - either as a surrender or as a loan. When you
receive a distribution, you are taxed on the amount of the withdrawal that is
earnings.
Taking Money Out of Your Policy
For tax purposes, your Policy will be treated as a modified endowment contract,
unless, under certain circumstances, it was exchanged for a policy issued before
June 21, 1988. Consequently, if you make a withdrawal or a loan from your
Policy, the Code treats it as first coming from earnings and then from your
premiums. These earnings are included in taxable income.
The Code also provides that any amount received from an insurance policy which
is included in income may be subject to a 10% penalty. The penalty will not
apply if the income received is:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid if the taxpayer becomes totally disabled (as that term is defined in
the Code); or
(3) in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer.
If you purchased a Policy in exchange for a policy issued prior to June 21,
1988, different tax rules may apply.
See "Tax Status" in Part II for more details.
Diversification
The Code provides that the underlying investments for a variable life policy
must satisfy certain diversification requirements in order to be treated as a
life insurance contract. Cova believes that the investment portfolios are being
managed so as to comply with the requirements. Under current federal tax law, it
is unclear as to the circumstances under which you, because of the degree of
control you exercise over the underlying investments, and not Cova would be
considered the owner of the shares of the investment portfolios. If you are
considered the owner of the investments, it will result in the loss of the
favorable tax treatment for the Policy. It is unknown to what extent owners are
permitted to select investment portfolios, to make transfers among the
investment portfolios or the number and type of investment portfolios owners may
select from without being considered the owner of the investments. If guidance
from the Internal Revenue Service is provided which is considered a new
position, then the guidance would generally be applied prospectively. However,
if such guidance is considered not to be a new position, it may be applied
retroactively. This would mean that you, as the owner of the Policy, could be
treated as the owner of the investment portfolios.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
The Cash Surrender Value in your Policy is available:
(1) by making a surrender (either a partial or a complete surrender), or
(2) by taking a loan from your Policy.
Loans
You may borrow money from Cova while the Policy is still in force. The Policy
will be the only security Cova will require for a Policy loan. You cannot borrow
against your Policy:
* until the end of the right to examine period, and
* if the Policy is in a grace period.
Loans are considered distributions from the Policy for tax purposes. The portion
of the loan that has come from earnings will be taxable to you and may be
subject to a 10% penalty tax.
See "Tax Status" in Part II for more details.
Loan Amount. The maximum loan amount is equal to 90% of the Account Value:
* less loan interest due on the next Policy Anniversary,
* less the surrender charge,
* less the Policy maintenance fee, if any, and
* less the deferred premium tax charge, if any.
The minimum loan amount is $500. If total loans equal or exceed the Cash Value,
the Policy will terminate at the end of the grace period if Cova does not
receive an appropriate loan repayment.
Loan Account. When you make a loan, a portion of your Account Value equal to the
loan will be transferred on a pro rata basis from the investment portfolios to
the loan account. The loan account is a portion of Cova's general account that
contains Account Values attributable to Policy loans.
Loan Interest. Loan interest due on the Policy loan will accrue daily at a
current rate of 6.0% per annum. The loan interest is due each Policy Anniversary
and if not paid will become part of the loan. When that happens, Cova will
transfer a portion of the Account Value equal to the loan interest due, on a pro
rata basis, from the investment portfolios to the loan account.
Interest Credited. Amounts held in the loan account will be credited daily with
interest, at a current rate of 4.0% annually.
Preferred Loan. The part of your loan equal to earnings is the Preferred Loan. A
preferred loan will be credited interest daily at a current rate of 6.0% per
annually.
Effect of Loan. When you make a loan against your Policy, Cova will redeem
Accumulation Units from the investment portfolios equal to the loan request and
transfer that amount to the loan account.
A Policy loan, whether or not repaid, will have a permanent effect on the
Policy. This is because the loan account does not share in the investment
results of the investment portfolio(s). If it is not repaid, the Policy loan and
accrued loan interest will reduce the amount of Cash Value. It will also reduce
the amount payable at death because outstanding loans and accrued loan interest
are deducted from the death benefit.
Loan Repayments. You can repay all or part of a loan at any time while your
Policy is in force and the insured is alive. There is no minimum loan repayment
amount. If you want to repay a loan in full, the loan repayment must equal the
loan plus all the accrued loan interest.
When you repay a loan, Cova will transfer the amount held in the loan account to
the investment portfolios according to your most recent instructions.
Unless you tell Cova otherwise, any payment Cova receives from you will:
* go first to pay any interest due,
* then to repay any loan, and
* then will be considered a premium payment.
Total Surrender
You can terminate your Policy by notifying Cova in writing. Cova will pay you
the Cash Surrender Value. When that happens, the Policy will be terminated and
there will be no other benefits. When you make a total surrender there may be
surrender charges and deferred premium tax charges and the policy maintenance
fee will be deducted.
Partial Surrenders
You can surrender some of the Cash Surrender Value by making a request in
writing to Cova. The minimum amount you can surrender is $500, unless your Cash
Surrender Value is less.
Cova requires that you maintain a minimum Account Value in your Policy of at
least $5,000 after you make a partial surrender. If you do not, the Policy will
terminate and Cova will send you the entire Cash Surrender Value.
When you make a partial surrender, there may be surrender charges and deferred
premium tax charges.
When you make a partial surrender, the Face Amount of your Policy will be
reduced. The Face Amount is reduced in the same proportion that the Account
Value is reduced by the partial surrender. When you make a partial surrender,
the amount of the surrender is deducted on a pro rata basis from Account Value
allocated to the investment portfolios, unless you specify otherwise.
Termination of the Policy
Your Policy will terminate if:
(1) you make a total surrender of the Policy,
(2) the grace period has ended, or
(3) the insured has died.
Reinstatement
If your Policy terminates while the insured is still alive you can have it
reinstated provided the Policy did not terminate because you made a total
surrender. You can only reinstate your Policy within 5 years after the end of
the grace period. If there are joint insureds, both insureds must be alive.
When you reinstate your Policy you must provide Cova with satisfactory evidence
of insurability and you must either repay any outstanding loan and accrued
interest or you must reinstate the loan along with any accrued interest. You
must also pay a sufficient premium to:
(1) cover all the monthly deductions and any policy maintenance fees that were
unpaid during the grace period, and
(2) be sufficient to keep the Policy in force for at least 2 months after the
date of reinstatement.
When you reinstate your Policy, the Face Amount of the reinstated Policy will be
the Face Amount of your original Policy at the time the Policy terminated,
unless you direct Cova otherwise. You cannot select a Face Amount that is larger
than that. The Account Value adjusted for the past due charges of your Policy
when you reinstate it will be the Account Value at the time of termination plus
the additional premium paid at the time of reinstatement. The past due monthly
deductions and Policy maintenance fee, if any, will be deducted from this
amount. The surrender charge, if any, and the deferred premium tax charge, if
any, are based on the number of Policy Years from the original Policy Date.
The effective date of the reinstated Policy is the next processing date
following Cova's approval of your application for reinstatement.
8. OTHER INFORMATION
Cova
Cova Financial Life Insurance Company ("Cova") was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation, and changed its name to Xerox Financial Life Insurance Company in
1986. On June 1, 1995, a wholly-owned subsidiary of General American Life
Insurance Company purchased Cova, which on that date changed its name to Cova
Financial Life Insurance Company. 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.
The Separate Account
Cova has established a separate account, Cova Variable Life Account Five
(Separate Account), to hold the assets that underlie the Policies.
The assets of the Separate Account are held in Cova's name on behalf of the
Separate Account and legally belong to Cova. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business Cova may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or charged against the
Policies and not against any other policies Cova may issue.
The Separate Account is divided into sub-accounts.
Distributor
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is an affiliate of Cova.
Commissions will be paid to broker-dealers who sell the Policies. Broker-dealers
will be paid commissions up to 5.5% of premiums and a trail commission up to
.25% for years two through nine which increases up to .40% in year 10 or later.
Sometimes, Cova enters into an agreement with the broker-dealer to pay the
broker-dealer persistency bonuses, in addition to the standard commission.
Suspension of Payments or Transfers
Cova may be required to suspend or postpone any payments or transfers for any
period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or Cova cannot
reasonably value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
Ownership
Owner. You, as the owner of the Policy, have all of the rights under the Policy.
If you die while the Policy is still in force and the insured is living,
ownership passes to a successor owner or if none, then your estate becomes the
owner.
Joint Owner. The Policy can be owned by joint owners. Authorization of both
joint owners is required for all Policy changes except for telephone transfers.
Beneficiary. The beneficiary is the person(s) or entity you name to receive any
death benefit. The beneficiary is named at the time the Policy is issued, unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the insured dies. If there is an
irrevocable beneficiary, all Policy changes except premium allocations and
transfers require the consent of the beneficiary.
Assignment. You can assign the Policy.
PART II
More Information
Cova
Cova Financial Life Insurance Company (Cova) was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation, and changed its name on January 1, 1986 to Xerox Financial Life
Insurance Company. The Company presently is licensed to do business in the state
of California. On June 1, 1995, a wholly-owned subsidiary of General American
Life Insurance Company (General American) purchased Xerox Financial Services
Life Insurance Company (Xerox Life), an affiliate of Cova, from Xerox Financial
Services, Inc. The acquisition of Xerox Life included related companies,
including Cova. On June 1, 1995 Cova changed its name to Cova Financial Life
Insurance Company. 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 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.
Executive Officers and Directors of Cova
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
<TABLE>
<CAPTION>
Principal Occupation During
Name the Past 5 Years
<S> <C>
John W. Barber*** Director of Cova - June, 1995 to present; Director of First Cova Life Insurance
Company (FCLIC) - June, 1995 to present; Director of Cova Financial Services Life
Insurance Company (CFSLIC) - June, 1995 to present; Vice President and Controller
of General American Life Insurance Company - December, 1984 to present; President
and Director of Equity Intermediary Company - October, 1988 to present.
William P. Boscow* Vice President of Cova and CFSLIC - 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 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 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 - 1991 to present; Vice
President, Chief Actuary and Director of CFSLIC - 1991 to present; Vice President,
Chief Actuary and Director of FCLIC - 1992 to present; Senior Vice President,
Chief Actuary and Director of CLMC - 1996 to present, prior thereto Vice President
and Director from 1993 to 1996 and Vice President from 1991 to 1993.
Thomas E. Hughes, Jr.** Treasurer and Director of Cova - June, 1995 to present; Treasurer and Director of
CFSLIC - June, 1995 to present; Treasurer of FCLIC - June, 1995 to present;
Corporate Actuary and Treasurer of General American Life Insurance Company -
October, 1994 to present. Formerly, Executive Vice President - Group Pensions,
General American Life Insurance Company - March, 1990 to October, 1994. In
addition to the Cova companies, Director of the following General American
subsidiary companies: Paragon Life Insurance Company and RGA Reinsurance Company -
October, 1994 to present. Treasurer of the following General American subsidiary
companies: Paragon Life Insurance Company, General Life Insurance Company of
America, General Life Insurance Company, General American Holding Company, Red Oak
Realty Company, Gen Mark Incorporated, Walnut Street Securities, Inc., Walnut
Street Advisers Inc., White Oak Royalty Company, Walnut Street Funds, Inc., and
RGA Reinsurance Company - October, 1994 to present.
Douglas E. Jacobs* Vice President of Cova - 1985 to present; Vice President of CFSLIC - 1985 to
present; Vice President of CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President
from 1990 to 1995; Vice President of CFSLIC - 1997 to present, prior thereto
Assistant Vice President from 1988 to 1995; Vice President of FCLIC - 1997 to
present, prior thereto Assistant Vice President from 1993 to 1995; Vice President
of J&H/KVI - 1985 to present.
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFSLIC, FCLIC, CLMC, Advisory and Cova
Investment Allocation Corporation (Allocation) - April, 1997 to present; Chairman
of the Board, President and Chief Executive Officer of General American Life
Insurance Company - May, 1992 to present; Mr. Liddy also holds various positions
with the General American subsidiaries as follows: Chairman of the Board and
President of General American Mutual Holding Company, GenAmerica Corporation and
General American Holding Company; Chairman of the Board of Security Equity Life
Insurance Company, Conning Corporation, The Walnut Street Funds, Inc., General
American Capital Company, Reinsurance Group of America, Inc., RGA Life Reinsurance
Company of Canada, and RGA Reinsurance Company.
James W. Koeger** Assistant Treasurer
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 Director of Cova
Series Trust (Trust) - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova - June, 1995 to present; Assistant
Secretary and Director of CFSLIC - June, 1995 to present; Assistant Secretary and
Director of FCLIC - June, 1995 to present; Associate General Counsel and Vice
President of General American Life Insurance Company - 1973 to present; also,
Director, Vice President, General Counsel and Secretary for several other General
American subsidiaries including Equity Intermediary Company, Red Oak Realty
Company, and White Oak Royalty Company; General American Holding Company and
Paragon Life Insurance Company. General Counsel and Secretary, Reinsurance Group
of America, Incorporated. Director and Secretary, General American Capital
Company. General Counsel and Secretary, Conning Corporation. General Counsel,
Conning Asset Management Company. Director of RGA Reinsurance Company, Walnut
Street Securities, Inc. Secretary to the Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President and Director of Cova - May, 1997 to present; Executive
Vice President and Director of CFSLIC - May, 1997 to present; Executive Vice
President and Director of FCLIC - May, 1997 to present; Executive Vice President
of CLMC - May, 1997 to present; Executive Vice President and Director of Advisory
- December, 1996 to present; Executive Vice President, Chief Financial Officer and
Director of FCLIC - May, 1997 to present, Executive Vice President and Director of
Allocation - December, 1996 to present.
Myron H. Sandberg* Vice President of Cova - 1985 to present; Vice President of CFSLIC - 1985 to
present; and CLMC - 1989 to present.
John W. Schaus* Vice President of Cova 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.
Lorry J. Stensrud* President and Director of Cova from June, 1995 to present, prior thereto Executive
Vice President; President and Director of CFSLIC from June, 1995 to present, prior
thereto Executive Vice President; President and Director of FCLIC from June, 1995
to present, prior thereto Executive Vice President; President and Director of CLMC
from June, 1995 to present, prior thereto Executive Vice President only; President
and Director of Advisory from 1993 to present; President and Director of
Allocation from 1994 to present. Director of CLSC from 1989 to present; President,
Chief Executive Officer and Director of Trust - 1996 to present.
Joann T. Tanaka* 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.
Patricia M. Wersching** Assistant Treasurer
Peter L. Witkewiz* Vice President and Controller of Cova, CFSLIC and FCLIC - July 1998 to present;
Vice President of Cova, CFSLIC and FCLIC - 1993 to June, 1998.
<FN>
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: Cova Life Administration Services Company, 4700 Westown Parkway,
Bldg. 4, Suite 200, West Des Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with its view of present applicable law, Cova will vote the shares
of the investment portfolios at special meetings of shareholders in accordance
with instructions received from owners having a voting interest. Cova will vote
shares for which it has not received instructions in the same proportion as it
votes shares for which it has received instructions. Cova will vote shares it
owns in the same proportion as it votes shares for which it has received
instructions. The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation under it should be
amended or if the present interpretations should change, and as a result Cova
determines that it is permitted to vote the shares of the funds in its own
right, it may elect to do so.
The voting interests of the owner in the funds will be determined as follows:
owners may cast one vote for each $100 of Account Value of a Policy which is
allocated to an investment portfolio on the record date. Fractional votes are
counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by Cova not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each owner having such a voting interest will receive periodic reports relating
to the investment portfolios in which he or she has an interest, proxy material
and a form with which to give such voting instructions.
Disregard of Voting Instructions. Cova may, when required to do so by state
insurance authorities, vote shares of the funds without regard to instructions
from owners if such instructions would require the shares to be voted to cause
an investment portfolio to make, or refrain from making, investments which would
result in changes in the sub-classification or investment objectives of the
investment portfolio. Cova may also disapprove changes in the investment policy
initiated by owners or trustees/directors of the funds, if the disapproval is
reasonable and is based on a good faith determination by Cova that the change
would violate state or federal law or the change would not be consistent with
the investment objectives of the investment portfolios or which varies from the
general quality and nature of investments and investment techniques used by
other funds with similar investment objectives underlying other variable
contracts offered by Cova or of an affiliated company. In the event Cova does
disregard voting instructions, a summary of this action and the reasons for such
action will be included in the next semi-annual report to owners.
The Separate Account
Cova has established the separate account, Cova Variable Life Account Five
(Separate Account), to hold the assets that underlie the Policies. The Board of
Directors of Cova adopted a resolution to establish the Separate Account under
California insurance law on March 24, 1992. Cova has registered the Separate
Account with the Securities and Exchange Commission as a unit investment trust
under the Investment Company Act of 1940.
The investment program of the Separate Account will not be changed without the
approval by the Insurance Commissioner of the state of California. If required,
the approval process is on file with the Commissioner of the state in which this
Policy is issued.
If the New York Stock Exchange is closed (except for holidays and weekends) or
trading is restricted due to an emergency as defined by the Securities and
Exchange Commission so that Cova cannot value Accumulation Units, Cova may
postpone all procedures which require valuation of the Accumulation Units until
valuation is possible.
Legal Opinions
Legal matters in connection with the Policies described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
Reduction or Elimination of Surrender Charge
The amount of the surrender charge on the Policies may be reduced or eliminated
when sales of the Policies are made to individuals or to a group of individuals
in a manner that results in savings of sales expenses. The entitlement to a
reduction of the surrender charge will be determined by Cova after examination
of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Policies with fewer sales contacts.
2. The total amount of premium payments to be received will be considered. Per
Policy sales expenses are likely to be less on larger premium payments than
on smaller ones.
3. Any prior or existing relationship with Cova will be considered. Per Policy
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Policy with
fewer sales contacts.
4. There may be other circumstances, of which Cova is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, Cova determines that there
will be a reduction in sales expenses, Cova may provide for a reduction or
elimination of the surrender charge.
The surrender charge may be eliminated when the Policies are issued to an
officer, director or employee of Cova or any of its affiliates. In no event will
any reduction or elimination of the surrender charge be permitted where the
reduction or elimination will be unfairly discriminatory to any person.
Misstatement of Age or Sex
If the age or sex of the insured(s) has been incorrectly stated, the death
benefit will be adjusted to reflect the death benefit that would have been
provided by the last cost of insurance at the correct age and/or sex of the
insured.
Cova's Right to Contest
Cova cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the insured's lifetime for two years from the
Policy Date. If the Policy is reinstated, the two-year period is measured from
the date of reinstatement. In addition, if the insured commits suicide in the
two-year period, or such period as specified in state law, the benefit payable
will be limited to premiums paid less debt and less any surrenders.
Settlement Options
The Cash Surrender Value or the death proceeds may be paid in a lump sum or may
be applied to one of the Settlement Options. The Settlement Options are:
Option 1: Life Annuity
Option 2: Life Annuity with 5, 10 or 20 years guaranteed
Option 3: Joint and Last Survivor Annuity
Option 4: Payments for a Designated Period
You or the beneficiary can select to have the Settlement Options payable on
either a fixed or variable basis.
Tax Status
NOTE: The following description is based upon Cova's understanding of current
federal income tax law applicable to life insurance in general. Cova cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. Cova
believes that the policies to be issued will qualify as "life insurance
contracts" under Section 7702. Cova does not guarantee the tax status of the
policies. Purchasers bear the complete risk that the policies may not be treated
as "life insurance" under federal income tax laws. Purchasers should consult
their own tax advisers. It should be further understood that the following
discussion is not exhaustive and that special rules not described in this
prospectus may be applicable in certain situations.
Introduction. The discussion in this prospectus is general in nature. It is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. Cova has not considered any applicable state or other tax laws.
Moreover, the discussion in this prospectus is based upon Cova's understanding
of current federal income tax laws as they are currently interpreted. Cova makes
no representation regarding the likelihood of continuation of those current
federal income tax laws or of the current interpretations by the Internal
Revenue Service. Cova is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
Cova and its operations form a part of Cova.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy.
The Code contains a safe harbor provision which provides that life insurance
policies such as the Policies meet the diversification requirements if, as of
the close of each quarter, the underlying assets meet the diversification
standards for a regulated investment company and no more than fifty-five (55%)
percent of the total assets consist of: cash, cash items, U.S. Government
securities, and securities of other regulated investment companies. There is an
exception for securities issued by the U.S. Treasury in connection with variable
life insurance policies.
The Treasury Department issued Regulations which established diversification
requirements for the investment portfolios underlying variable contracts such as
the Policies. The Regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an alternative to the safe
harbor provision described above. Under the Regulations, an investment portfolio
will be deemed adequately diversified if:
(i) no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
(ii) no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
(iii)no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
(iv) no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
For purposes of these Regulations, all securities of the same issuer are treated
as a single investment.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
have been met, "each United States government agency or instrumentality shall be
treated as a separate issuer".
Cova intends that each investment portfolio underlying the Policies will be
managed by the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered as the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, Cova reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. The Code requires that the
amount of mortality and other expense charges be reasonable.
In establishing these charges, Cova has relied on the interim guidance provided
in IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While Cova has attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not agree with Cova's interpretations of Section 7702 that were
made in determining such compliance. In the event the Policy is determined not
to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies.
You should consult your own tax adviser with respect to the tax consequences of
purchasing the Policy.
Policy Proceeds. Loan proceeds and/or surrender payments, including those
resulting from the lapse of the Policy, from the Policies are fully taxable to
the extent of income in the Policy and may further be subject to an additional
10% federal income tax penalty. (See "Tax Treatment of Loans and
Surrenders".)Otherwise, the Policy should receive the same federal income tax
treatment as any other type of life insurance. As such, the death benefit
thereunder is excludable from the gross income of the beneficiary under the Code
and any benefits paid under the Accelerated Death Benefit Rider should also be
excludable from gross income under the Code. Furthermore, you are not deemed to
be in constructive receipt of the Account Value or Cash Surrender Value,
including increments thereon, under a Policy until you make a surrender. If the
death proceeds are to be paid under one of the Settlement Options, the payments
will be prorated between the amount attributable to the death benefit which will
be excludable from the beneficiary's income and the amount attributable to
interest which will be includable in the beneficiary's income.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Policy owner or beneficiary. Owners and beneficiaries should consult their tax
advisers.
Joint Lives. The Policy may be issued with a Joint Life Rider providing for the
payment of the death benefit upon the death of the last surviving insured. While
Cova believes that a Policy issued on this basis complies with Section 7702 of
the Code, such circumstances are not directly addressed in either Section 7702
or the related regulations. In the absence of regulation or other guidelines,
there is some uncertainty as to whether a Policy with such a joint life feature
meets the requirements of Section 7702 of the Code.
Tax Treatment of Loans and Surrenders. The Code alters the tax treatment
accorded to loans and certain distributions from life insurance policies which
are deemed to be "modified endowment contracts". The Policy's premium
requirements are such that Policies issued on or after June 21, 1988 will be
treated as modified endowment contracts. A Policy received in exchange for a
modified endowment contract is also a modified endowment contract regardless of
whether it meets the 7-pay test.
However, an exchange under Section 1035 of the Code of a life insurance policy
entered into before June 21, 1988 for the Policy will not cause the Policy to be
treated as a modified endowment contract if no additional premiums are paid.
A Policy that was entered into prior to June 21, 1988 may be deemed to be a
modified endowment contract if:
* it is materially changed, and
* fails to meet the 7-pay test.
A Policy fails to meet the 7-pay test when the cumulative amount paid under the
Policy at any time during the first 7 Policy Years exceeds the sum of the net
level premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven (7) level annual
premiums.
A material change would include any increase in the future benefits provided
under a Policy unless the increase is attributable to:
(1) the payment of premiums necessary to fund the lowest death benefit and
qualified additional benefits payable in the first seven Policy Years; or
(2) the crediting of interest or other earnings (including policyholder
dividends) with respect to such premiums.
Assuming that the Policy will be treated as a modified endowment contract,
surrenders and/or loan proceeds are taxable to the extent of income in the
Policy. Such distributions are deemed to be on a last-in, first-out basis, which
means the taxable income is distributed first. Loan proceeds and/or surrender
payments may also be subject to an additional 10% federal income tax penalty
applied to the income portion of such distribution. The penalty shall not apply,
however, to any distribution:
(1) made on or after the date on which the taxpayer reaches age 59-1/2;
(2) which is attributable to the taxpayer becoming disabled (within the meaning
of Section 72(m)(7) of the Code); or
(3) which is part of a series of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and his or her beneficiary.
Furthermore, only under limited circumstances will interest paid on Policy loans
be tax deductible.
If a Policy is not classified as a modified endowment contract, then any
surrenders shall be treated first as a recovery of the investment in the Policy
which would not be received as taxable income. However, if a distribution is the
result of a reduction in benefits under the Policy within the first fifteen
years after the Policy is issued in order to comply with Section 7702, such
distribution will, under rules set forth in Section 7702, be taxed as ordinary
income to the extent of income in the Policy.
Any loans from a Policy which is not classified as a modified endowment
contract, will be treated as indebtedness of the owner and not a distribution.
Upon complete surrender or lapse of the Policy or when maturity benefits are
paid, if the amount received plus the Policy debt exceeds the total premiums
paid that are not treated as previously surrendered by the Policy owner, the
excess generally will be treated as ordinary income.
You should seek competent tax advice on the tax consequences of taking loans,
making a partial or total surrender or making any material modifications to your
Policy.
Tax Treatment of Settlement Options. Under the Code, a portion of the settlement
option payments which are in excess of the death benefit proceeds are included
in the beneficiary's taxable income. Under a settlement option payable for the
lifetime of the beneficiary, the death benefit proceeds are divided by the
beneficiary's life expectancy (or joint life expectancy in the case of a joint
and survivor option) and proceeds received in excess of these prorated amounts
are included in taxable income. The value of the death benefit proceeds is
reduced by the value of any period certain or refund guarantee. Under a fixed
payment or fixed period option, the death benefit proceeds are prorated by
dividing the proceeds over the payment period under the option. Any payments in
excess of the prorated amount will be included in taxable income.
Multiple Policies. The Code further provides that multiple modified endowment
contracts that are issued within a calendar year period to the same owner by one
company or its affiliates are treated as one modified endowment contract for
purposes of determining the taxable portion of any loans or distributions. Such
treatment may result in adverse tax consequences including more rapid taxation
of the loans or distributed amounts from such combination of contracts.
You should consult a tax adviser prior to purchasing more than one modified
endowment contract in any calendar year period.
Tax Treatment of Assignments. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. You should therefore consult a
competent tax adviser if you wish to assign or change the owner of your Policy.
Qualified Plans. The Policies may be used in conjunction with certain qualified
plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent qualified plans consultant.
Income Tax Withholding
All distributions or the portion thereof which is includable in gross income of
the Policy owner are subject to federal income tax withholding. However, the
Policy owner in most cases may elect not to have taxes withheld. The Policy
owner may be required to pay penalties under the estimated tax rules, if the
Policy owner's withholding and estimated tax payments are insufficient.
Reports to Owners
Cova will send you semi-annual and annual reports of the investment portfolios.
Within 30 days after each Policy Anniversary, Cova will send you an annual
statement. The statement will show:
* the current amount of death benefit payable under the Policy,
* the current Account Value,
* the current Cash Surrender Value,
* current debt, and
* all transactions previously confirmed.
The statement will also show premiums paid and all charges deducted during the
Policy Year.
Cova will mail you a confirmation within seven days of the transaction of:
(a) the receipt of premium;
(b) any transfer between investment portfolios;
(c) any loan, interest repayment, or loan repayment;
(d) any surrender;
(e) exercise of the free look privilege; and
(f) payment of the death benefit under the Policy.
Upon request, you are entitled to a receipt of premium payment.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. Cova is
not involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
Experts
The balance sheets of the Company as of December 31, 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.
APPENDIX A
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 55 and 70 and a husband and wife age 65. Our
hypothetical insureds are in good health which means the Policy would be issued
with standard rates. The initial premium was $10,000 and is 100% of the Maximum
Premium Limit.
There are three illustrations - all of which are based on the above. We also
assumed that the underlying investment portfolio had gross rates of return of
0%, 6%, 12%. This means that the underlying investment portfolio would earn
these rates of return before the deduction of the advisory fee and operating
expenses. When these costs are taken into account, the net annual investment
return rates (net of an average of .86% for these charges) are approximately
- -.86%, 5.14% and 11.14%.
It is important to be aware that this illustration assumes a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Account Value, Cash
Surrender Value and the net death benefit. The net death benefit is the death
benefit minus any outstanding loans and loan interest accrued. We used the
charges we described in the Expenses Section of the Prospectus. These charges
are:
(1) mortality and expense risk charge equal to an annual rate of 0.90% of the
Account Value in the investment portfolios for the first ten years and
0.50% annually after that;
(2) an administrative charge equal to an annual rate of 0.40% of the Account
Value;
(3) a tax expense charge equal to an annual rate of 0.40% of the Account Value
for the first 10 years;
(4) any surrender charges or deferred premium tax charge which may be
applicable in determining the Cash Surrender Values; and
(5) the Policy maintenance charge.
We also deducted for the cost of insurance based on both the current charges and
the guaranteed charges.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how $10,000 grows if it was invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed insured's age, risk classification, Face Amount, the
proposed initial premium, and reflecting both the current cost of insurance and
the guaranteed cost of insurance.
APPENDIX A
ILLUSTRATION OF POLICY VALUES (continued)
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 55, Standard Rate Class
$10,000 Single Premium Face Amount of $27,290
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,654 8,788 27,290 9,528 8,674 27,290
2 11,025 9,319 8,508 27,290 9,044 8,260 27,290
3 11,576 8,994 8,237 27,290 8,548 7,832 27,290
4 12,155 8,680 8,089 27,290 8,036 7,493 27,290
5 12,763 8,375 7,902 27,290 7,506 7,087 27,290
6 13,401 8,081 7,717 27,290 6,954 6,646 27,290
7 14,071 7,795 7,533 27,290 6,375 6,166 27,290
8 14,775 7,519 7,351 27,290 5,763 5,639 27,290
9 15,513 7,251 7,170 27,290 5,111 5,057 27,290
10 16,289 6,992 6,992 27,290 4,413 4,413 27,290
15 20,789 6,055 6,055 27,290 51 51 27,290
20 26,533 5,224 5,224 27,290 0 0 0
25 33,864 4,488 4,488 27,290 0 0 0
30 43,219 3,835 3,835 27,290 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 55, Standard Rate Class
$10,000 Single Premium Face Amount of $27,290
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,235 9,335 27,290 10,110 9,210 27,290
2 11,025 10,476 9,601 27,290 10,206 9,331 27,290
3 11,576 10,724 9,874 27,290 10,289 9,439 27,290
4 12,155 10,978 10,288 27,290 10,355 9,665 27,290
5 12,763 11,238 10,663 27,290 10,403 9,828 27,290
6 13,401 11,506 11,046 27,290 10,430 9,970 27,290
7 14,071 11,781 11,436 27,290 10,431 10,086 27,290
8 14,775 12,063 11,833 27,290 10,401 10,171 27,290
9 15,513 12,353 12,238 27,290 10,336 10,221 27,290
10 16,289 12,650 12,650 27,290 10,229 10,229 27,290
15 20,789 14,845 14,845 27,290 9,300 9,300 27,290
20 26,533 17,449 17,449 27,290 5,800 5,800 27,290
25 33,864 20,538 20,538 27,290 0 0 0
30 43,219 24,202 24,202 27,290 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 55, Standard Rate Class
$10,000 Single Premium Face Amount of $27,290
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,816 9,916 27,290 10,691 9,791 27,290
2 11,025 11,701 10,826 27,290 11,437 10,562 27,290
3 11,576 12,661 11,811 27,290 12,244 11,394 27,290
4 12,155 13,702 13,012 27,290 13,118 12,428 27,290
5 12,763 14,831 14,256 27,290 14,068 13,493 27,290
6 13,401 16,055 15,595 27,290 15,103 14,643 27,290
7 14,071 17,384 17,039 27,290 16,232 15,887 27,290
8 14,775 18,824 18,594 27,290 17,469 17,239 27,290
9 15,513 20,387 20,272 27,290 18,826 18,711 27,290
10 16,289 22,083 22,083 27,290 20,324 20,324 27,290
15 20,789 34,449 34,449 39,960 31,610 31,610 36,667
20 26,533 53,968 53,968 57,746 49,478 49,478 52,942
25 33,864 85,356 85,356 89,623 78,254 78,254 82,167
30 43,219 133,694 133,694 140,378 122,449 122,449 128,571
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 70, Standard Rate Class
$10,000 Single Premium Face Amount of $17,020
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,654 8,788 17,020 9,420 8,577 17,020
2 11,025 9,319 8,508 17,020 8,799 8,038 17,020
3 11,576 8,994 8,237 17,020 8,125 7,448 17,020
4 12,155 8,680 8,089 17,020 7,385 6,892 17,020
5 12,763 8,375 7,902 17,020 6,565 6,205 17,020
6 13,401 8,081 7,717 17,020 5,648 5,406 17,020
7 14,071 7,795 7,533 17,020 4,614 4,471 17,020
8 14,775 7,519 7,351 17,020 3,441 3,375 17,020
9 15,513 7,251 7,170 17,020 2,102 2,086 17,020
10 16,289 6,992 6,992 17,020 558 558 17,020
15 20,789 6,055 6,055 17,020 0 0 0
20 26,533 5,224 5,224 17,020 0 0 0
25 33,864 4,488 4,488 17,020 0 0 0
30 43,219 3,835 3,835 17,020 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 70, Standard Rate Class
$10,000 Single Premium Face Amount of $17,020
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,235 9,335 17,020 10,007 9,107 17,020
2 11,025 10,476 9,601 17,020 9,984 9,111 17,020
3 11,576 10,724 9,874 17,020 9,926 9,083 17,020
4 12,155 10,978 10,288 17,020 9,823 9,146 17,020
5 12,763 11,238 10,663 17,020 9,668 9,113 17,020
6 13,401 11,506 11,046 17,020 9,449 9,016 17,020
7 14,071 11,781 11,436 17,020 9,155 8,841 17,020
8 14,775 12,063 11,833 17,020 8,771 8,572 17,020
9 15,513 12,353 12,238 17,020 8,280 8,187 17,020
10 16,289 12,650 12,650 17,020 7,655 7,655 17,020
15 20,789 14,845 14,845 17,020 1,024 1,024 17,020
20 26,533 17,449 17,449 18,321 0 0 0
25 33,864 20,626 20,626 20,832 0 0 0
30 43,219 24,463 24,463 24,707 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Single Life Option
Male, Issue Age 70, Standard Rate Class
$10,000 Single Premium Face Amount of $17,020
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,816 9,916 17,020 10,594 9,694 17,020
2 11,025 11,701 10,826 17,020 11,242 10,367 17,020
3 11,576 12,661 11,811 17,020 11,956 11,106 17,020
4 12,155 13,702 13,012 17,020 12,749 12,059 17,020
5 12,763 14,831 14,256 17,020 13,640 13,065 17,020
6 13,401 16,063 15,603 17,020 14,654 14,194 17,020
7 14,071 17,440 17,095 18,312 15,825 15,480 17,020
8 14,775 18,932 18,702 19,879 17,169 16,939 18,028
9 15,513 20,548 20,433 21,575 18,632 18,517 19,563
10 16,289 22,295 22,295 23,410 20,213 20,213 21,224
15 20,789 34,741 34,741 36,478 31,448 31,448 33,021
20 26,533 54,121 54,121 56,827 48,265 48,265 50,678
25 33,864 84,909 84,909 85,758 75,002 75,002 75,752
30 43,219 133,492 133,492 134,827 117,392 117,392 118,566
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,710 8,838 28,020 9,710 8,838 28,020
2 11,025 9,410 8,591 28,020 9,410 8,591 28,020
3 11,576 9,114 8,346 28,020 9,097 8,330 28,020
4 12,155 8,827 8,225 28,020 8,766 8,169 28,020
5 12,763 8,548 8,064 28,020 8,413 7,937 28,020
6 13,401 8,277 7,903 28,020 8,032 7,670 28,020
7 14,071 8,014 7,743 28,020 7,614 7,359 28,020
8 14,775 7,758 7,584 28,020 7,149 6,990 28,020
9 15,513 7,509 7,425 28,020 6,622 6,549 28,020
10 16,289 7,267 7,267 28,020 6,018 6,018 28,020
15 20,789 6,411 6,411 28,020 1,256 1,256 28,020
20 26,533 5,640 5,640 28,020 0 0 0
25 33,864 4,944 4,944 28,020 0 0 0
30 43,219 4,316 4,316 28,020 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,295 9,395 28,020 10,295 9,395 28,020
2 11,025 10,582 9,707 28,020 10,582 9,707 28,020
3 11,576 10,871 10,021 28,020 10,860 10,010 28,020
4 12,155 11,168 10,478 28,020 11,126 10,436 28,020
5 12,763 11,474 10,899 28,020 11,375 10,800 28,020
6 13,401 11,789 11,329 28,020 11,603 11,143 28,020
7 14,071 12,114 11,769 28,020 11,804 11,459 28,020
8 14,775 12,449 12,219 28,020 11,970 11,740 28,020
9 15,513 12,793 12,678 28,020 12,090 11,975 28,020
10 16,289 13,148 13,148 28,020 12,153 12,153 28,020
15 20,789 15,711 15,711 28,020 11,678 11,678 28,020
20 26,533 18,804 18,804 28,020 6,306 6,306 28,020
25 33,864 22,539 22,539 28,020 0 0 0
30 43,219 27,047 27,047 28,020 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
<TABLE>
<CAPTION>
Cova Financial Life Insurance Company
Modified Single Premium Variable Life Insurance
Hypothetical Illustration
Joint Life Option
Male, Issue Age 65, Female, Issue Age 65, Standard Rate Class
$10,000 Single Premium Face Amount of $28,020
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
---------------- --------------------
Premiums
Accumulated
End of at 5% Cash Net Cash Net
Policy Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
---- -------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 10,879 9,979 28,020 10,879 9,979 28,020
2 11,025 11,823 10,948 28,020 11,823 10,948 28,020
3 11,576 12,838 11,988 28,020 12,837 11,987 28,020
4 12,155 13,943 13,253 28,020 13,926 13,236 28,020
5 12,763 15,146 14,571 28,020 15,097 14,522 28,020
6 13,401 16,455 15,995 28,020 16,359 15,899 28,020
7 14,071 17,880 17,535 28,020 17,721 17,376 28,020
8 14,775 19,430 19,200 28,020 19,195 18,965 28,020
9 15,513 21,118 21,003 28,020 20,796 20,681 28,020
10 16,289 22,955 22,955 28,020 22,544 22,544 28,020
15 20,789 36,451 36,451 38,273 35,720 35,720 37,506
20 26,533 57,842 57,842 60,735 56,427 56,427 59,248
25 33,864 91,958 91,958 96,556 87,775 87,775 92,164
30 43,219 146,202 146,202 147,664 136,908 136,908 138,278
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
</FN>
</TABLE>
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND DO NOT REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. THE NET DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER
VALUE FOR A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN DEPENDING UPON
ACTUAL INVESTMENT RESULTS. NO REPRESENTATION CAN BE MADE THAT THIS
HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
APPENDIX B
PARTICIPATING INVESTMENT PORTFOLIOS
Below are the investment objectives and strategies of each investment
portfolio available under the Contract. The fund prospectuses contain more
complete information including a description of the investment objectives,
policies, restrictions and risks. THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT OBJECTIVES WILL BE ACHIEVED.
AIM VARIABLE INSURANCE FUNDS:
AIM Variable Insurance Funds is a mutual fund with multiple portfolios.
A I M Advisors, Inc. is the investment adviser to each portfolio.
The following portfolios are available under the contract:
AIM V.I. CAPITAL APPRECIATION FUND
Investment Objective: The Fund's investment objective is growth of capital
through investment in common stocks, with emphasis on medium- and small-
sized companies. The portfolio managers focus on companies they believe
are likely to benefit from new or innovative products, services or
processes as well as those that have experienced above-average, long-term
growth in earnings and have excellent prospects for future growth.
AIM V.I. VALUE FUND
Investment Objective: The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by
the Fund's investment advisor to be undervalued relative to the investment
advisor's appraisal of the current or projected earnings of the companies
issuing the securities, or relative to current market values of assets owned
by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective.
AIM V.I. INTERNATIONAL EQUITY FUND
Investment Objective: The Fund's investment objective is to achieve long-term
growth of capital by investing in a diversified portfolio of international
equity securities whose issuers are considered to have strong earnings
momentum.
COVA SERIES TRUST:
Cova Series Trust is managed by Cova Investment Advisory Corporation (Cova
Advisory), which is an affiliate of Cova. Cova Series Trust is a mutual fund
with multiple portfolios. Cova Advisory has engaged sub-advisers to provide
investment advice for the individual investment portfolios. The following
portfolios are available under the contract:
PORTFOLIOS MANAGED BY J. P. MORGAN INVESTMENT MANAGEMENT INC.:
INTERNATIONAL EQUITY PORTFOLIO
Investment Objective: The International Equity Portfolio seeks to provide a high
total return from a portfolio of equity securities of foreign corporations.
LARGE CAP STOCK PORTFOLIO
Investment Objective: The Large Cap Stock Portfolio seeks to provide long-term
growth of capital and income.
QUALITY BOND PORTFOLIO
Investment Objective: The Quality Bond Portfolio seeks to provide a high total
return consistent with moderate risk of capital and maintenance of liquidity.
SELECT EQUITY PORTFOLIO
Investment Objective: The Select Equity Portfolio seeks to provide long-term
growth of capital and income.
SMALL CAP STOCK PORTFOLIO
Investment Objective: The Small Cap Stock Portfolio seeks to provide a high
total return from a portfolio of equity securities of small companies.
PORTFOLIOS MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO
Investment Objective: The Bond Debenture Portfolio seeks to provide high current
income and the opportunity for capital appreciation to produce a high total
return.
DEVELOPING GROWTH PORTFOLIO
Investment Objective: The Developing Growth Portfolio seeks long-term growth of
capital through a diversified and actively-managed portfolio consisting of
developing growth companies, many of which are traded over the counter.
LARGE CAP RESEARCH PORTFOLIO
Investment Objective: The Large Cap Research Portfolio seeks growth of capital
and growth of income consistent with reasonable risk.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
Investment Objective: The Lord Abbett Growth and Income Portfolio seeks to
achieve long-term growth of capital and income without excessive fluctuation in
market value.
MID-CAP VALUE PORTFOLIO
Investment Objective: The Mid-Cap Value Portfolio seeks capital appreciation
through investments, primarily in equity securities, which are believed to be
undervalued in the marketplace.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, CLASS 1 SHARES:
Franklin Templeton Variable Insurance Products Trust is a mutual fund with
multiple portfolios. Effective May 1, 2000, the portfolios of Templeton Variable
Products Series Fund were merged into similar portfolios of Franklin Templeton
Variable Insurance Products Trust. Each portfolio has two classes of shares:
Class 1 and Class 2. The portfolios available in connection with your contract
are Class 1 shares. Franklin Advisers, Inc. is the investment adviser for the
Franklin Large Cap Growth Securities Fund, the Franklin Small Cap Fund and the
Templeton Global Income Securities Fund. Templeton Investment Counsel, Inc. is
the investment adviser for the Templeton International Securities Fund.
Templeton Global Advisors Limited is the investment adviser for the Templeton
Growth Securities Fund. The following portfolios are available under the
contract:
FRANKLIN LARGE CAP GROWTH SECURITIES FUND (the surviving fund of the
merger with Franklin Large Cap Growth Investments Fund)
Investment Objective and Principal Investments: The Fund's investment goal
is capital appreciation. Under normal market conditions, the Fund will
invest at least 65% of its total assets in equity securities of large cap
growth companies that are expected to have revenue growth in excess of the
as a whole either through above-average industry expansion or market share
gains.
FRANKLIN SMALL CAP FUND (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Investment Objective and Principal Investments: The Fund's investment
goal is long-term capital growth. Under normal market conditions, the
Fund will invest at least 65% of its total assets in equity securities of
U.S. small capitalization (small cap) growth companies.
TEMPLETON GLOBAL INCOME SECURITIES FUND (the surviving fund of the
merger with Templeton Bond Fund)
Investment Objective and Principal Investments: The Fund's investment goal
is high current income. Capital appreciation is a secondary consideration.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in the debt securities of governments and their political
subdivisions and agencies, supranational organizations, and companies
located anywhere in the world, including emerging markets.
TEMPLETON INTERNATIONAL SECURITIES FUND (formerly Templeton International
Fund)
Investment Objective and Principal Investments: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund will invest
at least 65% of its total assets in the equity securities of companies located
outside the U.S., including in emerging markets.
TEMPLETON GROWTH SECURITIES FUND (the surviving fund of the merger with
Templeton Stock Fund)
Investment Objective and Principal Investments: The Fund's investment goal is
long-term capital growth. Under normal market conditions, the Fund will invest
at least 65% of its total assets in equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets.
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios. Each
portfolio is managed by Conning Asset Management Company. The following
portfolio is available under the contract:
MONEY MARKET FUND
Investment Objective: The Money Market Fund's investment objective is to provide
investors with current income while preserving capital and maintaining
liquidity. The Fund seeks to achieve this objective by investing primarily in
high-quality, short-term money market instruments. The Fund purchases securities
that meet the quality, maturity, and diversification requirements applicable to
money market funds.
PART II
UNDERTAKING TO FILE REPORTS
a. Subject to the terms and conditions of Section 15(d) of the Securities
and Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority confined in that section.
b. Pursuant to Investment Company Act Section 26(e), Cova Financial Life
Insurance Company ("Company") hereby represents that the fees and charges
deducted under the Policy described in the Prospectus, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
INDEMNIFICATION
The Bylaws of the Company (Article V, Section 9) provide that:
This corporation shall indemnify, to the fullest extent allowed by California
law, its present and former directors and officers against expenses, judgements,
fines, settlements, and other amounts incurred in connection with and proceeding
or threatened proceeding brought against such directors or officers in their
capacity as such. Such indemnification shall be made in accordance with
procedures set forth by California Law. Sums for expenses incurred in defending
any such proceeding may also be advanced to any such director or officer to the
extent and under the conditions provided by California law.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling person of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement comprises the papers and documents:
The facing sheet
The Prospectus consisting of __ pages.
Undertakings to file reports.
The signatures.
The following exhibits.
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2.
1. Resolution of the Board of Directors of the Company*
2. Not Applicable
3.a. Form of Principal Underwriter's Agreement**
3.b. Selling Agreement**
3.c. Schedules of Commissions**
4. Not Applicable
5. Modified Single Premium Variable Life Insurance Policy*
6.a. Articles of Incorporation of the Company**
6.b. Bylaws of the Company**
7. Not Applicable
8. Not Applicable
9.a. Form of Fund Participation Agreement by and among AIM Variable
Insurance Funds, Inc., A I M Distributors, Inc., Cova Financial
Life Insurance Company, on behalf of itself and its Separate
Accounts, and Cova Life Sales Company***
9.b. Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and Cova
Financial Life Insurance Company+
10. Application Form*
11. Powers of Attorney*
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Consent of Independent Auditors
*Incorporated by reference to Registrant's initial Form S-6 filed electronically
on October 9, 1997.
**Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
Form S-6 (File No. 333-37559) electronically filed on November 13, 1997.
***Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4
(File No. 333-34817) as filed electronically on February 11, 1998.
+Incorporated by reference to Post-Effective Amendment No. 2 to Form S-6
electronically filed on April 29, 1999.
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that it
meets the requirements of Rule 485(b) for effectiveness of this Registration
Statement and has duly caused this Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized in the City of
Oakbrook Terrace and State of Illinois on this 28th day of April, 2000.
COVA VARIABLE LIFE ACCOUNT FIVE
Registrant
By: COVA FINANCIAL LIFE INSURANCE COMPANY
By:/s/BERNARD J. SPAULDING
______________________________
Senior Vice President, General Counsel
and Secretary
COVA FINANCIAL LIFE INSURANCE COMPANY
Attest:
/s/PETER L. WITKEWIZ
________________________ By: /s/MARK E. REYNOLDS
____________________________
Executive Vice President
Controller
- ------------------------
Title
Pursuant to the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board and
- ---------------------- Director -------
Richard A. Liddy Date
/s/LORRY J. STENSRUD President and Director 4-28-00
- -------------------- -------
Lorry J. Stensrud Date
/s/J. ROBERT HOPSON Director 4-28-00
- -------------------- -------
J. Robert Hopson Date
William C. Mair* Director 4-28-00
- ----------------------- -------
William C. Mair Date
E. Thomas Hughes, Jr.* 4-28-00
- ---------------------- Treasurer and Director -------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 4-28-00
- ---------------------- -------
Matthew P. McCauley Date
John W. Barber* Director 4-28-00
- ---------------------- -------
John W. Barber Date
/s/MARK E. REYNOLDS Director 4-28-00
- ---------------------- -------
Mark E. Reynolds Date
/s/J. TERRI TANAKA 4-28-00
- --------------------- Director --------
J. Terri Tanaka Date
/s/PETER L. WITKEWIZ 4-28-00
- ---------------------- Controller --------
Peter L. Witkewiz Date
</TABLE>
*By: /s/LORRY J. STENSRUD
______________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
EX-99.B2 Opinion and Consent of Counsel
EX-99.C1 Consent of Actuary
EX-99.C2 Consent of Independent Auditors
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
April 28, 2000
Board of Directors
Cova Financial Life Insurance Company
4100 Newport Place Drive
Suite 840
Newport Beach, CA 92600
RE: Opinion of Counsel - Cova Variable Life Account Five
-------------------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of Post-Effective Amendment No. 3 to a Registration Statement on Form
S-6 for the Modified Single Premium Variable Life Insurance Policies to be
issued by Cova Financial Life Insurance Company and its separate account, Cova
Variable Life Account Five.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Cova Variable Life Account Five is a Unit Investment Trust as that term
is defined in Section 4(2) of the Investment Company Act of 1940 (the "Act"),
and is currently registered with the Securities and Exchange Commission,
pursuant to Section 8(a) of the Act.
2. Upon the acceptance of premiums paid by an Owner pursuant to a Policy
issued in accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable law, such an Owner will have a
legally-issued, fully paid, non-assessable contractual interest under such
Policy.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Prospectus which forms a part of the Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/RAYMOND A. O'HARA III
-----------------------------
Raymond A. O'Hara III
ACTUARIAL OPINION AND CONSENT
This opinion is furnished in connection with Post-Effective Amendment No. 3 to
the registration of the individual modified single premium variable universal
life policy of the Cova Variable Life Account Five, file numbers 333-37559
and 811-08433.
I am familiar with the terms of the Registration Statement and the accompanying
exhibits. The prospectus included in the Registration Statement describes the
policy issued by Cova. In my professional opinion:
1. The charges on the policy are reasonable in relation to industry norms and
in relation to the expenses expected to be incurred by Cova in connection
with this policy. There are policy charges for administration, Federal
taxes, premium taxes, cost of insurance, and mortality and expense risk.
The Surrender Charge is the only sales load charge in the policy. This
charge is a declining scale over the first 9 policy years, starting at a
maximum of 7.5% of premium.
2. The illustrations of accumulated premium, death benefits, account values,
and cash surrender values that appear in the prospectus are consistent with
the provisions of the policy, and are based on the assumptions stated in
the accompanying text.
3. The illustrations show values on both a current basis and a guaranteed
basis. The only charge that is on a current and guaranteed basis is the
cost of insurance charge, all other charges are identical on a current and
guaranteed basis. The current illustration uses the current cost of
insurance charges that are currently assessed by the company. The
guaranteed illustration uses the maximum cost of insurance charges that
could be assessed at any future date during the lifetime of a policy.
4. The specific ages, sex, rate class, and the premium amounts used in these
illustrations are representative of the typical purchasers that Cova
expects will purchase the product. These characteristics have not been
selected so as to make the relationship between premiums and benefits look
more favorable in these specific instances than it would for prospective
purchasers with different characteristics.
I hereby consent to the use of this opinion as an Exhibit to the registration.
/s/J. ROBERT HOPSON
--------------------------------
J. Robert Hopson
Consent of Independent Auditors
The Board of Directors
Cova Financial Life Insurance Company
We consent to the use of our reports on the financial statements of Cova
Financial Life Insurance Company (the Company) dated February 4, 2000,
and on the financial statements of the sub-accounts of Cova Variable
Life Account Five dated March 20, 2000, and to the reference to our firm
under the heading "Experts" in the Prospectus, in the Post-Effective
Amendment No. 3 to the Registration Statement (Form S-6, File No. 333-37559)
of Cova Variable Life Account Five.
/s/KPMG LLP
-----------
KPMG LLP
Chicago, Illinois
April 28, 2000
